With Rick Newman, Senior Columnist for Yahoo Finance
Steve spoke this week with Rick Newman, Senior columnist for Yahoo Finance and seasoned author, about the economic responses to the current COVID-19 pandemic and what they imply for world and personal finances.
Ignoring The Horrific Economic Numbers
Everyone is panicking a little in light of the current coronavirus pandemic, and this panic has been reflected in the economy. But Rick has recently written an article which encourages people to ignore most of the horrific-sounding economic numbers being circulated. “The terror really began with Goldman Sachs predicting a 24% decline in the second-quarter GDP,” Rick said. But the truth that we really need to pay attention to is that history is the greatest of teachers. “The Great Depression is really our benchmark for how bad the economy can get, and the worst decline our country experienced in GDP during that time was 14% in 1932,” Rick continued.
Morgan Stanley predicted an even greater decline of 30%. But what both Goldman Sachs and Morgan Stanley are talking about is a change in the GDP from the first fiscal quarter to the second fiscal quarter on an annualized basis.
“But it’s that annualized basis that’s screwing everything up,” Rick pointed out. There are reasons to annualize a quarterly figure under normal circumstances: it identifies an economic pace to give an indication of what the rest of the year will look like. But during this coronavirus pandemic, things are just not normal. “We could see significant GDP declines, but no economist thinks that the entirety of 2020 is going to decline by 24% to 30%. That would require the GDP to fall that percentage for four quarters in a row,” Rick said. He noted that the general consensus is that 2020’s GDP will fall by about 5% compared to 2019, which is terrible but not as bad as some of the figures make it seem.
Steve pointed out that skewed numbers affect the investment world, too. “You could look at your returns and be up 10% for the quarter. But that doesn’t mean you’ll be up 40% for the year.”
Putting Annualization Into Context
Rick used the auto industry as a good example of annualizing numbers. The idea is to get the pace of sales. “In February, the pace of sales was 16.6 million vehicles. But what most forget to say is that auto dealers didn’t sell 16 million vehicles in February. That figure is the seasonally adjusted annualized rate or SAAR. It gives everyone an idea of how sales are paced this year versus last year. In 2019, the figure was 17.1 million vehicles. This means the pace of sales slowed a bit. But it’s not helpful to use annualized figures during dramatic world changes and the reference point is totally out of whack.”
Steve concluded, “I think Morgan Stanley and Goldman Sachs should have reported those numbers differently.” In reply, Rick pointed out, “But the fact is that those two giants were talking to each other. It’s Wall Street research for Wall Street analysts. That’s why we feel it’s important to provide context. With context, it’s not as bad as some of the numbers would make it seem.”
Steve asked Rick about another article he’s written, ominously entitled, “We May Have Lost 21 Years of Job Growth.” The coronavirus pandemic is really hitting employment numbers the hardest. “Some employment numbers are out-of-date because it’s a government survey that comes out about two weeks behind the survey. Under normal circumstances, this gives us a decent picture. But with the way things are now, with such dramatic changes, we need information from forecasting firms. For the month of April, economists believe well over 20 million jobs could be lost,” Rick shared.
The hardest hit industries are those in restaurants, food service, hospitality, and other non-essential roles. According to Rick, “Oxford Economics thinks around 24 million people are or could be out of work by the end of April. And the numbers could get far worse before anything gets better,” he continued. And subtracting that many people from the workforce puts the U.S. back to the same employment levels as 1999. “That means we’ve lost about 21 years’ worth of job growth in just two months,” Rick said.
On a more optimistic note, he added, “But it’s important to not lose sight of the fact that no matter how bad it gets, we can bounce back. There have been terrible depressions and periods of economic uncertainty before. We always end up getting the jobs back.”
Signs Of Recovery To Watch For
“The degree and depth of the problems in this country have a lot to do with the timing of the coronavirus outbreak and what it’s going to take to get the virus under control so that we can get back out and normal life can resume,” Steve said. He asked Rick for his best guess on what it’s going to take to make that happen.
“The stimulus plan the government put out was a great start,” Rick said. “But the ultimate stimulus plan isn’t financial, it’s public health. I’m just following the epidemiologists on this and, basically, they say we need massive widespread testing before we have a vaccine. I mean, we know we cannot speed a vaccine as much as we would like. That’s going to take probably a year or more. Before we get to that point, we need massive testing. Let’s say that we develop billions of tests that have rapid results. People can use these tests once a week. This offers them the certainty that they’re not sick and shows they’re safe to head back to work, that widespread testing is really the thing that is going to allow us to go back to work and start reopening restaurants and movie theaters and things like that. And, for everybody who’s interested in this, the best authority on this is Scott Gottlieb. He was the FDA administrator from 2017 to 2019. He has written a terrific pathway to recovery study that’s at the American Enterprise Institute. I’d like to tell people, go find it. It’s at aei.org.”
You can learn more from Rick at Yahoo Finance.
