Sep 2, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🏀 Shout out to my Denver Nuggets 🗻 who got a superb game 7 victory over the Utah Jazz last night, 80-78. What a game! If anyone knows Gary "G-Money" Harris, tell him he was the real MVP.

🎙“I hate war as only a soldier who has lived it can, only as one who has seen its brutality, its futility, its stupidity.” - See who said it and why it matters at the bottom.

1 big thing: The recession within the recession

Illustration: Sarah Grillo/Axios

Economists are warning that the economic downturn caused by the coronavirus pandemic is now creating another recession: mass job losses, business failures, and declines in spending even in industries not directly impacted by the virus.

Why it matters: The looming recession — a possible recession within a recession is less severe than the coronavirus-driven downturn. But it's more likely to permanently push millions out of the labor force, lower wages and leave long-lasting scars on the economy.

What we're hearing: "As the recovery has slowed down we’ve seen a couple of metrics transform from something that was extraordinary and unique and that we’d only seen in this COVID recession to something that is much more in line with our historic experience with typical recessions," Ernie Tedeschi, a managing director and policy economist for Evercore ISI, tells Axios.

The warning signs he sees:

  • The increasing number of layoffs that have gone from classified as temporary to classified as permanent.
  • The increasing number of men who have lost jobs in recent months, a traditional recession dynamic and reversal of the trend that saw more women being laid off in early months.
  • The rising rate of long-term unemployment, an unfortunate hallmark of the 2008 Great Recession.

"The longer this weakness persists, the harder it is to recover later on," Tedeschi adds.

  • Darius Dale, managing director at Hedgeye Risk Management, tells Axios: "Our view is that the U.S. economy is transitioning from a depression to a recession and not a recovery."

But, but, but: It will be hard to see the recession in most data, because third quarter economic growth will be compared to the second quarter, which was the worst downturn in history.

  • Absent another wave of lockdowns, Q3 GDP growth should be the highest ever — but largely because of pent-up demand and the simple fact that most U.S. business are allowed to operate.

Be smart: The new recession is exactly what policymakers were trying to avoid by passing the $2 trillion CARES Act in March.

The bottom line: The recession within a recession is giving economists flashbacks of 2008 and the long recovery needed to get many of the country's lower-income citizens back on their feet.

  • The difference this time is that it follows an economic shock that caused at least three times the number of job losses, and has put four times as many people on government unemployment insurance.
Bonus chart: Odds of a double-dip recession

Data: NABE; Chart: Axios Visuals

How it happened: "We had an uneven shutdown around the country and what that allowed the virus to do is really take hold and remain a force for economic outcomes," Constance Hunter, chief economist at consulting firm KPMG, tells Axios.

  • Hunter also serves as president of the historically right-leaning National Association for Business Economics, which recently released a poll of its members that found two-thirds believe the economy is still in a recession.
  • More than a third (37%) see at least a one-in-two chance of a double-dip recession — an occurrence that Hunter notes is "extremely rare."
2. Catch up quick

The CDC will issue an order to pause evictions through the end of the year in an effort to slow the spread of the coronavirus pandemic. (Axios)

Retail tenant evictions are picking up across the country as courts reopen and states’ moratoriums are expiring, with landlords expecting to find eager new clients. (WSJ)

U.S. manufacturing expanded for the fourth straight month, showing its best reading in nearly two years, but employment and investment remain depressed. (MarketWatch)

3. Hotels warn: “Our industry is in crisis"

Data: AHLA; Chart: Axios Visuals

Congress will return from its late summer recess soon and the hotel industry is pushing for new economic relief, warning that six months into the coronavirus pandemic in the U.S. it "remains on the brink of collapse."

What it means: A new report from the American Hotel and Lodging Association finds that heading into Labor Day weekend, which would normally be a boom time for the industry, 14% of hotels are booked, compared to 41% in 2019, and overall demand remains well below normal levels.

