Written by: Samira Fatehyar
Synopsis
Listen to the podcast here.
It seems as if everything has calmed down over the last couple weeks. We’re hearing more and more about the rising Covid numbers and less about the election. We’re also hearing more from Fed Chairman Jerome Powell on the status of the economy and how he believes a recovery is going to take a long time. This is what I also believe. The stock market is in its own world and does not accurately reflect what is being experienced on Main Street. People are still struggling to make ends meet and are awaiting another round of stimulus checks, with many worried when the CDC eviction moratorium ends in January. Many are also facing astronomical medical bills due to their Covid diagnosis. But the one indicator that seems to be not telling the whole story is unemployment. We’ve seen a gradual decline over the last few months, but over 10 million are still unemployed. With the rapid technological changes occurring, many will be forced to learn new skills and will have to remain out of the workforce until they are able to acquire those skills. On top of this, those skills are not cheap to acquire, meaning more people will go into debt. This is the unfortunate truth that we need to realize and start figuring out how to deal with it.
As always we’ll start with a quick economic update. We then have the opportunity to talk with Dr. Florina Salaghe, a professor at Benedictine University, about unemployment and what’s really happening within the numbers we are given. We will not have a European View segment this time around but we will next time.
Economic Update
US Household Debt
In the recent Household Debt and Credit Report produced by the Federal Reserve Bank of New York, we learned that household debt increased to a record level in the 3rd quarter of this year to $14.35 trillion. This is fueled by many factors but one that stands out is the rise in new mortgage loans, but this was mostly due to refinancing. Of course, it makes sense to refinance at a time when interest rates are in the near zero territory. What I found most shocking about this was the fact that more than 70% of those who refinanced had a credit score of 760 or higher and those with credit scores under 620 only accounted for 2% of the refinance increase. If anything, this should add to the ever-mounting evidence that a K-shaped recovery will occur when this is over. And don’t get me wrong, those with higher credit scores should be rewarded but that shouldn’t mean that those with lower credit scores should be punished. The same thing has occurred with car loans as well. According to the report,
The median credit score on newly originated auto also increased, from 707 to 712.
Graph 1, below, shows the total debt balance and composition from 2003 to Q3 2020.
Graph 1
Total Debt Balance and its Composition
https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2020Q3.pdf
What I find most intriguing about our debt composition is that mortgage debt is at 69% which is the highest since 2003. Meaning that the majority of household debt is from mortgages. According to the report though,
About 16,000 individuals had a new foreclosure notation added to their credit reports between July 1 and September 30, by far the lowest level we have seen since the beginning of our series in 1999.
This is worrisome. Yes, there is a forbearance program through the CARES Act that is halting foreclosures, but we are at a point where even in a healthy market we are seeing less foreclosures. Once the forbearance program ends, we should expect to see a flood of foreclosures. This forbearance program is set to end on December 31st. If people have been skipping their mortgage payments to make ends meet in the meantime, what makes Congress think that they’ve saved up enough to pay all their foregone mortgage payments? The biggest problem I have is that the data as of now is skewed. According to Liberty Street Economics, a forum that features insight and analysis from New York Fed economists working at the intersection of research and policy, they stated the following:
Many lenders have marked forbearance participants who were previously delinquent as current as these borrowers had no payment due for the month. On average, delinquent borrowers whose loans were converted to “current” upon entry into forbearance saw an average 48 point increase in their credit scores (here, Equifax Risk Score 3.0). In contrast, the average credit score of borrowers who were current before the forbearance was unchanged.
This should be alarming to anyone hearing of this. We truly are not seeing how dire the situation is because we simply don’t know how many are actually delinquent on their loans. We won’t know until the forbearance program ends on December 31st. These postponed payments all become due at once. This is a scary situation.
Of course, if another stimulus package is passed, we’ll be able to delay the flood for awhile, but eventually we will have to face the day when foreclosures will be flooding into the market. All we’ve done is kick the can down the road and we’re hoping that we won’t have to deal with it. We’d be better off trying to find a less expensive solution now, instead of a VERY expensive solution later. We’re seeing record levels of people in need of food assistance. When will Congress wake up and realize that something needs to be done now?
