Economics Podcasts – Wells Fargo Commercial

Economics Podcasts

Listen to our podcasts on the latest economic developments and other topics of interest.

Audio: Regional economic impacts of COVID-19’s resurgence – 07/14/2020

Transcript: Regional economic impacts of COVID-19’s resurgence – 07/14/2020

Announcer: Welcome to a special edition of the Wells Fargo Economic Podcast, a review of recent economic developments and topics of interest. And now your host, Charlie Dougherty.

Charlie Dougherty: Thanks for joining us. I'm Charlie Dougherty, and with me is Wells Fargo Securities Senior Economist, Mark Vitner. On this edition of the podcast, we're going to discuss the potential regional economic impacts of the recent reemergence of the Coronavirus. Mark, over the past few weeks, there's been a resurgence of the Coronavirus, primarily the Sun Belt but also in the West. These outbreaks are occurring in large metro areas which account for relatively large share of economic activity, such as Los Angeles, Houston, and Miami. Considering that some of these areas have now taken targeted precautionary measures, such as shutting down bars, for example, what does that mean for our overall economic outlook?

Mark Vitner: Well, growth is probably going to moderate somewhat over the summer months. The measures that the states have taken really didn't take hold until late June and by then, we had already seen that many businesses and consumers had already begun to moderate their behavior somewhat. So we saw some of the high frequency data already begin to roll over. So activity has clearly begun to moderate, but not so much that the recovery is going to get upended. It's just going to be a little bit slower than what we had previously.

Charlie: So Florida has seen a dramatic rise in new Coronavirus cases. The bulk of those cases have occurred in South Florida, but each of the state's major metro areas now appear to be seeing outbreaks. How does this impact the Florida economy, which to a large extent is driven by tourism?

Mark: Well, Florida is certainly taking it on the chin, because of its heavy dependence on tourism and that's where the bulk of job losses have been. They've been at restaurants and bars and tourist attractions. We saw a nice rebound beginning in May and June and really continuing into early July, we've seen that hotel occupancy has done very, very well. But we've begun to see that restaurant dining has slowed. Folks are voluntarily embracing a little bit more social distancing and after the 4th of July, we've seen that hotel occupancy has begun to come back down, and we've begun to see that tourists have become a little bit more cautious about visiting the Sunshine State.

Charlie: So new cases are on the rise in Houston, Dallas, Ft. Worth, Austin and San Antonio. How will the reappearance of the pandemic affect the Texas economy, which is also dealing with an energy industry in disarray from lower oil prices?

Mark: In all of these states, the rise in new cases has also accompanied a rise in testing, and so we have seen that that's part of the issue. The proportion of tests that have come back positive has been rising, however, so testing doesn't explain all of the increase. One of the things that we're seeing is that we've got a lot of cross border activity with folks, Texans, that have dual citizenship or have family members that are in hard hit parts of Central America or South America are coming back home to seek treatment, so that's been a complicating issue, too, and then we've just had the rise in economic activity that we saw in May and June with more people out interacting. We've seen a rise in COVID cases. The increase that we've seen to date has already caused consumers to moderate behavior, much as they've done in Florida and other hot spots. So we've seen that a number of the high frequency series have already begun to roll over. We're seeing that the OpenTable seated diner reservations data has come down a little bit. We've seen that the Google Mobility data, when you look at the number of people that are traveling to restaurants and other forms of entertainment, that's begun to slow a little bit. We are seeing that folks are moderating behavior and then state and local governments have implemented some various forms of lockdowns. We don't expect to see a total lockdown in any state, but we do see some tightening of regulations, particularly in regard to bars, and that's likely to slow activity somewhat.

Charlie: Now we are starting to see those types of restrictions in California, but Southern California, in particular, is seeing a spike in new infections. How is that going to weigh on the state's economic recovery, which is just getting underway?

Mark: Well, Southern California accounts for well over half of California's economy and so it's really unfortunate in that in California the economy never fully reopened and we still saw a rise in infections. So it's a little troubling. Folks are quick to blame the reopening for the rise in infections in Texas and Florida and Georgia and some other states, but California really didn't reopen its economy and still saw a rise in infections. There seems to be something else at play here. In some ways, it's the exact opposite of what we thought was going to happen in the summer months and that we thought that more sunshine and warmer weather that we would see we would see that the virus, the rate of the spread of the virus would slow, and that hasn't been the case. In fact, when you look even outside of the United States, it's the warmer it's the countries with the warmer climates that have all seen a resurgence in COVID, and so bottom line for Southern California is that they've had to tighten up on the rules as to what they're going to allow to reopen. This is very problematic in Southern California because not only do you have a lot of small businesses there, but you have a lot of independent contractors that are working in the gig economy, and if small businesses, restaurants, entertainment venues, if they're not open, then the gig workers many of the gig workers don't have an opportunity to earn a living as well. So that's really led to a significant slowing in the rate of improvement that we're seeing in Southern California. We did add jobs in the month of May and we'll probably add jobs again in the month of June on a net basis but it's only a tiny fraction of the jobs that were lost in March and April.

Charlie: Mark, thank you for joining us, and thank you all for tuning into this episode of the Wells Fargo Securities economic podcast.

Audio: Update to our U.S. economic outlook – 06/16/2020

Transcript: Update to our U.S. economic outlook – 06/16/2020

Announcer: Welcome to a special edition of the Wells Fargo Economic Podcast, a review of recent economic developments and topics of interest.  And now your host, Shannon Seery.

Shannon Seery:  Hello, and thanks for joining us. This is Shannon Seery and with me today is our Chief economist, Jay Bryson, to discuss our latest economic outlook.  So Jay, we recently updated our forecast and our monthly outlook publication where we downwardly revised our Q2 call for GDP growth.  What's our current latest expectation regarding the Coronavirus related fallout and subsequent U.S. recovery?

Jay Bryson: Yeah.  So, that's a good question, Shannon.  I mean, it looks like economic activity came to a virtual standstill in the second quarter.  I mean, we estimate that GDP is going to contract at an annualized rate that's close to 40%.  I mean, we've never ever seen anything like that.  You know, retail shops closed down.  Restaurants closed down, you know, etc., during that period of time.  But now that states are starting to reopen again, I mean, it does look like that GDP is going to bounce fairly well in the third quarter.  I mean, we're looking to grow somewhere around 25% or so.  Now that said, you know, that's a big change.  That's a big growth rate, but still we don't think the level of GDP in the country gets back to its peak.  It peaked in the fourth quarter of 2019.  We don't think that's going to be sometime until at least 2022, and another way to think about that would be, what does that mean for the unemployment rate?  You know, before this whole thing began, back in February, the unemployment rate was 3.5%.  We got close to 15% in April.  It is starting to come back down.  By the end of next year, we still think the unemployment rate is 6% or so.  Many of these jobs will come back as the economy reopens, but there are a fair number of in businesses that have already failed aren't coming back and so those jobs aren't coming back as well.  So Shannon, you know, what does that mean for the Fed?  What does the Fed do in this sort of environment?

Shannon: Yeah.  So the fed, Jay, quite frankly, stands ready to do pretty much whatever it takes to support the economy through the crisis.  So, you know at its most recent policy meeting, the FOMC released its summary of economic projections where we got the latest dot plot which shows the individual committee members projections for where the fed funds rate will be at the end of next three years and most predictions for the fed funds rate were to remain unchanged at the zero lower bound. We really think that short term rates are going to remain where they are, but outside of its forward guidance regarding rates, the fed has reiterated its commitment to asset purchases.  You know, we expect the fed to continue to buy Treasuries and mortgage backed securities through at least the end of the year.  You know, I think it's worth mentioning that there's going to be a flood of treasury issuance into the market this year amid the increasing federal deficit.  While we expect the fed to buy some of it, it's probably not going to buy it all.  Our short term rates will likely remain around zero percent.  We do expect long term rates take the ten year, for example, to finish the year a little over one percent and be around 1.5% at the end of 2021.  So not a huge increase but the long end of the curve is expected to rise a bit from where we are today.  So now, Jay, our outlook seems fairly constructive.  You know, if you think about our forecast and what we've laid out here, what do you see is the largest downside risk at this point?  And on the flip side, are there any positive risks that we should consider?

