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Economic Outlook 

Thank you so much. And welcome to the U.S. Bank economic outlook session. Thanks for joining us. Today, we're going to discuss the ways in which the shifting economic landscape is impacting our lives and our business. My name's Betsy Cadwallader. I'm the Northwest Region Head for Commercial Banking for U.S. Bank, which includes the Puget Sound region of Washington, the metro markets of Portland Oregon, as well as San Francisco and Sacramento, California.  

I'm honored to have the opportunity to introduce three senior leaders from U.S. Bank who will share with you their views on the current state of affairs when it comes to the economy, politics, and policy. Kevin MacMillan leads our state and federal government relations team at U.S. Bank. He's responsible for our engagement with the legislators, our regulators, and other policymakers. 

Also joining us is Matt Schoeppner, a senior economist of U.S. Bank. Matt is responsible for the development, coordination and production of analysis on the macro U.S. economy, regional economies, foreign major economies, and the financial markets. And finally, our third speaker is John Stern, Executive Vice President and Corporate Treasurer for U.S. Bank. John manages our capital, liquidity, interest rate risk, asset liability management, wholesale debt issuance, and the investment portfolio for the bank.  

We hope you'll find their perspectives and insights they share today to be exceptionally timely and relevant. We'll start with comments from our speakers and leave plenty of time for Q&A. Before we begin, I do want to remind the participants that this is taped for replay, and if you objects, please disconnect now. 

But with that introduction, let's begin. And I'm going to turn the presentation over to Kevin MacMillan. Kevin, I think you're there.  

Thank you, Betsy. It's great to be with everybody today. Welcome, and good afternoon from Washington. I hope everybody is safe and well. 

Welcome to tax day, 2020. If it's news to you that it's tax day, you may want to call your accountant following this meeting. But otherwise, I thought what we would do today is talk about the unprecedented times we're in, and give you some insight into the electoral, both presidential and congressional, and policy outlook coming from Washington for the rest of the year.  

So if we move forward on our slides here to the next slide, and proceed forward to the presidential elections, 2020 presidential election, let's kick it off there. There are 111 days to election day, which promises to be an election like no other. On the next slide, I thought one of the many unique factors of this election to talk about briefly is the youth vote. 

There's very interesting data coming in for this group of voters. It's the first presidential election for voters born after 9/11. These voters are very civically active, they are actually surpassing the silent generation in share of the vote for the first time. They live near urban areas, and they have a great opportunity to impact this coming election.  

I think one of the key questions is, how is a pandemic going to impact voting? There's going to be increased mail-in voting, increased absentee voting. Polling places may be differently configured. There may be long lines. So how voting occurs in this environment is going to be very different. 

And this youth vote will be very interesting to watch. In normal times, many of the youth in this demographic are away at college or otherwise preoccupied, but perhaps in this election that will be different. So it'll be something worth watching. The youth vote is oftentimes considered to be closely watched, but not well-turned out. In this election, I think, is one area that will be worth watching and closely paying attention to.  

So if we look at the presidential politics-- let's go to the next slide-- there are actually over 1,000 people who have registered to run for president, including Kanye West. But these two candidates are the two most likely to win the White House, I think, as we all understand and believe. And if you look their key issues that they're going to be focused on between former Vice President Biden and President Trump, pandemic response is at the top. It's, of course, in the top of everybody's minds these days and in the upcoming months. Social justice reform, police reform, and health care top the list for national Democrats, and national Republicans are looking to economic recovery, police reform, and the continuation of the America First policies that the President ran on during the last election. 

I think it's really interesting-- there was development last week-- if you saw on the news that there was the release of the Biden-Sanders Unity Task Force policy platform, which is going to set the platform for the Democratic conventions coming up this summer. And it really, I thought, was fascinating to see the two wings of the democratic party coming together and issuing this 100-plus page platform that provided quite a bit of detail on the policy priorities for the party-- environmental policies, fiscal policies, health care, social justice reform.  

It's the first time I've seen two wings on either party joined together in advance of moving to a convention and publicly putting forward something quite as sweeping as that. So if you have some spare time, it provides some great insights into what to expect in a Biden administration. But if we go to the next slide, just a little bit slightly deeper dive on the President's focus on COVID response. 

Certainly, the stimulus package was a key factor. We can get into some more detail around that. Withdrawal of the WHO is something that he has been some criticized for, some praised for, but certainly a key tenant of sort of back to the America first views of this administration. PPP, we'll get into that in some more detail, but clearly viewed as a key tenant of the President's re-election strategy. And then, the overall campaign themes, I think we just sort of trend towards the America First policy or continue on from what we've seen from the prior campaign.  

