Axios Markets

The economic progress made by the U.S. over the last month is slowly falling apart. Three of the four most populous states in the country are seeing notable increases in confirmed cases of COVID-19, business activity is contracting, consumer confidence is retreating, bankruptcy filings are rising, and the stock market is falling.

• The question now is what comes next.

Why it matters: Even before governors in various states announced new bar and restaurant restrictions on Friday, "high frequency data on service sector activity suggests businesses and consumers may already be responding to the surge in new cases," economists at asset manager Nomura wrote in a note to clients.

• Economists at Deutsche Bank note, "states with faster case growth are now underperforming economically based on measures of small business activity, restaurant bookings and consumer spending."

The state of play: In March, as it became clear the coronavirus pandemic would severely impact U.S. businesses and consumers, the Fed stepped forward and led the way with extraordinary policy action — cutting rates from 1.50%–1.75% to near zero in a matter of weeks and announcing an unlimited quantitative easing program.

• Congress followed, passing the largest spending bill in U.S. history, and already is on pace to borrow nearly $4 trillion for fiscal year 2020 (which ends Sept. 30).

Yes, but: There is growing evidence that the Fed's programs are not benefiting ordinary Americans and congressional action has missed the mark.

• The most obvious is jobs data, which show 33.1 million Americans still receiving some form of unemployment benefits.
• Banks, flush with record new deposits from antsy customers, have significantly reduced loans and tightened lending standards.
• The U.S. savings rate in May was 23.2%, down from April's record 32.2%, but still nearly three times as high as before the pandemic.

Where it stands: So far, the Paycheck Protection Program looks to have excluded many of the most needy businesses and close to 90% of the government's $500 billion loan program for bigger companies remains untapped.

• Larger firms have preferred public markets — where they can borrow at record low rates thanks to the Fed's actions — over lending from Congress that requires executive compensation limits and freezes on layoffs.

What to watch: Economists at Jefferies point out, "Congress has to deliver the Phase 4 legislation in the narrow window between July 21-31."

• July 21 is the first day both the House and Senate are back in session following the July recess, and July 31 marks the expiration of expanded traditional unemployment benefits and pandemic unemployment assistance, which was being utilized by around 12 million people, as of Thursday's report.

A total of 119 companies have defaulted on debt so far this year, meaning that in just over five months there have been more corporate defaults than the full year 2019, S&P Global reported Friday.

• The U.S. has led the way with 78 defaults so far this year and that was before the announcement of Chesapeake Energy's bankruptcy filing on Sunday.

What they're saying: "Both Europe and other developed regions have seen a considerable increase in defaults compared with previous years and have either matched or surpassed their full year tallies in 2017, 2018, and 2019," Sudeep Kesh, head of S&P Global Credit Markets Research, said in a press release.

• With 16 defaults so far in 2020, Europe has surpassed its full year 2019 and 2018 tallies of 15 and 13, respectively.

The world now has 10 million confirmed cases of COVID-19 and 500,000 deaths, according to data from Johns Hopkins. More than one in five cases recorded during the pandemic has come in the last two weeks alone. (Axios)

China's central bank made boosting the economy a higher priority and vowed better fiscal, monetary and employment policy coordination following its quarterly policy committee meeting. (Xinhua)

The Fed is reviewing the Reserve Bank of Australia's yield-curve control program as it considers a new tool to keep U.S. interest rates low. (WSJ)

Pilots and test crew members from the FAA and Boeing are slated to begin a three-day certification test campaign for the 737 MAX today. (Reuters)

On average, Black households in the U.S. with heads who have completed a college degree have less net worth than white households headed by someone with less than a high school education.

Big facts: It is only after completing advanced post-college work that the median Black household surpasses the median white household's net worth for a head with only a high school degree.

• Even then, the average Black earner has about half as much wealth as the average white earner with just a college degree.

What we're reading: "Family wealth is a predictor of both college attendance and college completion," notes a 2018 study from the Insight Center for Community Economic Development.

• "Black students are more likely to take on student loans and accumulate student loan debt, and they are more likely than white students to drop-out of a university because of financial concerns. Ironically, their wealth position could deteriorate because of their intense motivation to pursue higher education."

One level deeper: "Another commonly held misconception is that Black families have a cultural predisposition to under-value education."

• "However, the best evidence indicates that Black families, controlling for household type and socioeconomic status, tend to be more supportive than white families of their children’s education through direct financial support."
• "Black parents who provide some support for their children’s higher education have two-thirds of the median net worth of white parents who provide no support for their children’s higher education.
• "For given levels of household income, parental educational attainment, and/or parental occupational status, Black youth also get more years of schooling and acquire more credentials than white youth whose parents have a similar status."

Americans' personal income fell 4.2% last month, which was better than expected, but remained supported by increased government spending on unemployment benefits, food stamps and other generalized welfare payments that are all at never-before-imagined highs.

• Personal spending ticked up, largely supported by one-time CARES Act direct payments, with personal income excluding government transfers up 1.5% from April.
• However, disposable income fell 4.9%, suggesting that the U.S. household remains impaired despite millions being recalled to work.

By the numbers: Personal income was up 7.0% as of May, but wages and salaries were down 5.4% year over year, with government transfers still up 67.5% from their May 2019 level (but down from an increase of 90.1% in April).

• Importantly, proprietor income rose 2.8% in May, month-over-month, after being down 12.7% in April, suggesting small businesses are starting to come back online.
• Consumption was driven by a 28.4% increase in spending on durable goods, with new and used autos up 40.8%, and other durables up 24.5%.

What we're hearing: "The collapse in spending on discretionary services, mostly leisure, recreation, and food service, is the drag here," notes Ian Shepherdson, chief economist at Pantheon Macroeconomics.

• "June spending will be much stronger, but we’re worried that July and August could see a relapse, led by a consumer retreat in the South and parts of the West, in the face of the surge in COVID infections."

The big picture: "It is clear that following the one-time bounce in spending observed this month, income and savings dynamics are moving in a direction that suggests that a general paradox of thrift has, for now, captured wealth households," Joe Brusuelas, chief economist at RSM, wrote in a note to clients.