Jay: Yeah.  So I think both of those risks, you know, knowing what I know right now, you know, really relates to the evolution of the virus from here and how governors have to react to that.  I mean, we are seeing cases start to rise again in some states and so if these states have to kind of go into, you know, some sort of lockdown mode again, that's a big downside risk to the economy.  That said, I do believe that governors will be under tremendous pressure not to lock down the economy on a statewide basis.  You know, maybe if there's some sort of metropolitan area where there's a hot spot, maybe they impose some restrictions there but, you know, again, not on the entire state.  So it really depends on how this virus evolves from here.  On the flip side, I can think of some good upside potential, and that is maybe we find a vaccine for this pandemic quicker than we thought.  You know, if we have a vaccine in place by, say, this fall, then states can really start to reopen quickly.  Now, of course, we have to not only find a vaccine for the virus but we also have to be able to produce it quickly.  But if those things happen faster than what we believe right now, that certainly is an upside to growth later this year.  So you know, again, it really depends, I think, on how this virus progresses from here and we'll just have to see how all that plays out.

Shannon: Well, thanks for joining us, Jay.  Thanks for your insights.  Thank you all for joining us on this episode of the Wells Fargo Securities Economics Podcast.

Audio: Record decline in payrolls, but more to come – 05/11/2020

Transcript: Record decline in payrolls, but more to come – 05/11/2020

Announcer: Welcome to a special edition of the Wells Fargo Economic Podcast, a review of recent economic developments and topics of interest. And now your host, Shannon Seery.

Shannon Seery: Hello, and thanks for joining us. This is Shannon Seery and with me today is our acting Chief Economist, Jay Bryson, to discuss the labor market.

So Jay, we recently got the non-farm payroll report for April which was truly an unprecedented report with over 20 million jobs lost. Maybe you can just give everyone a brief overview of what the report means and if it changed our view of the labor market.

Jay Bryson: Yeah. It was a pretty awful report for April. I mean, as you mentioned, Shannon, more than close to 21 million people lost their jobs. It wasn't a huge surprise given the fact that we had seen initial jobless claims just jump up. As a matter of fact, 26 million people had filed initial jobless claims between March and April. Unemployment rate at 14.7%, it would have been higher had not the labor force gone down by six million people and there was this widespread job losses. Manufacturing was down a million. Retail was down about two million. Education & health care down 2.5 million and that may sound a little counterintuitive, but people have stopped going to their doctors and dentists for just routine sort of things and there's lots of layoffs and leisure & hospitality, that was down about eight million. Again, I don't think it really changes our view dramatically. You know, we kind of knew that this was coming and I guess, you know, the big question is, you know, what happens here going forward.

Shannon: Thanks. And so we saw a 4.7% jump in average of earnings in April and that's compared to 0.2 to 0.3% on average over the past few years. With so much job loss, what was behind that surge?

Jay: It seems kind of weird, right? You have these huge job losses and yet average hourly earnings go up 4.7%. I mean, you know, that's 20 times what it normally goes up and really what it reflects is a compositional change. As I mentioned earlier, leisure & hospitality, we lost eight million jobs there. They pay below average wages. I mean, if you look at the average wage in the economy, economywide, it's about $28 an hour. In the leisure hospitality sector, it's only about $16 an hour. So if you're losing a lot of jobs there at the bottom, just mechanically, it just raises the overall average and, you know, we're not going to see that repeated. Or, not repeated to the same extent as we go forward. As a matter of fact, eventually you would start to expect average hourly earnings growth to weaken just because of the weakness in the labor market.

So you know, Shannon, we talked about all these job losses and how this average hourly earnings really wasn't a sign of strength. You know, is there anything good? Was there anything good in this report?

Shannon: Yeah. So we saw a measure of temporary layoffs kind of jump. So in the household employment survey where the Bureau of Labor Statistics surveys households on their employment situation about 18 million of the 20 million unemployed individuals reported that they were on temporary layoff. Now whether or not they turn out to be displaced on just a temporary basis remains to be seen and you know, the longer the pandemic goes on, the more likely that what was temporary becomes permanent. But the data do give us some hope that many displaced workers will be eventually called back to their jobs, you know, as the economy really starts to reopen.

Jay, with all that in mind, what is our outlook for the labor market? With many parts of the country beginning to reopen, do you think the worst is behind us with April jobs report, or is more bad news expected for the labor market?

Jay: Well, we think when the May report prints in early June, there will be more bad news, not to the same extent. You know, if you look at since that April survey was conducted, about seven million more people have filed for jobless claims and there's probably going to be more as well. But we're probably not going to see, you know, another month of 20 million people losing their jobs, but you know, we would expect that the unemployment rate is going to approach 20% in the Month of May. But as businesses start to reopen and you know some states are already starting to reopen now. Some of those furloughed workers will be called back. And so as you get into June, July and August, you should start to actually see some pretty positive prints, you know, in the millions of people actually coming back. That said, we don't think we're making up all the job losses anytime soon. So, if you look at the unemployment rate back in February, before all this began, that was at 3.5%. You know, again, we think that's going to approach 20% in May. And then start to recede after that, but we still think by the end of next year, you're still looking at an unemployment rate in excess of 6%. You know, many businesses remain in business. They haven't been open, but because of the loans that they've received from the federal government, from the Federal Reserve, they still remain in business. That said, not all businesses are still around. Some have already closed. And those workers won't be coming back to those jobs, and so again, we do see a recovery in the labor market, but we don't think we're going back to February at least not anytime soon.

Shannon: Great. Well, thanks, Jay, for all of your insights and thank you all for joining us on this episode of the Wells Fargo Securities Economic Podcast.


Audio: Fiscal fallout from the COVID-19 pandemic – 04/30/2020

Transcript: Fiscal fallout from the COVID-19 pandemic – 04/30/2020

Announcer: Welcome to a special edition of the Wells Fargo Economic Podcast, a review of recent economic developments and topics of interest.  And now your host, Hop Mathews.

Hop Mathews:  Hello.  Thanks for joining us.  I'm Hop Mathews here with Economist Michael Pugliese.  So Mike, you and I, along with Jay Bryson, co-authored a three-part series on what the fiscal situation might look like on the other side of COVID-19.  As we've discussed previously on this podcast, at present, we're seeing record budget deficits from the federal government.  In this series, we took a longer term view on the fiscal outlook and analyzed some of the different policy or economic outcomes it would take to stabilize the debt-to-GDP ratio starting a few years down the road.  So, Mike, why don't you tell us a little bit about the first two reports in that series?

Mike Pugliese:  Yeah.  So the first two reports focused on more of that medium- to long-term outlook you just referenced.  So, we've already talked about in reports and you can hear on the podcast about the fact that the federal government is running record budget deficits right now that we haven't seen since World War II, and so a question that we decided  to look at is, what might the fiscal outlook look like on the other side of this?  So, you know, just for illustrative purposes, we assume the deficit remains pretty big for the next few years and policymakers don't do a whole lot to try to change that as the recovery gets underway but then just again, for illustrative purposes in FY2023, what if policymakers wanted to try and take steps to either stabilize or reduce the debt-to-GDP ratio over the following seven or eight years or so through the end of the 2020s.  So part one, we looked at, you know, what would it take on the revenue side and what would it take on the spending side, so what kinds of changes would Congress have to make to the levers that they control directly?  So tax and spending.  And then in part two, we looked at some of the macroeconomic variables that drive the debt-to-GDP ratio, which Congress has less direct control over.  So economic growth, inflation, and interest rates and things like that.