The next slide really shows that the president's approval and disapproval ratings have deteriorated significantly since mid-April. I think this is an interesting slide in that in mid-April, the president was actually doing quite well. And the pandemic emergency had been declared, we were in a mode of assessing how to deal with it, and his numbers had deteriorated significantly since then, now, with over 55% disapproval ratings from several of the polls taken. 

That's a challenging position for an incumbent to overcome. But there is some time for him to seek to rehabilitate his position. And I think that we'll see a very aggressive campaign in that vein as well.  

We go to the vice president, the former vice president, a lot of more focus on social justice environmental policies on the next slide. We expect to repeal the Trump tax cut. And really, the next big item for the former vice president is the announcement of who his running mate will be. I expect that will be coming in a very near future. The list is fairly short, with differing politicians emerging depending on the week as to where their position may be within the vetting process. 

So it's a fairly short list. The vice president has signaled that he will have a female running mate, and likely a minority female running mate. So that is expected in the coming days and weeks, and will definitely drive a lot of attention to the vice president, former vice president and his campaign.  

But if you look at his numbers on the next slide, they are approximately 50% voter favorability over the past few months. And I think that lead is growing from the most recent numbers I've seen. The betting odds favor the former vice president by almost 20 points. He seems to be doing quite well in a lot of the battleground states. 

And really, the ultimate slide in this part of the presentation is this next slide, which shows our electoral map. Because those other polls are really national polls, and this is what matters. You need 270 electoral college votes to win the White House.  

This is a fairly new map that came out last week. And it's very favorable to the former vice president. It actually shows him with 279 electoral college votes, and thus winning the White House, currently. Then that places otherwise tossup states like Pennsylvania, Michigan, and Wisconsin into the lean democratic column. So that is the path for the former vice president to victory, and will be the path in which President Trump will seek to reclaim or otherwise seek to win. 

In the prior election, Trump won Pennsylvania, Michigan, and Wisconsin, and these other tossup states. So to see what occurs in the next 111 days will be very fascinating. But this is definitely a favorable map for the former vice president. And if you live in any of those states, turn off your televisions and take your phones off the hook, because you're going to be inundated with campaign solicitations, door knockers, and you name it. So it will be a very, very busy ground game in all these tossup and lean states, if you will.  

So if we move to the congressional elections, on the next slide, let's start with the United States Senate. There are a lot more Republicans up for re-election. 23 compared to 12 democratic senators up for re-election. So there are more pickup opportunities for Democrats in 2020. 

Democrats need five seats to take the majority, if they don't win the White House. If they do win the White House, they need only four seats to take the majority in the Senate, as tiebreakers in the Senate are broken by the vice president. So either way, the Democrats do have an opportunity and a path forward to win the White House. I mean, sorry, win control of the Senate. And the next slide brings to bear really what states are in play here.  

So the tossup states, if you look in the middle part, they're all Republicans. Arizona, Colorado, Maine, Montana, and North Carolina are all in the tossup race currently, or in the ranking. Alabama is in the lean Republican column. So if Alabama switches parties from Democratic to Republican and the GOP loses all the tossups, the Senate will be at a 50/50 tie. 

With more races in the lean column, lean GOP versus a lean Dem column, the GOP is at risk of losing additional seats. The map was very different six months ago. Six months ago, Montana and North Carolina were in the lean GOP column. And many of the Georgia seats we're actually seeing the likely GOP column. The trend is shifting, the path is shifting towards more likelihood of a closer or switching parties for the Senate.  

The next slide, we go over to the House of Representatives. You need 218 seats to hold the majority in the House. The likely of a house flip from Democratic to Republican is virtually zero. Republicans need to pick up 18 seats. And house Republicans aren't competing in enough seats and have a much higher rate of retirements than Democrats. So I think it's a safe call to say that the democratic majority will be retained in the House. And the question will be the other chamber. 

So with that, let's just switch gears quickly and look at the legislative outlook for the remaining few months. And we'll start with a bit of a look back. Let's quickly talk about the federal actions around COVID-19. They've been significant and they have been swift.  

We've seen coronavirus relief legislation major packages. I'll dig a little deeper on that in the next slide. Paycheck protection program was a massive and largely successful program. The COVID-19 economic relief for individuals and lending facilities, also quite significant. And the Federal Reserve really came to the rescue early on with a lot of fiscal and monetary relief, that, I think, John Stern will talk about in some detail further on in the presentation. 

