FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 8, 2020

Thoughts On The Economy & Soaring Bankruptcies

IN THIS ISSUE:

1. US Economy Suffered Record Losses in First Half 2020

2. August Jobs Report Came in Much Better Than Expected

3. Business Bankruptcies Jumped 26% in First Half 2020

4. Trump Boat Parades Across the Country on Saturday

Overview

As we are all painfully aware, the US economy suffered its worst economic loss in history in the second quarter, with Gross Domestic Product plunging almost 32% (annual rate). That followed a loss of 5% (annual rate) in the first quarter. The US economy has never before seen its annualized growth rate slow this much in such a short time, not even in the Great Depression.

Over 22 million Americans lost their jobs or were furloughed in the 2Q, due to the lockdown of the “non-essential” economy. Fortunately, about half of these workers have now gone back to their old jobs or found new ones.

Most forecasters believe the US economy is roaring back in the 3Q and will continue to expand strongly in the 4Q as well. Most believe we will see above-trend growth in Gross Domestic Product at least through the 1Q of next year. Some forecasters conclude that if GDP grows as the average of forecasts suggest, the economy will be fully recovered by the end of the 1Q of next year.

Unfortunately, that logic is wrong, as I will explain below. The truth is, the US economy will have to grow much faster than is currently forecast in order to fully recover from the disaster we experienced in the first half of this year. I’ll break down the latest numbers for you as we go along.

Following that discussion, we’ll take a look at last Friday’s better than expected jobs report for August. After that, we will look at the latest numbers on business bankruptcies which are continuing to skyrocket. I have some particularly alarming bankruptcy numbers for New York State you should definitely see. Let’s get started.

US Economy Suffered Record Losses in First Half 2020

According to the Commerce Department, US Gross Domestic Product declined by an annual rate of 5% in the 1Q, followed by the stunning plunge of 31.7% annualized in the 2Q when much of the economy was in lockdown. The decline of 31.7% was the worst quarterly reading in our nation’s history, including during the Great Depression.

During the 2Q, over 22 million Americans lost their jobs or were furloughed indefinitely as much of the economy was in government ordered lockdown. As this is written, only about half of those workers have been able to return to their old jobs or find new ones. I’ll discuss the latest jobs report for August as we go along today.

The good news is the economy is making a strong comeback in the current quarter. Most analysts’ expectations for 3Q GDP growth are in the 18%-22% range (annual rate). Morgan Stanley is currently predicting a 21.3% spike in GDP this quarter, while financial data provider IHS Markit is estimating a 20.1% increase in the third quarter.

The Wall Street Journal recently surveyed 60 leading economists for their outlook on the 3Q, and the average estimate came in at +18.3% annualized. While these 3Q estimates might seem impressive, I must tell you most economists have been revising their 3Q forecasts lower in the last few weeks. They are not as optimistic about a super-strong recovery in the second half of the year as they were just a couple of months ago.

Most forecasters are suggesting GDP growth for the 4Q may only be around 10% (annual rate). Let’s say we get a 3Q GDP report showing 18%-20% annualized growth, followed by another 10% for the 4Q. If so, that means the economy will have contracted for all of 2020. If that is the case, it will be the first losing year for US GDP since 2009 in the depths of the Great Recession.

If 3Q and 4Q GDP come in as discussed above, it will mean the severe recession of the first half of this year has ended. But it will NOT mean the economy has recovered all the loss incurred in the first half of this year. Far from it.

And given the severity of the loss in first-half 2020, the prospects for a continued strong recovery don’t look so good. The last time we had an economic setback of this magnitude was in 1946 when GDP fell 11.6%. That year was followed by another losing year in 1947 when GDP fell another 1.1%. I’m not predicting another losing year in 2021, but I certainly wouldn’t rule it out, either.

August Jobs Report Came in Much Better Than Expected

Last Friday, the Labor Department reported that the August unemployment rate unexpectedly fell to 8.4% versus the pre-report consensus of 9.8% and down from 10.2% in July. A surprising 1.4 million new jobs were created, also significantly above the consensus.

Government hiring helped boost total job creation in August, with the growth of 344,000 workers accounting for a quarter of the monthly gain. Most of that hiring came from Census workers, whose rolls increased by 328,000. Despite worries of a revenue crunch at the municipal level, local government employment rose by 95,000.

The total of those on furlough also fell significantly. There were 24.2 million people who said they were not working because their employer either closed or lost business due to the COVID-19 pandemic, down from 31.3 million in July.

Other big job gains came from retail, up by 249,000 positions, while professional and business services rose by 197,000. Leisure and hospitality, the hardest-hit sector during the pandemic, saw a gain of 174,000, most coming in bars and restaurants. Most forecasters expect another solid jobs report for September as the economy continues to rebound.

Business Bankruptcies Jumped 26% in First Half 2020

Chapter 11 business bankruptcies soared by 26% in the first half of 2020 as more companies sought to protect themselves from creditors during the COVID-19 pandemic. US courts recorded a total of 3,604 businesses filing for bankruptcy in the first six months of 2020.

There have been another more than 500 Chapter 11 filings under new bankruptcy rules which began in February, designed to help small businesses move through the process more quickly and with less paperwork and costs. It remains to be seen how many of the businesses that have filed for bankruptcy manage to reorganize and survive, but it is clear many will not.

The pace of bankruptcies is set to increase even more in the next several months as the Paycheck Protection Program funds and other assistance programs run out for small and midsize businesses. Many more businesses will either never reopen or shutter their doors by the end of this year.

And here’s a real shocker I just read over the weekend: More than 60% of New York restaurants said they are likely to close by the end of the year without some form of financial relief, according to a new survey by the New York State Restaurant Association -- as the coronavirus pandemic continues to take its toll on businesses across the US.

In a previous survey, restaurant owners listed commercial rent relief and an increase in indoor dining seating capacity as some of the ways the state government could help the industry. Sadly, New York City Mayor Bill de Blasio apparently believes it is in his best political interest to keep The Big Apple shut down. This is unforgivable!

They also insisted that business interruption insurance claims be paid by insurers which have been holding back such payments over so-called technicalities in their contracts. A group of New York restaurants last month sued their insurers in state court, arguing they are entitled to business interruption insurance coverage for losses and expenses associated with the pandemic.

I continue to believe the level of business bankruptcies will continue to move significantly higher between now and the end of this year. I’ve been warning about this for months now and, unfortunately, the numbers are confirming it. In my opinion, we haven’t seen the worst of it by a longshot. Of course, I hope I am wrong.

Trump Boat Parades Across the Country on Saturday

As longtime readers know, Debi and I live on beautiful Lake Travis northwest of Austin. For several weeks, organizers had been planning a “Trump Boat Parade” for the Saturday of Labor Day weekend. I figured the event might draw a few hundred boaters to participate.

In a real shocker, over 2,100 boaters registered to participate in the parade! It was a shocker because Austin is a very liberal city. Despite that, boaters turned out in droves to display their Trump flags on their boats and proudly participate in the parade. Reports are that over 2,500 boats were in the parade on Saturday, and many homes along the parade route also displayed Trump signs and flags.

What was most amazing is the vast majority of the parade participants trailered their boats from other places to Lake Travis and had to find places to launch them in the lake. They were serious! Marinas and boat ramps were overwhelmed, we are told.

What I did not know until last Saturday was that these Trump Boat Parades were organized on waterways all across the country for the Labor Day weekend, from Florida to California and from Texas to the Dakotas. Whether you were a Trump fan or not, it was really cool to watch!

All the best,

Gary D. Halbert

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