INDICATOR: February Producer Prices and Jobless Claims
KEY DATA: PPI: -0.6%; Goods: -0.9%; Energy: -3.6%; Services: -0.3%/ Claims: -4,000
IN A NUTSHELL: “The disinflationary pressures being created by Covid-19 are likely to get a lot worse and that is another challenge policymakers will have to face.”
WHAT IT MEANS: If it weren’t enough that the economy is teetering on the edge as schools close, events are being canceled and illnesses mount, now we see that there are potentially significant disinflationary factors at work in the economy. Producer costs plummeted in February, led by decline in energy prices. We are just at the beginning of the pass-through of the collapse in energy costs, so expect the March numbers to be a lot worse. But it wasn’t just Putin’s fight with the Saudi’s that created the largest drop in the Producer Price Index in five years. There were declines across the board. Both goods and services prices dropped. There are 53 special indices in the report that parse the data every which way possible. Only four posted a number above zero. And looking at the intermediate and crude numbers, it looks like there is only downward pressure in the pipeline.
On the good news front, jobless claims fell last week, so the problems have yet to hit the labor markets. But companies are starting to cancel investment plans, hiring is being frozen and some firms are beginning to warn that layoffs could be coming. It is early in this process but watch the claims numbers carefully. A surge would indicate not that a recession could be coming but it is likely already here.
MARKETS AND FED POLICY IMPLICATIONS: The wholesale price declines do not make the case that deflation is an issue. The pathway from producer to consumer prices is hardly straight and often hits a dead end. Indeed, yesterday’s solid rise in the February Consumer Price Index makes it clear that there is still some upward direction in inflation. But the economy is slowing and we still don’t know how bad things are now, yet alone how bad things will get. Inflation is likely to decelerate and the Fed has used up all its effective bullets. The remaining ones are just tracers, showing us the way to the bottom. Given the Fed wasn’t at its target before Covid-19 hit, it is likely to lose more ground for quite a while. That adds to the challenges it faces.
What worries me is that there still seems to be the view that it is okay to just live our lives normally. That sounds great, but the virus just loves crowds. It knows no borders. And people are still in disbelief. A pandemic in 2020? Isn’t that something that occurred in the Dark Ages or maybe the 1950s? Isn’t the world’s health technology so advanced that we can eradicate these pesky problems quickly? The answer is no.
We are in the midst of the first great crisis created by the simple fact we now live in a global village. It isn’t just communications that move quickly and easily across the world. Goods, people and viruses do so as well. Technology, as advanced as it is compared to the past, is not where it needs to be so we can move rapidly to combat the virus.
And then there is government. It is almost criminal what we hear coming out of Washington. We are told there are plenty of tests available. If so, why aren’t they available to the practitioner? I went to my doctor this week with a cough and other symptoms. I wasn’t tested, I suspect because doctor’s offices don’t have testing kits. It is hard to measure the impact if you have no measuring sticks and the incompetence in Washington is making things worse not better.
On the economic side, they are just as clueless. Cut payroll taxes? Huh? The economy is slowing because to control the virus we need to limit human interaction and to deal with that the proposal is to cut payroll taxes? People are starting to understand the reality of the situation (though not enough do), and they are becoming fearful and unwilling or unable to live normally, and the proposal is for a payroll tax? Giving people that are stuck in their homes and/or fearful of what may happen if they venture out more money is not the wisest of ideas.
Yes, industries are hurting and more will as the voluntary and involuntary quarantines expand. Yes, the economy is likely to go into recession and don’t be surprised if it starts with the March or April data at the latest. I put a two-quarter recession into my forecast.
But we will not get back to normal until the virus is brought under control. That can only be done with massive aid to the healthcare sector so that every one who is at risk can be tested and everyone can be treated, regardless of their healthcare coverage or lack thereof. Why that wasn’t proposal number one is beyond me, but I guess all I have to do is look at the “geniuses” in Washington and see why. If you can propose bailing out industries, you can propose making healthcare universal, at least for a while, and bail out people who cannot afford healthcare.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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