Readers have been asking about our view of the economic recovery and the labor force. We are receiving mixed signals from economic data, and the bottom-line answer is uncertain. Let’s get to details and some suggested readings and end with my personal view.
First, here’s my colleague Bob Eisenbeis’s quick note that was released late on a Friday (October 8) afternoon. Some may have missed it, given the timing, so we will add that link here: “Another Disappointing Jobs Report,” https://www.cumber.com/market-commentary/another-disappointing-jobs-report.
Second, here’s a Peterson Institute analysis, “September job growth was worse than expected but better than it looked”: https://www.piie.com/blogs/realtime-economic-issues-watch/september-job-growth-was-worse-expected-better-it-looked.
Next, a new study from the Chicago Fed, “Measuring the Effects of the COVID-19 Delta Wave on the U.S. Hourly Labor Market,” finds that the Delta surge has impacted the labor market, offsetting some of the momentum vaccinations had provided: https://www.chicagofed.org/publications/chicago-fed-letter/2021/461.
An alternative view and one that I respect is articulated by my friend Danny Blanchflower. He and Alex Bryson are doing extensive work on forecasting labor force changes using measures of sentiment survey data. Here’s their most recent piece, “The Economics of Walking About and Predicting US Downturns”: https://cpb-us-e1.wpmucdn.com/sites.dartmouth.edu/dist/5/2216/files/2021/10/us-fear-oct-8-final-nber.pdf. Their former work (2021a-b-c) are listed in the “References” citations within the document. If the authors are correct, the US is entering a recession dip right now and may develop a real headwind. I strongly recommend reading the entire research paper. Here’s the abstract:
“Economic shocks are notoriously difficult to predict but recent research suggests qualitative metrics about economic actors’ expectations are predictive of downturns. We show consumer expectations indices from both the Conference Board and the University of Michigan predict economic downturns up to 18 months in advance in the United States, both at national and at state level. All the recessions since the 1980s have been predicted by at least 10 and sometimes many more point drops in these expectations indices. A single monthly rise of at least 0.3 percentage points in the unemployment rate also predicts recession, as does two consecutive months of employment rate declines. The economic situation in 2021 is exceptional, however, since unprecedented direct government intervention in the labor market through furlough-type arrangements has enabled employment rates to recover quickly from the huge downturn in 2020. However, downward movements in consumer expectations in the last six months suggest the economy in the United States is entering recession now (Autumn 2021) even though employment and wage growth figures suggest otherwise.”
We believe the headwinds are real. The reason is that we simply accept COVID as a large economic shock and therefore do not see the present economic landscape as a typical business-cycle sequence. If that is a correct view, then the Blanchflower-Bryson view of fear-induced behavior has validity until the “fear” issue has dissipated. We have no way to know how long that will take.
Florida is a key observation place for us. We have our headquarters here. Forty households are involved directly in our Florida-based workforce. Our Florida clients can be found statewide, from Jacksonville to Key West and from St. Petersburg to Boca. Nearly all of them have had experiences on a near-personal level with COVID, with serious illness or death among their extended families or good friends. When we talk with them, there is an element of fear, and for very good reason, in our view. They do not trust their government, which is busy litigating with school boards and has just hired a state surgeon general who previously questioned masks or vaccines and advocated for hydroxychloroquine as a treatment for COVID.
Many of our Florida clients are both residents and snowbirds. So their state of residence has not changed, but their behavior has changed. They know risk. They witnessed 1 out of 370 Florida residents now dead (latest COVID excess deaths estimates). Many will come to Florida later than they normally do. They have continually asked me and my Cumberland colleagues about safety, about the status of the hospitals, and about the availability of medicines and treatments. Nearly all have seen reports on the Florida Department of Health inadequate data, lack of timely information, and misleading statistics.
FL is not alone. We see similar conditions in other US states. To see how safety concerns and lack of trust in government play out in economic terms, we must examine how sentiment changes are captured and how they translate into economic terms. The Blanchflower-Bryson paper is trying to use that approach to derive estimates of the future course of the US economy.
The second element is Long COVID, or Post-Acute COVID-19 Syndrome (PACS). We will be writing about it in detail, so we will summarize the issue here. Simply put, many millions of people get COVID. The infection passes, and they no longer test positive for COVID. But their symptoms linger, or perhaps they think they are recovering but develop new symptoms later, even months later. Symptoms of blood clots, or brain fog, or chronic fatigue, or respiratory distress or others persist for weeks, months, or perhaps years. The link to COVID can be vague and so Long COVID was slow to make headlines and come into the awareness of the general population and medical professionals.
Long COVID is another source of fear. We think it is going to be a large one. If we use the British experience to date, we can already estimate that there will be about 10 million Long COVID cases in the United States. And given our terrible track record on vaccination and mitigation (masking, etc.), we are likely to have more Long COVID than the other major OECD countries do. That is the present trend.
Long COVID clinics are expanding in number and depth in the US. There are now over 40 of them. A year ago, there were zero.
So our view about the economy and the labor force is downbeat. We do not think the COVID shock is over. In fact, we see the evolution of Long COVID as a much bigger shock because of the estimates we can now make. Life expectancy in the United States will decline again in 2021 after a 2020 decline. We do not yet have the adjustment to the population from disability from Long COVID. That is coming. We do see a labor force that cannot seem to recover in numbers to the pre-COVID level. Our view is that it cannot recover because the people are no longer there. Some of them are dead. Millions more are developing a temporary or partial or permanent disability from Long COVID.
This forecast reveals itself in rising wage levels and shortages of workers. It is a nationwide issue. Our view is that it will worsen. It will trigger a substitution of capital investment to replace the labor that is no longer ample and available.
So, whether or not we have a technical recession is not the relevant question for us. It is the substitution of capital investment to replace missing labor that is the key issue. The investment implications are huge.
One last thing. The Federal Reserve Bank of San Francisco has studied pandemics and traced their economic repercussions. Here’s the link to this must-read historical background and analysis: “Longer-Run Economic Consequences of Pandemics,” https://www.frbsf.org/economic-research/publications/working-papers/2020/09/.
The history of pandemics has been studied by this writer in depth, starting with the Athenian plague 2500 years ago. In every case there was a rise in fear. In every case there was a rise in wages earned by those who survived. In every case there was a shift or shock or transition in the form of government. They were not always pleasant changes. And in every case the “real” interest rate fell following the pandemic, and it did so along with a recession that followed every pandemic, without exception.
There is no reason to expect the ongoing COVID-19 pandemic to be any different.
David R. Kotok
Chairman of the Board & Chief Investment Officer
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