June 4, 2020

As the May economic data begins to roll in, let’s update the picture on the damage to the economy.

Last week, we had the first revision of the Q1 economic output.  It was down 5%.  Of the twelve weeks measured, the economy went into lock down for the last three of those weeks.  You can see that timeline here …

If we extrapolate the Q1 economic contraction to a full quarter under lockdown, maybe we get something in the neighborhood of -20- to -25%.

With that in mind, let’s revisit how the Atlanta Fed is projecting Q2.  Remember, just three weeks ago, the Atanta Fed model was projecting -43% for Q2.  Today, the model is projecting down 54%.  You can see what the evolution of this projection looks like (the green line) as the Q2 economic data has been rolling in. It has continued to move lower.

What is the consensus view of economists outside of the Fed?  The blue line shows the average forecast of a 35% contraction.

This continues to look like the expectations are set to be beaten (i.e. positive surprises).

The latest University of Michigan consumer surveys (sentiment, current conditions and expectations) all remain well above the levels of the Global Financial Crisis.

And “capacity utilization” was running at about 65% in the last report (from mid-May).

As we discussed last month, the important takeaway there, it’s not zero.  Despite what is described as an “economic stoppage,” the economy still operated at almost 65% capacity in the month of April.  And I suspect it will better in May, as economies began to open up as early as the last week of April.

So, what’s the disconnect in this data and in the Atlanta Fed model?

The models these economists rely on doesn’t account for the unprecedented actions taken by the Fed and Congress.

They have protected the balance sheets of consumers and businesses.  That’s the difference.

And today we had good news on that front.  The Senate passed revisions to the PPP loans. Small businesses will now have six months, instead of two months to spend the money that was intended to bridge them from closing to a full reopen.  And they will now only need to use 60% of it toward payroll, instead of 75%.  Translation:  It has become a more balanced mix of payroll grants and a pure cash grant.

With that, small businesses that were in decent condition have survived, and in some cases are flush with cash, as the doors have reopened for business. Plus, employees have been kept whole, through a combination of subsidized unemployment and an attachment to their jobs.

This all sets up for a huge bounceback in the economy.

Remember, between fiscal and monetary stimulus, we have more than a quarter’s worth of GDP already pumped into the economy.  That implies a complete stoppage of the economic heartbeat for three months.  That hasn’t been the case – far from it. The excess money in the system is going to levitate the nominal value of GDP.