Hop: Yeah.  What were some of the main findings of that analysis in your mind?

Mike: Yeah, after we project the debt-to-GDP ratio through to FY2023, in order to stabilize it at that level going forward, it really isn't a huge change.  It's about 1% of GDP over those seven years is what it takes to stabilize the debt-to-GDP ratio at the level that we project prevails in FY2023.  So that can obviously all be done on the tax side, all be done on the spending side or potentially more likely some mix of the two.  Now if you try to reduce the debt-to-GDP ratio all the way back to where it was in 2019, pre-COVID-19, that's a bigger ask.  It requires either much bigger tax increases or much bigger spending cuts and you know, that at least in our view, is probably going to be a lot more difficult to achieve particularly depending on the pace of the recovery that's happening over the next several years.  Now in part two, when we looked at the some of these macroeconomic variables, I think the most interesting finding was that if interest rates were to hold at current levels over the course of the next decade, that would go a long way toward stabilizing the debt-to-GDP ratio, once these next few years start to see the deficit recede back to quote, unquote, more normal levels.  Of course, it's an open question whether rates will be that low for such an indefinite period of time.  Another thing, of course, that could go a long way toward stabilizing or reducing the debt-to-GDP ratio is faster economic growth.  But, of course, if we had an elixir for faster, sustained economic growth, we probably wouldn't have this much debt in the first place.  So while the macroeconomic variables maybe help avoid some of the more difficult tax and spending decisions that would have to be made in this illustrative scenario, you know, there are obviously, kind of by definition, things over which policymakers in Washington, D.C. have less control.

Hop: Sure.  Makes sense.  In part three, we looked back in history and examined the country's economic and fiscal situation coming out of World War II.  Why do you think that period is relevant?

Mike:  Yeah.  So there were.  There were some similarities during that period.  So during World War II, the deficit exploded.  The debt-to-GDP ratio exploded, rising from about 42% in 1939 all the way up to its peak of 106% in 1946.  There was a lot of economic uncertainty.  We just had the great depression.  It was unclear what was going to happen as the wartime demobilization kind of began in earnest, and no one quite knew what was going to happen in the future.  And the outcome that we got over the next, call it decade and a half, was a debt-to-GDP ratio that returned to pre-world War II levels eventually and so it offers us a bit of just historical example to look back at and see, what was the recipe that got us there on the fiscal outlook?

Hop: Yeah.  And what do you think that experience can tell us about today?

Mike: Well, if you look back to that period, the answer is it was a little bit of everything.  So taxes went up quite a lot during World War II in order to finance the war and while they receded somewhat after World War II ended, they did not return anywhere close to the level that prevailed before 1939.  Spending from the federal government went up, unsurprisingly, during World War II and while it also receded after the war, they kind of levered, and spending sides were brought into balance such that on average—this wasn't true every year, but just generally speaking—the federal budget was pretty balanced over the course of that decade and a half from the mid-1940s through to, you know, the early 1960s.  And so that helped keep the numerator in that debt-to-GDP ratio pretty stable.  Now another thing that contributed to that was pretty low interest rates, and the drivers of that are pretty multifaceted, but just to highlight one, it was a period of pretty accommodative monetary policy from the Federal Reserve.  Particularly during and immediately after World War II when the Fed was adopting or had adopted an explicit yield curve control policy, where they fixed interest rates across the Treasury curve.  Again, just highlighting some of the similarities to conversations we're having today relative to the conversations and policies that were discussed and examined and adopted back then.  And then the last but certainly not least, there was a period of relatively robust economic growth.  So real GDP contracted quite sharply in 1946 after the war ended, but the 15 years after that, real GDP growth averaged north of 3% over those 15 years.  You had a pretty strong period of economic growth, a pretty robust period of labor productivity growth that, again, helped from a denominator perspective of that debt-to-GDP ratio.  There was no one magic bullet.  It really was a mix of tax and spending changes and macroeconomic conditions related to growth and interest rates that helped bring that ratio down.  Now looking forward, what are some of those implications for today?  Well, there are some similarities.  Interest rates are a good example.  Interest rates are very low right now and on a real basis, they're negative.  There's an expectation that the Fed will be very accommodative for quite some time.  But there are some constraints and some differences between now and after World War II period.  You know, there are some structural, longer-term budget pressures redemanded for mandatory spending.  It's up for debate if taxes will be increased meaningfully after this crisis has subsided when it comes to that faster economic growth and faster labor productivity growth.  It's certainly possible but it's far from a sure thing.  So you know, at least in our view, what we think is the most likely outcome is that any debt stabilization or reductions that occur, if they occur at all, are probably going to be a lot more slow and a lot less sharp than the ones that occurred over 15-year period after World War II.

Hop: Thanks, as always, for your insights, Mike, and thank you all for joining us on this episode of the Wells Fargo Economics Podcast.


Audio: Economic outlook for major foreign economies – 04/27/2020

Transcript: Economic outlook for major foreign economies – 04/27/2020

Announcer: Welcome to a special edition of the Wells Fargo economic podcast, a review of recent economic developments and topics of interest.  And now your host, Jen Licis.  

Jen Licis: Thanks for joining us.  This is Jen Licis here with Brendan McKenna to discuss our views on the economic outlook in major foreign economies.  So, Brendan, amid the coronavirus outbreak, we've seen varying responses from governments as they try to contain the spread of the virus, including strict lockdowns and social distancing rules.  How has this changed the economic forecast?  And what is your current outlook on the global economy?

Brendan Mckenna: Thanks, Jen.  So really the outlook for the global economy has absolutely deteriorated amid the outbreak of COVID 19 and as you mentioned, the subsequent lockdown measures that have been put in place really across the globe at this point.  As for our latest forecast period completed in mid April, we actually expect the global economy to fall into recession.  And we're forecasting about a 3% contraction for the global economy.  But as far as the international outlook, we're forecasting multiple G10 economies to enter recession and to also experience full year contractions as well.  And, in particular, we see the largest contraction and deepest recession occurring in the eurozone, where we expect strict social distancing protocols and lockdowns across some of the more systemically important countries like Italy, Germany and France to really weigh on the region's growth prospects going forward.  Some of the eurozone data that we've actually gotten already is somewhat concerning, especially the April PMI surveys which fell to new lows, and car registrations that declined very significantly already.  So we're looking for about a 5.5% annual contraction in the eurozone.  And we're also looking for pretty steep contractions in the UK and Canada as well.  But as far as some of the emerging economies, we're forecasting an annual contraction in China as the Q1 GDP data was softer than we expected.  And then some of the other measures of activity that have also been subdued as well are likely to weigh on China's growth prospects going forward.  And then in India we're also looking for about a 1% annual contraction as some of the domestic imbalances that were really forming in 2018 and 2019 are likely to be exacerbated by the effect of COVID 19.  

Jen: So in response to both the coronavirus pandemic and also sharply lower oil prices, it seems as if fiscal monetary policymakers have stepped in to alleviate some of these pressures.  What do you see as some of these policy responses, and have some of these responses been more aggressive than others?  