  • 33% of Americans say they have traveled overnight for leisure or vacation since March, and only 38% say they are likely to do so by the end of the year. 
  • 16% of Americans plan to travel for Labor Day, 25% for Thanksgiving and 29% for Christmas.
  • Four out of 10 hotel employees have not returned to work.
  • Nearly two-thirds (65%) of hotels remain half full or less — the threshold at which most hotels can break even and pay debt.

Where it stands: Treasury Secretary Steven Mnuchin on Tuesday urged Congress to pass another relief bill during a hearing before a congressional panel, saying he would call House Speaker Nancy Pelosi to negotiate.

What they're saying: “Our industry is in crisis. Thousands of hotels are in jeopardy of closing forever, and that will have a ripple effect throughout our communities for years to come,” Chip Rogers, president and CEO of AHLA, said in a statement.

  • “We are incredibly worried about the fall and what the drop in demand will mean for the industry and the millions of employees we have been unable to bring back."
  • "We need urgent, bipartisan action from Congress now.”
4. Consumer confidence popped at the end of August
Data: Hamilton Place Strategies, CivicScience; Chart: Axios Visuals

Consumer confidence picked up in the second half of August as confirmed coronavirus cases declined from record high levels.

By the numbers: Overall consumer confidence jumped 3.4 points in the past two weeks to 50.0 in the latest HPS-CivicScience Economic Sentiment Index, its highest reading since mid-March.

  • Confidence in the overall U.S. economy jumped 6.6 points to 52.8. 
  • Confidence in finding a new job rose 4.8 points to 40.4, while confidence in making a major purchase rose 3.3 points to 46.4.

A similar survey that tracks daily changes from data provider Morning Consult also found consumer confidence had risen to its highest since the pandemic began roiling the United States.

Why it matters: Closely watched reports from the University of Michigan and the Conference Board that survey consumers through the middle of the month have shown confidence stagnating at yearslong lows in recent months.

  • The new data suggest that the end of August marked a defined uptick.

Of note: While overall confidence has rebounded to pre-pandemic levels, the HPS-CivicScience data show confidence in finding a job and in personal finances remain significantly lower.

5. A credit upgrade cycle may be coming

U.S. companies have taken on a historic amount of debt this year, with investment grade corporates already issuing a record $1.5 trillion in bonds, more than any full-year total ever.

  • But many have also upped their holdings of cash, making net debt burdens far lower than expected, data from Bank of America Securities show.

Why it matters: Lower indebtedness means companies will have stronger balance sheets and better ratings. That could mean not only do fewer companies default on debt than expected, but it "ultimately should lead to an upgrade cycle" in credit ratings, BofA analysts say.

By the numbers: While investment grade industrial companies increased indebtedness by $397 billion in the first half of the year, they also grew cash holdings by $351 billion, meaning net debt rose by only $46 billion.

  • BofA credit strategist Hans Mikkelsen points out in a note that gross debt for IG non-financial non-utility issuers grew by 8.7% year over year, but was allocated heavily in cash and securities holdings.
  • Net debt actually declined by 4.8% (adjusting for the effect of ASC 842 accounting rule change).

The intrigue: "This is a dramatically better outcome for corporate balance sheets overall than what it looked like at the darkest hour," Mikkelsen said.

  • "Recall that economists and equity analysts lowered estimates so much that we have seen large beats both for economic data and corporate earnings for [the second quarter]."
Dion Rabouin

Thanks for reading!

Quote: “I hate war as only a soldier who has lived it can, only as one who has seen its brutality, its futility, its stupidity.”

Why it matters: On Sept. 2, 1945, Japanese officials held a formal surrender ceremony in Tokyo Bay aboard the USS Missouri, marking the end of World War II. Sept. 2 was declared V-J Day or Victory over Japan Day.

  • The quote comes from Dwight D. Eisenhower, who served as a general in the war and eventually become president of the United States.