U.S. Economic Outlook

Layers of uncertainty

As an economist one has to live with uncertainty. Perhaps, that is why many economists have fallen in love with statistics and mathematics, as they promise at least some clarity. And, depending on whether it is a time of low or high volatility of economic data, there is always the option of issuing an outright disclaimer – to contrast against that idealized state of having full confidence in ones forecasts. And we have seen lots of such disclaimers recently.

April's labor-market report offered the most prominent example.[1] As it had been the case in March, the special circumstances of the pandemic most likely led to measurement errors. Usually, workers that are temporarily unemployed are included in the headline unemployment measure. In recent reports, a lot of those people probably misunderstood the questions being asked. Among workers who had been furloughed, a sizeable number appear to have been classified as absent from work because of "other reasons" as a result. The note at the end of the news release suggests that if those furloughed had been included, the unemployment rate would have been close to 20% – much closer to what we and some U.S. Federal Reserve (Fed) officials tend to believe.[2] However, the "official" unemployment rate increased by more than 10 percentage points to 14.7%. That was less than markets had feared, but still marked the largest jump in the unemployment rate since World War 2. 20.5 million jobs have been lost as a direct consequence of the measures to fight the pandemic. And if this was not enough of a historical tragedy, other data suggest an even gloomier underlying picture. A jump of average hourly earnings to 4.7% month-over-month from 0.5% indicates that it was primarily people in low-wage positions who lost their jobs (Chart 1). Fed Chair Powell recently indicated that he also thinks so, citing a Fed study that shows that 40% of those households with an income of less than 40,000 U.S. dollars lost their job in March.[3]

Chart 1: Wage data suggest mainly low wage workers are affected by lockdown measures

202005_US Economic Outlook_CHARTS 1_EN_72DPI.png

Sources: Bureau of Labor Statistics and DWS Investment GmbH as of 5/15/20

Many of those low-paid workers who lost their jobs previously worked in the service industry but this is not how the story ends. Unemployment increased on a broad basis across all sectors (Chart 2). Even employment in goods-producing industries was hit hard in April. Employment there dropped by 11% on average compared to March. Of course, the decline was much smaller than the 59% drop of employment in clothing & accessories stores, or the almost 70% drop in scenic & sightseeing transportation. Still, it demonstrates dramatically what we already explained in our last DWS U.S. Economic Outlook as of 4/20/20: less contact-intensive sectors are not shielded as they closely interact with high contact-intensive sectors. Employment in apparel production dropped by 40% for instance. This is consistent with our narrative of a transmission of shocks from high contact-intensive to low contact-intensive jobs. The pain will probably continue to spread for a bit longer, as many businesses most likely are still assessing their options.

Chart 2: Job losses are mainly concentrated in the service sector, but also production was hit hard in the non-farm payroll changes since March

202005_US Economic Outlook_CHARTS 2_EN_72DPI.png

Sources: Bureau of Labor Statistics, Haver Analytics and DWS Investment GmbH as of 5/15/20

And we are not short of dramatic statistics in these days. Two of the most important economic measures, retail sales and industrial production, both demonstrate the harm done to the economy since the lockdown measures were put in place (see Chart 3). With industrial production dropping 11.2% month-over-month and retail sales collapsing an even more stunning 16.4% month-over-month, historic comparisons are rare– at least where we have the data. For industrial production one could be tempted to use the well iterated war-time narrative. We agree that wars offer a suitable comparison when it comes to the magnitude of the shock. However, the parallel breaks down when considering the expected duration of the shock. During times of war, the U.S. economy faced a similar challenge in reorganizing itself, from the human tragedy of lost lives and accumulated government debt to the eventual task of switching industrial production back to peacetime needs. Back then, however, the enemy was thousands of miles away. Today the virus already invaded the homeland.

Chart 3: Impact of the pandemic on the real economy

202005_US Economic Outlook_CHARTS 3_EN_V2_72DPI.png

Sources: United States Census Bureau, Federal Reserve Board, Haver Analytics and DWS Investment GmbH as of 5/15/20

This proximity changes the nature of the shock, and makes its duration so uncertain. As we often mentioned, the course of the pandemic will ultimately steer the recovery. This, however, goes beyond simply counting cases of infections and assessing medical progress in search for a vaccine or better treatments. As the front lines of this war are not in a far distance country but rather in front of our doorsteps, every U.S. resident will face her or his own battle against the pandemic. Personal trade-offs and individual decisions will determine how economic activity will unfold looking ahead. While some certainly welcome the easing of various lockdown measures, eventually being able to go back to work and earn a living, others will remain cautious, thereby limiting aggregate economic activity. A recent report from the University of Michigan (U-M) elaborates how even "long after a vaccine ends the pandemic, some people may still automatically attach a negative evaluation to events that involve crowded venues, for example."[4] And U-M's very own and well known consumer sentiment report already reveals such trade-offs. After collapsing in March, future expectations remained on low levels in May while current economic conditions managed to increase marginally. Meanwhile, other surveys indicate that around 60% of U.S. citizens fear catching the virus.[5]

For a current economic assessment, however, we need to turn back to what statisticians provide us with – while of course keeping in mind that no such metrics can be perfect in such uncertain times. One metric we follow regularly these days would be the weekly economic index compiled by the Federal Reserve New York. In line with our thinking, it indicates that gross domestic product (GDP) already dropped by about 11% year-on-year.

Chart 4: Tracking the economic slump

202005_US Economic Outlook_CHARTS 4_EN_V2_72DPI.png

Sources: Fed New York, Bureau of Economic Analysis, Haver Analytics and DWS Investment GmbH as 5/15/20

Looking ahead, we expect uncertainty among households and businesses alike to prevail. Paired with the global nature of the shock, this suggests a rather moderate recovery ahead – provided, of course, that there will be no second pandemic wave which would prolong the recession and increases the risk of another financial crisis. While there are reasons to hope that a vaccine or better medical treatments could mitigate some of the negative impacts in such a risk scenario, we still believe even then it will take some time until those weapons against the virus are ready to be deployed on a large scale. Uncertainty over medical advances aside, potential production constraints may limit its deployment. And the simple fact that some people might prefer to wait and see, even if and after a new vaccine becomes available; this also points to a sluggish recovery.

And if the course of the pandemic is uncertain, so too is the effectiveness of current fiscal-policy measures deployed to mitigate its impact. Here we side with Fed Chair Powell and agree that more might be better in times of high uncertainty.[3] Generally though, we caution that an economic assessment remains challenging. That reflects not just the various pitfalls in measuring the economy correctly as we mentioned above. More fundamentally, it is also a consequence of the heavy weight millions of individual choices will play in determining the future path of the U.S. economy.

Overview: key economic indicators

2019

2020

2021

2022

Q4

Q1

Q2F**

Q3F

Q4F

Q1F

Q2F

Q3F

Q4F

Q1F

GDP (% qoq, annualized)

2.1

-4.8

-39.9

29.8

16.9

5.3

3.4

2.4

1.9

2.0

Core inflation (% yoy)*

1.6

1.3

0.7

0.3

0.1

0.4

2.2

2.8

2.6

2.5

Headline inflation (% yoy)*

1.6

1.7

1.6

1.4

1.2

1.2

1.6

1.9

2.1

2.0

Unemployment rate (%) (EOP)***

3.5

4.4

16.6

11.5

8.6

7.1

6.4

6.1

5.8

5.5

Fiscal balance (% of GDP) (EOP)***

-5

/

/

/

-18.2

/

/

/

-8.3

/

Federal funds rate (%)

1.5-1.75

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

*PCE Price Index
** Forecast
*** End of period

 

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