May 28, 2020

Analysis | The Finance 202: The Fed has bracing news for anyone expecting a sharp economic rebound

By Tory Newmyer

with Brent D. Griffiths

The Federal Reserve just tossed a glass of cold water in the face of anyone predicting a swift economic recovery.
The ongoing crisis brought on by the pandemic shutdowns has caused “steep" job losses, with activity “falling sharply” across the map, the central bank’s latest survey of economic conditions on the ground finds.
And business owners report their outlook for the recovery remains “highly uncertain” and most are pessimistic about the trajectory of the rebound, according to the Fed’s new beige book, which collects anecdotal information from a wide swath of business owners around the country.

A pedestrian wearing a protective mask walks passed closed businesses the Chinatown neighborhood of New York on Wednesday. (Nina Westervelt/Bloomberg)

The report, covering six weeks of activity through May 18, offers a snapshot of an economy in the teeth of a shock whose scale and duration remain unknown. It is a bracing reminder that as some Americans take advantage of easing restrictions to resume working and spending — and the stock market continues to rally — the economic wound remains open.
The ongoing muddiness of the picture compounds the challenge for policymakers.
As job losses pile up, the Paycheck Protection Program, a cornerstone of the federal relief effort, largely missed the neediest businesses it aimed to save with its first round, a new report from S&P Global finds. Per the study, 63 percent of the PPP’s initial $350 billion in forgivable loans went to sectors less effected by the shutdowns. The loans also skewed toward larger businesses, meaning there were fewer to go around.
“The industries that were hit so hard are still feeling the pain,” S&P Global chief U.S. economist Beth Ann Bovino tells me.

(via S&P Global)
And while the second tranche of the program appears to be doing a better job reaching the most at-risk businesses — so far, it has doled out roughly 2.6 million loans, a million more than the first round, and it still has 39 percent of its cash remaining — it is too soon to evaluate how many jobs the program has salvaged.
“We’re not going to know that until we do a post-mortem on the PPP,” Bovino says. “The first question is, ‘Did PPP keep small businesses alive?’ Once we learn how many of these businesses survive, we can find out how many workers they need.” 
House lawmakers are poised to vote today on a revamp of the program's rules to give businesses more time and flexibility with the loans. And the question of its efficacy will take on renewed urgency this morning when the Labor Department releases the latest weekly jobless claims number. Economists expect 2.1 million more people filed for unemployment benefits, bringing the ten-week total to over 40 million.

How weekly job loss claims have piled up since the pandemic shutdowns began, through last week.
The Fed’s survey suggests a significant number of those job losses will be permanent.
The PPP “has helped many businesses to limit or avoid layoffs, although employment continued to fall sharply in retail and in leisure and hospitality sectors,” the beige book found.
And expectations for a swift bounce back in some regions remain grim. In the Cleveland area, for example, the survey finds only a third of business owners who cut workers expect to rehire close to the full number of them when they reopen. And among the firms closed in the St. Louis area, only a third expect to reopen in the next three weeks; less than a fifth expect demand for their offerings to pick up in the next five weeks.
“There was little in the report to suggest the economy was on the verge of a ‘V’-shaped recovery as of mid-May,” Evercore ISI analysts Krishna Guha and Ernie Tedeschi write in a note.
The macroeconomists’ view from on high offers little more clarity. 
As business owners fumble forward, those trained to understand the nature of major economic shocks appear just as stumped about what's happening. “Is this a demand shock or a supply shock? Yes. And no,” Paul Krugman, the Nobel Prize-winning economist and liberal New York Times columnist, tells Bloomberg’s Noah Smith. “What's happening now is that we've shut down both supply and demand for part of the economy because we think high-contact activities spread the coronavirus. This means we can't just use standard macro models off the shelf.”
And when it comes to crafting a federal response, the disease itself “remains the wild card in all this,” Bloomberg’s Timothy O’Brien and Nir Kaissar note. “If the coronavirus stops savaging lives and the economy soon, then the bailout’s scope and duration will come into focus. If the virus remains deadly — particularly if a second surge appears later in the year — then government lifelines will need to lengthen and the bailout’s playbook may need to be rewritten.”

