Core economic sectors are running smoothly, yet the epidemic has reconfigured the U.S. economy structure. The environment with crosscurrents and conflicting signals everywhere is much more complex than ever. Despite the new coronavirus diagnosis of more than 1.3 million, U.S. financial markets continued to strengthen their v-shaped rally, rising 5 percent in the first week of May. As to the real economy, expectations of a recession in the next six months have risen from 20% to 71%. Faced with the highest unemployment rate since the great depression of 1933 and a 4.8% contraction in GDP in the first quarter of 2020, the U.S. real economy inevitably entered a recession in Q2.
The severe divergence between the market and fundamentals characterizes the current market movement as a bear market rally——relies solely on government bailout without fundamental support. The race between markets and fundamentals becomes the core of the subsequent market risk. Unlike China, the U.S. government relied solely on financial means to prop up the market. From health care, social control, production and logistics during the epidemic, to preparations for the reopening of the economy, the United States lags behind in administrative implementation related to the real economy. Relying only on financial means, it does not create value to rescue the market. It maintains the high level of the market for a short time, but breeds a greater risk of collapse. This is not only a risk for stocks and bonds, but may even involve the subsequent erosion of the dollar’s status as the sole instrument of international settlement.
What we want to emphasize is that, in the background of rising markets, investors’ sentiment is relatively negative. As of Friday, the percentage of investors who are favor of bullish market fell 6.9 percent to 23.7 percent from the previous week, while the percentage of those with a neutral view of the market declined slightly, while the percentage of those who are short rose sharply to 52.7 percent, according to the survey.
In just one month, Washington has seen a seismic structural shift, while the Congress approved more than three rounds of special budgets. Accordingly, the U.S. Treasury expects the increase in U.S. debt to exceed $3 trillion in Q2. The Federal Reserve broke through the legal shackles to flood the market, breaking the link between the dollar and the federal credit.
During the subprime crisis, the U.S. national debt went from nearly $9 trillion before the crisis to nearly $12 trillion when it emerged from the recession. In other words, it took two and a half years for $3 trillion of new debt to be created during the subprime crisis (2007Q1-2009Q3). The $3 trillion increase in the national debt helped the U.S. economy end its recession in the second quarter of 2009. However, in this crisis, the epidemic has not yet seen a turning point, and the real economy is still on a downward path. The new federal debt exceeded 3 trillion in a single quarter. What can be predicted is that $3 trillion is just the beginning. If the pandemic continues repeatedly through the end of the year (the White House expects a vaccine to be ready) and the recession continues through June 2021, the federal debt will increase by more than $10 trillion (about 50% of GDP). The Fed’s unlimited QE will not impose any constraints on the unlimited expansion of federal debt.
Data shows that the macro economy is on a downward path. All economic activities are carried out against the background of the continuous raging of the epidemic. On the one hand, the White House is actively promoting the restart of the economy. On the other hand, New York state, as the core region of the epidemic, has been diagnosed with more than 340,000 cases, accounting for one quarter of the whole. There is no plan to relax the control and restart the economy in the short term. From the supply and demand aspects of the economic operation, the macro data shows that the economy is on a precipitous decline channel. America’s real GDP fell by 4.8% in the first quarter. Weakness is pervasive in all sectors. Consumer spending, business investment, exports and inventories contributed to the decline, even as residential investment, government spending and imports partially offset it. In the United States, there are some negative signs of a complete halt to the economy, and a neutral rebound is hard to come by in the short term. All component indices have also retreated, and both revenue and demand expectations have hit post-world war two low. The results send a shocking signal that covid-19 has made the U.S. recession worse and longer than ever before. An unprecedented 20.5 million jobs were lost, all major industries lost jobs, and the unemployment rate rose to 14.7 percent.
Auto sales fell sharply in April for the second month in a row, falling to a seasonally adjusted annual rate of 9 million vehicles, down 46.2 percent from a year earlier. Unit sales of light trucks and SUVs fell 41.8 percent year on year. Car sales were down 57 percent from a year earlier. The long road back to the new normal will begin in May, as states begin to reopen and car markets adjust to online sales. However, consumer conservatism and sharply declining driving ranges mean that car sales will be well below long-term trends over the next one to two years. U.S. manufacturing is in a deep recession because covid-19 is shutting down non-essential businesses, disrupting global supply chains and pushing the U.S. and global economy into recession.
The good news, however, is that the core economy is still doing well. New York’s core financial industry works perfectly. The hardware, software and human capital invested in the financial center’s operations after 9/11 ensured that Manhattan’s financial center remained fully functional during the encounters. And as a center of scientific and technological innovation, it seems that the basic operation. The functions of the import and export center have not been greatly affected. From a national economic perspective, we’ve seen semiconductor sales on the rise. The health of core economic sectors is the cornerstone of future economic recovery. The crude oil market is stabilizing. Crude oil inventory growth slowed to a normal level this week. Commercial crude inventories rose 4.6 million barrels, well below the 8.7 million barrels forecast by analysts. Refinery capacity utilization rose to 70.5 percent from 69.6 percent. Oil prices also stabilized.
A stormy battle between the two parties. This week, Moody’s index of political uncertainty in Washington climbed above 200 for the first time. The Fed has been doing everything to make the markets function properly and ease the economic shocks. Congress has passed three rounds of fiscal stimulus, but the unfolding epidemic requires more fiscal and monetary stimulus. These unprecedented measures have led to an even sharper clash between the two parties.