Brendan:  Sure.  So you're absolutely right in the sense that policymakers have moved forward with aggressive easing of both monetary policy and fiscal policy.  As far as monetary policy, though, not only have monetary policymakers within the G10 cut rates to effectively zero or, in some countries, negative, but they've also moved forward with some pretty large scale quantitative easing programs as well.  We've seen the ECB expand its quantitative easing program rather significantly, while the UK has also implemented QE measures, and the Bank of Canada has also opted to start its first QE program ever.  But on the fiscal side, we've also seen some large stimulus programs enacted which include tax cuts, more accommodative lending measures and, in some cases, direct cash payments from most of the G10 governments, while easier monetary policy and large fiscal measures have absolutely been welcomed by markets and have actually brought some stability to equity markets, in particular.  Ultimately, we don't think that's going to be enough to avoid these economies falling into recession or annual economic contractions.  

Jen: So it also seems like the FX markets have been a little bit unsettled, just as the global backdrop seems to weaken.  What do you see as the potential market implications, and which currencies do you think are vulnerable to more weakness?  

Brendan: So FX markets have absolutely been one of the more volatile asset classes this year.  And we've seen some pretty large sell offs across foreign currencies and particular within the emerging market space.  But as of right now, we still expect the safe haven currencies to outperform in the short term.  So here we're talking about the U.S. dollar, the Japanese yen and probably to a lesser extent the Swiss franc.  Just given the way that the eurozone is expected to perform over the short term and the uncertainties that are still within the global economy, we do see additional downside in the euro.  We also see some additional downside in some of the G10 foreign currencies such as the British pound, and also given the way oil markets have performed, we see a bit more weakness in the Canadian dollar.  But over the longer term, we do think that fundamentals are in place where the U.S. dollar should eventually start to depreciate, as some of the uncertainties around the virus start to get pulled out of the market and some of the economic strains that have persisted over these G10 economies also start to be alleviated as well.  As far as emerging currencies in the short term, as I was saying, we do think that some of these uncertainties are going to persist, and those uncertainties should weigh on the prospects for emerging currencies.  But over the longer term, as the dollar starts to depreciate, we are a bit more optimistic for the economic recoveries in some of these emerging economies and for sentiment to broadly turn positive.  And that should also help some of these emerging currencies strengthen over the next 12 to 18 months.

Jen: You've alluded a little bit to the volatility in oil.  Would you be able to explain a little bit more of what has been going on in oil markets?  

Brendan: Absolutely.  So oil markets have come under a lot of pressure over the last couple of months.  And I'd say there's really two different things that are combining to really form the pressure that crude and WTI, in particular, have come under.  So the first is the demand shock from the COVID 19 virus.  Just given all the lockdown measures that have been in place and really just results in people staying at home and less demand for oil and natural gas.  So what that's doing is actually creating an oversupply of oil in the marketplace right now.  And you can actually argue that there's already been an oversupply of oil into the market.  So the demand shock is really just adding and exacerbating the oversupply that's pushed oil prices down over the last couple of years.  The other dual shock, the other shock that oil markets have come under is the tensions between Saudi Arabia and Russia earlier in the year.  So going back a couple of years, they had a production cut in place.  Tensions arose.  And they were not able to extend that production cut.  And that really just added more supply into the market as both Saudi and Russia were looking to expand production and really maximize output.  So really what's going on is just an oversupply of oil, a fundamental lack of demand.  And that's really pushed oil prices down rather significantly over the course of the year.  In fact, we've seen WTI at some points trade negative, which has never happened before in the history of oil markets.

Jen: Thanks.  That is interesting.  So when do you expect a recovery to set in?  And what would this look like for markets?  

Brendan: So the recovery is something that's really uncertain at this point.  I think you probably need to see a breakthrough in the containment of the virus, which as of right now looks like we're still a couple of months away.  But as of right now we're building in a recovery for Q3 of this year, so that's when we start to see some of these economies begin to recover and quarterly growth become positive.  We're actually forecasting positive growth for Q3 in the eurozone, in Canada, as well as in the UK, and also some of the emerging economies that we forecast, like China, India and Mexico.  The problem is, because of the sharp downturns and sharp contractions that we're likely going to see in Q1 as well as in Q2, we do think that, even though we have a recovery built in in the second half of this year, that's not really going to be enough for some of these economies to avoid annual contractions and also falling into recession.  So really the message is we have a Q3 recovery built in, but there's a lot of uncertainty around that.  And really we're going to monitor the containment of the virus and the spread of the virus.  And we'll adjust our recovery outlook going forward.  

Jen: All right.  Thanks, Brendan, for all these insights, and thank you all for joining us on the Wells Fargo economics podcast.
Audio: The oil price collapse – 04/24/2020

Transcript: The oil price collapse – 04/24/2020

Welcome to a special edition of the Wells Fargo Economic Podcast, a review of recent economic developments and topics of interest.  And now your host, Matt Honnold.

Matt: Thanks for joining us.  Mark, oil is in the news quite a bit this week as the price on the front-month WTI futures contract went negative for the first time in history.

Matt: What is going on in the oil market right now?

Mark: Well, that was really one for the record books.  To see oil prices go negative on your screen is something that a lot of folks never thought they would see.  While there are some technical aspects to it, it does reflect some really, really troubling market fundamentals.  The technical aspect is that the contract is expiring, and so if you are holding the contract, you might have to take delivery and if you don't have a place to put the oil, that would be a real problem, people that are holding a contract are needing to buy their way out of the contract.  So essentially that's what gave us the negative prices.  I don't know that-- I don't know of anybody that was actually paid to take oil as the contract expired, but that's the-- what we did see when the prices went negative.  What concerned me most, though, is that while folks focus on the technicals, it reflects the fact that we're running out of storage space, and the reason we're running out of storage space is the demand for oil has fallen much more than the production of oil, and you would think that when the price falls that you would just shut down oil production, but that's not possible.  It's not physically possible to shut down oil production entirely because there are costs in restarting that production and some production is needed to produce natural gas.  Some production is needed to keep oil going through Pipelines and I'm concerned that demand has fallen so much that this oversupply issue is likely to remain in place for the next several months, and that's why we saw the contracts a little bit further out also came down.  They seem to be suddenly closer to $20 a barrel now, but they're still a whole lot lower than most oil price forecasts have been.

Matt: What implications does the collapse in oil prices have for the U.S. economy, both in terms of employment and the capital investment spending?

Mark: Well, I think that this-- that the drop in prices and again, it's not necessarily the fact that we printed the negative number that creates the implications, but that negative print was a sign that the oil market-- the supply-demand imbalance in the oil market is far worse than I think folks have thought and that we have even more limited storage capacity; and as a result, prices are likely to remain lower for longer.  Earnings are going to be hit.  We're likely to see a deeper consolidation, which means capital spending budgets are going to be cut even deeper.  If companies give you a range of outcomes of what they were going to do in capital spending, it's probably going to be at the lower end of their range in terms of capital outlays and it may even be lower than that, and so the cuts-- the impact on job losses is likely to be greater, and the impact is likely to be greatest in parts of the country where the marginal costs, or listing costs, of oil are the highest.  And so that's where you're likely to see production shut in the most and for the longest periods of time.

Matt: We know Texas will be particularly affected by the drop in oil prices.  What other regions will feel a major effect?

Mark: Texas is such a big oil producer.  It's kind of hard to escape anything negative that impacts the industry.  So Texas will certainly be impacted.  They're also home to much of the energy industry.  So Houston is home to most of the energy producers, the Pipeline companies, the engineering companies, and we're likely to see a consolidation among those players.  It's interesting because we hear a lot about how the Russians and the Saudis are trying to go to war against the shell producers, but ultimately, this consolidation is going to make the industry much more efficient.  U.S. oil producers are going to be able to produce oil at even lower costs than they can today.  It's going to be painful.  We're going to lose thousands of jobs.