But the next slide is really stark. If you're into the government business like I am, it's stunning to see the speed that the relief passed over the course of one month, really, this past spring and March. There were no hearings, no partisanship, virtually no votes in either chamber, and trillions of dollars in aid approved that went to combat the economic fallout from COVID-19.  

So we saw phase 1, phase 2, phase 2 fairly quickly. The establishment of PPP, which is now just rolling off of people's tongues. Unemployment assistance, paid sick leave, worker assistance, direct payments to individuals, we saw that being plussed up in the following month, with the Paycheck Protection Program and some health care enhancements, a little bit more money and some slight tweaks. 

And now we're at the stage where we're looking for a final bill, moving towards the elections. This phase 4 TBD bill is really-- we expect to see it revealed next month. But the next slide really helps us glean some perspective on what to expect. So between the two parties there is some agreement and there's some lines in the sand.  

I think that this slide shows some of the some similarities and some of the differences. But what I would expect-- and I think you can largely rely on-- is that we'll see a trillion-ish dollar package that will include liability protections for businesses, state and municipal government support, some additional direct payments, or new direct payments, perhaps more limited than the prior package, additional funds for testing, additional funds for health care, some questions on whether we return to school, incentives or requirements, unemployment benefits for returning to work incentives. 

PPP will be significantly enhanced. I think that they'll expand the eligibility for PPP. They'll be more options to borrow, there'll be different terms, they'll be likely some provisions around forgiveness or easing the path towards forgiveness. There may be some limited tax provisions. And I would say a long shot would be to include some infrastructure measures, but I think that's a long shot.  

So we're going to see the Senate unveil their package on Monday, I would expect, or early next week. And then, it will be a three-week sprint towards the end, towards a final passage, which I'm targeting approximately August 7 or 8 that we'll see a bill passed by both chambers agreed to and signed into law by the President. So that's a major undertaking by the Senate and the House. 

If we go to the next slide, there are, really, five other major things to resolve, which is in normal times, this would be consuming an enormous amount of time. But with this pandemic, these big items have been pushed off. So there are less than three months before the budget needs to be approved or the government runs out of money. I don't think that that's really going to be an issue. That will be resolved very judiciously and expeditiously, I guess, with the looming elections.  

But things like the FISA program, some health care programs, some infrastructure under the FAST Act and the National Defense Authorization Act all have to come to agreement before the end of the year. And I think that some will be resolved before election day-- they have to be-- some will be pushed off for short-term periods depending on the elections, and if there are major changes in control of the Senate and the White House, then those programs will be under review. And then we'll have to revisit them in early 2021. 

So just in conclusion, election season will be upon us soon. Control of the White House and Congress are very much within reach for national Democrats. There will be a three-week sprint, beginning on Monday, for Congress to agree and pass the next stimulus package. And there are a few other large provisions to consider.  

But for the most part we're in crunch time here in Washington, we're going to see a lot of deal making in the next three weeks. And I'll look forward to any questions and comments you have going forward. And with that, I'll pass the baton to John Stern. 

Fantastic. Great, Kevin. Fantastic update you gave. Good morning and good afternoon, everyone. Thanks for joining us. I hope everyone is doing very well.  

I'm going to talk about a couple of things today. First of all, the Federal Reserve and what policies they're implementing right now during this pandemic. Second is how these policies have really impacted the markets, particularly interest rates. And I'll also try to shed some light on what we think about that in terms of the future. And then, finally, just how the pandemic has impacted the banking industry at a high level and what we think are the next steps. 

So if we can move to the next page, page 22, and talk about the Fed. Kevin talked about the aggressiveness and the speed at which Congress, on a relative basis, moved for the CARES Act and other programs. The Fed did the exact same thing.  

They moved with impressive speed to get programs up and running. Things that took months and months to get stood up and implemented during the great financial crisis in '08, '09, some of those programs were revised that took days and weeks to stand up. It was really quite impressive. 

In addition, they virtually had every single credit market out there, multiple programs were announced. In a listing there, you can see down below, of some of there are many, many here, but the first two are in terms of commercial paper funding and mutual fund liquidity facilities. Those were old programs, stood up relatively quickly.  

But the innovation of the Fed to move with the market, I thought was impressive as well. Paycheck Protection Program, Kevin talked about that. There was a liquidity facility that the Fed put together to help banks finance those loans. And then the Fed also is entering into the credit markets by going into the primary market corporate credit facility. That is, they're actually going out and buying securities of investment grade companies, lowering credit spreads and facilitate the markets there. And then the main street lending facility is just starting to get up and running. So a lot of work there that is going on. 

