The U.S. Macro Economy: The Epitome of Violent Change

It is perhaps appropriate to layout some of the major trends in macro.  We live in tumultuous times. Economic policy uncertainty is at all-time highs and somewhat mirroring this meteoric rise is the spike in the BAA-10Y spread.

Governors followed the dire recommendations of senior health officials who conditioned fear through forecasts of hospital occupancy and projected COVID-19 deaths. As a result, the economy shut down and consumption patterns altered. Retail consumption of motor fuel fell to the lowest levels since WW2.

Vehicle sales collapsed and so did auto production.  

  

One notable change was in the consumption of meat. Customers stampeded the meat section and prices spiked. The Economics of supply and demand has been sure-footed during corona times.

Consumption of red meat jumped by over two lbs per capita!

Labor Markets

Perhaps the most dramatic effect of the shutdowns has been on the supply/demand for labor. The demand for labor as reflected in the job-finding rate collapsed alongside the demand for new business orders. 

The unemployment rate has spiked to levels not seen since the Great Depression.

Hiring fell off and sharply rebounded. Quit rates collapsed contributing directly to slowing wage growth.  

 Job openings sharply contracted and the numbers of unemployed have swelled. 

Only time will tell how labor markets rebound, but it is my suspicion that unemployment will remain high for some years to come.

Financial and Commodity Markets

Real oil prices collapsed.

Interest rates hit the floor.

The collapse of sales and GDP caused stock prices to become detached from nominal economic cashflow.

Familiar Trends Emerged

The dramatic fall in interest rates and personal income caused time tested patterns to emerge. The financial incentive and economic incentives to refinance old debt and issue new ones converged.  Debt issuance increased across-the-board.

Mortgage refi's spiked, causing dealer balance sheets to become bloated.

Increased issuance and declining expectations for nominal GDP growth lead to market makers rapidly changing their prices and corporate bond spreads widened.

The deterioration in short-term inflation expectations caused a familiar decoupling of new bond vs season bond prices in the Treasury market.

In order to support the markets and the economy, the Federal Reserve resumed its balance sheet operations.

Models of expected returns failed spectacularly

Regression-based models of expected treasury returns failed during this time period. This is because inflation, and expected inflation held up while yields were plummeting.

Models with indicator saturation (ISAT) were better able to hold up against the dramatic structural change.

Trade and International Transactions

Let's talk trade. The U.S. Commodity Trade balance remains notably positive, the first sustained positive balance since 1973.

Depending on which measure one uses - U.S. real effective trade exchange rates are near all-time highs.  Whether this is hurting or helping our balance of commodity trade is hard to say.  On the one hand, it lowers the incentive for domestic production, and on the other, it lowers the cost of our commodity imports.

One example is that our imports of fuel have fallen faster than our exports resulting in a positive energy balance.

Trade policy has had remarkable effects. Look no further than the marked improvement in the goods balance with China.

Foreigners are trying their best to combat the rise in the dollar and raise money, and this is reflected in the record sales of U.S. Treasury notes and bonds.

Selling out of Ireland and the UK has been particularly notable.