Outside of Texas, the harshest adjustments will likely be in Wyoming and North Dakota where the industry operates basically at a higher marginal cost.  Those economies are also a little bit more dependent upon the earnings from the taxes that are raised on oil and gas production.  Alaska's another state that this is going to be tough on.  Alaska has a tough time cutting production because they have to feed oil into the Pipeline and unfortunately, that oil costs a lot.  So they may be losing money on the oil that they're producing, but they're still going to have to produce because they have to feed a certain amount of oil to keep the Pipeline going.

Matt: Lastly, to what extent is the decline in oil prices only a COVID-19 story?  Are there other long-term secular factors at play here as well?

Mark: I think there are some long-term secular factors, but the means to petroleum is not growing as rapidly as it had been in prior decades before the COVID-19 outbreak, and that may influence how quickly things recover.  Certainly as the economies open up around the world and people start flying again, start driving again, the demand for petroleum products is going to pick back up but that process is going to be drawn out on its own and the fact that more folks are working from home and likely to continue to do so means that the demand is probably going to come back a little bit slower than folks are counting on and longer term, I think it's likely to grow slower than it was prior to the-- prior to this COVID-19 recession.

Matt: Thanks, Mark.  Thanks to all of you for joining us on the Wells Fargo Economics Podcast.


Audio: COVID-19's effect on the labor market – 04/08/2020

Transcript: COVID-19's effect on the labor market – 04/08/2020

Announcer: Welcome to a special edition of the Wells Fargo Economic Podcast, a review of recent economic developments and topics of interest. And now your host, Matt Honnold. 

Matt Honnold: Thanks for joining us. So, Tim, we have seen three weeks now of record-shattering numbers for people filing claims for unemployment insurance. How does this compare with the financial crisis or earlier recessions?

Tim Quinlan: Yeah, it's been crazy, in good times, your initial jobless claims figures tend to be between, you know, 300, 400,000 or so. The lowest we've ever had was 162,000. So even in the best of times there's more than 100,000 people a week doing this. The high watermark previously was 695,000. That was set in 1982. Keep in mind, that coming into this Coronavirus, earlier this year, these figures were really quite low, close to 200 or so a month. 

So if you're comparing it to the previous financial crisis, it took a long time for jobless claims to get up to elevated levels. So we first breached 350,000 in November of 2007. We crossed 400, almost seven or eight months later in July of 2008. We didn't cross half a million until November. We didn't cross 600,000 until January. The high watermark of the prior cycle was the week of March 27th, 2009, and it was 665,000, and note there that, you know, the equity markets actually bottomed a few weeks before that. So it's kind of sometimes darkest before the dawn with the equity markets and this thing. But this time to make the comparison, it was just, lights out. The first week of March, we were at 211,000. Two weeks later, we're at 3.3 million. 

Matt, early on, you had a handle on this thing before others did. You had kind of sent emails to the rest of the economics team before the initial surge warning got a spike in jobless claims. How did you happen to have such a tight pulse on this issue?

Matt: Yes. So with a few exceptions, such as Pennsylvania and Wisconsin, most states don't publish their claims data on a daily basis leading up to the national data release. However, given just the magnitude of the claims that many of these states were seeing these past few weeks, we've been able to get an early indication of what to expect at the national level. For example, the governors of Ohio and California both indicated at press conferences that the claims in their states had risen to just unprecedented levels. Another thing is state and local newspapers from all across the country which were reporting similar surges and backlogs. So from there, you can attempt to estimate and extrapolate to the national numbers.
So at the national level, if you add up the past three weeks, jobless claims numbers, we're talking 16.8 million people who are now out of work. So Tim, how does that compare to the financial crisis?

Tim: Well, you know, comparing jobless claims to the unemployment report, for example, is not a perfect exercise because the monthly non-farm payroll's number is net number. So your total jobs created less your total jobs lost. But between January of 2008 and February of 2010, the U.S. economy shed 8.7 million jobs or about 6% total.

Matt: So in just three weeks, we've lost almost twice as many jobs as during the recession of 2008-2009?

Tim: Yes. The unemployment rate never breached 10% during the financial crisis, but we now expect it to jump to over 15% in just the next coming couple of months.

Matt: But this time is a little different, right? All of these stay-at-home orders and social distancing guidelines have essentially closed huge chunks of the country and the economy as well.  So how do we adjust for that?

Tim: Right. Important point. I mean, you could describe what we're going through here as a recession in fast forward. I mean, never before have financial markets so swiftly gone from all-time highs to bear market declines and never before have we deliberately ground the economy to a halt and it's useful to remember why we're doing this. The economy and markets can recover. The dead cannot. 

The upshot of this is that we get a fast-forward recovery, too. I mean, not enough to make us whole right away, but we look for the labor market to start to recover this summer and for GDP growth to turn positive again in the third quarter as the economy starts to emerge from lockdowns. The fiscal measures that Congress has put in place in recent weeks are meant to support the businesses and households during the Coronavirus-induced lockdowns. As the economy reopens, businesses that have remained viable should begin to recall those furloughed workers. So we look for very rapid growth in nonfarm payrolls in the second half of the year which should cause the unemployment rate to recede considerably but not every business will make it to the other side. It means that not all furloughed workers will return to their previous jobs. 

So although we look for robust job growth starting later this summer, we forecast that payrolls at the end of next year, 2021, will remain nearly 3% below their peak from February of 2020. So the unemployment rate, which went into this thing at a 50-year low of 3.5% back in February, should still be a little higher than 6% at the end of next year. So, you know, ultimately the shutdown had to happen to save lives. The rebound will be swift but not swift enough to get us back to where we were before the crisis began. Thanks to robust and timely fiscal and monetary policy solutions, it's likely that the job market will rebound more quickly from this recession than it has in prior cycles.

Matt: Thanks, Tim. Thanks to all of you for joining us on the Wells Fargo Economics Podcast.

Audio: Outlook for the U.S. federal budget deficit – 04/08/2020

Transcript: Outlook for the U.S. federal budget deficit – 04/08/2020

Announcer: Welcome to a special edition of the Wells Fargo Economic Podcast, a review of economic developments and topics of interest. And now your host, Hop Mathews.

Hop Mathews: Hello. This is Hop Mathews here with Michael Pugliese to discuss the outlook for the U.S. federal deficit and how the Treasury plans to finance it.

So Mike, you were on the podcast last week to talk about what was in the $2 trillion stimulus bill that Congress passed and what some of the economic impacts to that bill might be. Now broad terms, how might the bill impact the federal deficit going forward?

Michael Pugliese: Yeah. So coming into this year for fiscal year 2020, the budget deficit, we thought, was going to be something around $1 trillion and then since then, you've really had two things happen on the deficit front.

One, of course, is the fact that the economic outlook has simply deteriorated a lot and you know, when the economic outlook goes south, what you have is you generally get a bigger budget deficit, as there are fewer people paying taxes, right, there's less income. There are less profits to be taxed and then on the flip side, some of the quote, unquote, automatic stabilizers start to kick in. So unemployment benefits rise and more people go on Medicaid, the federal government's health insurance program for lower income individuals, et cetera; and then in addition to that, you have this large bill, multiple bills kind of phases of this Coronavirus response, but the last one really being the biggest one from a deficit standpoint and you know, aspects of that will increase the deficit pretty much one for one, so you know, the household checks that the government is cutting to individuals, the extension on unemployment benefit, some of those will increase at, you know, pretty much right through. Some of the others maybe it's a little bit more unclear what the deficit impact will be. So you know, for example when the federal government makes a loan that is expected to be paid back, you know, that's a little bit different than simply cutting a household a one-time check that you don't ever expect to see again. The exact contours of what the deficit will be from that bill is still a little bit unclear. You know, our forecast at this point in time is for the federal budget deficit in FY2020 to be about $2.4 trillion. 

