Graph of the week

Graph of the week

29-05-2020 | Insight

The vicious cycle

  • Jeroen Blokland
    Portfolio Manager

Extraordinary stimulus by both central banks and governments is intended to help the global economy and give it time to recover. With a gradual relaxation of lockdown measures, few signs as yet of a second virus wave and the global search for a Covid-19 vaccine, a recovery is likely. Yet, we must remain vigilant for risks that make the road to that recovery bumpier than markets currently seem to be pricing in. One of those risks is the US consumer.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates

41 million people out of work

In the past two months, 41 million Americans have filed new claims for unemployment benefits. And unemployment has surged to 14.7%. Moreover, this rate is for the month of April and doesn't yet reflect the new claims filed in May. Estimates vary greatly, but the rate could easily peak well above 20% in the coming months.

However you look at it, this isn't good news.

Jobless Americans are losing confidence and, unsurprisingly, spending less than working Americans. In recent months, US consumer confidence has plummeted – to its lowest point in six years. The collapse in consumer confidence in March and April was the biggest ever in such a short period of time.

Incidentally, before Covid-19 struck, consumer sentiment was at its most positive since the start of the millennium, driven by a very stable labor market and economic growth, in combination with historically low mortgage rates. So, thankfully, the decline began at a very high level.

Crisis of confidence

The declining confidence is not only concentrated among jobless Americans. With millions of Americans still losing their jobs each week, the sudden stop of economic activity is heightening concerns among the entire population. This means that people are putting spending on the back burner. The percentage of disposable income that Americans are saving has shot up to 13.1%.

We have to go back as far as 1981 to find a similarly high savings rate. So, it’s not surprising that US retail sales tumbled more than 16% in April.

The cycle

The above developments could lead to a ‘traditional’ vicious recession cycle, where the decline in employment opportunities results in lower spending and, ultimately, lower profits for companies. They, in turn, have to fire even more people, causing a further fall in confidence. And so on.

There is a chance, which should not be underestimated, that this vicious cycle will get in the way of a rapid economic recovery this time, too. What is more, the blow this time around is so big that it’s hard to imagine there not being any long-term damage.

The sharp decline in labor participation is a key indicator of this. A V-shaped recovery therefore seems almost impossible, but at present the markets don't seem willing to contemplate any other letters from the alphabet.

Not too negative

Nevertheless, there are a number of factors that lead me to believe that a traditional recession cycle may not materialize or, at least, won’t be so severe. The first is speed. As stated above, the actions taken by central banks and governments are extraordinary. Never before have stimulus packages been so substantial and implemented so swiftly, with job retention often being used as the reason for this. In addition, when the economy does pick up – somewhere in coming months – unemployment figures are expected to fall back by millions again each week.

Lastly, the average – with an emphasis on ‘average’ – household debt in the US has fallen sharply in the last ten years. While all of these are factors that could prevent the cycle, they certainly don’t eliminate the risk entirely.

Subjects related to this article are:

Important legal information

The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.

The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.

Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.

This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.

I Disagree