So if we go to the next page, in terms of the aggressiveness on the credit side and the credit programs, the Fed was also very aggressive on the monetary policy side. They cut interest rates to 0%. You can see in that bottom left-hand chart that the Fed was starting to increase rates in 2016 all the way up through 2018 and into '19. And since then, the Fed has been very aggressive in cutting rates and cut rates immediately down to zero in that mid-March time frame.  

On the right-hand side, in addition to the interest rates, they also, in an effort to really help support the economy and support the functioning of markets, they engaged in what is called unlimited quantitative easing. And what that means is the Fed is creating money in the system by purchasing securities, notably U.S. Treasuries as well as agency mortgage-backed securities. They came in at about $120 billion per day they were purchasing. Just an astronomical number. That's the bottom right chart, you can see there just in that March and April time frame. 

They did that, and obviously it slowed down their pace, but continued to do so at a clip of 120 billion per month. But they are approaching basically $3 trillion of purchases during just this short amount of time. So we go to the next page and show, what does that mean?  

If you look at just where the Fed's balance sheet was back in 2007 and '08, they had a $1 trillion balance sheet. That's the blue line that you see in this chart. And over the course of the financial crisis in 2009 through '14, the Fed grew from one trillion to basically to $4 and 1/2 trillion. So the Fed, going from 4 and 1/2 to $7 trillion in a matter of months, they basically did all these QE programs in the great financial crisis in a matter of months, as opposed to a matter of years. So just shows you how fast and far they went to ensure a functioning market. 

And right now, the pace of purchases are slowing, and that is really used to stimulate investment and provide accommodation so that the economy can persist. And Matt will talk more about that down the road. If we go to the next page, you may think that the Fed has done a lot of work-- and they have-- but they still have some tools available to them.  

They can talk their way-- be more aggressive in the way they talk, meaning that's the forward guidance that you see here on page 25 here in the top left. They can communicate to markets either by picture or by words. The picture down below, their dot plot you can see there that they come out with every quarter. 

But also in terms of the amount that they may say, for example, we will keep rates low until inflation exceeds 2%, or the output gap is closed, or something to that effect. And so that is something that they can do. Even a stronger approach would be to do yield curve control. This is a tool where they could actually come out, put their money where their mouth is, and by saying, for example, we're going to have the three-year treasury, we will make it go no higher than 20 or 25 basis points for the next several years, so they can peg interest rates in that sense.  

Another tool they can use on the right-hand side of this page is negative interest rates, which we don't think they want to use, nor do we think that they will use. But there is a probability, there is an environment or scenario where this could happen. In fact, if you look at the futures market, roughly today where we are at, that gray line that you see here, there are futures that are priced in that show a negative interest rate. 

So that means the market is ascribing some probability to having a negative rate scenario. Doesn't mean it's going to happen, but we have seen this take place in Europe and in some aspects, in Japan, where negative interest rates are happening. So we don't anticipate that in a base case scenario, but it is certainly possible.  

So we go to the next page. The impact on lower for longer and the yield curve. So the Fed, by doing all these activities that I just talked about, is really driven down the yield curve, and that's what you see here. We talked about the Fed funds rate going down to basically zero, but this is the Treasury yield curve as it stands today. 

Notice a year ago, the curve was actually inverted. And that usually is a sign of bad news. And I don't think the bond market knew that a pandemic was coming. But clearly, the economy was already on edge at this time last year, anyway, with short-term rates higher than long-term rates. And that's what that blue line is at the top.  

Since then, you've seen rates have come crashing down, and we anticipate that that will remain the case, and just kind of supports a lower for longer yield curve that we continue to see here. So if we go to the next page, what does that mean in terms of how the markets have behaved? Clearly, a sign of two different markets. It's really quite remarkable. 

If you look at the 10-year treasury, for example, and just have a time series of how the 10-year treasury has performed over the course of the year, the 10-year was at nearly 2% at the beginning of the year, and then came crashing down during the beginning of the pandemic in that February, early March time frame. We went well through the 1.3% all-time low that was set back in 2016.  

We actually got down to, I believe, it was 36 basis points at one point in early March in intraday trading. And you can see it was very volatile during that shaded time frame on the chart that you can see. But since then, we've settled in and remain at very, very low levels here at around 60 basis points. 

Meanwhile, the stock market-- I probably don't need to go over this too much, everyone watches that that's on this call, I'm quite sure. But the fastest bear market we ever saw in terms of the S&P 500 moving down quite violently, you see there in the March time frame, but then it was also the fastest recovery out of a bear market. So very much a V-shaped recovery here in the bond market, or in the equity market, whereas the bond market has more of an extended U or some other sort of a shape to it. So Matt will talk about some of those things, I'm sure, in terms of economic outlook, but these two markets seem to be talking different things at this point.  