A few other takeaways from the report was that credit card debt is decreasing, which is good and bad. This means that people are paying down their credit card debt, which is an incredibly wise thing to do. But it’s bad because this also means that many will probably not take on new credit card debt, which means less holiday spending. In a survey done by TransUnion, 54% of the respondents, “said the pandemic has affected their finances, and roughly half of those people said they expect to reduce their retail and discretionary spending.” We’re entering the time of year when we see the largest spending done. Companies need us to spend money or else, they’re going to face an even harder time. But if we, the consumers, don’t have money to spend, then many businesses will end up suffering.
Retail Sales
The Census Bureau recently came out with a retail and food services report for the month of October. Graph 2, below, shows that the growth in sales is declining. This is a strange time of year to be seeing this as the holiday season is right around the corner.
Graph 2
Percent Change of Retail Sales from Prior Month
https://www.wsj.com/articles/us-economy-october-retail-sales-coronavirus-recovery-11605561529
It’s true that online shopping has really picked up and been the biggest sector of growth, but if people don’t have the extra money to spend, they just won’t spend it. On Tuesday, November 17th, Fed Chairman Jerome Powell said,
Across the country, we’re seeing new cases. We’re seeing hospitalizations rise. And we’re seeing states begin to impose some activity restrictions…The concern is that people will lose confidence in efforts to control the pandemic, and…we’re seeing signs of that already.
Companies that sell goods should, by now, be focusing all their efforts on their online presence. As more restrictive measures are imposed, many will have to stay at home for all their shopping needs. We need to get money into the hands of consumers in order to spend the money. Though, some will argue that this effort could go to waste with people saving the money instead of spending it, I still think it’s worth a shot. At the same time though, the Federal Reserve is quite frankly running out of fire power. We can keep printing money, but that is only increasing inflation.
On a tangent note, I listened to Mr. Tom Lombardi, an adjunct professor at Pepperdine University and founder of 3iQ Corp, an Investment Fund Manager offering digital asset investment products such as The Bitcoin Fund, talk about inflation and the monetary supply. He mentioned that since there is an oversupply of dollars as a currency, people are trying to put them into assets and when they do this the value of these assets increase. So when people say the Facebook stock is seeing growth, it may actually just be the devaluation of the dollar. An interesting note that I thought needed to be shared.
Back to the Federal Reserves’s dilemma, on Thursday November 19th, Treasury Secretary Mnuchin stated that he would allow many of the emergency Federal Reserve lending programs to expire. This is a big deal as this means that many companies hoping to obtain debt at low interest rates would no longer be able to have the opportunity. On top of this, Mnuchin has asked the Federal Reserve to pay back $70 billion worth of funds that were used to cover any loan losses. As I write this, it’s unclear if the Federal Reserve would do it, but this is huge. We’re at a time when we have politicized a public health crisis and now our government is at odds with our monetary system. There are several companies that are still in need of the loan programs the Fed has offered and by making them no longer available will only add to the already fragile times we are in.
Zombie debt
I have gone on several rants in past posts about how I am extremely against pumping money into companies that are clearly insolvent. There are a few key criteria that need to be met to be considered a zombie company, one of them being the inability to earn enough to pay their interest expense. The fact that these companies are receiving fiscal stimulus packages and/or have the ability to obtain cheap debt is a real concern. This problem is only getting worse. Graph 3, below, illustrates the massive amount of debt zombie companies have taken on.
Graph 3
Amount of Money Zombie Firms Owe
https://www.bloomberg.com/news/articles/2020-11-17/america-s-zombie-companies-have-racked-up-1-4-trillion-of-debt?sref=jbVt2saA
Zombie companies in 2020 have a total of $1.4 trillion worth of debt. $1.4 trillion! If we look at how much zombie companies owed during the Great Recession, a total of $500 billion, we can really see how dire of a situation this has become. According to a Bloomberg analysis, of 3,000 publicly traded US companies, 20% of them are considered to be zombies. You may be wondering, who are these companies? They’re everyday household names like Delta Airlines, Exxon Mobile, Carnival Corp, Macy’s Inc, and Boeing. Yes, these beloved companies are now considered to be zombies. And yes, just because you are labeled as such, doesn’t necessarily mean you’ll stay there but it’s still something to be concerned about. History shows us that an estimated 60% of zombie companies actually do recover, but they are also 3 times more likely to become zombies again.
