ADP data point to downside economic risk in US

The numbers coming out of the US today from ADP show the negative impact that coronavirus-related economic rollbacks have had on employment. The data processing firm said the US lost 123,000 jobs in December, where expectations had been for a rise of 88,000 according to Refinitiv. This was the first private sector job loss according to ADP data since April. The question now is not whether growth slows but how much and for how long.

Meanwhile, in Europe, we are seeing the most all-encompassing lockdowns since the ones initiated in March 2020. This reinforces my view that Europe has lapsed into a second recession. Taken together with the US data, it is telling us that the surge in coronavirus cases will have a meaningfully negative impact on the global economy in Q1 2021.

The double dip scenario

Just as a reminder, here’s what I wrote on Oct 31 of last year:

I am moving to double dip as my base case for the global economy because of the lockdowns rippling across Western Europe. I have seen confirmed or likely lockdowns in France, Germany, Spain, Wales, the UK, Belgium, the Netherlands, and Austria now. The economic impact will be large enough and the collection of countries is large enough to believe it means a global double dip, not just a European one. Given the data out of the US and the fact that we have not yet seen lockdowns, I am holding my fire on the US. But I think the double dip is likely here as well.

I still stand by this assessment. The logic here is that coronavirus case counts went unchecked long enough to overload healthcare systems, leading to economic shutdowns. And those shutdowns will lead to recession.

But, of course, this outcome is playing out over months, not weeks. And the new, more contagious strain of the virus first spotted in the UK will make the desire to impose lockdown that much greater, meaning the likelihood of global recession is now higher.


In Europe, we have a situation where politicians move to lockdown sooner, where the social safety net is greater, and where exposure to the more virulent strain of COVID-19 is well advanced. This adds up to a fall-off in economic activity that is met with huge amounts of deficit spending and monetary stimulus.

It won’t be enough to prevent small- and medium-sized businesses from failing, or in preventing businesses in COVID-impacted sectors from failing. But it will be enough to prevent worst case outcomes as the vaccine is distributed. And from a household income perspective, I am largely hopeful.

The Europeans are talking about mass distribution by mid-year. That timetable seems optimistic but let’s use that as our bogey. That means economic pain in Q1 and Q2 with Europe emerging in Q3 with pent-up demand accelerating growth by Q4.

The US

In the US, on the other hand, politicians are less likely to lock down. This may change under a Biden presidency. But the catastrophic conditions in the Dakotas in the fall did not precipitate lockdowns there. So I expect, as this third US wave progresses, the US will not lock down except when the situation gets very severe.

Community spread of the more virulent mutated strain of coronavirus is already confirmed in the US. So, it’s only a matter of time before we see conditions in the US similar to those in the UK, where 1 in 50 have tested positive for coronavirus in recent weeks. Therefore, with healthcare systems already near or at threshold, I predict the B117 strain spread and the Christmas/New Year’s fallout will push the US into more widespread lockdowns by February.

Unfortunately, the social safety net in the US is more porous. And that means job loss, evictions, and deprivation. This is tragic on a personal and humanitarian level. But it also will mean the economy will suffer. And I stand by my assessment that we are headed for a double dip in the US as well.

What the ADP figures show you is that the job losses have already begun even before the B117-affected coronavirus spread has materialized in the US. Whether or not the data released Friday confirm the ADP numbers is irrelevant. What’s clear is that we now know the recovery has stalled and likely broken. The V-shaped trajectory of the re-opening is history.

My View

I am going to leave it there today and wait for the data from Friday before I make more extensive comments. But, the overall gist here is that I am more into the double dip base case camp now than I was before.

The recent jobless claims data have been better than expected, declining for two consecutive weeks. And we did not see 1 million people filing in a single week, something I said would make the double dip a lock. But the ADP data shows you the damage of the Fall shutdowns the US did have was enough to not just cause job growth to decline, but to cause a loss in private sector jobs.

When the B117 variant comes to the US, the outcome will be amplified. And we should expect shutdowns that will cause GDP to contract outright. Interestingly, the ADP numbers show that both small and large businesses lost jobs while medium-sized ones gained jobs. To me, this is indication that market-listed companies are feeling the pain. And the rally in shares is, thus, at odds with the economic reality in these companies.

How much longer can investors look through the data until the mass vaccination arrives? For the first time in this business cycle, I can say that the price action and mood feels like 1999. There is a manic, irrational undergirding to the way asset prices are responding to news flow. And so, with me anticipating a negative surprise from B117-induced viral spread, I also see a sharp correction as a reasonable risk in the coming months. Caveat Emptor

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