Trump tracker

Trump listens as acting director of the Office of Management and Budget Russ Vought speaks during an October news conference last year. (Evan Vucci/AP)
White House will break decades of precedent by not releasing updated economic projections.
Outlooks this summer would almost certainly predict a downturn: “White House officials have decided not to release updated economic projections this summer, opting against publishing forecasts that would almost certainly codify an administration assessment that the pandemic has led to a severe economic downturn,” Jeff Stein and Josh Dawsey report.
“The White House is supposed to unveil a federal budget proposal every February and then provides a ‘mid-session review’ in July or August with updated projections on economic trends such as unemployment, inflation and economic growth. Budget experts said they were not aware of any previous White House opting against providing forecasts in this ‘mid-session review’ document in any other year since at least the 1970s.”
  • There's bipartisan consternation over the decision: “Both liberal and conservative critics said the White House should publish its economic projections in line with the precedent set by prior administrations, regardless of the uncertainty caused by the pandemic. The White House under President Barack Obama continued to release these numbers during the Great Recession, although they were unflattering.”

When superpowers collide

Chinese delegates cast their votes at the closing session of the National People's Congress (NPC) in Beijing on Thursday. (Carlos Garcia Rawlins/Reuters)
China moves forward on Hong Kong crackdown.
Communist Party officials made the decision even as other countries ready potential punishments: “China’s rubber-stamp parliament approved a plan to impose a new national security law on Hong Kong that will dramatically increase Beijing’s power over the city and could bring about an end to its status as an international financial capital,” Anna Fifield reports.
“The National People’s Congress, wrapping up its annual meeting [today], voted to forward the plan to its standing committee for drafting, but the outlines have already been well telegraphed. The law is Beijing’s boldest move yet to undercut Hong Kong’s autonomy and is a direct response to the pro-democracy protests that broke out in the former British colony last year.”

Secretary of State Mike Pompeo. (Nicholas Kamm/Pool/AP)
Pompeo declares Hong Kong is no longer autonomous from China.
The decision could have major trade implications: “It will be up to [Trump] to decide the next steps, which could include sanctions on Chinese officials, higher tariffs and visa restrictions. David Stilwell, the assistant secretary of state for East Asia Pacific Affairs, said the administration has a ‘very long list’ of options, but refused to be more specific. But Stilwell said efforts will be made to target the pain on officials in Beijing while mitigating the impact on the people of Hong Kong and the United States,” Carol Morello reports.
“Tensions between Washington and Beijing have been growing steadily over the past year, with belligerent disputes over trade, press freedoms and China’s early reluctance to alert the world to the coronavirus that became a global pandemic. Then last week, China announced a proposed law in which the Chinese Communist Party can deploy 'relevant national security organs' to Hong Kong, giving legal cover for the mainland security services to operate in the previously autonomous financial center. Pompeo has called it a ‘death knell’ for Hong Kong.”
House sends different China sanctions bill to Trump: Lawmakers "passed legislation calling for sanctions against Chinese officials for the detention and torture of Uighur Muslims in the country’s western region of Xinjiang,” CNBC's Tucker Higgins reports. “The legislation was approved by a vote of 413-1 after passing overwhelmingly in the Senate earlier this month.”

Meng Wanzhou, chief financial officer of Huawei, leaves B.C. Supreme Court in Vancouver. (Jonathan Hayward/The Canadian Press via AP)

Huawei CFO loses court fight against extradition to the U.S.: “Huawei Technologies Co’s Chief Financial Officer Meng Wanzhou was dealt a setback by a Canadian court,” Reuters's Tessa Vikander and Moira Warburton report.
“The ruling, which could further deteriorate relations between Ottawa and Beijing, elicited immediate strong reaction from China’s embassy in Canada, which said Canada is ‘accomplice to United States efforts to bring down Huawei and Chinese high-tech companies’ … The ruling paves the way for the extradition hearing to proceed to the second phase starting June, examining whether Canadian officials followed the law while arresting Meng.”
U.S. seizure of Chinese-built transformer in Houston may foreshadow the future: “Federal officials commandeered the electrical transformer, built by closely held Jiangsu Huapeng Transformer Company, at the port and had it trucked under federal escort to Sandia National Laboratories in Albuquerque, N.M., according to people with knowledge of the matter,” WSJ's Rebecca Smith reports of equipment that was headed to Colorado.
The event "raises questions about whether more interventions could be ahead as the federal government begins to enforce an executive order [Trump] signed on May 1 that gives federal officials authority to block utilities from using gear sourced from companies deemed influenced or controlled by ‘foreign adversaries’ of the U.S. While the order didn’t identify these adversaries, it was widely seen as targeting primarily Russia and China.”

