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"This Time Is Different!" No, Seriously!

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This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here

Full disclosure first. We are fully aware of the long history of those four words “This time is different” -- and how they have made more accomplished and more brilliant economists look bad in the past!

We duly acknowledge a long, long tradition of ‘economic’ experts weighing in poorly on any negative state of affairs. They usually argue things like “this time around will evolve differently than in the past.” History cannot be any guide. ‘Marketing & Sales’ experts may be more appropriate.

Zacks economists don’t want to push the envelope. Instead, we want to shed light on looming macro aggregate numbers. We wish to provide modest guidance, for how investors can better interpret this current market environment. Compared to past events, we are indeed in unprecedented times. The COVID-19 epidemic is (by far) the most challenging health crisis to which any of us have borne witness. Therefore, it becomes singularly difficult to compare our current environment to historical events. Distant events (outside of anyone’s living memory) might have only a few similarities regarding one or another of our key economic growth variables. So, we can safely affirm some idiosyncrasies in our current malaise.

Exhibit A: The most common comparison to the current pandemic is to one of the direst health events in the last 100 years. This is the 1918 influenza pandemic, also called the Spanish flu (which according to research from 2005 actually originated in the United States). This reference point fails to acknowledge this: Any prediction about the next few months -- based solely on the Spanish Flu experience -- will be misguided. We have a modern health care sector better equipped to combat a novel virus. Incorrect treatments, such as overdoses of aspirin, likely exacerbated the death toll of the Spanish Flu. Wartime parades, housing soldiers in tight barracks, and awful WWI trench warfare propagated second and third waves of infections back then.

In particular, we want to emphasize the 2 most important macro demand indicators — real GDP growth and U.S. household unemployment rates — have to be taken with a grain of salt. This is paramount when evaluating shocking forecasts of -30% contractions in the 2nd quarter U.S. GDP growth. Think suppression, not recession. The choice of words matter.

Ugly macro numbers inevitably bring up other memorable images from the 1930s Great Depression, where huge plunges in negative growth rates first got recorded and studied. Those came out of a much less regulated economy and financial market. We need to remind ourselves of that. The sole underlying cause for current macro weakness is exogenous, top-down, public health policy actions. Thus, it is not inherently related what was happening inside the U.S. economy or its financial markets. Subsequently, macro data is no clear indication of a current flaw or structural problem, either hailing from the U.S. or the global economy, for that matter.

We can illuminate this, by stewarding the history of macro-economic thinking, for lay people. GDP and unemployment measures were created in order to allow centralized, Federal demand managers to evaluate spending and interest rate conditions, and plan future policies accordingly. A very high unemployment number has usually been indicative of a mismatch between market-related labor demand and supply, for instance. The modern concept of GDP was first developed by Simon Kuznets for a U.S. Congress report in 1934. After the Bretton Woods monetary conference in 1944, GDP became the main tool for measuring a country's economy. Economists are applying a GDP measure developed a full 16 years after the Spanish flu pandemic of 1918. In his report, Kuznets even back then warned us against its use as a measure of welfare.

This time is different. There, we said it again!!

Bullish equity market reactions at the time of the release of record high unemployment numbers, and shocking negative GDP growth numbers, are one indicator. Savvy risk market participants have understood the shortcomings of the GDP concept. Already! Global markets and societies have been on lockdown for the last 2 months. None of these numbers should come as a surprise. To anyone.

In particular, when it comes to current policy responses, focus on the many ways enacted demand policies have likely alleviated any enduring impacts from this unprecedented global pandemic lockdown event. Heed economist John Maynard Keynes and the 1936 title of his last and most important book, “The General Theory of Employment, Interest and Money.” Our central authorities swiftly provided liquidity to fixed income markets, cash to deprived small businesses, and a variety of income measures to support the growing group of unemployed individuals. His final book gave macroeconomics a central place in economic theory and contributed much of its terminology.

Unemployment numbers are a similar challenge. They are authentic by all means. But they do not reflect a market-driven ‘Keynesian’ mismatch between demand and supply for labor now. We all are aware that once various large U.S. state economies are allowed to open up again, we should expect a rapid rebound in U.S. unemployment rates.

However, there is a catch.

As lockdowns continue, we do expect employers will find ways to replace their furloughed staff… and not rehire them after their final markets open. It might be companies, who leverage Internet-related tools they learned to rely on during the shutdowns, permanently replace staff, or downshift cap-ex demands. This poses the more durable danger, in our view. That is, prolonged unemployment will cause structural changes inside these firms, and therefore, to the economy.

For example, this may require our prior office-driven workforce to adapt dynamically, to adjust to the future demand of a more diffused U.S. labor market. Perhaps that is a bridge too far for many shocked former employees? Then again, perhaps there are silver linings for them too? They have been set free.

To summarize, we are apprehensive. About any assessment of the current state of our economy based on traditional metrics such as GDP and unemployment. However, we do expect those two variables might have predictive power, as a period of subdued economic activity prevails once shutdowns are more or less lifted.

In particular, U.S. household unemployment numbers might not necessarily bounce back quickly, the longer shutdowns last. In that sense, we think this time is NOT different from past crises. The longer U.S. unemployment numbers remain elevated, the more difficult it will be to lower them.

Still, some past patterns will not repeat themselves. The direst example from the last 100 years of U.S. history will not be replicated this time around.


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