So more than 100% increase from where we were before. Right. A really big increase in terms of what we're expecting and we think it will come down a little bit next year, but it's likely to still be very elevated relative to where we had it even just a few months ago. 

Hop: Yeah. Those are some pretty big numbers. Can the government afford to run such large deficits?

Michael: So in the near term, I think the answer's yes. The federal government here in the U.S. certainly has the ability to run such big deficits. So you know, to give you a little more color, that's something in the ballpark of 11% of GDP. You know, the peak during the great recession was about 10% of GDP, so you know, at the moment you're talking about just a little bit bigger than where we were during the depths of the great recession, and if you look back even farther in history, the government has run much bigger budget deficits than that. So if you go to back to World War II, the federal government was running 20 to 30% of GDP budget deficits so two to three times where we are in our current forecast. So you know, certainly from that standpoint, I think in the near term, it can. The U.S. Treasury has a lot of benefits, you know, when it comes to financing this debt. The U.S. is the biggest economy in the world. The Treasury Market is the deepest, most liquid bond market in the world. The U.S. dollar is the world's reserve currency. So you know, the U.S. has a lot of advantages kind of on a structural basis that maybe some other countries don't have. Now, of course, longer term, right, we probably can't run these kinds of deficits indefinitely. But you know, from a short-run standpoint, from a year or two or something like that, I certainly think the federal government can finance this debt, but you know, it probably does raise some bigger, more difficult economic and policy questions over the medium to long term, but you know, in the here and now, when you're dealing with this kind of public health and economic emergency, you know, very honestly, those are problems for down the road and not necessarily at the forefront at this point in time. 

Hop: Sure. That makes sense. So kind of speaking of the here and now, where does the government plan to get all this money?

Michael: Yeah. It's funny. It raises kind of an interesting question, right? We all talk and listen to what the economic impact will be and how much the deficit will go up, and I think some people just leave it there. It kind of raises this question of, where does $2 trillion just come from so quickly anyway?

Hop: Yeah. 

Michael: And the answer is the U.S. Treasury will issue bonds. It will issue debt, and those bonds will be auctioned off and that money will then be raised so that the money can be sent out to big businesses, small businesses, households, you know, across the board, the money gets spent. 

Hop: Sure. Yes. So the Treasury is going to issue these bonds to finance the deficit. But I know they have a few different types of bonds that they can issue, you know, whether it's a 2-year note or 30-year bond. How does the Treasury decide exactly what to issue?

Michael: Yeah. So the Treasury has two goals when it's managing, you know, kind of its debt issuance program. The first, not surprisingly, is the least cost to the taxpayer. You know, they're trying to issue however much debt is deemed necessary based off of the laws the Congress and president have passed, and then in addition to that, you know, they're trying to make sure that debt is done in a regular and predictable pattern. It's not as simple as looking across the Treasury curve and saying, oh, well, interest rates are lowest at these maturities so we should just simply issue all of it here, or you know, the Treasury tries to keep that in mind but it doesn't want to be too opportunistic because when you are the biggest, you know, U.S. dollar bond issuer in the world, you don't want to upset the apple cart too much by opportunistically jumping around in huge dollar amounts all over the curve. So the idea is the Treasury is weighing these two things against each other. On the one hand, they're trying to issue the debt as cheaply as possible. But on the other hand, it wants to make sure that the increase in issuance across all of these different maturities is done in a regular and predictable pattern. So kind of in the near term, you know, if you think about it, the issuance will probably be heavily in Treasury bills, very short-term stuff, you know, it's very robust demand right now for ultra-safe, short-dated assets, and interest rates on Treasury bills are effectively right around zero right now. But then over time at some of those longer-dated parts of the Treasury curve, I think you'll see issuance rise as Treasury tries to term out some of that debt and increase auction sizes a little more gradually and a little more predictably in the parts of the curve where investor demand is not quite as widespread as it is, say, in Treasury bills. So I think given the numbers we're talking about, you're going to see increased issuance across the entire curve, but a lot of it is going to be done in Treasury bills right off the bat. 

Hop: Sure. Yeah, that makes sense. I mean, kind of regardless of where they issue along the curve, don't you think bringing all the supply to market will push up interest rates since we're making it more costly for the government to finance the deficit?

Michael: Yeah. If you think about it just from a kind of from a simple supply and demand standpoint, right, if you have a lot more supply of Treasury securities, all else equal, you're going to get higher interest rates. Of course, that has a big caveat to it, right? It has the caveat of all else equal. You know, something you've seen more recently is demand rise, again, like we just talked about. There's a lot more demand for ultra-safe, you know, secure assets during these points in time or other things that aren't equal. You know, people aren't expecting the Fed to hike rates anytime soon. So that should help keep at least the front end of the curve anchored and you know, people are concerned about low inflation and a poor economy. So that may keep a lid on yields. Even just more fundamentally, you have huge, huge buying from the Fed. So forget about private sector demand, if you just think about demand overall, you know, the Fed bought something like $700 or $800 billion in Treasury securities just in the Month of March alone. You know, all else equal, you would expect this increase in Treasury supply to push up rates but when you have a lot of private demand for a variety of reasons, the Fed is coming to the market and buying in significant size. People aren't expecting the Fed to hike rates anytime soon. You know, there's an expectation that growth and inflation will be weak for a while. Those factors may kind of outweigh what you see on the supply side. Now over time, maybe if things settle down, people start to get a little more optimistic about the economy, you know, the Fed's buying starts to recede some. Auction sizes for Treasury securities to the public are rising across the board steadily, then you very well may see that kind of effect pushing up rates over time. But I think for at least a little while, as long as what the Fed is doing remains in place from keeping rates low and buying and so on and so forth, you probably won't see a huge move in rates from this increase in issuance. 

Hop: I see. Well, thank you for taking the time to sit down and talk through all this. Thank you all for listening to this installment of the Wells Fargo Economics Podcast. 


Audio: COVID-19 undercuts the housing recovery – 04/02/2020

Transcript: COVID-19 undercuts the housing recovery – 04/02/2020

Announcer: Welcome to a special edition of the Wells Fargo Economic Podcast, a review of recent economic developments and topics of interest.  And now your host, Charlie Dougherty.

Charlie: Thanks for joining us.  I'm Charlie Dougherty and with me is Wells Fargo Securities Senior Economist, Mark Vitner.  On this edition of the podcast, we're gonna discuss how the Coronavirus will impact the housing market.  Mark, with a lot of economic activity abruptly coming to a halt, much in order to suppress the spread of the Coronavirus, it looks like the economy is going to sharply contract.  Many businesses are laying off employees and consumers are staying home and pulling back on discretionary spending.  Given everything that's going on, how is the housing market holding up?

Mark: Well, the housing market had incredibly strong momentum prior to the intensification of the COVID-19 outbreak and it, too, is coming to a sudden stop, but some of that momentum is going to carry through.  Existing home sales were committed to some months ago and so we're still going to see most of those closings go through.  I imagine that some folks who suffer job losses or maybe they saw their stock portfolios tank might have to back out of some of those deals but for the most part, existing home sales will hold up for a little while, but new sales going forward are likely to fall 30 to 40% in the short term because of the fact that people aren't going to be out shopping.  They're going to be staying at home and a lot of folks don't want people to come through their homes and while they're still will living in them, so a lot of open houses have been pulled back.  So in the very near term, which is the spring selling season, we're going to have a sharp contraction.  New home sales will probably be somewhat less impacted, but we're still likely to see a pullback in new home sales as pretty sharp in April and early May.

Charlie:  Now, part of what has been helping the housing market in recent months are lower mortgage rates.  Now in response to the fairly swift economic deterioration that we've seen, the Fed has lowered interest rates to effectively zero and committed to a massive new quantitative easing program.  What does all that mean for mortgage rates in coming months?