Coronavirus fallout

The Post's front page:

The U.S. death toll has reached 100,000.
This has happened in less than four months: “Nearly three months into the brunt of the epidemic, 14 percent of Americans say they know someone who has succumbed to the virus,” Marc Fisher reports.
“These 100,000 are not nameless numbers, nor are they mostly famous people. They are, overwhelmingly, elderly — in some states, nearly two-thirds of the dead were 80 or older. They are disproportionately poor and black and Latino. Among the younger victims, many did work that allowed others to stay at home, out of the virus’s reach. For the most part, they have died alone, leaving parents and siblings and lovers and friends with final memories not of hugs and whispered devotion, but of miniature images on a computer screen, tinny voices on the phone, hands pressed against a window."
Record unemployment leaves Americans vying for “safe” jobs.
There are signs the pandemic is transforming the labor market: “The scramble for remote, socially distant employment reflects lingering fears on the part of U.S. workers about their physical and financial security as the pandemic stretches into its third month. There have been roughly 40 million applications for jobless benefits since March, and the Trump administration is expected to announce Thursday that even more have joined their ranks," Tony Romm reports.
“For Americans seeking new gigs, or aspiring to return to the workplace, the market may prove daunting, according to a snapshot compiled by ZipRecruiter, a job-posting website. There is a growing number of openings in warehouses as major retailers such as Amazon expand their footprints. But some of the greatest demand is for harder-to-get, ‘safe’ jobs requiring little to no face-to-face contact, including data entry, customer service and other human-resource tasks, said Julia Pollak, the company’s labor economist.” (Amazon CEO Jeff Bezos owns The Washington Post)
More from the U.S.:
  • Americans who kept their jobs are finding their salaries slashed: “The hard numbers won’t be in for months, but anecdotal evidence is piling up. On earnings calls, big businesses including The Container Store Group and Lyft have cited what they say are temporary salary reductions. Federal Reserve officials also have found plenty of supporting evidence,” Bloomberg's Matthew Boesler and Reade Pickert report.
  • Fauci warns about hydroxychloroquine: “Anthony Fauci, the government’s top infectious-disease expert, said hydroxychloroquine isn’t an effective treatment for covid-19 and urged caution as Republicans and Democrats plan their conventions for later this summer,” WSJ's Andrew Restuccia reports.
  • Cuomo renews push for state aid: “New York Governor Andrew Cuomo said … he has a message for ‘our friends’ in Congress: ‘Stop abusing New York. Stop abusing New Jersey. Stop abusing Massachusetts and Illinois and Michigan and Pennsylvania,'” CBS News reports.