If we go the next page, and if I think about where interest rates are and where they're going, certainly the economy may put more pressure as the performance of the economy may put more pressure on interest rates. I'm going to skip inflation for a second, go to treasury supply. Given the CARES Act and other things that Kevin talked about, the financing amount of supply that the treasury will have to come up with to support all these programs is going to be a very heavy bill. And so that should, in all things being equal, should put pressure on rates to go up. 

Meanwhile, you have the Fed that's supporting treasury markets, that's putting weight down on interest rate yields at this particular point in time. And then, I think inflation is kind of a wildcard here. In the short run, we think that these deflationary events will put pressure on rates to go down. But long-term, you've got to think about record deficits, you have to think about supply chain differences and changes with respect to China and other countries as we go through these pandemic changes.  

And so, what is the medium to long-term outlook on inflation? Perhaps Matt will cover some of that. But it also speaks to what will happen to interest rates as a result of it. 

If we go to the next page, shifting gears a bit. So how have banks performed through all this? And I think you can see here, quite evident that the banks, quite simply, were a source of the problem during the great financial crisis, no doubt. They are looking to become a source of the solution in this current environment.  

And so part of the reason for that is the banks are much stronger heading into this recession as opposed to the financial crisis. Liquidity has tripled, you see that in the left-hand side. Up to $3 trillion, and it's just growing as it were. And on the capital side, the capital virtually doubled from back in 2007. And the quality of that capital is a lot better as well. 

So banks are much more and better positioned. And so if we go to page 30, we already knew that to some extent because the banks had been supporting economic growth. They've grown in a time of need. Basically, the banking industry grew in two months what they typically do in two years.  

So loans were up 7% in a very short period of time. Some of that is starting to pay off. But this is all the support liquidity needs for many, many companies that we're looking for to be defensive in a time of what was, at that time, very stressful conditions. Meanwhile, deposits have continued to grow in the industry as a result. Some of those Fed policies that I talked about, $2 trillion-plus now is in the banking industry of new deposits since the pandemic, which is really quite incredible. 

If we go to the next page, I'll just wrap up here with the stress test. The banks really performed very well. Usually this is an annual process that the banks go through, and it has been a pretty benign event over the last few years. But recently, or this last round, it has more attention to it just given the environment.  

And the punchline from all this is that the banks performed very well given a hypothetical environment where GDP is down 10%, unemployment is up past 10%, stock market's down 50%. This is a hypothetical, it's not a predictive sort of environment. But you can see all the banks on the left-hand side stay well above their capital minimums, which is very important, and they perform very well as well. If you look on that right-hand chart, the amount of loss of capital during that stressful period, on a hypothetical basis, was really performed very well as well. 

And so finally, if I go to the last page here, for me on the pandemic, you can see that what the Fed really wants to do, while they went through this hypothetical, more needs to be done given the environment that we're in. So the Fed wants to do, basically, three things here, or did three things.  

First of all, they asked banks in the meantime, here, to stop with their share repurchases for the time being and then cap their dividends at this point in time. And the dividends are subject to a certain amount of earnings that they can generate. So if you can't generate enough earnings over the preceding four quarters, you may not be able to pay a dividend. So that was the first thing the Fed did. 

The second thing that they did is they performed a sensitivity analysis on top of the CCAR, or stress results. You could see in the left-hand the different type of scenarios. A V-shape, a U-shape, which is more of a sluggish recovery, and then a W-shape, which is a bounce back recession. And in each of those instances, the Fed on the right-hand side tried to peg, how did the banks perform in this, in aggregate, in each of these scenarios?  

So you can see as each of these happen, each scenario gets worse as each scenario plays out, and the banks get closer, in aggregate, closer to that 4 and 1/2% minimum. So as a result of this, the Fed is going to ask banks to rerun a stress test in the fall. There's a lot of unknowns at this point. But what we do know is that there'll be another few, a couple scenarios coming to the banks. 

They'll have to resubmit a capital plan. What we don't know is, how stressful will these scenarios be? What the levels will the capital levels be going to and, what will be the public disclosure out of all this? Do we need the public disclosure to help so that the public is aware of how strong the banking industry is?  

What we do need to watch, as everyone here on this call, I think, need to watch, is, if this is a backdoor way to inject or force banks to hold more capital. That could put pressure on, in terms of additional costs on loans, or could restrict credit. And so that's something that we're very mindful of and watching as an industry. And I think all people on the call need to need to focus on as we go through the next several months. 

