FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
May 5, 2020

IN THIS ISSUE:

1. 30+ Million Unemployed in 6 Weeks – Jobless Rate 19%

2. GDP Plunges 4.8% in 1Q, Likely to Plunge 30%-40% in 2Q

3. Consumer Confidence Index Dives in One-Month Record

4. US Consumer Spending & Manufacturing Tumble

5. How We’re Getting Along at Halbert Wealth Management

Overview – Economic Reports Continue to be Negative

The economic news continues to worsen with each passing week. We cannot ignore it, so I will continue to report on and analyze it. What is becoming increasingly clear is that this is no “garden variety” recession. Some forecasters are calling it the “New Depression.” That could be true, especially if we see millions of small businesses close their doors permanently just ahead, as looks increasingly likely.

As you know, consumer spending accounts for apprx. 70% of US Gross Domestic Product. And as we also know, consumers are hunkered down as never before. Many are scared to leave their houses even if stay-at-home restrictions are lifted just ahead. Millions of Americans will have lost their jobs permanently if millions of small businesses go bankrupt or shut down for good.

The number of Americans filing for new unemployment benefits continues to skyrocket, surpassing 30 million over the past six weeks in the latest report. While we won’t see the latest official unemployment report from the Labor Department until this Friday, many forecasters believe it is approaching 20%, the worst since the Great Depression.

So, it’s no surprise that the Consumer Confidence Index plunged by the largest amount ever recorded in a single month in March, as I will discuss below. It will be significantly worse for April. I will also discuss other economic reports that are equally troubling. While I hate to be the bearer of bad news, it is what it is right now, as you well know. At least I’ll give you my take on it.

At the end of today’s letter, I’ll give you a snapshot of how we’re dealing with the coronavirus crisis at Halbert Wealth Management and on a personal level. Overall, I think we’re coping with it pretty well. While I won’t say it’s been business as usual, most of us are in the office each day doing what we usually do. I hope everyone reading this is also doing well!

30+ Million Unemployed in 6 Weeks – Jobless Rate 19%

The number of Americans who have filed for unemployment benefits in the last six weeks since the coronavirus pandemic unfolded has skyrocketed to 30.3 million. In the latest reporting week, another 3.8 million Americans filed for unemployment. While that’s down from 4.4 million the prior week and the peak of 6.9 million at the end of March, millions more are expected to apply in the weeks just ahead.

Pinning down the true level of unemployment isn’t easy, but many forecasters believe it has now soared to 18%-19% of the pre-crisis labor force. In the weeks ahead, that number is almost certain to top 20%. While unemployment peaked in the Great Depression just below 25%, it has never risen this dramatically in such a short period of time. Unfortunately, we’re not done yet!

While some states are starting to reopen their economies, most are doing so only in phases (at 25% of normal in Texas, for example). Making matters worse, surveys are finding that many workers are not willing to return to their jobs just yet. Many say they don’t consider it safe to return to work, while others say they are making more money on unemployment than they would on their jobs (I warned about this problem). This will slow any recovery even more.

GDP Plunges 4.8% in 1Q, Likely to Plunge 30%-40% in 2Q

The Commerce Department reported last week that 1Q Gross Domestic Product fell by -4.8% (annual rate) That was the worst quarterly reading since 2008 in the depths of the Great Recession. It was worse than the pre-report consensus for a drop of 4%.

Consumer spending, the main engine of the economy, fell at a 7.6% annual pace in the 1Q. That’s the largest retreat since 1980. Americans slashed spending on cars, clothes, travel, eating out and most other goods and services. Since millions of people lost their jobs and stores were shuttered, many households tried to save more money to get them through the crisis.

Unfortunately, 2Q GDP is going to make the 1Q look like a walk in the park. Most forecasters believe the 2Q will see a plunge of 25%-30% or more! Some believe it could be as bad as 40%. While we won’t get our first glimpse of 2Q GDP from the Commerce Department until the end of July, the financial markets are already starting to “price-in” such an economic disaster.

