Seeking economic
stability during
a global pandemic

The ongoing shutdown of much of the economy kept job losses near their unprecedented pace. Unemployment claims, reported last week, totaled 6.6 million, down slightly from 6.8 million the prior week. That brings the three-week total to 16.8 million, a staggering 11% of record-high nonfarm employment in February. Unemployment claims represent gross job loss over the very short term. But the current situation hints that claims could approximate short-term net job loss better than during a typical downturn. Few organizations are hiring with businesses closed or severely limited in operations. We expect forthcoming declines in both open positions and nonfarm employment, the latter of which will likely set a record in April. 

Driven by massive job losses, business closures, and social distancing measures, sentiment in the economy turned sharply negative in recent periods. The consumer sentiment index registered its largest monthly decline on record in April. Negative consumer sentiment leads downturns in consumer spending: we expect record declines in consumption during the second quarter. Business sentiment also declined significantly as the NFIB Small Business Optimism Index registered its largest monthly drop during March. Of note, hiring intensions plunged, with very few businesses indicating an intention to increase staff.

With consumers and businesses turning dour and retrenching, major inflation indexes declined in March. The consumer price index (CPI) registered a its largest decline in five years, driven by the massive decline in energy prices. But the core CPI also declined for the first time since January 2010, with consumers pulling pack on discretionary spending. The producer price index (PPI) also declined again in March after the largest monthly drop in five years in February. We expect significant deflation ahead. The pullback in aggregate demand should exceed any shock to aggregate supply because consumers and businesses possess severely limited desire and ability to spend.

The Federal Reserve (Fed) continued to expand its toolbox, announcing a major expansion of its lending program that will provide up to $2.3 trillion in loans. This expansion includes purchases of short-term municipal bonds, $600 billion in loans through a Main Street Lending Program to small and medium-sized businesses, and an increase in the scope and size of the corporate bond purchase program to include exchange-traded funds (ETFs) that purchase high-yield bonds and “fallen angel” corporate bonds. The Fed’s balance sheet has already ballooned to roughly $6.1 trillion, up from roughly $4.2 trillion in early March. We forecast that the Fed’s balance sheet could increase to approximately $10 trillion. That figure represents roughly 50% of GDP and would eclipse the prior record of $4.6 billion from January 2015. With deflationary pressures building, the Fed likely sees little short-term risk to acting aggressively. 

Though tentative, financial markets seemingly stabilized a bit in recent weeks due to significant intervention from the Fed and the federal government. Though the volatility index (VIX) remains elevated, it has declined from its mid-March peak when volatility neared record levels from the Great Recession. The S&P 500 Index produced its best weekly performance since 1974 and is up roughly 25% from its mid-March trough. The corporate bond market, though still challenged, also rallied after the Fed announced additional corporate bond purchases. And credit risk gauges eased following the Fed’s additional measures. Crude oil prices increased after OPEC+ agreed to significant cuts in oil production of nearly 10 million barrels per day. That should help offset the massive decline in oil demand. Although stable markets alone cannot fix the crisis, ensuring normally functioning markets removes an impediment to economic growth.