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Steve Pomeranz: I’m very happy to have back a guest that I’ve had on many times. His name is Rick Newman. He’s a columnist for Yahoo Finance, and he’s always insightful, provocative, and takes on many of the biggest stories of our time. Always love to have him on the show. Hey, Rick, welcome back.
Rick Newman: I always enjoy being on. Thanks for having me.
Steve Pomeranz: My pleasure. So before we get started, I mentioned that you’re with Yahoo Finance. What is Yahoo doing in these times when everybody is quarantined in their home? I know I’m talking to you in your home. I’m recording this in mine. And I know that Yahoo does video pretty much all day. What are they doing?
Rick Newman: Well, we’re based in the East Village in Manhattan. That’s where our headquarters are. We have beautiful TV studios there. They’re brand new and nobody’s there right now. We are all working from home, and we have managed to broadcast eight hours a day live and sometimes a little bit more than that, through Google Hangouts, which is kind of a video conferencing service that Google offers.
So, we have engineers who are working the magic to get all the slides up on the screen and transition from one guest to another guest. But, we’re all just looking at each other on Google Hangouts, looking into webcams, and amazingly it works. We’ve had some flubs and some technical difficulties, but we think the audience gets it and they don’t care. And, we’re kind of just powering on.
Steve Pomeranz: So, Google Hangouts is like Zoom. Everybody knows about Zoom these days.
Rick Newman: Yes, similar to Zoom.
Steve Pomeranz: Yeah. Okay. Well, I contacted you because I wanted to discuss a couple of articles that you’ve written recently. And, one is entitled, “Ignore Those Horrific-Sounding Economic Numbers That We Read About All the Time.” And, you start with saying, “The terror began with Goldman Sachs predicting a 24% decline in the second-quarter GDP.” Take us through that.
Rick Newman: Well, I’ve read enough economic history that I was thinking back, I mean the Great Depression in the 1930s is our benchmark for about as bad as the economy can get in modern times. And I was thinking to myself, hold on a minute. I don’t think GDP fell by as much as 24% during the Great Depression, as bad as it was back then. So, I went back and looked. The worst decline in GDP occurred in 1932 where it’s ranked by 14% for the entire year. So, I went and said, what are they talking about—a 24% decline? Morgan Stanley’s was even worse; they’re saying 30% decline in second-quarter GDP. So, here’s the nuts and bolts of that. They are talking about the change in GDP from the first quarter to the second quarter on an annualized basis, and it’s that annualized basis that is screwing things up here.
So, there are reasons. I mean, in normal times, there are reasons to annualize a quarterly figure because it tells you what pace you’re on as if this were to be the rate of change over an entire year. But, in this instance, economists do not think that the change in GDP from the first-quarter to the second quarter is going to go on for an entire year. So, when they’re talking about a 24% drop in second-quarter GDP on an annualized basis, that’s saying if it happened every quarter like that for four quarters in a row, that’s how bad it would be. And no economists think it’s going to be that bad. So, just to wrap this up, how bad is the whole economy likely to do this year? So, I called Moody’s Analytics forecasting firm. They think GDP for the year 2020 compared to 2019 will fall by about 5%. That’s bad.
Steve Pomeranz: That’s very bad.
Rick Newman: That’s actually terrible.
Steve Pomeranz: Yeah.
Rick Newman: But it’s not as bad as 25%, so you know just how to understand these numbers everybody’s talking about.
Steve Pomeranz: Well, you know, these numbers can be skewed in the investment world too. So, for example, you can look at your return and you could be up 10% for the quarter. That does not mean that you’re going to be up 40% for the year. And on the reverse, if the market, let’s say, in the first quarter of this year was down 25%, we’re not going to say that the market’s down 100% for the entire year. So, it doesn’t make any sense whatsoever when talking about returns to annualize. But you mentioned that in some cases annualizing does make sense. And, you use an example of monthly car sales. Tell us about that.
Rick Newman: Right, yeah. So, I do cover the car industry, and this is the language everybody uses. So, what was the pace of car sales in February? The pace of sales was 16.6 million vehicles. Now, what everybody forgets to say is that the auto dealers did not sell 16.6 million vehicles in February but that was the seasonally adjusted annualized rate or SAAR, S-A-A-R. And, that’s the shorthand everybody uses. And that tells you how sales are doing this year compared with last year.
So, in 2019… now this is the actual number for the year… automakers sold 17.1 million vehicles. So, that’s the real number. And then you annualize that on a monthly basis to see how you compare. So, if the car sales in February were 16.6 million at an annualized basis, the pace of sales slowed a little bit from the total of 17.1 million in 2019. That’s when it’s useful to annualize. But, to my mind, it’s not helpful when you’re going through dramatic changes and your reference point is completely out of whack, which it is right now.
Steve Pomeranz: It seems to me that Goldman Sachs and Morgan Stanley and those others should have reported those numbers differently, in my view.
