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Why The Economy, Unemployment, And Financial Markets Will Take Years Returning To Normal

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For months, economists, government officials, and investors have been asking the same question: When will things get back to normal? Given what has transpired since the onset of this coronavirus, the U.S. will not return to its pre-pandemic state for many years. Unemployment will remain elevated as the economy struggles to recover. Before we discuss the reasons why, it’s important to understand that much of the information we hear is laced with varying degrees of bias, which has an effect on behavior. Here are a few examples.

President Trump said he expected a vaccine would be ready by the end of 2019. He also pushed back on the idea of more testing. When asked if he were serious [about testing], he said, “I don’t kid. Let me just tell you. Let me make it clear.” Later, in an interview with Sean Hannity of Fox News, he said, “Sometimes I jokingly say, or sarcastically say, if we didn’t do tests, we would look great,” Even if it was a joke, it was in very poor taste. On June 20, the president held a campaign rally in Tulsa, Oklahoma where very few of the thousands of attendees wore facemasks and virtually none practiced social distancing. Why would the president do and say these things? He is most likely downplaying the COVID-19 threat hoping that people will reengage leading to an economic rebound prior to the November election. However, the virus does not care that he is the leader of the free world.

Corporate CEOs and stock analysts are another group with a strong bias. With the recent and severe decline in consumer demand from closing the economy and the difficulty with its reopening, corporate revenues have declined sharply. Normally, a decline of this magnitude would cause stock prices to plummet. And they would have if the federal government had not injected trillions of dollars into the economy. If a CEO of a major corporation were to publicly reveal that their company was on the verge of an abyss, what do you think would happen to the price of its stock? Moreover, what do you think ‘might’ happen to their position as CEO? Self-preservation is a strong motive.

Managers of ‘Stock’ Mutual Funds and ETFs are another group that tends to paint a rosy picture when things get rough. Since their compensation is typically tied to the amount of assets under their management, and since they wish to avoid major fund outflows, they tend to be more optimistic, at least in public.

These are only a few of the biases that are common in modern discourse. Now let’s look at the reasons why the economy will spend years recovering.

Covid-19

Whether this is a second wave or an extension of the first, the fact remains that Covid-19 is rapidly expanding and too many people are ignoring the recommended safety protocols. Plus, a vaccine will likely not be available until early 2021 according to Dr. Scott Gottlieb, former head of the CDC.

Corporate Debt

The level of corporate debt was already elevated before the pandemic. Although the PPP will forgive loans if the proceeds are used properly, many corporations tapped into private lending. Thus, the level of corporate debt will be an issue to watch.

National Debt

As of the most recent fiscal year ending June 30, 2019, the national debt was $22.7 trillion. At this moment, it is $26.3 trillion and rising. The federal government had a choice when the outbreak began; do nothing and watch the economy sink into a depression or borrow from the future to support the present. Neither was all that attractive, but the second choice did save us from greater economic misery. However, with the debt at such a high level, future economic growth will be impaired. For more on this, please refer to an article I wrote entitled, The Approaching Coronavirus Debt Crisis: How Excessive Debt Reduces Economic Growth.

Labor Force

The labor force is in the midst of a major transformation, which will take years to complete. Many companies have already filed for Chapter 11 bankruptcy protection and many will ultimately cease to exist. This will lead to fewer available jobs as companies take a hard look at reducing expenses. Companies will also add technology to replace various jobs. Another important issue is the spike in unemployment among younger workers, many of whom are receiving more from unemployment than they earned while working. Ample employment opportunities for younger workers is vital to the health of any economy.

10-Year Treasury Yield

If you want to assess the health of the U.S. economy using only one piece of information, look at the yield on the 10-year Treasury. At least that’s what Alan Greenspan said during an interview in the mid-1990s. In recent days, the yield has been trending lower, indicating possible trouble ahead.

America is in its most difficult period in modern history. While I don’t wish to sound like chicken little, I believe a rational examination of the current crisis can offer no other conclusion. In this election year, politics have played a far too important role in the coronavirus conversation and we have seen a great deal of disinformation. Every American has the right to decide if the safety measures offered by the medical community are appropriate or not. Choosing not to wear masks and engaging in mass gatherings will only further the spread of Covid-19 and prolong the recovery. It is my hope, and the hope of millions, that logic and reason will prevail, and that we will all place the safety of our neighbors at the top of the list. Is it constitutional to require us to wear masks and avoid large gatherings? Perhaps not, but it is prudent, and it is required if we want things to return to normal any time soon. The choice is ours to make. Please choose wisely.

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