So with that, that ends my comments for here. And I'll pass it over on the economic side, to Matt Schoeppner. Matt?  

Hey, John. And good afternoon or morning from Minneapolis. And thanks, everybody, for joining. 

Let me start by just saying we meet amid enormous hardships caused by the pandemic. Lives and livelihoods have been lost, and it's inflicted heavy stress on both people and businesses. We've all been impacted personally and professionally, hence us doing this virtually today, but thanks, again, for coming on and joining us today.  

Yeah, starting on page 34, the scale and the speed of the downturn in economic activity in late March and April was truly unprecedented. It's a term I've used probably hundreds of times in the last few months. And you can grasp this pretty quickly from just a handful of visuals, which, here, showing retail sales on the left, in dollars, and industrial production, which is an index, on the right. 

And I'd also add, no part of the economy has really been immune to measures taken to minimize the spread of the virus. Instead of making you squint, I've actually pulled out the latest four-month period of the crisis on the right-hand side of each of these charts. You can see retail sales off by almost 25% in just two months across, really, nearly every major spending category, and industrial production was likely to drop and buy out the most in April in over a century. And again, with every major industry posting a decline.  

But the good news, you can see here, too, that many aspects of daily life have started to return to normal. And data in May has stabilized, and you may see have seen this morning, again, at today's June Industrial Production Report, listing almost another 5%, 5 and 1/2% in June, which is not yet on this chart, but more encouraging news. 

Some areas have seen a fairly sharp revival, specifically consumer spending activity with almost 2/3 of sales returning in May as stores began to reopen and consumer demand really just came roaring back. And I'd say particularly for big ticket items like autos and housing. For businesses, however, and many of you on the call can probably attest, this hasn't been, like, flipping on a switch. Many are now reopening under strict health protocols, workers fearful of infection, and in some places, now, are seeing continued or recurring work stoppages. So it's easy to see how household demand might revive quicker through this than business activity, particularly over the summer here.  

Turning to page 35, on that, I'd say these swings in activity have been perhaps most visible in the labor market. These charts here show total employment levels on the left and the unemployment rate on the right. You could see employers shed over 22 million jobs from payrolls in March and April. That's over 15% of the total employment that was there in February. And the unemployment rate jumped from a 50-year low of 3 and 1/2% near the start of the year to a post-world War II high of 14.7%. 

Then, came the May and June job reports, which both vastly exceeded expectations. I might say, in part, because many states really started to reopen earlier than was expected. But with a combined 7 and 1/2 million jobs returning and the unemployment rate dropped back down to around 11% as workers started to be rehired, these were big gains. Don't get me wrong, but you can see it still leaves total employment some 16, 17 million, or roughly 10% below the pre-crisis peak in unemployment. Still looking over the 10% of peak that was hit a decade ago during the financial crisis.  

So turning to page 36, if there's one takeaway message it's that the economy still has a long road ahead back to a full recovery. I put it here at the top, this is a deep hole. Activity is swinging around so dramatically and quickly that some of these traditional indicators that I've shown so far that we read about every month or so are now are really taking a backseat to epidemiology charts and more real-time economic signals. 

In fact, I now seemingly spent part of my days tracking everything from COVID reproduction rates to daily mobility data on retail and recreation from Google. It's just a very different environment than I've ever experienced. This chart on the left is an example of how some of this alternative or high-frequency data can be translated into effects on the overall economy, or GDP, in this case.  

The New York Fed actually developed this, what they call the Weekly Economic Index back last spring, to track the rapid developments around the pandemic. You can see, GDP widely expected to have fallen right around 10% to 12% peak to trough between February and late April. So for some context, that's about two to three times the decline that we saw during the financial crisis. So not surprisingly, this is likely to prove to be the most severe recession in modern history. 

However, if all goes well, it's also likely to be the shortest, as most of these real-time signals, this one enough in the right chart being daily credit card and debit card spending suggests economic activity is rebounding with all 50 states having started to lift restrictions in some form or another, by mid-June. Although there are clearly some areas that remain depressed, and you can see it here, particularly related to travel, recreation, and eating out. Some of them still off almost half of the sales that they were seeing prior to the pandemic.  

Turning to 37. So what's happening now is people like me are trying to draw on experts in epidemiology and health care to make assumptions around this. And really put together a best guess of whether or when people and businesses will start to gain confidence that it's safe to restart those various activities. 

