Happy Friday!
Let’s use this time to run through the latest employment numbers and what they mean regarding the economic outlook. And so, I want to start from a self-quote I made yesterday from a January 8 post.
The reverse radical recovery
This is the part to focus on:
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.
Let me unpack that into a number of statements.
- We saw a sharp recession of unprecedented depth followed by a sharp partial recovery. After the initial V-shaped recovery, the jobs recovery has preceded at a slower pace.
- Looking at the full picture since the lockdown ended, retail, leisure and hospitality continue to be the sectors most at risk.
- The risk is both from changed consumer behavior during the pandemic and the sudden and disproportionate impact of lockdowns on those sectors.
- Omitting lockdowns, the overall contour of the recovery remains a reverse radical in the jobs sector – where a V-shaped move is followed by decent but much slower growth.
To illustrate why we’re calling this the reverse radical recovery, look at the section highlighted in yellow on this chart of non-farm payrolls below.
We’ve gained a lot of the jobs back that we lost but we are well off the pre-pandemic levels. And the slope of the line is rolling over, in large part due to job losses in pandemic-affected sectors.
Pandemic’s impact
For example, look at the last month’s data. We saw the US economy add 49,000 jobs, marginally lower than the 50,000 expected. However, where those jobs were added is key. In contrast to Wednesday’s ADP report, only 6,000 were private sector jobs. And there were massive losses in the pandemic-affected sectors: transportation down -28,000, healthcare down -41,000, leisure and hospitality down -61,000, retail down -38,000.
What that’s telling you is that the initial job losses in those sectors wasn’t enough in an economy still afflicted by a pandemic. Job losses are mounting and will continue to mount until the pandemic is over. Moreover, those losses will be greater when there are lockdowns that cause these sectors to shut down, as there were in December and January.
As an aside, the December job loss was increased from 140,000 to 227,000.
The mutant variant impact
Everything I have read or heard supports the idea that a number of mutant COVID-19 strains are more infectious, subjecting populations to the logarithmic maths of viral transmission virulence. Just from a maths perspective, think about this.
If the virus is under control with low transmission rates, then the so-called R-number is below 1. For example, an R of 0.5 means that 100 people would infect only 50, who would infect 25, who would infect 13. That’s a scenario where the disease is controllable and might even eventually be brought to heel.
However, when the R-number is greater than 1, you get an exponential increase in death. For example, an R of 1.3 means that 100 people would infect 130, who would infect 169, who would infect 220. You quickly get to a situation after 10 rounds of transmission where 1,060 people are infecting 1,379 people. That’s system overload eventually.
Now take that virus and make it more easily transmissible. Put the R at 1.6 instead of 1.3 and then you have 100 people would infect 160, who would infect 256, who would infect 410. In fact, after ten chains you have 6,872 people infecting 10,995 people a level 6 times higher than in the previous example.
What these numbers are telling you is that transmissibility is much more important than lethality in spreading the virus, and ultimately in killing people. A virus that is 30% more infectious is much more lethal than one that simply kills 30% more people. That’s because of the exponential impact of chains of transmissibility.
So, these mutant viruses are deadly.
Outcomes
From the data I have seen, all of the mutant variants have travelled worldwide at this point. Unless your borders are locked with strict quarantine protocols, the more transmissible viruses are in the country you live in right now. And they’re being spread at much faster rates than other strains.
It’s likely that these easily transmissible mutant strains will soon dominant COVID-19 infections around the world. Think of this as a spread in 2021 of COVID-19 mutant strains that is similar to the original spread in 2020, where only a tight border control and quarantine is likely to stop transmission. All efforts to restrict travel now are far too late to have any impact.
Meanwhile, we’ll just have to see what this means in terms of infections given that we are also rolling out vaccines too. I think we will see a fourth wave in the US. I had thought it would coincide with the cresting of the third holiday season wave. But it seems it will take a number of weeks. So, the decline in figures we see now may be a calm before the storm.
My view
Another wave of the coronavirus will have a massive impact on the economy. Putting aside the potential that any of these variants escapes antibody binding, making the vaccine less effective, we can still expect an impact. It’s the transmissibility that will create the biggest impact. And eventually it will lead to shutdowns.
In a world with Covid fatigue, what we saw in the UK, where even lockdowns didn’t stop rampant transmission, is likely to occur in the US as well. And so, I anticipate heavy impacts on retail, transportation and hospitality sectors. Those meme stocks need to be sold because some of them are going to zero.
This is what’s coming. Sorry to be the bearer of bad news. Let’s hope the Biden Administration is prepared.