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Why consumer confidence in the U.S. may translate into a ‘K-shaped recovery’

As the coronavirus continues to put pressure on at-risk industries, many large companies are increasing layoffs and furloughs as stimulus hopes begin to wane. TS Lombard U.S. Economist Steven Blitz joins The Final Round panel to discuss.

Video Transcript

MYLES UDLAND: Well, it is a Thursday, so we know we got initial jobless claims this morning. Still more than 800,000 people filing for unemployment insurance. Earlier this week, we saw private payrolls jumped by more than 700,000, so how are we to think about the state of the labor market as we head towards tomorrow's big jobs report?

For more on that, we're joined now by Steven Blitz. He's an economist over at TS Lombard. Steven, let's start then with tomorrow's jobs report, what your expectations are, and what data I guess you've taken in over the last month that you've deemed most important in thinking about the state of the labor market recovery.

STEVEN BLITZ: Well, I think there's two answers. Been since the beginning here, there's two labor markets. So I think that the overall numbers are going to improve. We'll probably see something like 1, 1.5 million new jobs, net new jobs. And that'll get everybody excited, and it'll continue to keep negotiations stalemated in Washington over the stimulus package.

But the real number that we need to focus on is the number of people who have lost their jobs who are claiming that the jobs loss is permanent, as opposed to temporary. That keeps going up. It's over 4 million now. It's clear recession territory. When I look at the unemployment rates by the different job sectors, it's clear that what's occurring, is that the people who originally said that their job loss was temporary, is now permanent.

And that means that you've got a lot more people who are sitting there in need of unemployment insurance, in need of care, in need of the government continuing to ring-- fence the economic issues, or I should say, the income impact of that group, because it's a lot of people. And if government fails to do that, then this thing leaks out.

This isn't your typical recession, and that's one of the reasons why so many narratives continue to fail. Why, for example, we have high unemployment and high consumer confidence. Because when we look, we'll see, and this probably is going to improve again on Friday.


STEVEN BLITZ: Leisure and hospitality employment is still 25% below where it was in January. But for most other industries, it's around 5%. So you've got one group in depression and another group in a very mild recession. And that matters a lot in terms of policy, matters a lot in terms of impact, especially when we know that it's the lowest income. Yeah, go ahead, Myles, I'm sorry.

MYLES UDLAND: Right, no, I mean, I wanted to ask about the kind of to the K-shape recovery. I think we can all agree, it's kind of the consensus now. I mean, shoot, Joe Biden's talking about it in the debate. I think that probably is a consensus at this point. And one point we see an interesting dynamic, was this morning with the savings rate. The way that household savings came down now.

It's still higher than pre-pandemic levels, but there's basically, you could run the math, there's what, two, three months cushion that people have to draw down some of the benefits from the CARES Act until we are at the breaking point, I guess we could say, of people who have gotten enhanced assistance and rent relief, things like that. That will run out. And so I guess I would ask, are we maybe understating, is the market maybe understating the urgency behind the situation in the economy right now?

STEVEN BLITZ: Yeah, I think they're understating it, and I think they're misunderstanding it. So in the top quintile is 30 odd percent. The top 40% of income earners is 60% of consumer spending. The bottom 20% is 9% in terms of income. And so what that means, is that right now, the stock market is more important to consumer spending and the equity market is high. It makes expectations high. So retail sales look great, even though you have really probably like 10%, 11% unemployment rate.

What they misunderstand, is that the reason why all that can work together, is that fiscal policy ring-fenced that impact. So this isn't a downturn because of economic malfeasance. This isn't 2008. This is a mandated shutdown of activity that is still, it's not as mandated as it was back in the spring, that's why half the people who are unemployed then are back employed now, but you still have a tremendous number of people who are unemployed. They're at the lower end. You're ring-fencing that economic impact.

You tear down that fence, you open those gates, and now you start getting the bankruptcies that start traveling up through the commercial real estate system, that start impacting the banks and on and on and on. Then it will begin to become a problem. And that's why Mnuchin and Powell were in front of Congress a couple weeks ago saying, you gotta keep up with this. You have to keep up with doing this, because if you don't pay people. Because these people aren't out of work because they did something wrong. They're out of work because the government said, where you work can no longer be open.

MYLES UDLAND: And I guess in thinking about this as well, the market has taken a very positive view on what a vaccine could mean for 2021 and reopening a lot of these businesses. We're talking, you and I both sitting in Manhattan, and we see all the businesses that support large office buildings that are not open and haven't been open, and who knows when they will open. Is the market maybe being too bullish on what a vaccine does to those sorts of businesses that have been closed for 12 or 18 months at that point?

And just turning the switch on, you just turn the lights on and bring everybody back. It's going to take a very long time for the positive impacts of a vaccine to make their way into growth. And are lawmakers also being too complacent about that kind of timeline?

STEVEN BLITZ: Well, that's exactly right. So if you take away that income support along the way, when the office building fills back up again, if that guy who was there has gone bankrupt and shut down, you have to find somebody who's going to rent that space and start that business. And who in this environment is going to recommit that capital to do that, when you don't know if in a year, some other virus comes around? And then you're stuck again, and then you're out of business.

So there is a lot that needs to be done here that in terms of income support, to keep that going. And if you fail to do that, if government fails to keep that income support going, you have a, you do set up for it being a problem next year than the markets are anticipating. Now if a buyer, if the fall, winter isn't that bad in terms of the virus, we can paint a very good picture that by the spring, thing are doing a lot better than we anticipate. And that's why Powell has said, and I mean, any intelligent person would say the virus is still in control of the direction of the economy.

MYLES UDLAND: Yeah, and it certainly feels like, and I'm sure you knows as well as anybody, a lot of people in markets are tired of hearing that. But I think that Jay Powell is probably right in that.

STEVEN BLITZ: It doesn't, the problem is, it doesn't fit into a model. You can't model it. And what the virus does at the moment, is it caps how high economic activity can get. So the ceiling on economic activity, so the pace, and you're already seeing the pace of growth starting to slow down sooner than most models forecast. Because most models are forecasting that the pace of activity is going to get you back to prior potential.

Now the potential though is always still there, but it's capped at a lower level, because the virus is preventing a certain amount of activity from reengaging. And in a wealthy economy like we have, leisure spending is a big part of it. If you're a small poor economy that basically manufactures widgets for the rest of the world, you bounce back from COVID pretty quick, because you get back to producing. And you're not a wealthy country, you don't have people with a lot of money spending a lot of money on leisure. That's not what we have here.

Leisure's a very important industry. Restaurants are an important industry. All these things, flying around and visiting places. You cut that off, you lower the top in terms of how high the economy and the level of economic activity can get, which means you start to slow down sooner than what the markets are anticipating. And you lower that cap even more if you allow the income support to that closed off area to dissipate.

MYLES UDLAND: All right. A very important conversation we will certainly continue in the months ahead. Steven Blitz is a US economist with TS Lombard. Steven, always great to get your thoughts. Thanks for joining the show

STEVEN BLITZ: Thank you.