FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
April 21, 2020

IN THIS ISSUE:

1.  A Major Hit to US Economy in 1Q, a Disaster Coming in 2Q

2. Unemployment Rate Could Soar to 20% or Higher in May

3. Congress Nears Deal on Massive New Stimulus Package

4. Corporate Innovation Flourishes in Coronavirus Battle

Overview

Most of the economic forecasters I read now believe we are currently in a severe recession or worse. As you will see below, most predict the 2Q will be the worst in (most) of our lifetimes. You will recognize most if not all the names on the list I will provide below, and most are predicting that US GDP will plunge by 20% (annual rate) or more in the 2Q alone. That’s never happened before.

Likewise, most forecasters I read believe the real US unemployment rate today is in the 10%-15% range or higher, more than triple the 4.4% the Labor Department reported for March on April 3. Likewise, most forecasters I read believe the unemployment rate will continue to soar to 20% or more just ahead due to the economic lockdown.

In the last four weeks alone, we have wiped out over 22 million jobs. That’s more than all the jobs (20 million) the economy created since the Great Recession ended in 2009, during the longest economic expansion in US history. We have never seen anything like this in our lifetimes!

While the economic news today is as bad or worse than most of us have ever seen, there is some encouragement to be found in all of this. I’ll get to that at the end of today’s letter.

A Major Hit to US Economy in 1Q, a Disaster Coming in 2Q

The Commerce Department will release its first “advance” estimate of 1Q Gross Domestic Product a week from tomorrow on April 29. There is widespread disagreement on how bad that initial estimate will be because the coronavirus didn’t impact the US that much until March. As a result, forecasts vary widely as to how much of a hit GDP took in the 1Q.

The chart below shows the latest 1Q GDP estimate from the Atlanta Federal Reserve Bank versus that of the Blue Chip Consensus, which is the average of dozens of leading economists. The Atlanta Fed’s weekly “GDPNow” forecast shows the economy fell from 2.2% (annual rate) in the 4Q of last year to just over 1% at the end of the 1Q. And this indicator didn’t go negative until the second week of April.

The Blue Chip Consensus, on the other hand, went negative in the third week of March and plunged to nearly -4.0% by the end of the month and went on to -6.0% by April 12. It is worse than that now as you are reading this. I will be surprised if GDP is not down 10% or more for April.

Unfortunately, 2Q GDP is likely to be much worse. There’s no way I can sugar-coat the chart that follows. It includes the estimates from some of America’s top forecasters for 2Q GDP. It is chilling, to say the least! I hesitated to include it, but we all need to see it.

Keep in mind these are numbers for the 2Q contraction alone. With the exception of Bloomberg, these numbers are stunning! This is not the gloom-and-doom crowd.

The government’s latest $250 billion Paycheck Protection Program (PPP) was oversubscribed in less than a week. Hundreds of thousands of small businesses applied too late and have gotten no assistance. However, as this is written, lawmakers in Washington appear close to approving a fourth stimulus package that may provide another $400-$500 billion to small businesses, hospitals, etc. – more on this below.

I unfortunately stand by my warning last week that millions of small, and not so small, companies may never reopen their doors. This is an unprecedented national disaster.  As of April 17, only about 20% of small businesses that applied for a PPP loan had received any money, according to the National Federation of Independent Businesses.

Unemployment Rate Could Soar to 20% or Higher in May

Most forecasters I read believe the real US unemployment rate today is in the 10%-15% range, more than triple the 4.4% the Labor Department reported for March on April 3. Likewise, most forecasters I read believe the unemployment rate will continue to soar to 20% or more just ahead due to the economic lockdown. Some believe it could hit 30% over the next couple of months.

In the last four weeks alone, over 22 million Americans have filed for new unemployment benefits, the highest rate ever recorded in this country. New jobless claims over the last four weeks were 3.3 million, 6.9 million, 6.6 million and 5.25 million last week – all new records.

Let me again put that into perspective: Since the Great Recession ended in the first half of 2009, the US economy added 20 million new jobs through February of this year, in the longest economic expansion in this country’s history. Now, we’ve wiped out 22 million jobs in just four weeks!

