Not surprisingly, the first part of the year had two distinct phases. For instance, industrial production was flat at first – down half a percent in January and up half a percent in February. But in March it fell 4.5% and in April it plummeted 11.2%, the worst drop in the index’s 101-year history. Similarly, unemployment was near a record low at the end of February, sitting at 3.5%. It jumped to 4.4% in March as 1.4 million workers lost their jobs, then surged to 14.7% as over 20 million more people were let go. The numbers will get worse as close to 40 million have filed for benefits over the past 9 weeks.
Consumer confidence, often an indicator of things to come, paints a similar story. Since 2017 and right on through February the Conference Board’s Consumer Confidence Index has hovered at very high levels, generally in the 120s and 130s; levels historically unmatched except for a brief period in 2000. During April the Index dropped to 86.9. The “Present Situation” Index fell from 166.7 to 76.4!
The two phases, up and down, led to a somewhat muddled GDP decline of 4.8%; muddled in the sense that it is somewhat meaningless. The economy was expanding in the 2% to 3% range until about 8 weeks ago. It will get there again. But at present, the state-by-state lockdowns here and the national-level lockdowns abroad are fostering a decline that may measure 30% or more once all the beans are counted.
Importantly, our institutions have been responsive. Though perhaps imperfect in aspects of design and implementation, the massive federal stimulus, including payments to individuals and forgivable loans to small businesses, will do much. Critically, the Federal Reserve was very quick and massive in its support of the financial system. The Fed:
• dropped the target Federal Fund rate from 1.5% to 0%;
• brought back ‘QE’, buying hundreds of billions of treasuries and mortgage-backed securities;
• increased lending facilities to the 24 large primary dealers;
• relaunched the money market mutual fund liquidity facility to backstop the entire money market system;
• expanded its repo operations from about $100 billion into the trillions;
• reduced its bank lending rate and relaxed regulatory requirements;
• began lending directly to large corporations and restarted the Commercial Paper Funding Facility;
• announced several new lending facilities for small businesses, municipalities, and consumers.
Further, the Fed provided forward guidance indicating it would continue these measures until the Board members were confident “the economy has weathered recent events”. Per my answer in the quote cited earlier, the Federal Reserve is attentive and doing it part.
Until a vaccine or mortality-reducing medicines for COVID-19 are widely available it will be difficult for things to get back to where they were. But such are on the way, and until then adjustments are being made by governments, their agencies, companies, and individuals. Even if there is a new normal, we will adjust to that new normal, and grow again, and thrive again.
In the meantime, there will still be volatility. There is a prospect of a second wave of the disease in autumn, and thus another round of lockdowns. The medical news seems to change weekly, but on trend in a positive direction. And seemingly hidden in the background is the election, which may or may not bring much change in policy direction on many fronts.