"Job Losses 'Stunning'”
by Brian Maher
"The S&P entered “correction” this morning - down 10% from its most recent high. It later resumed its erring ways, gaining 9 points by closing whistle. The Dow Jones duplicated the mistake. It ended up gaining 52 points of its own after the opening wobbles. Technology stocks saved the day. Someone decided it was a grand occasion to “buy the dip.” The Nasdaq posted a 39-point gain on the day. But what explained this morning’s swoon? Here is the reason widely on offer: The latest unemployment numbers...
“The Labor Market Losses Are Stunning”: We learn this morning that 870,000 Americans filed unemployment claims last week. Economists had soothsaid 840,000. That is, the report was a “miss” — to the downside. Chris Rupkey, chief business economist for MUFG Union Bank: "The labor market losses are stunning in that they show there isn't enough work out there yet in the middle of September nine months after the Covid-19 virus shut the economy down."
And so the rambunctious recovery we were promised has proven a chimera, a phantom... elusive as quicksilver… and as illusory as swamp fire. Where is the cavalry to rescue the day? Where is the man atop the white steed charging in? The cries for aid go out. Yet they are met with silence…
We Need Fiscal Stimulus!!! Jerome Powell paces the floor back at headquarters, pleading for reinforcements. He has done what he can do. But he alone lacks the firepower to break the enemy, he appears to concede. Yesterday, he appeared before Congress and whinnied: The recovery would pack more oomph “if there is support coming both from Congress and from the Fed,” adding: “Direct fiscal support may be needed.” Thus, his men begin to question his generalship… and cough sadly behind their hands at his feebleness.
Strategist Dennis DeBusschere claims the Federal Reserve is “diminishing its own credibility by continually emphasizing the ineffectiveness of monetary policy and begging for fiscal support.” We were unaware the Federal Reserve retained any credibility whatsoever. But let it go. The fiscal support for which it begs is not forthcoming. It is a casualty of politics, the unfolding Battle of the Supreme Court.
No Reinforcements Until 2021: Jan Hatzius, chief economist at Goldman Sachs: We think it is now clear that Congress will not attach additional fiscal stimulus to the continuing resolution (to avoid a government shutdown). This implies that after a final round of extra unemployment benefits that is currently being disbursed, any further fiscal support will likely have to wait until 2021.
Goldman Sachs - incidentally - has downgraded its Q4 GDP projections. Previously a 10% annualized rate, it now envisions a 4% annualized growth rate. Yet if a fresh wave of the virus rolls ashore this fall — a true plausibility — harsh lockdowns may resume. Millions more could be turned from their jobs. And growth could lag further yet. It is a grim possibility. Yet it is a possibility. But a vaccine is on the way, the sunshine-blowers assure us. Worry not. Yet we are not half so convinced it is true…
Don’t Count on a Vaccine: COVID-19 is of course a coronavirus. And as we have written before: "Not once - despite all the angels and saints - have medical men brewed a successful vaccine against a coronavirus. Decades of effort have led them down blind alley after blind alley after blind alley. We are further informed that the respiratory system is generally unreceptive to vaccination… as a round hole is unreceptive to a square peg. It is walled off, inaccessible to the vaccinary machinery.
Dr. Ian Frazer - a scientist - has himself helped develop vaccines. Says he: "It’s a separate immune system, if you like, which isn’t easily accessible by vaccine technology. It’s a bit like trying to get a vaccine to kill a virus on the surface of your skin." Not only are these vaccines poor respiratory disease fighters. They sometimes turn their coats… and go over to the enemy side: "One of the problems with corona vaccines in the past has been that when the immune response does cross over to where the virus-infected cells are it actually increases the pathology rather than reducing it. So that immunization with SARS corona vaccine caused, in animals, inflammation in the lungs, which wouldn’t otherwise have been there if the vaccine hadn’t been given."
In conclusion: "I think it would be fair to say even if we get something which looked quite encouraging in animals, the safety trials in humans will have to be fairly extensive before we would think about vaccinating a group of people who have not yet been exposed to the virus." Of course, it is possible the medical men will mix a vaccine that proves both safe and effective. Heaps and heaps of scientists labor furiously for that very purpose. But history is against them. And the possibility of a functioning vaccine in the near future appears… unlikely. What is likely - what is certain - is the continued yelling for fiscal stimulus…
The Myth of Consumer Spending: From the general run of financial analysts, to economists of nearly every model and make, to the Federal Reserve itself… we are told fiscal stimulus is the potion for our ills. And the larger the dose, the quicker the recovery. That is, spending money the nation does not have is the way up. That is, plunging deeper into debt is the royal route to prosperity. In back of it all is the conviction that consumption is king. Consumption represents 70% of the United States economy, they bellow. When consumption teeters the economy reels. We must therefore pry open wallets and set cash registers jingling. Americans must consume - lest the heavens fall.
Yet we have challenged the mother myth that consumer spending equals 70% of the United States economy. That is because official GDP calculations do not include heaping piles of economic goings-on. These piles include business investment and spending on “intermediate” goods. These are inputs required for the production of final goods - hence intermediate. The steel in the automobile, the sugar in the candy, the wood of the furniture… these are intermediate goods. Yet their purchase does not classify as consumer spending - else they would be double-counted.
Consumer Spending Is Only 30% of GDP? Explains economist Mark Skousen: GDP only measures the value of final output. It deliberately leaves out a big chunk of the economy -intermediate production or goods-in-process at the commodity, manufacturing and wholesale stages - to avoid double counting.
Now mix in expenditures on intermediate goods. What do we find? We find consumer consumption only constitutes perhaps 30% of GDP: I calculated total spending (sales or receipts) in the economy at all stages to be more than double GDP… By this measure - which I have dubbed gross domestic expenditures, or GDE - consumption represents only about 30% of the economy, while business investment (including intermediate output) represents over 50%.
Assume the foregoing is true. If business investment constitutes over 50% of the economy… perhaps business investment should be the grail… rather than consumption. Production must come first. We must produce before we can consume. “Products are paid for with products,” argued Jean-Baptiste Say over two centuries ago. Yet the consumption-mongers place the wagon cart of consumption before the draft horse of production. They would have us consume before we have produced. And their fiscal stimulus would yield little production. Thus they produce moonshine. And they would have all of us consume it. Barrels of the hooch will likely arrive early next year… with the hangover to follow."