If the unemployment rate rises to 25% in the weeks just ahead, that will be the highest unemployment rate in our history. The peak in the Great Depression was 24.9%. And as noted above, some forecasters believe it could hit 30% before this coronavirus crisis is over.

Many people have been struggling for weeks to file for unemployment benefits via their states’ overwhelmed and outdated websites. And while the government has rushed to help by authorizing trillions in stimulus, delays in getting the money to households and businesses -- as well as the current shortage of program funds (more on that below) -- could push the jobless rate higher or keep it elevated for longer.

“We don’t have the administrative systems to get $2.2 trillion into the economy in three weeks,” said Claudia Sahm, director of macroeconomic policy at the Washington Center for Equitable Growth. “What we have right now is a race between the virus wreaking havoc on the economy, and the relief trying to get out.”

If initial jobless claims don’t begin leveling off, a 30% unemployment rate moves from “the realm of possibility to the most likely forecast,” said Sahm, a former Federal Reserve economist.

That would be triple the 10% seen in the wake of the Great Recession of late-2007 to early 2009 and well above the nearly 25% seen during the Great Depression. The median estimate of economists in a Bloomberg survey earlier this month was for a 2Q jobless rate of 12.6%. And that may prove to be overly optimistic.

Congress Nears Deal on Huge New Stimulus Package

Lawmakers in Washington appear to be nearing the finish line on a fourth stimulus package that will provide between $450 to $550 billion in additional aid for businesses and hospitals affected by COVID-19, including up to $350 billion for small business loans. This new monster stimulus bill could conceivably pass as early as today or tonight.

Treasury Secretary Steven Mnuchin said earlier this week that there would be at least $300 billion for the Small Business Administration’s Paycheck Protection Program (PPP), $50 billion for Economic Injury Disaster Loans, $75 billion for hospitals and $25 billion for testing.

President Trump asked Congress for an additional $250 billion of stimulus; however, Democrats in Congress insisted on considerably more to include aid to hospitals and significantly more Covid-19 testing. Republicans quickly agreed.

Secretary Mnuchin reportedly hinted earlier this week that there may be additional spending bills in the works to follow this fourth one. He indicated that President Trump would be willing to consider federal money for states and local governments, including additional funds for Medicare and COBRA support.

While these emergency stimulus bills may be necessary to prevent the economy from going into a full-fledged depression, our budget deficit which was already expected to reach $1 trillion this fiscal year is likely to be $3 trillion or more!

Our national debt will easily top $25 trillion this year. No one knows when the foreigners who own much of our debt will start to revolt. I’ll save that discussion for another time.

Corporate Innovation Flourishes in Coronavirus Battle

While today’s Forecasts & Trends easily qualifies as the most negative I’ve ever written, let me close with a positive development of late. Businesses and factories all across America are reinventing themselves to deal with the fallout from the coronavirus crisis. Companies of all sorts are having to innovate and change the way they operate, including the products and services they offer – and they’re having to do it very fast.

They run the gamut from companies making face shields and personal protection equipment to individuals using 3-D printers to turn out N95 masks and academic labs repurposing themselves into coronavirus test center. The list includes General Motors teaming up with Ventec Life Systems to make ventilators – just to name a few. Meanwhile, dozens of treatments and vaccines for COVID-19 are in development around the country.

Moderna Inc., a Cambridge, Mass. biotech company, has already begun human trials on a vaccine, barely two months after the virus’s genome was sequenced – and others are not far behind.

At the start of the crisis, virus tests had to be sent to distant labs, and took days to deliver results. Since then medical device companies have rolled out tests with progressively faster turnaround times, including one by Abbott Labs that can deliver results in under 15 minutes in a doctor’s office.

I could go on and on with examples of how businesses and entrepreneurs around the country are using innovation to reinvent their companies, but I think you get the picture. Best of all, this time around, innovators are exploiting tools and methods that didn’t exist in previous crises.

We may not have seen the worst of this crisis yet, and the economic news may get worse before it gets better, but there is no doubt America will get through this dark period.

Wishing you strength and good health,

Gary D. Halbert

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