Economically, I would say we’re out of the woods for a recession now except to the degree mutant variants force new lockdowns. Four data points, real quick here.
- The 14-day change in hospitalization is -23%, with 91,440 hospitalizations at present. That’s down from a peak over 130,000
- Initial jobless claims came in today at 779,000, moving the 4-week average down ever so slightly to 848,250. That’s down from a 927,000 level in the week ended January 9 and a 936,000 level in the week ended January 16.
- ADP showed the private sector added 174,000 jobs in January, ahead of expectations for 49,000 and a -78,000 print in December
- Tomorrow, non-farm payrolls are expected to show 50,000 jobs added after a decline of 140,000 in December
Back on January 8, I wrote this:
The job loss in the December data was in the areas of the economy that were shut down in December like leisure and hospitality. And prior months’ data were revised up. That means, absent shutdowns the reverse radical recovery would have been intact. The shutdowns arrested the economy’s momentum and led to job losses. So, any future shutdowns will do the same going forward.
As I expect more severe shutdowns going forward, I expect job losses too, perhaps not in the January data but in the February and March data. And I, therefore, expect a concomitant loss of spending and a decline in GDP for Q1.
Would that qualify for a recession or is it just a blip on the way to the vaccine rollout? We’ll see. But I think the tunnel until vaccine rollout is longer than many anticipate. We have at least the Winter and Spring to get through, and likely the summer. We might be here next January without everyone having been vaccinated. That’s two years of a pandemic-affected economy. Be prepared for that eventuality. And I don’t think market expectations are in line with this outcome.
Let me update this with my current view a month later.
In terms of paragraph one, the job losses in December were indeed in the shutdown-vulnerable industries. And I continue to believe that “absent shutdowns the reverse radical recovery would have been intact”.
In terms of paragraph 2, with the hospitalization rates receding, we shouldn’t expect mass shutdowns anytime in the near-term in the US. So while I continue to not expect job losses in the January data coming out tomorrow, I don’t expect losses for the February data either. I know initial jobless claims are high – still at levels higher than the worst levels of previous recessions. Nevertheless, we are still ‘re-opening’ and so that means the job gains are even bigger in an economy not shutdown.
As to paragraph 3, let me end my thoughts on the last paragraph. March is more the question for the US now with regard to mutant variant spread and shutdowns. And, at present I still question whether a dip in personal consumption and GDP would qualify for a recession or just be a blip on the way to the vaccine rollout. We are about to get a massive stimulus to tide people over, maybe as large as $1.9 billion. That will go a long way toward preventing economic loss that would cause a recession – since to qualify the output loss normally has to have duration except in the extreme case in Q1 2020 when it was abrupt and sharp.
In sum, I no longer believe a new mutant variant shutdown would qualify as a new recession. But having said that, I would also add that Europe is in the midst of a double dip recession, perhaps the result of the mutant virus spread. So we can’t rule it out. But barring a US double dip, we won’t get a global double dip. And that can no longer be a base case outcome.
With all that said, I will repeat how I ended last month’s post: “We might be here next January without everyone having been vaccinated. That’s two years of a pandemic-affected economy. Be prepared for that eventuality. And I don’t think market expectations are in line with this outcome.”
And remember, on the lack of vaccination by the end of this year, that’s almost certainly true globally. But it also might be true in developed economies too. And that means the potential for the virus to mutate and escape antibody binding is elevated. The grey swan now is longer-term viral mutation and the negative impact that has on public health and the economy.