This Is a Recession by Proclamation, Says Jim Paulsen

Tue, Jun 9, 2020 - 12:13pm

The May Jobs Report numbers were labeled by some economists as the biggest payroll surprise in U.S. history. There were 2.5 million jobs added and the unemployment rate dropped to 13.3%. Jim Paulsen from the Leuthold Group discussed these numbers and a post-COVID-19 economy on FS Insider. See below for excerpts from his interview.

For audio, see We're Definitely Seeing an Economic Rebound, Says Jim Paulsen.

Many economists expected close to 20% unemployment levels, evoking a Great Depression-like scenario. Does this new number, 13.3%, move us away from that worst-case scenario and more toward a V-shaped recovery?

I think it does. I don't ever think this has been anything like the Great Depression, even if we went to 20%. It's just totally different than anything we’ve seen. This is what I've referred to as the only recession by proclamation.

The only reason we had a recession is because we proclaimed that we're going to have one. When we proclaimed it, we turned on the off switch to the economy for a period and everyone knew we were in recession. But if it's by proclamation, you can now say we're having a recovery by proclamation by just simply turning the switch back on.

In the Great Depression we had no switch, there wasn't anything close to this. So, this is very different than that. But this does do good things. The headlines coming from this are going to build confidence among all economic players and they’re telling consumers, homebuyers and companies that finally, things may be turning around.

There might have been other companies out there considering further layoffs that might now think they can make it. There might be consumers who were considering buying a car or house or other items, and with better headlines, some of them who now have a job again, they might go ahead and start purchasing.

One of the things we saw, just in the last month, was the savings rate in this country went up to 30%. That was in large part because of the stimulus people received. They didn't spend it, probably because they were worried about needing it for something down the road. But if people start going back to work, suddenly all that stimulus we've dumped to the system is going to start to work.

That is to say, they'll start to spend that 30% savings rate. And if they do, companies will be even more inclined to hold on to their workforce and maybe even expand that. I think it is good news. Maybe the numbers are overstated. We'll back off a little bit here. But you know, a lot of people were already thinking that we'd have a positive job number in June. We just got it a month early.

You’ve said the virus and economy can coexist even with a second wave. What are some of the main points of your outlook on how we’ll continue to recover and adapt to a post-COVID-19 world?

Most scientists and health officials suggest that we're going to have another spike in cases, likely not now, but probably in the fall again. The question isn't whether we have another spike, it actually seems quite likely. It's whether that will shut the economy down again. That's the real issue. And I think that it certainly could if it's bad enough and dire enough. While I think the odds say we’ll have a spike, we're not likely to close down for a number of reasons.

The reason given across the country for why we shut everything down was because we did not have the hospital capacity to meet the needs from COVID-19, particularly in the ICU. We’ve struggled even with hospital equipment during this crisis, but I think our capability and capacity in those areas have been much improved. New York had a bunch of ready-made hospitals for additional COVID patients and then they didn't need them.

The point is, we've learned a lot about how to quickly add hospital capacity if need be, and hospital supplies are at the ready as well. In some ways, we're much more prepared for a spike now than we were when it first hit. We could probably handle it without facilitating a shutdown in economic activity, or at least not anywhere close to the same extent.

In addition to that, we know a lot more about the virus at this point. We don't know everything, and it could certainly change. But the science tells us quite clearly that the lethality of this virus is among the elderly and the immunocompromised. We can put a ring around those groups and protect them, I think, much better going forward than we have in the past.

Even if there's another spike of cases, people also now realize this is out there and they're taking more precautions overall. So that'll help lower the lethality. We're also testing more and doing tracing now, which will help. We haven't gotten full vaccines, but we're already developing treatments. One was just mentioned with very favorable results that reduces the death rate of those in the ICU that have COVID.

Lastly, I just think that the public outcry would be huge if we did shut it down again. It would be hard to convince those who just got their jobs back, and those who are still unemployed to go back to home imprisonment, unless the situation is just super dire.

So, I think a better investment bet is that even if virus cases spike again, which they probably will, economic activity can probably find a way to coexist. Don't forget, we’ve got the best scientists and minds in the world looking for a cure. We also have the best capitalist minds working hard to figure out how to run their business in a relatively low risk – not zero risk – but low risk, acceptable manner. And I think they'll find ways to do that.

To listen to our full-length interview with Jim Paulsen and to hear his advice to investors click here. If you're not already a subscriber to our FS Insider podcast where we interview book authors, strategists and industry experts from across the globe on all things economics, finance and markets...

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