Gilles Möec (AXA IM) | The epicentre of the pandemic first moved from Asia to Europe and is shifting to the United States which has now the highest number of covid-19 cases. There, labour market data suggest the economic toll is already very significant, even if the rise in jobless claims is to some extent a reflection of the generosity of the fiscal support brought about by the government.
In the very short run, we are quite relaxed on the capacity to protect income across all advanced economies, but the duration of the lockdown is the crucial variable. The later lockdowns start the longer they may have to last, since beyond a “critical threshold” at which the healthcare system is swamped out, time is needed to “re-charge” treatment capacity. While in Europe, and in Italy particularly, the news-flow on this front is positive, in the US it seems we are still far from “peak epidemic”. While we may tentatively pencil in a significant relaxation in lockdown measures by the end of April/beginning of May in Europe, we may have to wait until the end of Q2 in the US and given the level of trade integration this means we would have to wait until then before the normalisation of the world economy starts in earnest.
Beyond Q2, we need to start thinking about the shape of the recovery – assuming no relapse in the pandemic forces more lockdowns in Q2 and Q4. Informed by the Chinese data, it seems that consumers remain prudent upon exiting lockdown. Beyond behavioural changes, the decline in the value of accumulated financial assets and generic uncertainty may shift saving rates higher. But our main concern is investment.
Uncertainty will take its toll there as well, but more fundamentally we think the rise in corporate debt which is likely to be unavoidable to protect spending on fixed costs such as labour compensation– on top of public spending – could impair capital expenditure.
There are currently many “recovery shapes” being discussed. For our part we would go for a “swoosh rebound” (the shape of the Nike logo), with positive, but fairly low GDP growth from Q3 onward.
Looking through the spectacular US labour market data
We have had quite a few spectacular economic data releases in the US last week. The deterioration in the labour market is taking place at a faster pace than what most observers were expecting, but this may be more a reflection of the specific features of the US policy response to the crisis rather than adding anything to the quantification of the recession, which we knew was going to be very significant anyway.
The market was expecting the “payroll data” for March to reveal a net loss of 100K jobs only, since the survey covered the first half of the month, i.e. before most states went into lockdown. The actual decline was 7 times higher, and the unemployment rate jumped from 3.8% to 4.4%. But as we suggested two weeks ago, when looking at “real time data” such as restaurant bookings, a large share of the US population “self-confined” early without waiting for government instructions (restaurant activity was already down by c/40% year-on-year in the week to March 15). It is thus no surprise that businesses hit by such spontaneous social distanciation started offloading workers quickly. The details of the release of the “establishment survey” confirm this: two third of the job losses came from the leisure and hospitality sectors.
Those payroll data are already completely obsolete compared with the weekly “jobless claims numbers”. Initial claims rose 6.6mn in the week to March 28th, after 3.3mn in the week before. There is always some discrepancy between the data used to build the unemployment figure (based on the monthly “household survey”, more on this below) and those jobless claims, but at first glance they are already consistent with a rate of close to 10% while the intensity of the lockdown measures has risen over the last few days, which suggests labour shedding is only beginning.
Still, contrary to Europe where a number of “in-work unemployment benefit “systems exist and have been recently beefed up (“chomage partiel” in France, “Kurtzarbeit” in Germany), in the US there is not much of an alternative for employees to protect their income than applying for “full” unemployment benefits. In fact, the stimulus package adopted last week allows furloughed workers, and not just laid-off employees, to be eligible to unemployment benefits. The “furloughed” employees remain legally attached to their employers – the contractual relationship is not severed. Since the official international definition of being unemployed means being immediately available to take a job, the statistics ahead may not count those furloughed employees towards the unemployment rate.
Why is this important beyond the statistical nitty-gritty? Because looking ahead this may affect the shape of the recovery. Indeed, the depth and duration of mass under-employment after “peak lockdown” will partly depend on the strength of “attachment” between workers and businesses. Businesses will have to make a conscious decision to re-hire employees they have laid off, whereas resumption of “normal employment” should be swifter for those who opted for “furlough”. Also, furloughed employees usually keep the healthcare benefits provided by their employers, which – on top of the diminished uncertainty coming with retaining a higher probability to resume work after the crisis – should have a positive impact on their willingness to spend (no need to engage in precautionary saving towards potential health issues). In sum, the proportion of these two forms of labour shedding behind the rise in jobless claims in the weeks and months ahead will be one element to keep in mind when assessing the chances of a quick rebound in activity in the US.
What matters in the very short run is the shock to aggregate income, and on this front, we think we can afford to be relaxed. Federal support is quite generous, topping up the state benefits by up to USD600 per week for up to four months. On average, this means eligible employees relying on unemployment benefits will get the equivalent of the median in-work earnings (marginally south of USD 4,000 per month).
For now, household spending capacity is thus essentially unchanged. The government has substituted itself to the business sector to pay wages in the worst hit industries. We can work through the fiscal cost with simple assumptions. Federal Reserve of Saint Louis President James Bullard stated the unemployment rate could reach 30% temporarily in the US. This would cost the federal government USD 120bn for a full month of indemnification, i.e. 0.6% of GDP.
The issue though is how long we will have to wait before the situation starts normalising and unfortunately, we are concerned with the “sunk cost” which the initial hesitant sanitary response in the US has triggered.
In sum, with consumer spending possibly impaired by a higher propensity to save and serious potential curbs on investment, we think the likeliest scenario is for the world economy’s rebound post lockdown to be quite soft. World GDP would thus follow a swoosh shape (the Nike logo).