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3 essential economic indicators to watch during the Coronavirus crisis
The world is in an absolute kerfuffle, but we seem to be too numb to comprehend the size of our problem. There is an abundance of information that makes it hard to know what is important and what?s not.
It is true that we?re focusing our energy on the current health crisis that we are at, but this will eventually pass, and we?ll be left with a ruined economy to deal with.
I?m not trying to be a pessimist and spread panic, but rather focus on the bigger picture and ignore information noise. It is the right of every citizen to realize the real threat here, which is the inevitable economic collapse.
In this piece, I want to make it simple, and highlight 3 economic indicators to watch in the coming months. Those indicators help us track how close are we to a total economic crash.
1- Unemployment Rates
The level of unemployment has skyrocketed amid the Coronavirus pandemic. The American Labor Department reported another 5.2 million unemployment insurance claims for the week ended April 11. That brings the total number of Americans seeking unemployment benefits to over 22 million.
For context, the previous weekly record for initial jobless claims wasn?t in 2008, but in October of 1982 where it reached 695,000.
Unemployment claims in the USA
It is noteworthy to mention that the American economy was working at almost full capacity with just a 3.5% unemployment rate prior to the crisis. Official real unemployment rates for April hasn’t been announced yet, but experts estimate it to be around 18%.
I would like to believe that most people will get their jobs back after the lockdown and the real unemployment rate will decrease, but the reality seems to be the opposite.
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Looking at it from the employer perspective, business owners have also suffered huge losses during the lockdown, and they are more likely to be heading towards cutting costs rather than hiring new people. The market will need time to adjust to the new patterns of supply and demand, but until then lots of businesses will collapse, and lots of people will lose their jobs.
To put things in perspective, the unemployment rate hit a record of 25% in 1933? 4 years after the great depression of 1929, and remained over 14% during the entire 30s decade. The highest peak since then was a 10.8% in 1982.
National Unemployment Rate ? USA
2- Rent Defaults
The housing market is a prime area to look at during any financial crisis, as we have seen in 2008. However, unlike 2008, where the housing market collapse was triggered by mortgage defaults, 2020 figures suggest that rent defaults might be the trigger to a full-scale real estate crisis as nearly one-third of Americans haven’t paid the rent of April yet, a whopping 15% drop from the previous month.
As of 5th of each month
The sad reality is that the national economy doesn’t care about your rent payments per se, but it fears the consequences of its domino effect. At the end of the day, rent payments alone constitute an insignificant portion of the total size of the economy.
The chain of events is simple: the more people default on their rents, the more landlords default on their mortgages. Hence, more banks, insurance companies and other financial institutions suffer losses, and the ripple effect begins to spread all over the economy.
Nevertheless, the significance of rent defaults over mortgage defaults is that it affects more people on a personal level, causing major social implications not only economic ones.
3- S&P 500
The simplest way to understand the stock market is to think of it as visual representations of people?s trust in various sectors of the economy.
One of the most useful indices to track the economy is the S&P500 as it contains the stocks of the top 500 performing companies in the USA. Looking at the chart below, it is easy to notice how the trust in the economy plummeted when we realized the seriousness of the pandemic but was restored with the announcement of various relief packages.
S&P 500: Last 3 months
It is naive to be misled by the above graph and assume that we?re in a recovery. The recession had already started and it will last for months, if not years. For reference, the graph below shows a comparison between the early stages of the 2008 financial crisis and the current situation. Notice how in 2008, S&P 500 had periods of gains but it eventually continued to fall.
S&P500: 2020 Compared to 2008
We should note that unlike rent and employment which are essential to the majority of the population, the stock market is mainly dominated by big investors. In other words, the above charts reflect the trust of big investors in the economy, and as long as governments support their largest banks and companies, the stock market won?t collapse immediately.
In my opinion, the real threat lies in rising unemployment levels, and rent defaults. Such events not only affect the stock market, but also affect most people directly on a personal level, and would cause serious social implications, not only economic ones. Just think of how many people might end up not only jobless but also homeless by the end of this.
In the end, we can compare the current situation of the global economy with shooting a rabbit: once a rabbit is hit, It will still run around 30?40 meters before collapsing. So even if it is already dead, it just collapses at the very end, and the end is near?
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Reflections from the Author
Modern economics has transferred humans into numbers and figures. It assumes people are rational utility-maximizers beings, but we?re not! We are emotional social species, and the economy is just an extension of social relationships.