• Market Crumbs

The Lost Decade?

Image via Ante Hamersmit on Unsplash

Only six months into the new decade it's hard to fathom writing about whether or not the 2020s will end up being considered a "lost decade," but here we are.

As a result of COVID-19which has wreaked havoc in both terms of loss of life and economically, the U.S. Congressional Budget Office is warning the economic pain may be felt throughout the decade.

The CBO is now predicting that $7.9 trillion of economic activity, as measured by real GDP, could be lost through fiscal 2030 as a result of the coronavirus. That equates to 3% less than initial estimates in January.

The CBO estimates nominal GDP, which doesn't account for inflation, will decline by $15.7 trillion over the same period. This measure shows a 5.3% decline from initial estimates in January.

Following the revised estimates, Senator Chuck Schumer said additional stimulus is needed.

"In order to avoid the risk of another Great Depression, the Senate must act with a fierce sense of urgency to make sure that everyone in America has the income they need to feed their families and put a roof over their heads," Schumer said.

"Business closures and social distancing measures are expected to curtail consumer spending, while the recent drop in energy prices is projected to severely reduce U.S. investment in the energy sector," CBO Director Phillip L. Swagel said in response to Schumer. "Recent legislation will, in CBO’s assessment, partially mitigate the deterioration in economic conditions."

With much about the coronavirus still unknown, especially the further effects on the U.S. economy, Swagel warned additional revisions to the CBO's estimates are likely.

"An unusually high degree of uncertainty surrounds these economic projections, particularly because of uncertainty about how the pandemic will unfold this year and next year, how the pandemic and social distancing will affect the economy, how recent policy actions will affect the economy, and how economic data will ultimately be recorded for a period when extreme changes have disrupted standard estimation methods and data sources," Swagel said.

With many Americans who have lost their jobs still unemployed, the pressure will be on politicians to come up with another form of stimulus.

All the while, the stock market continues to price in a full economic recovery despite signs that may not be the case. The S&P 500 is now up more than 40% from the March low and back to within 10% of its all-time high.

Despite the stock market pricing in a full recovery, it's far from an accurate portrayal of how things are for many Americans. These Americans, most of which don't benefit from the stock market, will be the ones most affected by a lost decade.

Leftover Crumbs

  • ADP report surprises. Private payrolls dropped by 2.76 million in May, well below expectations of 8.75 million job losses, according to ADP. Service-related industries shed 1.967 million jobs, while goods producers lost 794,000 jobs. "The impact of the Covid-19 crisis continues to weigh on businesses of all sizes," co-head of the ADP Research Institute Ahu Yildirmaz said. "While the labor market is still reeling from the effects of the pandemic, job loss likely peaked in April, as many states have begun a phased reopening of businesses."

  • Mortgage demand remains strong. Mortgage applications to purchase a home jumped 5% last week and are now 18% higher than the same period a year ago, according to the Mortgage Bankers Association’s seasonally adjusted index. Despite the average 30-year fixed rate mortgage setting a new record low of 3.37%, mortgage applications to refinance dropped 9% for the week. Refinancing's share of overall mortgage activity dropped below 60% after being as high as 76% earlier this year.

  • Google hit with lawsuit. Google has been hit with a $5 billion class action lawsuit alleging the company still tracked the browsing information of users while in "incognito" mode. The suit alleges Google learned about the "most intimate and potentially embarrassing things" by gathering data through Google Analytics, Google Ad Manager and web plug-ins. Google intends to defend itself, saying their terms state Google "might be able to collect information about your browsing activity" in "incognito" mode.

  • Largest U.S. IPO of the year. Warner Music Group upsized its IPO and will raise $1.93 billion in the largest U.S.-listed IPO this year. Warner increased its offering from 70 million shares to 77 million shares, valuing the world's third-largest recording label at $12.75 billion. Shares priced at $25 per share compared to the target range of $23 to $26 per share.

  • AMC issues warning. AMC Entertainment Holdings, the world's largest movie theater operator, warned there's "substantial doubts" it can continue operating as a going concern as theaters remain shut as a result of COVID-19. "We cannot predict when or if our business will return to normal levels," AMC said. AMC had $718 million in cash as of April 30 and said it can withstand movie theater closures until the end of July.