And with that, as you can see here in these charts, which show consensus estimates for both economic growth on the left and unemployment on the right, most private forecasters expect, on aggregate, that after an initial bounce this summer, the recovery will resemble more of a crawl than a sprint. Or like John said, if you follow the symbols, more of a swish than v-shaped snap back.  

Specifically what I think is notable here is that almost 90% of forecasters think it won't be until at least the end of next year before the U.S. economy fully recoups these losses. And unemployment is projected to still be over 9% at the end of this year and near 7% at the end of next. So again, expectations are that this is going to be a long road back. 

Turning to 38, that path doesn't come without enormous uncertainty, specifically regarding the next course of the virus. In fact, I'd say this is the principal reason why the economy isn't likely to quickly snap back to normal. There just isn't enough confidence that the pandemic is contained.  

And we're seeing this now that clear reintensification of COVID infections and hospitalizations, like that's shown here on the left, just across the South and in parts of the West. This is an area that makes up almost 3/4 of the U.S. economy. So it's not trivial. 

Clearly a key risk that has me, and I suspect many others, thinking about the mounting threat it puts on an otherwise, still what I'd call a young and early recovery. Some states are now being forced to pause or even reverse reopening plans, obviously out of public health concerns. And I'd say it's very likely, now, that people's changing behavior will lead to some loss of momentum in these areas, plus if outbreaks in multiple metros start to add up, that could even threaten to derail this summer bounce we've had, as it as it clearly would limit a return to work. Otherwise, like I said earlier, clarity is a necessary condition for a stronger overall recovery. And this only adds to the persistence of uncertainty, which I'm sure, as many of you know, is corrosive on hiring and capital investment decisions.  

On that, the second key risk I'm paying close attention to right now is shown here on the right, are that initial claims for unemployment insurance remain stubbornly high. That almost a million and a half per week, now almost four months into the crisis. What surprises me is that the improvement seem to be getting less and less, despite, as you can see on the chart, plateauing at levels still about seven times higher than in February, and in fact, well above any other point on record. 

By now, most states have reopened their economies, yes, albeit with some social distancing restrictions, but this initial period rehiring, as it starts to wind down, unless these layoffs start to abate, there's meaningful chance that job growth will not only moderate, but could even turn negative in some of the upcoming late summer jobs reports, particularly if layoffs were to start creeping back higher due to a shift from re-opening back to lockdowns in certain areas of the country.  

And then, finally, on page 39, my third concern now is this rapidly fading fiscal support from the federal government. So far, as Kevin and John have both described, a quick and massive policy response has effectively helped. And from my chair, put a floor under collapsing confidence. 

You could see this in these two charts with consumers on the left and businesses on the right. And many of you probably know it's also helped buoy sales and minimize layoffs, too. In total, as John said earlier, the Fed's now expanded its balance sheet to roughly about $7 trillion dollars from roughly $4 trillion in late February.  

And Washington has already pushed roughly 2.8 trillion. If you add up Kevin's numbers in 80, and that actually equals about 13% of GDP, which is pretty extraordinary, especially in such a short period of time. Because the federal support is expected to be largely gone by the summer despite, as you saw earlier, unemployment's still in the double digits and amid these other pandemic uncertainties. So it's hard to believe that if nothing is done, this would be fodder for some fairly significant backsliding this fall. 

The four specific areas that I'm focused on is, first, the fading support from those direct stimulus checks for, most notably delivered, distributed in April and early May, and then quickly spent, used to pay down debt or saved. Second is exhaustion of the PPP. that we talked about earlier, which was initially designed to help small businesses only really get through a shock lasting about two months.  

The third is the stress being put on state and local governments, which, as you know, have balanced budget requirements. So they're facing a whole other level of challenge. And perhaps most notable, is this UI benefits cliff at the end of July, with a $600 per week expansion, set to expire. 

To put some numbers around that, there's currently some 16 million people receiving jobless benefits. Or more if you include those on pandemic assistance. But an outright stop would actually equate to a reduction in personal income of about $40 billion per month, which is just over 2% of GDP, which obviously is not a trivial jolt to the economy. I'll also add that, to pair it up with John, even the Fed has sort of been swerving out of its lane recently, really to advocate for more federal support.  

So to wrap up, it's possible that how the economy does later this year may actually depend very much so on what Congress and the administration decide to do in the next few weeks. So as Kevin talked about, this is clearly another area to keep a close eye on. Otherwise with that, I'll turn it back to Betsy. And I think we have some good questions rolling in. 

Yeah, great. Thanks, you guys. And really, that's great insightful analysis of kind of the tremendous amount of data that we're all trying to absorb and get our heads around. So very, very helpful. And as promised, we have a little bit of time left for questions.  

