Moneybeat – Mis-matched economic data points

MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Looking in the rearview mirror economically, we see the first bit of detail on the impact to retail sales. That’s an important figure, as it’s one big component of a category called personal consumption expenditures. PCEs represent the biggest slice of Gross Domestic Product. What we spend on goods and services accounts for about 70 percent of GDP, and retail sales is a key indicator of what’s to come. For March, it was down, almost 9 percent. It’s the biggest month-on-month decline since the government started keeping records back in 1992.

Industrial output, this is mining, manufacturing, and utilities, that was also down in March about 5-1/2 percent. Bear in mind, these numbers are for roughly half a month of economic lock-down. April, that’s going to be a full month, and likely a grimmer set of tables and charts.

And yet, now two weeks in a row of strength on Wall Street. Joining me now to talk about it is financial analyst and adviser David Bahnsen.

David, good morning.

DAVID BAHNSEN, GUEST: Well, good morning. Good to be with you, Nick.

EICHER: Well, let’s talk about what seems a mis-match here in the data. Strong positive performance on Wall Street, and that in light of the bad economic data that we saw for March, variously from the Commerce Department, the Federal Reserve, the International Monetary Fund, even from the housing market. How do you square that?

BAHNSEN: Well, I hope that we can continue covering this subject every week because I think it is one of the most important things for people to understand and the need for understanding this will last for a long time: Markets are forward-looking discounting mechanisms. And economic data is backward-looking reporting mechanisms. 

So, to the extent that the data that we’re getting right now in the economy is backward-looking to how awful things were in March, you had a stock market that was going way down in March. And it was going way down because it knew, boy, the economy is going to get really bad. 

And the economy is going to be bad in April as well and right now what you’ve seen is the market in a very complex manner—it isn’t as binary as just economy good, will be bad, or economy bad, will be good. There’s varying moving parts to it. However, what was getting priced in in March is now believed to be more severe than will end up being the case, and the markets have had to adjust.

So when we talk about the market being better, it’s right now about 5,000 points off of its closing bottom. Back in late March it hit 18-19,000 and now the Dow’s at 24,000. But it is still over 5,000 points lower than its highs from earlier in February where the Dow was getting very close to 30,000. So, it’s kind of in that in-between point and there’s something sort of metaphorical about that. I think that’s appropriate.

EICHER: Did anything jump out at you in terms of the retail sales report or the industrial production report or the housing index or the projection by IMF that the United States would have an overall 2020 GDP almost 6 percent lower? Did any of that strike you in particular?

BAHNSEN: Well, yeah, the industrial production struck me because there’s no way it’s actually that good. It showed a number that was auto manufacturing was down 25 percent but ex-auto it was only down 4-5 percent and there’s some lag effect there. It’s going to be way worse than that. The jobless claims number did get better by about 1.2 million. In other words, 1.2 million less new applications for unemployment in initial weekly jobless claims. So you were at 6.8 two weeks ago. 6.6 last week. And then 5.2. 

I think that all of it is going to get worse before it gets better. And yet the really, really two crucial interventions into these numbers are A) when the economy can get reopened. The second intervention is the stimulus.

EICHER: Let’s talk about the president’s outline on Friday. Kind of a federalist approach to reopening the economy, that’s intervention “A,” as you say. But intervention “B,” the stimulus, the news there is that the Paycheck Protection Program, that $350 billion fund, is fully distributed. It’s in the economy, and there’s need for more, but we have a political snag. How worrisome is that to you?

BAHNSEN: Well, worrisome that they’re not going to replenish it? No worry at all. They’re going to replenish it no matter what. The politics of not replenishing it would be absolutely catastrophic. What’s worrisome to me is what pound of flesh the Democrats are going to get out of the Republicans as they’re holding it over their head to get it replenished. 

As we’re talking, it looks like they’re moving forward with another compromise bill. And a couple of the things that House Republicans said they would not do are already now being discussed as being part of it. So, yeah, I think they’re going to add another $250 billion to the $350 billion that they are doing for small businesses through the paycheck protection program, which is by far been the most successful part of the CARES Act. 4,600 banks giving over 1 million loans that have funded at an average loan size of just about $200,000, 70 percent of the loans $83,000 in size going to over 1 million borrowers to keep the people on their payroll. And the SBA, which last I checked is a department of the federal government, somehow got all this done in less than two weeks. 

So, you don’t hear me compliment bureaucracies or agencies of the federal government very often, but I have to give credit where it’s due. They got this done rather efficiently with an awful lot of media noise suggesting otherwise.

EICHER: Let’s talk about the reopening real quick. I find it interesting the president vacillated a bit over time. First suggesting a federalist approach and then saying, “I have absolute authority.” Then settling on federalism, state-by-state…

BAHNSEN: Look, I don’t want to sit here and be praising of the president or overly critical. If I had to be one right here, it would be very critical because no one can deny it was utter incoherence this week to say “I have absolute authority” to tell states when they can open and not open and just a matter of days later totally reverse on that. But, the point should be made, if you’re going to take a wrong position and a right position in the same week, you may as well end up on the right one. [Laughs] And that’s what he did. And so I’m happy with the way it’s settled. Yeah. It’s a federalist solution.

It sets a blueprint. That’s what the market wanted. It’s what the people wanted. It’s what a lot of governors wanted. Some kind of sequencing. Some kind of semblance of structure. I think you have that now. But then, of course, you got to get the implementation. Striking that chord is going to be really important.

EICHER: David Bahnsen, financial analyst and advisor. David, thank you so much.

BAHNSEN: Thanks for having me, Nick.

(AP Photo/Ted Shaffrey) The normally busy area of Wall Street at the New York Stock Exchange is empty on a rainy day in New York, Monday, April 13, 2020. 

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