So, why are zombie companies bad for the economy? Well, they tend to be “less productive, spend less on physical and intangible capital and grow less in terms of employment and assets than their peers.” This is just not healthy for the economy. There comes a time when the government should intervene and times when there should not be that safety net. Not only is this unproductive to our economy, but it also leads the way to moral hazard. If these companies know that they will be continuously bailed out, then why should they have to care about profit maximization?
Chart 1
Firms in the Russell 3000 with interest-coverage ratios below 1
https://www.bloomberg.com/news/articles/2020-11-17/america-s-zombie-companies-have-racked-up-1-4-trillion-of-debt?sref=jbVt2saA
If we take a look at Chart 1, above, we can see which sectors are struggling the most. Healthcare has the most companies that cannot cover their interest expense. The rest in descending order includes technology and communications, consumer related firms, industrials and materials, energy, and then real estate and financial firms. This is alarming as zombies are spread across many different sectors. It’s not just one sector affected by this.
Many people may argue that keeping zombie companies alive will help our unemployment problem. That very well may be true, but only in the short-term. One of the biggest lessons I’ve learned in business school is to always have a long-term view on investments and business. Though it may hurt in the short-term, we’ll be better off by letting many of these firms fail. That’s the cold hard truth, but something that needs to be said.
Unemployment Examined
Unemployment: What’s really happening?
A Conversation with Dr. Florina Salaghe
I had the pleasure of meeting Dr. Florina Salaghe (Dr. Flo) back when I was at the University of Nevada, Reno obtaining my Masters in Economics. We became very close colleagues and have very lively economic discussions often. Dr. Flo is incredibly bright in the field of microeconomics and always offers great insight.
Florina Salaghe is an Assistant Professor of Economics at Benedictine University in Lisle, Illinois. She has a Ph.D. in economics from University of Nevada, Reno, where she also worked as a research assistant at the University Center for Economic Development. Her research interests lie in the area of applied microeconomics topics, behavioral and experimental economics, decision making, and development economics. To listen to the interview, please check out the podcast. The following is a transcript of our conversation.
Samira: Alright, so first off, thank you so much Dr. Flo for coming on the show. It's super great to have you here!
Dr. Flo: Thank you for having me!
Samira: So with everything that we've been experiencing since the beginning of the pandemic, do you believe the official unemployment rate is an accurate measure of unemployment?
Dr. Flo: Well, that's an excellent question, and I think a lot of the people don't actually realize that the official unemployment rate, which is the rate that most news outlets announce, is not technically the most accurate, and I think a lot of economists would agree with me here. So the unemployment rate is released by the Bureau of Labor Statistics, and they have a monthly job report which they release at the beginning of each month. They called the official unemployment rate U-3. However, it paints a rosier picture of the economy compared to what the reality is in the labor market The reason why I say that is because it doesn't include a couple of categories, which I believe are very important when looking at unemployment. And those categories are the discouraged workers and the workers who are currently under employed and let me detail a little bit about what these two categories actually are. So discouraged workers, which are not counted in the official unemployment rate are those who, for different reasons have not been looking for a job in the last four weeks, and so these reasons could be very different. They could be related to the fact that they are discouraged and they think there's no jobs available. They could be related to the fact that they have to take care of a sick family member, or maybe some children who are actually in school. And we all know that schools have gone remote in the last few months. They may be because they have lost their job and they are in an age group that is actually higher and they are afraid of being age discriminated and so on. So there are several reasons why they are not currently in the labor market, but given different economic conditions they might be. Now the second category that I mentioned is the underemployed category, where people have some part time work, maybe 10 or 12 hours a week. However, they only have the part time work because they were not able to find full-time work at the time. So if full time jobs would be available for them, they would like to work more. Now that being said, let me give you an example of what I mean, so you can have a better idea of the differences between the two rates. The official unemployment rate released by the Bureau of Labor Statistics for the month of October is 6.9%. It's not great, but it has been lower and lower every month since the peak of the pandemic in April. And let's compare that to U-6 unemployment rate, which is a more comprehensive rate which includes those categories that I mentioned before, which was at 12.1%. So all those both of these follow the same trends. Really, the more accurate picture is depicted by U-6.
