Moneybeat - Permanent economic damage

MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Government released Gross Domestic Product numbers for the first three months of this year. But it’s largely the last two weeks of that first quarter that did the bulk of the damage. And the report shows quite a lot of it: Economic activity contracted nearly 5 percent for the quarter overall. GDP minus 4.8 percent, the sharpest quarter-to-quarter drop since the financial crisis more than a decade ago.

Consumer spending in March down from February 7.5 percent: by far the biggest month-on-month decline since the record set in 1987. 

And new claims for unemployment benefits last week, 3.8 million. 

When all is counted for April, some labor economists predict a 20 percent unemployment rate. Those are depression-era numbers: at one point back then, unemployment got as high as 25 percent. 

Just a lot of damage here.

Financial analyst and advisor David Bahnsen is on the line for our weekly conversation. David, good morning.

DAVID BAHNSEN, GUEST: Good morning, Nick.

EICHER: I do read your daily COVID and Markets blog post and of course Dividend Cafe—links, by the way, in the transcript. Now, I did note emergency approval from the Food and Drug administration for Remdesivir. But you made a point that I thought was really interesting, that this drug Remdesivir is an injectable, not a tablet, and so as you point out, “production will be difficult to scale.” So, not good news?

BAHNSEN: I’m not sure that that’s true that it’s not good news. The vast majority of therapeutics in really severe cases of things are injectables, and this particular treatment is for people who have more of a hospitalization level of COVID, so to the degree that what we’re looking to do is get people who are really sick healthy and get people who are really sick to not die, I think that this is very positive. As far as it being a household treatment with minor COVID, that was never really its intent. Remember, this particular treatment was initially developed as a potential Ebola treatment, which there was no such thing as a mild Ebola. And so COVID just happens to have 97-99 percent of its cases be very mild and remdesivir is not intended for that. But to the degree that it has shown tremendous promise for potentially fatal and real severe cases and that it has expedited discharge from hospitalization, that’s what we’re looking for in that data.

EICHER: But before we have good economic news, we’re going to have to have good health news, and so in that sense, that is a big step forward. Right?

BAHNSEN: Oh, yeah, it is. And I think that we have the indication from a couple days before Friday that this test came directly from those clinical trials being done by the National Institute for Allergy and Infectious Disease. And so  the promise of this treatment, I think, is very encouraging.

But, back to the economic side, Nick, I do think that we are in a tough position in that there’s no going back now in the timeline that the shutdown took place. It’s very hard to measure, it’s very hard for me to quantify, but I think I can paint a picture that there was a certain amount of permanent damage that was going to be done if the shutdown lasted two weeks. And that permanent damage was very minimal. And then not only did the present damage obviously continue, I mean, this is a sort of self-evident fact, the present damage continued to go higher and higher as the shutdown lasted longer, but I think the scale of permanent damage has gone up as well as we went into three weeks, four weeks, five—now we’re sitting here at roughly six weeks. But from start to finish, you’re going to end up with a minimum of 10 weeks of some form of shutdown that changes the picture of how much economic damage was done from what it originally could have been back in March.

EICHER: So we’re looking at jobless claims, just to run through some of the numbers here, David. 3.8 million. Again, just astronomical numbers. Things we wouldn’t have even imagined in February before this broke. But 3.8 million is fewer than the number of the previous week 4.4. And 4.4 was less than the 5.5 the week before. So, trending in the right direction. I mean, do you take comfort from that?

BAHNSEN: I don’t take comfort from it because it’s so obvious that that’s what was going to be the case. You get a point where because this is measuring initial jobless claims, it’s very hard for that number to go higher after the first couple weeks. Where I’ll take encouragement is when the number dips below a million, which I think is coming. And then we get a chance to see what the impact is out of the paycheck protection act, out of some of the short-term stimulus things, out of the main-street lending facility that the Fed announced this week. They’re expanding the criteria quite dramatically, which I think is going to open the door to even more people. 

But, Nick, if I were to speak very candidly to our listeners, I can’t measure this right now, but I can tell you qualitatively how I believe this is going to play out. For most people and their jobs and with some degree of marketable skill in the economy, they’re going to end up being re-employed, and probably very soon. 

The people that are at most vulnerability here and are most present in the unemployment data are the most expendable in the economy: are those those restaurant, food and beverage service type jobs, $8, $10, $12/hour type jobs that are very replaceable, that’s where I think it’s going to be most difficult for the stimulus to reach down and impact. And so we’re going to have a lasting effect there. 

But on the economic side, I do have every expectation that those in the lower end of the income spectrum are going to feel this the greatest.

EICHER: We saw a GDP number for the first quarter, no big surprise, it was negative. -4.8 percent. It’s so backward looking maybe not even useful. But, still, it’s kind of a final score in the sense that it tells us what happened in the first quarter and that those last couple of weeks in March really wiped out any kind of gains that we might have seen in the first, what, 10 weeks of the beginning of the year 2020. And then they say that is the sharpest drop quarter to quarter since the 2018 financial crisis. So, no big surprise but what do you take from the GDP numbers?

BAHNSEN: EIYou mean the 2008 financial crisis. And obviously that ended up lasting much, much longer, that GDP contraction, from when in hindsight we saw it officially began to when it officially ended was the longest period of contraction since the Depression. 

The 4.8 percent drop in Q1 is not just from two weeks. Apple came out in, I believe it was February 7th, to say that they already were seeing a dramatic decrease in order flow and supply-chain capacity from what had happened out of the Wuhan aspect of things. So, even just from a global supply-chain standpoint, there was already some degree of impact sifting through the economy from late January all the way through February. And I believe that most companies were already making adjustments on the margin by late February. 

The violence of GDP contraction comes from the dying consumer. And that, you’re right, is certainly the last two weeks of March. So, I am in the school of thought that says that if Q2 ends up being negative 20 or negative 40, there’s no difference between the two numbers. How could that be? Well, because from a human impact, that’s not going to measure the human side anyway. That’s measured in the wages and the unemployment net of stimulus. And so that part is baked in. And then there’s just varying degrees of the impact to trade, inventory, and production. 

The production side is the one that I’m most concerned with because what it means when we get the production side of our economy, the making of goods and services, up and running again, I know everything else falls into place. Now, you could say that’s an ideological argument because I’m a supply-sider, but I derive my ideology from my view of economics. 

EICHER: David Bahnsen, financial analyst and advisor. He’s the Chief Investment Officer at the Bahnsen Group. David, thank you. We’ll talk to you next week. 

BAHNSEN: Thanks again for having me, Nick.

(AP Photo/John Minchillo) An NYPD officer walks along a sparsely populated Wall Street, Friday, May 1, 2020, in the Manhattan borough of New York. 

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