Rick Newman: Well, they’re talking to each other. I mean, this is Wall Street research for Wall Street analysts. But reporters, like us at Yahoo Finance, we see a lot of this research and we report it. And, we’ve actually had discussions internally at Yahoo Finance. Let’s make sure we provide the context on stuff like this because, I mean, you should panic. If you think real GDP is going to fall by 24%, I mean, you should panic.
Steve Pomeranz: You should panic, yeah.
Rick Newman: But it’s not. It’s not that bad.
Steve Pomeranz: Okay, so, even a 4% or a 5% decline in real GDP is incredibly painful. And, we’re seeing that a lot of employers are laying off workers more and more. The question then comes to actually your second article I want to discuss, which is, you write, “We may have lost 21 years of job growth.” Take us through some of those numbers.
Rick Newman: So, we know that some of the employment numbers we are getting are, they’re just out of date because, like the government’s major employment survey, for instance, it doesn’t come out until two-and-a-half weeks after they do the survey. It’s literally a survey. So, normally that’s helpful because the economy’s not changing as dramatically as it is now. It’s not real helpful right now. So, I’m looking at what some of the forecasting firms think is actually going on right now in the month of April with regard to employment. And the economists think we could have lost well over 20 million jobs.
Steve Pomeranz: Wow.
Rick Newman: This is all the restaurant workers that we’ve been hearing about, the people who are not lucky enough to be in a salaried job such as mine, where you might be able to work from home. And these are people who, once the cash flow stops, they’re just out of work. So, Oxford Economics thinks 24 million. They think that’s how many people are out of work right now. And, that’s just in the month of April. So, it could get worse.
If you actually take those 24 million away from the employed labor force in the United States, that puts us back to the same employment level as in 1999. So, that means we would have lost 21 years of job growth in two months. That is astonishing.
Steve Pomeranz: Our economy is nothing like what it was in 1999. It doesn’t even seem possible in terms of the job mix, but also in terms of the size of the economy and the size of the population and all of that.
Rick Newman: It really doesn’t seem possible. I mean, just for comparison, during the recession in 2007 to 2009, we lost a lot of jobs then and that only added up to 11 years of job growth. So, it went back to about the same time. We’re going to get the… We always get the jobs back.
Steve Pomeranz: Yes.
Rick Newman: I mean, every single time in history. And there have been terrible depressions in U.S. economic history. We always get the jobs back. But this just gives you some idea of the scale of what’s going on. And it’s not showing up yet in the official numbers. The official unemployment rate I think is only 4.4% now. It’s going to skyrocket above 10%. And, by the way, 10% is the highest it got during the 2009 recession.
Steve Pomeranz: The degree or the depth of this problem has to do with the timing of the virus and the ability for us to get the virus under control and for us to get back out again. What is your best guess? What is your scenario for us getting back on our feet? What are the first signs that you would expect to see of the economy starting to heal?
Rick Newman: Congress, I think, did a good job with that giant stimulus plan. I think that was much better than some of the bailouts back in 2008 and 2009. But you know what the ultimate stimulus plan is here? It’s not an economic plan. It’s a public health plan. And I’m just following the epidemiologists on this and basically, they say we need massive widespread testing before we have a vaccine. I mean, we know we cannot speed a vaccine as much as we would like. So, that’s going to take probably a year or more. Before we get to that point, we need massive testing. And then, we also need these antibody tests.
So testing, first of all. If everybody can get a test and everybody can get repeated tests, you can check once a week. Let’s say—I’m just making this up—but in order to go to your job, you need to get the coronavirus test, let’s say, once a week. And, you need to know within a half-hour that you’re healthy and, yes, you can go to work, or you’re not healthy and you need to stay home. I mean, what’s happening right now because we have not had enough availability, a real shortage of these tests. It’s basically governors at this point, they’re just assuming everybody has it. That’s why everybody has to stay home because they’re assuming everybody has it because they have no way of telling.
So, that widespread testing is really the thing that is going to allow us to go back to work and start reopening restaurants and movie theaters and things like that. And for everybody who’s interested in this, the best authority on this is Scott Gottlieb. He was the FDA administrator from 2017 to 2019. He has written a terrific pathway to recovery study that’s at the American Enterprise Institute. I’d like to tell people, go find it. It’s at aei.org. And, I think he’s got the best thinking out there in terms of how we get out of this.
Steve Pomeranz: That’s beautiful. That’s exactly why I like to have Rick Newman on the phone with us. Rick, take care of yourself. Be safe. You’re located where?
Rick Newman: I’m in Westchester County, just north of New York City.
Steve Pomeranz: So, kind of the epicenter, not in the city… But Westchester, wasn’t that one of the first counties earmarked?
Rick Newman: Yes. Yeah, we had one of the first outbreaks a couple of miles from me. And we’re dodging the virus every day, man.
Steve Pomeranz: Yeah, we are too. Very good. Stay safe, and thank you for joining me today.
Rick Newman: Thanks for having me on, Steve. Always enjoy it.