If the 2Q GDP number is negative 25%-30%, I predict that will be viewed as confirmation that we’re not in a severe recession, but a depression. I don’t see how that can be anything but bearish for stocks. That’s why I’m not buying the latest bullish talk on Wall Street!

Consumer Confidence Index Dives in One-Month Record

The US Conference Board reported last week that its widely followed Consumer Confidence Index fell off a cliff in March, as was widely expected. The Index plunged from 132.6 in February to 110 in March. This was the largest monthly drop ever recorded, but it was actually slightly lower than the pre-report consensus expected.

The Conference Board said in a statement accompanying the report’s release: “Consumer confidence declined sharply in March due to a deterioration in the short-term outlook. The intensification of COVID-19 and extreme volatility in the financial markets have increased uncertainty about the outlook for the economy and jobs. March’s decline in confidence is more in line with a severe contraction – rather than a temporary shock – and further declines are sure to follow.”

Wow! I think that is the most bearish statement I have ever heard from the Conference Board in the 40+ years I have been following the Consumer Confidence Index. But I’m not surprised, since the Index is almost certain to have plunged even more in April as much of the US economy was/is in lockdown.

Goldman Sachs economists expect the US economy to contract by 34% in the 2Q and US unemployment to surge to 15% or more before this is over. As noted above, other forecasters I read believe it could be even worse, with the economy plunging by 40% in the 2Q and the unemployment rate hitting 20%. Let’s hope it’s not that bad, but we should not be surprised if it is.

US Consumer Spending & Manufacturing Tumble

With consumer confidence falling by the largest monthly amount ever recorded, it’s no surprise that consumer spending plunged by a new record in March. The Commerce Department reported last week that consumer spending fell 7.5% in March, the largest monthly drop ever recorded.

The decline occurred primarily in the second half of March, as business shutdowns and government stay-at-home orders took effect. The measures have remained in place in most of the country since then, depressing spending, incomes and broader economic growth.

This means that consumer spending contracted much more severely in April. I have not seen any forecasters’ estimates for consumer spending in April, but it will not surprise me to see another drop of 15%-20%.

I will tell you that one of my favorite economic writers, Richard Moody of Regions Bank, predicted late last week that April will be the low in the consumer spending downturn.
Now, I respect Richard a lot, but I fear he is premature on this call. He even admits that his prediction is based on consumer confidence rebounding in May and June. That remains to be seen.

The ISM Manufacturing Index continued to fall in April, down to 41.5 from 49.1 in March. This was the worst monthly reading since April 2009 during the Great Recession. Any reading in the ISM Index below 50 indicates the economy is in recession.

US industrial production plummeted 5.4% in March, another record monthly low since the government began keeping such data in 1919. A significantly larger decline is all but certain when we get the factory data for April.

OK, enough of the negative economic data for today!

How We’re Getting Along at Halbert Wealth Management

I sincerely hope all our clients and readers are doing well during this global pandemic. Of those we have talked to over the last month or so, all seem to be riding this crisis out at least fairly comfortably.

All of us at Halbert Wealth Management are doing well. While we have a few employees who are working from home, most of us are going into the office as usual. Our office is configured such that we can maintain social distancing and continue working pretty much as usual. We are fortunate in that regard.

Debi and I are doing well, and our kids and their spouses are doing well. Austin has managed to come through the crisis relatively well so far. The grocery stores and other businesses which have remained open are doing fairly well, and it appears that a good number of those that closed started reopening last weekend with more to follow this week.

All in all, we feel very blessed! Thanks to our clients for your continued confidence! We wish every one of you the very best. Hang in there, everyone!!

Wishing you strength and good health,

Gary D. Halbert

SPECIAL ARTICLES

What Do 30 Million Unemployment Claims Really Look Like?

GDP Falls 4.8% & It’s Only the Beginning

Consumer Confidence Plunges by Most Since 1973

Gary's Between the Lines Blog: Flood of Business Bankruptcies Has Already Begun

 

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.