Covid-19 & the Current State of the Economy
By John Hebert, CPM® CFP®
This morning, like most mornings, I got up, made myself a cup of coffee and turned on the business news. The commentator “buzz” was centered entirely on the upcoming Department of Labor jobs report for July. The estimated number was expected to be around 1.5 million new jobs added from June, as nervous analysts scrambled to come up with a narrative to explain anticipated disappointing numbers. Then the host cut off the conversation and turned to the reporter waiting to relay the results; the numbers flashed 1.763 million new jobs!
This pandemic has had an extraordinary impact, but it has unfolded like no other. At no other time in American history has the government sought to shutdown large swaths of the economy. The Spanish Flu of 1918 killed more than 675,000 Americans, and yet only a few towns shut down. Then came the Hong Kong Flu in 1968 which was estimated to have killed over 100,000 people in U.S., with little or no economic shutdown. Hence shutting down the economy was a shot in the dark.
As I write, we are now ending the first week in August and we know quite a bit more. GDP fell 3.4% in the first quarter and fell 9.5% in the second quarter (annualized rates were 5% and 32.9% respectively). All expectations are that the third quarter will show a substantial upside bounce.
The overall unemployment rate peaked in April at 14.7% and has fallen to 10.2% in July, reflecting a third monthly decrease in a row. Forecasts are that the unemployment rate is likely to fall consistently for the remainder of the year, but at a slower pace.
Continued improvement will depend on where and how quickly the economy opens up, as well as success in lowering the virus mortality rates. The overall consensus is that as every month goes by, more parts of the economy will re-open going forward. In total about 22.2 million people became unemployed during the March / April peak, and as of now over 9.3 million are back to work. This represents about a 42% re-employment level, and despite the wave of infections is the southwest, the re-employment effort continued.
Interestingly, the re-employment rates could significantly intensify in August, September and October as federal unemployment benefits expired at the end of July. Currently, the fourth stimulus bill is stalled in Congress. At issue, the federal benefit of $600 per week is thought to discourage many workers from re-entering the labor force since unemployment benefits exceed their employment income. Now those who have jobs waiting for them will likely return, and once that happens, in September and October we’ll get a clear picture of the long-term unemployment problem.
Now that the effects of COVID are clear; school re-openings, unemployment benefit levels, continued low interest rates, a potential executive order for a payroll tax holiday, as well as a vaccine and new treatments, will unquestionably determine the rate of re-employment and economic growth for the next six to twelve months. Oh, and by the way, in case you’d forgotten, there’s an election in less than three months!
What does this mean for the business owner? Our view at Modernize Wealth is that an extension of the Payment Protection Program, if there is one, will be more targeted towards smaller businesses, or focus on the most severely damaged industries. Additionally, the additional federal unemployment benefits, once negotiated, will likely settle in the 70% range, when you add the state and federal supplemental payment, of the individual workers’ prior employment salary to create a strong incentive to return to work.
We may quite possibly see an employer payroll tax holiday by use of Executive Order, though the constitutionality will be fought in the courts. The Fed has pretty much stated that Fed rates will stay at or near 0% until 2024, provided there isn’t an unforeseen uptick in the rate of inflation which is a serious log-term concern.
Finally, no deal will be struck by the Administration and the Senate with the House without liability protection for business against frivolous lawsuits related to COVID. Other parts of a stimulus bill will be geared towards state and local governments, while most of the rest of the House bill are unlikely to survive. Be forewarned; the is no guarantee that a deal will be reached, so plan accordingly.
COVID-19 has impacted all aspects of the global economy over the past several months.
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About the Author
Modernize Wealth specializes in working with business owners to create integrated personal/business financial plans, innovative investment solutions, and planning strategies. John Herbert’s financial industry gravitas comes from almost 30 years’ as a Certified Financial Planner and Certified Portfolio Manager. An accomplished educator, John taught Economics at Chapman University and the University of Phoenix for many years.