Records of ‘Worsts’ Continue to Fall in April

Some have called the current recession self-inflicted and you could say that is partially true. We didn’t have to shut down the economy, but we chose to in the interest of public health. Now people are losing their patience with the economic shutdown and protests are popping up across the country. Most states are either re-opening in stages and those efforts have already begun while some states have announced some sort of re-opening plan.

Many medical professionals are expressing concerns about re-opening too soon and the damage it could do—not only in the fight against the virus, but also economically. Our elected officials seem to be divided on how and what should be done, but one thing is abundantly clear. The economic shutdown has caused a number of records to be set, and not in a good way.

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The April employment report came out last Friday and it showed that there were 20.5 million jobs lost during the month. That was the biggest monthly job loss since the Bureau of Labor and Statistics started tracking the data in 1939. The unemployment rate jumped to 14.7% in April. The rate itself isn’t a record as the peak unemployment rate came during the great depression at 24.9%. I wasn’t able to confirm it, but I would guess this is the biggest one-month drop in the unemployment rate ever.

The employment news wasn’t the only record-setting news we have gotten either. Earlier today the CPI figures for April were released and the Core CPI dropped 0.4% and that is the biggest drop since the Labor Department started tracking consumer prices in 1957. Core CPI excludes volatile items like food and energy while the regular CPI doesn’t exclude those items. Regular CPI fell 0.8% and that is the biggest month-over-month drop since December 2008.

Food prices jumped sharply during the month, but that was offset by big declines in clothing, auto insurance, air travel, and hotel room costs. With the shelter in place orders prevailing throughout most of the country, Americans all but stopped traveling during the month of April. Another factor in the big drop in regular CPI were fuel costs. Not only are gas prices the lowest they have been in years, but the need for gas has declined considerably for most Americans.

On the surface, falling prices might seem like a good thing right now, but a prolonged deflationary phase could be just as devastating as a stretch of high inflation. If companies have to lower prices for the end goods, they will also have to cut the labor costs—either by a reduction in the number of employees or by reducing the hourly rates it pays.

Yet another record was set in the first quarter. According to an article from the Wall Street Journal, public pension plans experienced their biggest one-quarter drop in the last 40 years. Wilshire Trust Universe Comparison Service has been tracking the performances of public pension plans for the last 40 years and according to its data, plans lost 13.2% in the first quarter of 2020. That was slightly worse than the fourth quarter of 2008.

Stocks have rallied sharply so far in the second quarter and that has surely helped the plans recover to some degree, but how much will depend on the actions the plan administrators took during the historic drop in February/March. If they lowered their equity holdings after the big decline, the plan won’t have benefitted as much from the big bounce.

Another concern regarding the big losses will be the amount of pressure for both corporations and municipalities to cut benefits. Many corporations have moved away from traditional pension plans, but a great number of state and local governments still use pensions as a benefit that helps attract workers. If the benefits offered end up being cut, it will have a huge negative effect on retirees as their income will drop considerably. Such a decline could have a ripple effect on the economy as well.

Most economic experts are predicting that things will get a little worse over the next few months and then we will start to see things improving in the third quarter. That isn’t necessarily what the protesters want to hear, but that is what the experts see happening. We also have to consider that if we re-open everything too soon, we could see lockdowns reinstituted and that could make things worse and it could delay the recovery to the fourth quarter or even into 2021.

With an election in November, elected officials are walking a fine line of how to handle things. Every move they make is going to be scrutinized. If they keep the lockdowns in place too long, certain factions are going to be upset. If they re-open too soon and additional lives are lost, other factions are going to be outraged.

All I can say to officials is—Good Luck.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

2 comments

  1. In view of the fact that we might not exceed the number of dead from the H1N1 virus in 2009, when we did NOT shut down the economy, we should never have shut things down to begin with.

    The “experts” were so wrong about this that their opinions should be taken with a bucket of salt. In my line of training (physics) and work (aerospace engineering) any model that has to be “adjusted” multiple times because it is off by factors of ten or a hundred is NOT a useful model and would get trashed.

    • Edouard d'Orange

      You’re right, thinkr2. Supposedly, hospitals had to close to all but emergency cases and ALL of the dying Corona virus/Covid-19/Wuhan flu cases that were going to slam our healthcare system. (hope I don’t hurt any one’s wittle feelings- not your thinkr2- with a reference to China as the cause). Turns out that hospitals are laying off people. Anecdotally, Fairfax-Inova (VA) has laid off some administrative staff because so many elective surgeries were cancelled that they are losing money. Also, anecdotally, out of 36,000 people in my county, 46 have contracted the virus, but none have died. (There is no hospital in my county)

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