Recently, I have written a post about “Good News Statistics.”
I was specifically referring to data that had recently been released on retail sales and the unemployment rate.
My suggestion, at the time, was
Be careful. My advice is, don’t fully trust the data, and be careful about committing too quickly to an optimistic outlook.”
But, Things Have Changed
The first reason for this is that the broad statistics have been defined over the years and represent a world that is more or less stable and, therefore, more or less consistent. The past makeup of the economy can still be extrapolated into the future.
The American economy, the global economy, has changed. The severe recession has disrupted markets. Old relationships cannot be projected out into the future.
As a consequence, we really don’t know what we are measuring. Therefore, we really can’t trust all the statistics we observe because they might not be saying the same thing now that they were in the past.
And, this goes for the future in that we don’t have any feeling for what the structure of the economy, of the world, is going to be. Hence, how can we measure it and compare it with what is happening now or, what has happened.
As I have written in the past, the world we are living in is a world of “radical uncertainty,” a world that contains a lot of “unknown unknowns,” in addition to the “known unknowns” that we do know.
And, since the world is so out-of-equilibrium, we must edge along, taking one step at a time, and being patient.
The Canary in the US Economy Coal Mine
This is why the opinion piece by Rana Foroohar, in the Financial Times is so important.
Ms. Foroohar writes,
If you are looking to predict the shape of the US economy recovery don’t look at the markets.”
Also, be careful measuring aggregate statistical series constructed for specific uses.
Look instead at the small- and medium-sized businesses that represent 50 percent of employment in the country.”
Note, these are not data series that have been constructed to measure some “aggregate” economic activity. They are data that represent just the individual numbers themselves.
Ms. Foroohar claims that
They are the best economic indicator in America right now.”
They are also in trouble.”
I have tried to do this kind of analysis myself, focusing upon more specific instances. I have written about “The Pressure to Change Grows: Dramatic Moves All Around”: “The Burden of the Debt Load is Peaking”; and “Debt Loads Continue to Increase and the Number of ‘Zombie’ Companies Continue to Rise.”
These examples deal with what is happening on the “ground floor” and, thereby, tell the real story of what is happening.
Mr. Foroohar writes about the fact that “the typical small business only has enough cash reserves to cover two weeks of costs in lieu of any revenues.” With the Paycheck Protection Program returning to pre-Covid-19 levels by the end of July, unemployment benefits will shrink to around 40 percent of what they are now.” How do you translate this into how the economy is doing?
And, if there is no further fiscal stimulus or aid, one can expect new wave of small business failures. Local establishments are shuttered for the time being. By mid-June, Ms. Foroohar reports, “almost half of US small business owners said they did not expect a return to normal operations over the next six months.” This from a survey by Credit Suisse (NYSE:CS).
A New York Fed report indicates that only one in five small businesses can survive a two-month loss of income. And, the hardest-hit sectors, no return to normal, whatever that was.
Furthermore, these findings do not include the possibility that a second wave of the pandemic might be in the works.
One last comment in this discussion. The companies we are talking about here are “physical” entities…they are not virtual in nature. Technological innovation is not going to save them.
Constructed Data Series
All these factors fail to be captured in the “constructed” data series we tend to rely on so much of the time.
As we see the economy changing structurally because of the spread of the coronavirus pandemic and the consequent economic recession that follows, we lose touch with the future of the world.
There are good things happening as well. I try to keep abreast of these events as well. It is just that, as a society, we tend to concentrate on the bad things most of the time.
But, the good things that are happening, in many cases threaten what tend to be the more traditional spaces, make it even tougher for the “legacy” companies to survive.
The bottom line, however, is that we need to look beneath the aggregate numbers, whether they are markets, as Ms. Foroohar suggests, or whether they are data series constructed to capture the behavior of specifically defined “aggregate” behavior by the experts.
Ms. Foroohar cautions,
markets can stay wrong for a long time before correcting. How else can we explain asset prices that currently assume a V-shaped recovery, even as we see to be witnessing a second wave of infections in several US states?”
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.