Mark:  Well, it means that mortgage rates are likely to fall in the coming months.  Unfortunately, the turmoil that we've seen in the financial markets means that mortgage rates have actually risen at least in the first few weeks of the crisis because the Treasury Market has been in turmoil and there's some fear about a rise in mortgage defaults and the general disorder in the Treasury Market and the Mortgage-Backed Securities Market has meant that it's very difficult for mortgage provider to hedge their portfolios and so we've seen some improvement in recent days because there's been a lot of action on the part of policymakers and a lot of action by the Fed to help bring liquidity back to the markets, and so conforming mortgage rates have come back down a little bit.  We think they're going to drop further over the next few weeks.  Interest rates are likely to remain low for the next several months, probably for at least the rest of this year, and so I think there's going to be an excellent opportunity for people to refinance a mortgage or to come and purchase a home and get a mortgage at a very, very attractive rate.

Charlie: Now what about new home construction?  Right now, it appears construction may be the one activity that is able to continue during these times.  Do we expect the elevated new home development that we've seen in recent months to continue?

Mark: Well, the warmer weather in January and February allowed for a lot more home building activity to get started than we typically see and that's a good thing.  That means that a lot of projects have gotten started.  One of the things that's unique to the circumstance is that home building has been lagging.  It's been very slow to recover throughout this expansion, and we have underbuilt housing.  We've underbuilt all types of housing and so the inventory of completed homes is incredibly low right now, and even the inventories when we expand for the number that are under construction and the number of developed lots.  There's just not a whole lot out there.  So builders feel pretty confident about moving forward.  The pace of construction is still going to slow.  I think the folks are going to hold back a little bit so they can gauge how long this is all going to take to play out and what type of recovery we're going to see on the other side.  Construction will also come under a little bit of pressure because builders are going to have to observe social distancing guidelines.  So when you're building a home, you're not going to be able to have all the contractors coming in at the same time.  They're going to have to stage things a little more carefully, and we may also may see supply disrupts. There's a lot of things that go into the home that are made in China or made in some other part of the world, and we may see some shortages of things like light fixtures and cabinets and maybe even some types of plumbing fixtures and roofing materials and siding.  A lot of those things are sourced from overseas.  We've got some supply chain difficulties, but I really think that we're going to work through those because I think the level of activity is going to pull back enough in the short term that we shouldn't have too many—you shouldn't see too many problems there.  For the year as a whole, I don't think that single family starts are likely to pull back all that much.

Charlie: Well, housing was at the center of the downturn last time.  Overall, what is your sense on what we should expect from the housing market this time around?

Mark: I think that housing will prove to be resilient.  I do think that apartment construction is likely to come down pretty significantly.  Permits had been running up around 400,000-unit rate and running ahead of starts and I think that projects that have been started are likely to move forward.  The biggest problem for apartment operators is really in the Class B and Class C categories, which are older properties, and they're likely to see a rise in delinquencies and maybe some turnover in tenants, but for newer projects, a lot of newer project that were focused on the luxury, high-end lifestyle apartments in downtown areas, for those folks, they've got a lot of apartments that are being delivered this year and they're going to be delivered in a fairly weak job market.  So it's going to take them even longer to get those apartments leased out.  So I do think we're going to see a pretty significant pullback in apartments.  Overall, home building, both single family and multifamily, is not going to be part of the economy that sees the deepest contraction in this recession.  It's likely to prove more resilient than it has in past downturns.

Charlie: Mark, thanks for joining us and thank you all for tuning in.

Audio: Congress unleashes the fiscal firehose – 03/30/2020

Transcript: Congress unleashes the fiscal firehose – 03/30/2020

Announcer: Welcome to a special edition of the Wells Fargo Economic podcast, a review of recent economic developments and topics of interest; and now your host, Jay Bryson.

Jay: Hello, this is Jay Bryson. I’m the acting chief economist at Wells Fargo Securities and I’m joined here by my colleague Michael Pugliese to talk about some things that the government has recently done. Mike, the government recently passed the CAREs Act to help support the economy, during this period in time. Can you give us a high level of what the CAREs act is all about? 

Mike: Yea, it’s a pretty big bill Jay. If you think about the cornerstone policies on the household side, they really comes down to direct checks for individuals and expansion of unemployment benefits. On the direct checks side, the federal government is going to cut checks of $1,200 to single filers and $2,400 of married filers. The thresholds for those is $75,000 on the single side and $150,000 on the married side and there are some phase out thresholds above that so the checks slowly phase out up to $100,000 and $200,000, roughly speaking. Those checks should go out at some point in the next few weeks.

On the unemployment side, there was an expansion of unemployment benefits across a couple different segments of the programs. First, the benefits were made more generous. So, in addition to what you receive from your state, you’ll receive an extra $600 per week for four months. They were also made more expansive to include workers, like furloughed workers, which are not are not typically included in unemployment benefits. They are going to be collected for a little bit longer, so there was an extension past states usual each state’s time limit for collecting benefits. Those benefits at a high-level are the big cornerstone pieces on the household side that are attempting to improve the liquidity and solvency position of households.

Jay: So, you know this whole package includes about $2 trillion dollars. Do those programs you just talked about account for the whole $2 trillion or is there more?

Mike: No, there is a lot more. So on the appropriation side of the bill, there are slew of extra money for extra programs to help fight the virus; money for hospitals and veteran care, money for FEMA, things like that and there are a lot of business lending programs. On the small business side, there’s about a $350 billion boost to the small business administration loans. The idea behind those is that small businesses of roughly 500 workers or less will be able to take out a loan and if the money is used for certain purposes, to help pay rent or keep employees on the payroll that money will eventually be forgiven through the government and transition from a loan to a grant. For bigger businesses, states and municipalities, there is about $450 billion given to the Fed to allow them to set up a facility for Main Street Lending. The idea there is the money will be given to the Fed and they will set up a program through the banks to lend to bigger businesses states and municipalities, those organizations that wouldn’t qualify for the SBA loans. 

Jay: Talk a little bit more about the Fed programs. How will all those things work?

Mike: Yea, so when the Fed sets up an emergency lending program like this, it gets its authority from section 13 (3) of the Federal Reserve Act. The idea is that the Treasury will provide some type of equity infusion and that cushions the Federal Reserve against any type of losses. If previous programs are any indication, the Fed will then generally lever that equity up about ten to one. If the Fed were to get all $450 billion directly into that facility, that would imply more than $4 trillion in lending power the Fed would have behind this facility to lend to businesses or states or whatever organization or institution needs the money. So we’re talking about a really big lending program the Fed could set up here that could potentially take the size of this program up from $2 trillion up to $6 trillion plus. Of course not all of that is deficit spending. It’s different when the government just cuts a check it doesn’t expect to recoup any of that cost versus when it makes a loan with the intention of that loan being paid back potentially. But the $6 trillion number is certainly very big and very real and it might be a question for you Jay. Is all of this going to work? How is it going to help the economy through this tough time?

Jay: Yea, that’s the $64 trillion dollar question. We go back and we look at past stimulus programs, like back in 2009. There was a lot of direct spending in that particular package ten years ago. With this package, there is some direct spending measure here, like the checks you mentioned, but a lot of it is loans. The idea is to get the economy across this valley that we’re going to be looking at over the next few months. Economic activity across the economy or at least in many sectors is coming to a halt. These programs are there to support try to support households and businesses over the next few months while we are all hunkered down in our homes and not out there shopping. Really, it boils down to how long does the outbreak continue. If this is over relatively quickly, then this should be able to get us over this valley, but if we’re still hunkered down this fall then that’s a different question. That comes back to my final question for you. First, put it into perspective, how big is this relative to other packages that we’ve seen in the past? Second, this is phase three of spending for this year, will there be a phase four? Following on the heels of this phase three.