Samira: Yeah, this is great and I also agree with you that U-6 is a much more accurate number than U-3. So, in our last conversation you mentioned that different segments of the population are experiencing different unemployment rates, could you elaborate on that for our listeners?
Dr. Flo: Sure. So although the employment rates that we talked about give us a snapshot of the economy, I think it's important to dig a little bit deeper and see whether different socioeconomic and ethnic groups are affected differently. And we can start, for example, with paying attention to the industries that have been affected or impacted the most by the pandemic and other industries where it wasn't as easy to transition to an online environment where people could work from home. So if you look at the most current report released by the Bureau of Labor Statistics, the highest unemployment rate by far is in leisure and hospitality, and that's at 16.3% compared to the previous year, which was at 5.3%. Now, generally this sector does have a higher unemployment rate, but let's compare it to the lowest unemployment rate, which is in a sector called financial activities and that is at 3.8% compared to 2% in the previous year. So yes, there are differences between the sectors, but the pandemic has exacerbated these differences. So that's the first point that I wanted to make. Then if we look a little bit closer at differences between men and women and how they were impacted by the labor force, you see some stark differences there as well. For example, although the official unemployment rate for men and women are not that different, especially for the month of October, and I do believe that the official unemployment rate for women 20 and over is a little bit lower than that for men. It doesn't paint the whole picture, and I think it has to do with how this unemployment rate is calculated and the categories that are not included, such as the discouraged workers that we talked about. So I believe, that women are disadvantage for a couple of reasons. First, if they're married and have children and one of the spouses had to stay at home and take care of the children because the schools were closed, I think women were more likely to do that because they are typically paid less than men. So if you're going to make a choice, obviously the lower earner is going to be the one that's going to stay at home. Second of all, I think women are predominantly employed in the industries that I mentioned before, such as those included in leisure and hospitality, and those were affected more by the pandemic. Also, they're more likely to care for an ill relative if they need to compared to men. To get a more accurate picture, I think we also have to look at the participation rate in the labor market for men and women and we can see that it has been consistently lower for women. Furthermore, while the participation rate for men has increased over the past few months as the economy started to recover from the pandemic, that was not necessarily the case for women, especially in September with when school started again. So that's one of the ways in which the pandemic has affected people differently by gender. And I think the reason why this is so important is because being out of the labor force for a year or two, or even a few months actually puts them behind in the trajectory for their career. So it really does affect their trajectory. Now the second way in which I look at the differences between how different groups were affected by this pandemic is by education. So if you look at different education groups, obviously as you would expect, those with higher education have been less affected, while those with a high school degree or less have been more impacted by the pandemic and I think it all ties together with the type of industries and the type of jobs that different groups have. So obviously people who are more educated, working jobs that had an easier time transitioning to an online environment while people with lower educations tend to have jobs in sectors or industries more impacted. And a final way to look at this would be from an ethnic perspective. So if we look at the unemployment rate between White, African American and Hispanics, there have always been differences between the three groups, and we all know that whites have always faired out better. Now those differences have been exacerbated in this pandemic. So let me give you an example here. If we look at the unemployment rate for white males, that's about 5.8% for the month of October. And now compare this to African American males which are at a 11.5% and Hispanic and Latinos overall, at an 8.8%. So obviously the groups for African Americans and Latinos have been more affected. And let's compare those unemployment rates to those that we've seen in the labor market in February 2020, right before the pandemic. 3.1% for Whites, 5.8% for for African American and 4.4% for Hispanic or Latinos. So there have been differences prior to the pandemic, but those differences have actually increased because of the pandemic.
Samira: Yeah, that makes more sense and I really appreciate you breaking it down for our listeners to really understand the different segments and how unemployment really affects every segment of society differently, and so you know, the U-3 unemployment rate and U-6 unemployment rate is really just one snapshot of it, but it doesn't tell the whole story. So thank you so much for explaining that to our viewers. It feels almost as if many of the economic indicators that we rely on to help predict the future is turning out to be not so helpful this time around. I've had many people contacting me and saying that the stock market is is doing great, so that must mean the overall economy is doing great and we both know that this is not true. Do you foresee changes in the way economists look at data after the economic fallout from the pandemic ends?
