There’s a 2007 study on the economy during, and the economic recovery following, the 1918 Spanish Influenza Pandemic (sourced below). The study concluded that employment increased in the US during the pandemic due to a plethora of new jobs created specific to the problem. There was no shutdown of the economy. I then looked at historical unemployment figures. It’s clear to me now that there’s absolutely no basis for a quick recovery of employment, especially following black swan events. The V-shaped recovery narrative is bullshit.
Employment will take years to recover
Employment can’t recover overnight. There’s no basis for it. Proportional to the current workforce, the most jobs we’ve ever gained in a single month was in September of 1983 at 1.18 Million. After that, the jobs gain at the end of WW2 at a little over 951,000 when soldiers returned home from the war.
We’re currently sitting at 36.4 Million unemployed and counting. Hourly employees have been let go; we know white collar is next (see below). The number is only going to expand in the short term. Even if it were to stop at only 40 Million (one more week of job losses), it would take the best jobs gain ever in US history for 36 months in a row to return to this February’s employment levels. That won’t happen. The alternative argument for a quicker recovery is that many of these people will be immediately rehired. Based on my arguments below for a delayed recovery of many different businesses and significantly reduced demand, many if not most will not be.
The Q1 numbers were worse than you think.
Q1 saw a 4.8% GDP drop, despite a positive January & February. If January and February had positive GDP growth, then the March drop was proportionally equivalent to a 15-19% contraction.
Analyst Q2 GDP projections are too optimistic
A complete shut down of our economy has never happened before. Analysts are claiming a ~20%+ GDP drop. It will be greater than that by as much as 10 percentage points based on unprecedented negative economic reflexivity, which is not addressed in any of these analyst models. It strains credulity to believe that people will flock to restaurants, theme parks, travel locations, community centers, festivals, concerts, sports games, etc in droves.
In fact, I think every large gathering will have low attendance, and the companies that host events as their main business may find themselves without sufficient revenue to continue operations. This effect will lead to declines in revenue for many different other industries and businesses directly and indirectly. The many small businesses which profit from events, fairs, and festivals rely on a certain amount of revenue to pay for their spot at the event. These businesses will largely be defunct.
Once people decide to venture out, they’ll be unable to spend at pre-covid levels due to massive unemployment. Fear will set in as revenues decline. Investment sentiment will turn negative, and low interest rates won’t even be able to keep asset prices from crashing.
White collar layoffs are next
People making ~$250k-$1M+ at Fortune 500 firms are taking 20-50% salary reductions. Global businesses with domestic headquarters are first laying off their employees abroad, and next they will start trimming operations domestically. That’s the word. On face value, it appears bullish, due to lower labor costs, but instead it shows weakness in these firms and will lead to overall declines in demand across the broad economy. There will be many companies that will find their business in shambles in this quarter; this will drag down the indexes, even if a handful sectors happen to perform well by Q2 earnings at the latest. Although, news in the interim may accelerate the timeline.
Companies with recurring revenues sourced from customers with inelastic demand, such as pharmaceutical firms and military contractors will do fine for a while, but they will eventually fall as well due to high p/e relative to other income producing assets and equities.
A nationwide economic shutdown, in the manner it has been done, is like stopping a truck by running it into a wall. Large swathes of the economy have been effectively destroyed. They will have to be completely rebuilt. Demand will drop significantly for years. Employment will likely increase higher even after the economy is reopened.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.