Trump’s diagnosis adds to toxic cocktail of uncertainty hurting economy

0
65



It’s a truism that investors hate for uncertainty. But this year had been unusually chaotic, even before the leader of the world’s largest economy and his wife tested positive for Covid-19. The diagnosis deals a new psychological blow to a recovery that was already running out of steam. The lack of certainty could be just as damaging economically as anything else this year.

The data: An index released by the Federal Reserve Bank of St. Louis that tracks economic policy uncertainty hit record highs in May as the pandemic swept through the United States. The index, which is based on newspaper articles dealing with uncertainty, changes to the tax code and disagreement among forecasters, has been high for most of the year. Even the global financial crisis has not produced so much uncertainty.

“Every measure of uncertainty that we consider has increased sharply in the wake of the Covid-19 pandemic. Most measures have reached all-time highs, ”wrote the group of economists who created the index in a discussion paper released by the National Bureau of Economic Research in June. .

Researchers estimated in April that half of the predicted economic contraction caused by the pandemic would result from increased uncertainty.

How’s it going: It has been clear for some time that 2020 will remain an extraordinarily volatile year. But the level of uncertainty really matters to businesses, workers and investors.In the face of uncertainty, consumers tend to spend less and save more. Companies have reduced their production, investment and hiring. Financial markets are becoming more volatile and increasingly difficult to trade.

This is mainly because uncertainty obscures the future. Imagine, for example, a small business owner or CEO who must decide to install a new production line. This means spending money that will not be recouped if the project is never completed – giving the owner a very good reason to expect greater clarity.

The same principle applies to consumers. High uncertainty pushes risk-averse households to delay large purchases. Research suggests that people are especially cautious when their job prospects are unclear.

The situation now: The coronavirus remains a potent threat in much of the world outside of China, and the U.S. election looms as another source of uncertainty. Before testing positive for Covid-19, Trump refused to guarantee a peaceful transition of power, threatening a contested election and a potential constitutional crisis without historic precedent.

“News that President Trump and the First Lady have tested positive for Covid-19 has brought the pandemic to the forefront of market attention and raised many questions, with few immediate answers, ahead of this month’s election. next, ”Societe Generale strategist Kit Juckes said on Friday.

“Now we understand that this virus is affecting most people slightly and a small minority very severely … However, the path of the election campaign will inevitably change and the uncertainty has clearly increased,” he added.

Case study: Want an example of how uncertainty hurts an economy? Look no further than the UK.

Four years after Britain voted to leave the European Union, the country is still negotiating a Brexit trade deal with its largest export market. So far, discussions have failed to break through two key points of friction: fishing rights and rules on state aid to businesses.

The coming weeks will be crucial. A new deal with the European Union would help limit further damage to businesses as they desperately try to recover from the pandemic, which caused UK GDP to collapse by 20% in the second quarter.

But years of uncertainty have already caused significant damage to the country’s economy. According to Berenberg analysts, GDP growth in the three years following the June 2016 Brexit referendum slowed by almost a full percentage point to 1.6% as business investment stagnated.

US employment recovery is rapidly losing momentum

The recovery in employment in the United States is faltering.

The economy added 661,000 jobs in September, the Bureau of Labor Statistics said Friday. The unemployment rate stood at 7.9%.

Not great: Job growth has slowed considerably from 1.5 million jobs created in August. The figure for July was 1.8 million.

And even though the economy created more than a million jobs each month between May and August, recovering just over half of the jobs lost, the country is still down by 10.7 million jobs since February. , before Covid-19 hits. And the number of permanently lost jobs continues to increase.

Some companies announced massive layoffs last week, which will be a further drag on the recovery in the months to come. Disney, United and American Airlines all announced layoffs last week.

Glassdoor chief economist Andrew Chamberlain said on Friday that the latest report reveals a “two-sided economy.”

“More than 12.6 million Americans remain without work as COVID-19 rages, while in other pockets of the economy, employers have added millions of new jobs,” he said declared.

following

Monday: ISM non-manufacturing index

Mardi: Levi Strauss results, speech by Jerome Powell

Wednesday: Fed minutes, US crude oil inventories, German production data

Thursday: Unemployment benefits in the United States, income from Delta Air Lines and Domino’s Pizza

LEAVE A REPLY

Please enter your comment!
Please enter your name here