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The View from the Bottom


After spending decades studying the economy, it is understandable that this blog is usually about the economy, but it hasn’t been that way recently.  That’s because all the data has been relentlessly dismal – the worst I have ever seen.  What’s the point of elaborating the obvious?  The current economy sucks!  Here is some of the recent data:

Factory output dropped 11.2% in April, the worst in 101 years.
Auto production dropped 71.7% – yes, 71.7% — the worst ever.
The latest durable goods orders dropped a whopping 17.2%
Retail sales fell another 16.4% in April after the record fall in March.
Capacity utilization fell a jaw-dropping 8.3% in one month.
Our GDP dropped 5% in Q1  –  Q2 estimates are a drop of another 20-30%
Canada’s GDP dropped 8.2% in Q1  –  Q2 estimates are another 45% drop.
Corporate profits dropped even more, 13.9% in Q1.  Q2 will be worse, much worse.
Personal consumption is expected to drop at a 30% rate in Q2.
40 million Americans need a job.
80% of all Americans say jobs are “hard-to-get”.

So, why are we now looking at this relentlessly bad data?  Because I smell a bottom.  Here’s why:

While consumer confidence has dropped by a third, it has stabilized and stopped falling.
Forward-looking expectations rose for the second month to 96.9, higher than it was last October.
The consumers with jobs are extremely healthy, with an all-time high savings rate of 33%, because they haven’t been able to spend.
(The massive government stimulus of $1,200/person & $600/week extra unemployment benefits also helped greatly.)
Initial jobless claims have been falling for eight straight weeks.
Continuing jobless claims have been falling for two straight months – a very good sign.

The beautiful secret of capitalism is that it is self-correcting, although it corrects even faster with government stimulus.
The ugly secret of capitalism is that the poor suffer the most during recessions and even worse during depressions.

Nearing the bottom does not mean we are nearing the recovery.  The stock market obviously believes we will have a V-shaped recovery, which means a strong economic bounce.  We will not!  It will be a L-shaped recovery at best, which means a slower recovery . . . but still a recovery.  Until then, we may grind somewhat lower but more slowly.

The real economic recovery cannot begin until we know whether the expected rise in coronavirus infections this Fall is significant.  Capital expenditures and inventory changes cannot be adjusted before then.  America is currently budgeted for a slight rise but only a slight rise – a major rise will lower the bottom.  Likewise, reduced fiscal stimulus will also lower the bottom.  A major unknown is whether damage to the supply chain will slow our recovery.

In terms of plummeting economic data, the worst is over.  The question becomes – when will the real recovery begin?

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