9 charts show why the economy is in such a scary spot
The coronavirus crisis is about to blow up a cascade of U.S. economic charts.
If the latest projections are even close to correct, the U.S. economy will see numbers so big and bad in coming months that we’ll be forced to stretch the vertical scale on charts to fit them. The highs and lows of the past decade, which seemed so critical at the time, will recede into relative flatness, dwarfed by the moves of 2020.
Here are nine that, taken together, show how we’re entering difficult territory.
Every day brings ever more dire forecasts. In the latest, Goldman Sachs economist Jan Hatzius and his colleagues revealed they expect the bottom to drop out of the U.S. economy in the second quarter of 2020.
Their estimates show gross domestic product will contract at a 24 percent annual rate between April and June. That’s about three times that of the single worst quarter of the Great Recession (8.4 percent).
What has them spooked? The earn-spend-earn cycle at the heart of the U.S. economy is unraveling. Consumer spending makes up more than two-thirds of U.S. economic output. With millions expected to be laid off, Americans have much less cash. With tens of millions more locked up in their homes, they have fewer goods and services to buy with what little money they have.
We don’t have great direct measures of layoffs, but new claims for unemployment benefits are a good proxy. Goldman Sachs expects those to soar to an unprecedented 2,250,000 this week, reflecting what happened last week. That’s more than three times the previous all-time high.
Millions looking for work
All those laid-off restaurant, bar and retail workers will send the U.S. unemployment rate soaring, with peak estimates ranging from Goldman’s 9 percent to the 30 percent that St. Louis Federal Reserve President James Bullard warned about. After the Great Recession, unemployment topped out at 10 percent.
We won’t begin to know the equivalent number for the coronavirus crisis until May 8, when the government releases preliminary jobs numbers for April. Because of how the data are collected, the unemployment numbers from March will not include data from last week’s meltdown.
The virus has progressed so rapidly that traditional data sources can’t keep up. To fill the void, economists and policymakers have turned to real-time alternatives such as the restaurant-reservation app Open Table, which publishes a daily comparison of how far sit-down restaurant traffic has fallen relative to last year. As of Friday, it was down 99 percent in the United States. One of the most common jobs in the country, waiter or waitress, has effectively ceased to exist.
The stock market
In the absence of other data, we’ve been forced to rely on the stock market as a proxy for the country’s financial health. Keep in mind, of course, that it’s of direct interest to only a minority of the population. New York University economist Edward Wolff has found that 50.7 percent of Americans aren’t invested in the market, even via mutual or retirement funds, and 90 percent of stocks are owned by the wealthiest 20 percent.
With that caveat, know that markets paint an alarming picture. On Friday, the Dow Jones industrial average closed below where it was at Donald Trump’s inauguration. It was Wall Street’s worst week since the global financial crisis.
The fear gauge
These wild market gyrations aren’t expected to slow. Last week, the Cboe Volatility Index (VIX) closed at an all-time high. That peak reading indicated that, based on how they value options to buy or sell a broad index of stocks in the future, investors fear the market could swing as much as 24 percent in either direction in the coming month.
Investment grade ‘spread’ chart
With all this volatility, investors are beginning to worry that companies won’t be able to pay off their debt in the long term. While junk-bond yields have soared, folks aren’t just worried about high-risk companies. Investors are bailing out of every flavor of private-sector debt, even those given a AAA rating by Moody’s Investor Service. The gap between the yield on 10-year Treasury notes and the yield on high-rated corporate debt is at its highest level since the Great Recession.
The Treasury flip
And, of course, no list is complete without 10-year Treasury bond yield and the real (or inflation protected) Treasury yield. These help measure how eager investors are to lend the government money. The 10-year Treasury is near a historic low, meaning that as of Friday, investors were willing to lend the U.S. government for 10 years for a measly 0.92 percent per year return. After inflation, that was only 0.26 percent. In fact, at times during this crisis, investors have been willing to lend money to the government at a negative interest rate — meaning they’d get back less than loaned.
There will soon be a lot more U.S. government debt where that came from. The administration is in talks for a stimulus package of as much as $1.8 trillion, which comes on top of the near-trillion-dollar annual deficits the government was already running.
The United States is the world’s largest oil producer, but right now its world-beating shale firms are getting battered by a price war between the second- and third-largest producers, Saudi Arabia and Russia. While low oil prices used to boon to Americans, at a time when the economy is deteriorating and the United States relies on higher prices for so many jobs, the news is alarming.
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