Dr. Flo: Well, that's an excellent question and I think it's important to point out first of all that predicting the future is only possible if certain elements of the past repeat. And while we constantly learn and adapt by looking at the past, it seems that economic crisis don't have as much in common as we would like. For example, this time around the recession was caused by a global pandemic, something that we haven't seen since the 1900s. By contrast, the 2008 recession was caused by a failure of the financial system. So, although we might use similar tools to help us fight recessions because we have some similar symptoms, the underlying causes are different, and until we fix the underlying causes, I don't think we're going to be ready to move on and completely recover from this pandemic. Now you mentioned something very interesting related to the stock market. A lot of people think that the stock market mirrors what happens in the economy, but that hasn't really been true for the last 30 years or so. So thinking about the stock market, I think we need to look a little bit closer at what companies trade on the stock market, and these tend to be larger companies, which haven't been as impacted by the pandemic as smaller companies because they've had more flexibility in terms of adjusting to the newer conditions in the market. Second of all, the stock market in general reflects investors confidence. And that's based on who is investing in the stock market. So if you look at what happened in this recession, the stock market took a plunge in the beginning of the recession as fears of a global pandemic were realized. However, as soon as the Federal Reserve announced low interest rates for the foreseeable future, the stock market went back up, and that's because it increased investors confidence, right? If you're an investor, you like having smaller interest rates, and that gives you some hope or some optimism regarding the future. Now, thinking back, of who the investors are in the stock market, I think it's important to realize the ethnic and socioeconomic discrepancies here as well. Data from the Federal Reserve shows that about 60% of White households own stocks in the stock market, compared to about half of that, about 30%, when we're thinking about Latinos or African Americans. So that means that Whites are again better prepared or better equipped to face a pandemic. In order to invest, you need to have savings, but in order to have savings you need to be in an industry or have a type of job that wasn't as impacted by the pandemic. So the fact that the pandemic affected certain sectors and certain jobs more than others actually increased the wealth inequality between the different racial groups. So thinking about the fact that White households are more likely to own stock and are more likely to own homes for which the value has also increased during the pandemic, we can see how stark this wealth and income inequality have become because of the pandemic.
Samira: Yeah, no, this is a really great explanation because it's true. Stocks also in general are becoming less affordable to people as well as we're seeing, you know, $1000 or more to buy one stock of, you know one of the mega cap companies. I think it's pretty ridiculous. So yeah, I appreciate you also, bringing that view in there about how different ethnicities have a better opportunity at buying these stocks and investing in the stock market. So, we're witnessing the job market completely changed in front of our eyes, with many jobs moving to remote work and so on. Besides the technological changes, do you see other types of changes happening in the job market as well?
Dr. Flo: That's an excellent question, and I think it makes us think a little bit about what will happen when the pandemic is all over or when we're going to actually have it under control, and I think that these technological changes that have happened during the pandemic or because of the pandemic are not going to regress just because things are going to go back to somewhat more normal times. One of the important changes I think are more cultural, and I think they have to do more with how consumers have changed their patterns. I think we've been in a pandemic long enough that people, whether their consumers or workers or employers, have had time to change their habits and maybe gotten used to a different lifestyle. So in terms of companies and things going back to the way they used to before the pandemic, I think there's a couple of things that we need to think about. Do people who work remotely want to go back to working in the office? Some of them actually enjoy working from home and we have seen an increase in productivity of the majority of the workers working from home. If that's the case, from the employers perspective they are saving money because they don't have to have this big buildings for their offices which tend to be pretty expensive. And two, their workers productivity has actually increased. So if their workers actually prefer to work from home and are more productive, why would they have them come back? In certain jobs or certain industries, collaboration is also very important and I think we can all agree that collaborating on zoom or some other video chat platform is not the same as collaborating in person. So I think what's probably going to happen is we're going to see less people going into an actual office five days a week. I think we're going to see some kind of a combination between staying at home and working from home some days, and then going to the office other days for collaboration. In terms of our consumption patterns, I think those have changed as well. For example, if somebody got used to ordering their groceries online because fears of getting the virus while going to grocery store made them pivot that way, are they actually going to go back to shopping in the grocery store? We don't know. Are people going to feel confident about going out and socializing after the pandemic is over after we have a vaccine? How much they actually trust this vaccine? Maybe some people just got more used to being at home. They don't need to socialize as much or they're actually afraid, and that might actually influence your patterns, and I think it's important to realize that it won't only affect these workers and type of workers. I'm talking about those who were able to switch to a remote environment. But most importantly, I think it will affect the businesses and the workers from the leisure and hospital hospitality sectors because their customers are not coming in at the same rate as they used to before the pandemic. I think it will be an interesting thing to follow after we have a vaccine or some kind of a promising future regarding the pandemic.