A Boeing Co. 737 Max airplane sits on the production line at the company's manufacturing facility in Renton, Wash., last year. (David Ryder/Bloomberg)
The corporate front: 
  • Boeing cutting more than 12,000 U.S. jobs and resumes production of 737 Max: “The company had said it would cut 10 percent of a workforce that numbered about 160,000. A Boeing spokesperson said Wednesday’s actions represent the largest number of job cuts, but several thousand additional jobs will be eliminated in the next few months,” the Associated Press's David Koenig reports.
  • Disney says its Florida theme parks will re-open in mid-July: “A number of social-distancing measures will be imposed at the parks, said Jim MacPhee, senior vice president of operations for Walt Disney World Resort. Customers will be required to wear masks and undergo temperature checks,” Steven Zeitchik reports. “And MacPhee said parades and fireworks displays will remain temporarily suspended because of the crowds those events attract.”
  • American Airlines plans to cut 30 percent of management and administrative staff: That's a reduction of about 5,000 jobs, CNBC's Leslie Josephs reports. “The airline also started offering buyouts to these employees and said it plans to offer new voluntary leave and buyouts for frontline staff, such as flight attendants, next month.”
Around the world:
  • E.U. proposes $825 billion rescue plan: “Proponents are calling it Europe’s ‘Hamiltonian moment,’ after the 1790 agreement, engineered by Treasury Secretary Alexander Hamilton, that transformed the United States from a loose confederation of former colonies into a true federation with a central government. If approved, the E.U. plan could bind the bloc together at a moment when it seemed at risk of spinning apart under the pressure of the pandemic,” Michael Birnbaum and Loveday Morris report from Brussels.
  • Lufthansa rejects E.U.'s $10 billion bailout: The airline's supervisory board balked at the conditions attached to the funds, Reuters's Arno Schuetze and Ilona Wissenbach report. “The board, which had been expected to sign off on the aid, instead refused EU requirements that Lufthansa permanently give up take-off and landing slots at Frankfurt and Munich airports, where it commands a two-thirds market share.”
  • Johnson continues to defend embattled aid: “Prime Minister Boris Johnson faced a tough round of angry queries, serious skepticism and even mockery from British lawmakers over his continued support for his top political strategist, Dominic Cummings, who left his London home when he and his wife were stricken by the novel coronavirus to travel 260 miles to a family home,” William Booth and Karla Adam report from London.

Market movers

Traders wear masks as they work on the floor of the New York Stock Exchange on Wednesday. (Lucas Jackson/Reuters)
Dow tops 25,000 for the first time since March.
Markets are surging: “Financial stocks and beaten-up industrials helped power the blue chips — a comeback signaling confidence in the recovery — to a close of 25,548.27. Goldman Sachs, JPMorgan Chase and American Express all had big days,” Thomas Heath reports.
“This comes on top of Tuesday’s 530-point gain and leaves the Dow about 14 percent shy of the all-time high it set in February. It’s now off 10 percent for the year. The Standard & Poor’s 500-stock index advanced 1.5 percent to close above 3,000 points for the first time since March 5. At 3,036.13, the index is now 10 percent off its all-time high and down 6 percent for 2020. All 11 S&P sectors were positive, led by financials and industrials. The S&P technology sector was down most of the day but notched a slim gain at the close.”

Pocket change

SpaceX's historic launch scrubbed due to weather.
Elon Musk's moment will have to wait just a little bit longer: “Space officials Wednesday postponed the launch of a manned SpaceX rocket en route to the International Space Station because of problematic weather around Kennedy Space Center in Merritt Island, Fla., and a tropical storm brewing off the coast of the Carolinas,” Jacob Bogage and Christian Davenport report.
“The mission’s next launch window is scheduled for Saturday at 3:22 p.m., from historic launch pad 39A, the same facility that launched the first astronauts to the moon aboard Apollo 11 in 1969. The flight would have culminated years of work and the fulfillment of a risky bet by NASA under the Obama administration to entrust the private sector to fly astronauts. For SpaceX, it was the crescendo of an improbable odyssey that began in 2002 when founder and chief executive Elon Musk set out to start a space company.”


  • The Labor Department reports weekly jobless claims
  • Costco Wholesale, Nordstrom, Dollar General, Ulta Beauty, Abercrombie & Fitch and Burlington stores are among the notable companies reporting their earnings
  • Jet Blue CEO Robin Hayes speaks during a Post live event on the future of travel

The funnies

Bull session

The contretemps on CNBC
I don't think that's what the opening bell means: “CNBC’s ‘Squawk Box’ hosts Andrew Ross Sorkin and Joe Kernen got into a shouting match in a segment about the road to economic recovery,” Taylor Telford reports.
“Sorkin accused his co-host of downplaying the dangers of the pandemic, including the loss of 100,000 American lives. Kernen retorted that Sorkin was being an alarmist and sparking undue concern, and maintained that his goal was to help investors keep a cool head. The exchange highlights the deep divide in how to respond to what is both a public health and financial crisis. Business and social activity was suspended in much of the country to contain the spread of the deadly virus to devastating results for the economy. Some say the economic damage is worse than the pandemic itself.”
Video of the exchange:
In almost ten years, I’ve never seen Sorkin get this heated on Squawk Box. Worth searching for the segment in its entirety.
— priyadesai (@priyadesai) May 27, 2020

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