A slowdown in the economy will be shaken by the withdrawal of stimuli and the increase in the delta variant
While the story of the week was the big ‘dud’ in nonfarm payroll, most inbound data continues to be much weaker than the markets or financial media would suggest, as they continue to ignore. the implications. The graph above shows vehicle sales in the United States from 2015. Note the stable sales levels until the pandemic, the rise to just above normal and now a further decline. Sales in August were -11% lower than in July, falling to 13.5 million year-on-year. They were nearly 19 million in April. Could it be that the helicopter’s money advanced demand? Lack of semiconductors you will tell me! If so, why are used car sales also declining?
Now look at the New York Fed’s weekly economic index chart. As with autos, note the sharp rise in April and the slowdown since. From this chart, it appears that all “growth” occurred in April, leading to a second quarter GDP increase of 6.6%. But this index has been declining since, implying that “growth” has slowed since then, leading us to conclude that Q3 growth will be weaker than Q2 and Q4 will be even worse.
In previous blogs, we have discussed the potential impact of the Delta variant. The impacts of it continue. Restaurant reservations are down, hotels are experiencing cancellations and a drop in overnight stays, and a significant number of large companies have delayed the return to the office. The latest employment data shows job losses in the retail, hotel and restaurant sectors.
Here is a partial list of weakened inbound data:
- Mortgage applications: -2.4% W / W (last week of August) and -11.6% YTD.
- All five of the Fed’s manufacturing surveys fell in August (e.g. Dallas August 9.0 vs. July 27.3 (consensus: 23.0; far from the count).
- TSA Screenings: August 31 – the least since May 11
- Pending home sales: -1.8% M / M (July) (consensus: + 0.4%). This comes on top of -2.0% in June. Sales have declined in three of the past four months and five of the past seven. On an annual basis, sales were -9.5% lower and July -12.4% below December.
- The Atlanta Fed’s GDP Nowcast for the third quarter is + 5.1%; it was + 6.4% a month ago. The NY Fed’s GDP model is down to + 3.8% for the third quarter. It was + 4.2% in July.
- Johnson Redbook’s latest report showed a -0.6% drop in same-store sales for major retailers.
- The Chinese economy is slowing (maybe even contracting). The Caixin Manufacturing PMI index for August was 49.2 compared to 50.3 in July (consensus: 50.1) (50 is the demarcation between expansion and contraction). The Services PMI was even worse: 46.7 (August) versus 54.9 (July) (consensus: 52.0). Consensus predictions have failed big on both.
Wages Poll: Friday’s nonfarm wages at + 235K (corresponding to seasonal variations (SA)) also disappointed the consensus (+ 733K), yet another big mistake from trade forecasters. There was not much impact on the equity markets (September 3: DOW: -74.7, S&P 500: -1.5; Nasdaq
The people who have a job are the ones who get paid. Over the past two months, BLS told us that 1.288 million (SA) jobs have been created (1.053 million in July (revised) and 235K in August). The NSA figures (this is the actual number of jobs) for the two months combined were 278K (312K for August and -34K for July). 278K new payrolls are nowhere near 1.288 million. It is perhaps for this reason that the business surveys for August show weak employment! Note: NSA data shows -64K in retail, -74K in leisure / hospitality, -50K in accommodation (hotels) and -52K in restaurants. These data strongly imply that the Delta variant had a dramatic economic impact. We believe this impact will continue for at least a few months.
Weekly Initial Claims (IC): The weekly data is both encouraging and discouraging. Encouraging because CIs in state programs fell from 299K to 288K (NSA) the week of August 28. CIs represent further layoffs, and they continue to progress towards the 200K / week level that was “normal” before the pandemic.
But it is disheartening to realize that there will be a negative economic impact in early September when millions of unemployed people lose these benefits. Small business owners are the payers of the public systems for their employees, but the owners themselves are not eligible for state unemployment benefits (only their employees). Pandemic Unemployment Assistance (PUA) programs were put in place at the start of the pandemic for these business owners. As you can see from the initial PUA claims graph (data from April to August), PUA programs have struggled lately (delta variant?) And new weekly claims have remained above 100K.
PUA programs end the first week of September, so their demise is imminent.
Continuing complaints (CC): While the 100K / week IC is worrisome, the real issue is the impending termination of benefits for the 9.2 million continuing claimants (those who receive benefits for more than a week) in PUA programs.
If these beneficiaries received only $ 500 / week in benefits, they face a reduction of $ 45 billion / month in household income (or about 3% of that income). Expect a significant impact on consumption for at least the rest of the year.
Opt-Outs vs Opt-Ins: The tables below continue to show that opt-out states (those that do not pay the federal supplement of $ 300 / week) have continued to outperform opt-ins when it comes to reducing the number of unemployed. From May 15 to August 21, state opt-out unemployment fell by over 41% compared to less than 20% for op-ins.
Looking more granularly (table below), using final data from August 14, Opt-Outs (representing 25% of total CCs) reduced unemployment by -40K, while unemployment increase in opt-in states of + 42K!
Preliminary data from August 21 shows a slightly better performance of Opt-Ins, as their CC count only decreased slightly more slowly than Opt-Outs. As we have said in previous blogs, we believe that Opt-Ins will “catch up” when PUA programs end. And, again, we believe that once these programs are terminated, there will be a rush to find employment.
However, filling available positions is not an instant process. There is a necessary appointment, then an interview, a background check, and finally, an offer and an acceptance. So even if the majority of 9.2 million CCs start looking for work, it may take several months for some semblance of “normalcy” to return. And the economic implication is that there will likely be a noticeable slowdown in consumption, with retailing shrinking at an even faster rate than what we see in current emerging data.
The markets continue to ignore signs of an economic slowdown, as do the financial media. Of course, the stock markets love easy money, and slower economic growth means the Fed will stay easy longer. The bond market, on the other hand, appears to be seeing softness, and rates have reacted lower after some “inflationary” indigestion in the last quarter.
Besides existing signs of easing, the impending end of special unemployment programs means no weekly checks for more than nine million current beneficiaries. This is expected to have a negative impact on consumption, implying continued economic weakness in the fourth quarter.
(Joshua Barone contributed to this blog)