Samira: Interesting, yeah I agree with you as well and there's a lot of uncertainty about what the new normal is going to look like. It definitely won't look like the old normal and some of it is actually good. If you think about it, people won't have to commute to work all the time, and that could actually help with our climate crisis and all of that stuff so I think you're right and we'll just have to wait and see what happens next. Many economists, including myself, are under the impression that we're experiencing a K-shaped recovery. Do you also see evidence supporting this claim?
Dr. Flo: Definitely, I think that our discussion so far kind of pointed in that direction. After the pandemic is over, whatever the new normal is not going to be the same new normal for everybody. I think that even if different sectors were affected differently by the pandemic, I think those differences will continue afterwards because of the way that our lives have fundamentally changed from the way we think about our social life to the different industries where that are probably not going to recover. So I definitely think that we're looking at the K- shaped recovery, where some sectors will recover and thrive much faster than others, even after all of this is over.
Samira: Yeah no, I'm glad you also agree with that. And it's unfortunate because that means you know some people are going to do much better while other people really suffer unfortunately. Lastly, do you have any general advice you'd like to leave our listeners with?
Dr. Flo: Well, I think, we're at a time when we should really consider the way we look at economic growth and prosperity. It is the time to seriously think about diversity, inclusion and equity, and I think we've already seen trends pointing that way. We, as a society, need to decide what our values are and what we care about and try to really look at how society overall is affected, not just our immediate bubble. So we should dig a little bit deeper and start thinking about what are the things we care about. For example, is the growth rate of GDP the most accurate measure of well being and prosperity? Which socioeconomic and demographic groups are benefitting from the continuous growth? And when I say continuous growth, I mean pre-pandemic times we've seen an increasing trend in GDP growth. So while we care about the size of the pie, shouldn't we also care about who gets this extra slice of the pie? If these are the things that we care about, then we should definitely think of alternative measures or alternative economic indicators that we should follow.
Samira: Interesting, I like that. I think that is absolutely true, and you know, we have a lot of economic theory that we learned in school, but with the times changing and everything happening, I think a lot of that is going to have to change as well. So I definitely agree with you.
Dr. Flo: Exactly, and I think it's a good time to pivot and make sure that our economic indicators or the ones that we care about are in line with our values.
Samira: I like that, I like that a lot, so thank you so much Dr. Flo for coming on and we'd really enjoy having you on again.
Dr. Flo: Thank you so much for having me. It's always a pleasure.
Concluding Remarks
Things seem bleak these days with all the bad news we keep hearing. But, next week is one of my favorite holidays, Thanksgiving! It’ll be different this year, but it’s a sacrifice I’m willing to make to ensure the safety of my loved ones. In my community, Covid-19 is spreading like wildfire. Not to mention the fact that we just saw a wildfire in the Reno area a few days ago. 2020 has been one heck of a year to say the least. But I truly hope that we can remember the spirit of the holiday season. Thanksgiving being a time to look around and really appreciate the smallest things this year. I’m thankful for my health and the health of my loved ones. Christmas is a time to give and though it’s very different this year, we shouldn’t forget the spirit of it all.
Sure, the economy looks weak and it will remain weak for quite sometime, but let’s try our best to brighten up each other’s days. Give to your local food bank if you can. Reach out to a friend you haven’t talked to in awhile and see how they are doing. These little things can create giant ripple effects. But it takes strength, courage, and most of all patience to get through these hard times. Thank you to all our first responders, who have been working tirelessly and will probably not be able to spend the holidays with anyone. My thoughts are with you all. If you enjoy listening to our podcast and reading our blog, please consider donating to our efforts at our Buzzsprout page. Please continue to be safe and healthy everyone! Wear a mask! I’ll write to you all again in 2 weeks.