Mike: Yea, as a standalone package, it’s big, bigger than any standalone package passed in the Great Recession. If you take the February 2009 big stimulus bill, for example, that was something in the ball park of 5-5.5% of U.S. GDP. If you take the $2 trillion number for this bill and put aside the Fed’s ability to add to that, $2 trillion is about 9% of U.S. GDP. Now, if you were to add in all the other bills that happened over the course of the Great Recession, TARP, measures taken earlier in the crisis, the direct checks that went out then early in 2008, then you might be approaching the size of the package that we’re talking about now. But then we may very well see additional phases accumulate over the course of this. To the point you just made Jay, this is a little bit less about stimulus and more about rescuing the economy in the near term. If you think about what we’re talking about in terms of the slowdown in the economy, the contraction we’ll see and the increase in the unemployment rate, we may very well see more traditional stimulus down the road, like measures to get the economy going again once it reopens. That may take the form of tax cuts, infrastructure spending, just like we saw in that February 2009 stimulus bill. Some mix of the two. That’s not something that’s imminent. Congress is currently on recess, so they’ll be gone for the next couple weeks unless they get called back. But, if the economy is able to reopen in the next couple months, that may be what the phase four looks like, less on the rescue side and a little bit more of what we associate with a traditional stimulus bill; like tax cuts and more government spending.

Jay: Great well thank you Michael for going through all of this with us and thanks to all of you for joining us on this podcast.

Audio: A much deeper contraction – 03/26/2020

Transcript: A much deeper contraction – 03/26/2020

Announcer: Welcome to a special edition of the Wells Fargo Economic podcast, a review of recent economic developments and topics of interest; and now your host, Shannon Seery.

Shannon: The U.S. economy is confronting an unprecedented challenge in which efforts to contain the COVID-19 outbreak require deliberately grinding the economy to a halt. So Tim, what’s our latest take on how bad the fallout will be? 

Tim: Well, you know, it’s tough to know precisely Shannon. The day we’re recording this we got initial jobless claims that came in at more than three-and-a-quarter million people. To put that in perspective the previous high-water mark was set in 1982 at the height of that recession and was a little less than 7,000 so in our opening salvo here it’s more than four times higher than the previous record, so pretty bad to cut to the chase. Interestingly, the Fed declined to update its “Summary of Economic Projections” a section of its usual meeting when it talks about what it expects going forward. And when he was asked about it, Fed Chair Jay Powell basically said that this thing is evolving on a daily basis and a lot of this has to do with the measures taken to rein it in and its just not something knowable in his words. And I think his exact quote at the time was, “writing down a forecast in that circumstance just doesn’t seem to be useful.” 

Now you and I can’t get away with that. We have to come up with a forecast. Even if that involves more guesswork than econometric modeling. So let’s just get the ugly part of this out of the way. We’re going to see some steep declines. 

Shannon: Double digit declines? 

Tim: Yea, that’s right. We’re looking at a 14.7% decline in the second quarter. And another big dip in the third quarter. Hopefully, we get a sharp recover in the fourth quarter that carries into next year. But Shannon, as you know, a lot of the weakness shows up in consumer spending. Tell people what you did to help us come up with this bottom-up approach that we did for the retrenchment in consumer spending in the second quarter. 

Shannon: Right, so we’re confronted with this unprecedented event, so we really don’t have a comparable period in history to draw conclusions from. So what we did for consumer spending, is we broke it down by detailed category going back almost 20 years and found the worst quarter for each category on record. We then doubled that largest quarterly decline for each of these detailed components. But that was just our starting point. 

Tim: Right, then you and I went through line by line and adjusted those for categories apt to see the consumer behave differently. For example, we lifted some categories on non-durable spending like food at home to reflect that people are getting more from the grocery store, and of course we cut spending on so of the obvious categories like new cars and food away from home to reflect the fact that restaurants are closed in many parts of the country and new auto sales are likely to come under pressure as confidence weakens. So we are looking at a 17% rate of decline for consumer spending in the second quarter. Now you did some work on how that compares with other steep declines in consumer spending. What did you find? 

Shannon: Yeah, so the 17% decline that we have forecast would be the biggest contraction in consumer spending on record, to find the next largest contraction you have to go back to the end of 1950 where we saw nearly a 12% decline. So Tim, consumer spending is obviously one major factor in our forecast, but what do you expect for business outlays? 

Tim:  Well capital spending was the one part of the economy that was not really firing on all cylinders even going into this thing. We already had 3 consecutive quarterly declines in capital equipment spending already. Now obviously that gets much worse.  We’ve got not just equipment spending but overall business fixed investment falling in all four quarters of 2020 and not turning positive until 2021. 

Shannon: And what about the rest of the world? What do we expect there? 

Tim: Well, I guess we can think about that my breaking the global economy into three major regions. Europe (including UK), Japan and China. So starting with Europe. In many parts of the Eurozone, social distancing and stay-at-home measures are already in place. That is certainly the case in the United Kingdom, which is under lockdown orders at the moment, and Prince Charles himself, the heir to the crown, has been diagnosed with the coronavirus. So it’s pretty stark in the U.K. The BoE met earlier today and warned of “very sharp contraction in activity.” In the parlance of the BoE, they tend to keep a stiff-upper lip, the old conservative British, don’t overstate things kind of way. The BoE has been doing this since 1694, they’re the world’s oldest central bank. So for them to say a very sharp contraction in activity is about as dramatic you will ever hear out of them. Essentially, both Europe and the United Kingdom are headed into imminent recession. 

Japan likely is too. After more hand-wringing and deliberating than Brett Favre’s wavering decision over whether or not to retire from the NFL, they finally decided to postpone the Summer Olympic Games there so that is not going to take place until next year. Japanese GDP was weak going into this thing. They too have faced an outbreak of the disease there, but they have done better than most at containing it. We still look for GDP there to contract the most that it has since the financial crisis back in 08 and 09. 

China, of course this thing originated in China. But, China has been a pretty resilient economy avoiding pretty significant slowdowns. From the time it emerged from a rural backwater back in the 1970s, it has really never had a year since 1980 in which full year GDP growth has been negative. That’s about to change. Not only was Wuhan ground zero for the coronavirus, their economy also relies on being a “factory to the world” and most of the planet under lockdown, China’s export-driven economy will slow.  

So in answer to your question, we are headed into global recession. We expect global GDP will tumble more than 2% this year, the deepest global downturn in at least 40 years. 

Shannon: Tim, things are not looking good. So how long does this all last? We’ve debated within the team whether this will be a V-or-U-shaped bottom, will we see swift snap-back in activity or are we bound for a more gradual rebound, what’s your take there? 

Tim: Our whole premise here is that the pandemic does not come back to the northern hemisphere later this year, and if that holds, then we look for growth in most economies to turn positive by the end of this year. You do get this sort-of V shape, robust snap back, but still our global GDP forecast for next year is 2.7%, that would still be well below the 3.5% average annual GDP growth rate you’d expect to see over the last 40 years. 

In terms of the timeline, I think the best line for this came from Dr. Fauci who said “the virus sets the timetable.” I thought that was great. Just because the virus sets the time table though, that doesn’t mean we don’t do what we can to combat this slowdown. We didn’t discuss it much today Shannon but the Fed and Congress have both been very active on the fiscal and monetary policy front. I think we have Jay and Mike coming back on our next episode to discuss that? 

Shannon: Yes that’s right, next week our Acting Chief Economist Jay Bryson will be on the podcast with Michael Pugliese to discuss fiscal and monetary policy responses. Tim thank you for joining us, and until then, thanks everyone for listening in. Please stay safe out there. Thanks.