So I'm going to direct this first question to Kevin. We talked a lot about the effects of COVID with respect to how the government has reacted. But do you believe it's going to lead to more local, state, and/or kind of federal government regulations on businesses in general, or any specific sectors? 

Great, thanks, Betsy. I think that there is no doubt that we're going to see expanded activity at the state and local level with regard to regulations, and legislation and policies, just generally speaking. We've seen in quite a few jurisdictions, determinations around mortgage forbearance, and eviction forbearance, and other housing-related matters. So those I think would be, those are not going to be shrinking, they'll be growing above and beyond what's happening at the federal level.  

I think that we're going to see changes in tax structures, as Matt mentioned. We've seen the state and local localities are experiencing an enormous amount of pressure on their budgets, and we're going to see expanded efforts to try to close those budgets through taxation. So government engagement at all levels is going to continue to grow and expand as the pandemic continues to be a force of pressure on the economy and on people's pocketbooks everyday. 

Great. Thank you. And next, to John, and maybe Matt might want to add in. But we've talked a lot about the government stimulus. But it's obviously creating huge deficits. Where do we see the impact of those deficits in terms of macro and micro activity?  

Yeah, thanks. John, here. So we talked a little bit about this, but maybe just to think about it, Kevin talked about the CARES Act and all these other things that are probably coming down the road. I mean, you're probably staring at a $3 trillion dollar-ish, plus or minus, deficit this year. And you have a debt right now it's about 20, low $20 billion or so. 

That'll probably climb into the mid-20s more likely than not as we get through the end of the year and probably into next year. And that means, then, therefore, your debt-to-GDP ratio is north of 100%. And not a lot of countries have that, and it's a question of whether or not there's sustainability there.  

But in the meantime, as you can tell by interest rates, they're at all time lows. So clearly there are buyers out there. People are not concerned about the level of debt that the U.S. economy or the U.S. has. They feel like, I think, mostly feel like there's a robust economy behind it. And so the U.S. is able to print debt in a way that-- and they need to do that given all the things that we've been talking about. 

Especially, Matt, with the stimulus running out, we may need to do more in the fall, and so on and so forth depending on the flight of this of the virus. And so it's not a problem today. And so I guess my short answer is, it's not a problem today, but like most things, it's not a problem until it is, right? And so that's-- I don't know, Matt, if you have anything to add, but that's how I would address that.  

Yeah, I think clearly, rightfully, worries about massive [INAUDIBLE] and debt. John said that the debt-to-GDP is roughly right around, quickly heading to right around 100%, but it's also likely to approach record 120% according to CBO, which was the highest that was hit back in the World War II. But they actually had a fairly strong recovery not long after that that helped bring it down. 

But then, to your point, John, it's still hard to make an argument that pressing the brakes right now given the pandemic is still-- I wouldn't call it raging, but it's still ongoing-- in fact, doing so would probably not only undermine near-term growth, but even, I would probably argue, exacerbate the fiscal problem going forward.  

So there just isn't a good choice. It's the least bad option we have until we see the other side of this pandemic. And I'd add, John said that rates are pinned close to zero. Inflation is just anything still too low. Plus you have issuance of both high-yield and investment grade bonds hitting a record pace. 

I think it just goes to show the power of the Fed right now. I'll also say, this gets talked about a lot, but the truth is no one really knows the economic impact of different debt levels, whether it's 35%, a GDP like we saw before the financial crisis, 80% in February, 100% now or double that, it's really textbook theory says increased government spending puts, or borrowing, pushes rates up. And theoretically reduces or crowds out private investment by making it more expensive for businesses to borrow. But clearly, it's hard to make that case right now, specifically in today's environment, where I think desired saving just chronically exceeds investment. It's very difficult.  

OK, thanks. Thanks very much. Moving to stimulus packages, and this one's for Kevin. I think we've all seen the impact of COVID shutdowns on, really, the small business owners. Kevin, what do you think the likelihood is that the government will provide additional economic stimulus, and what that might look like, particularly for small businesses? 

Sure. As I mentioned, I think that there's almost, I can almost guarantee that we'll see some sort of economic stimulus package by the first week in August. The political realities on trying to get something accomplished are in line with, from both sides of the aisle. And the White House clearly wants it as well. And we've seen secretary Mnuchin and other administration officials undertaking a lot of trips to the Hill and negotiations. And so I think over the next three weeks, we'll see a lot of that package formulating.  

As with regard to small businesses, specifically, I think the PPP program is largely viewed as a very successful program. There's north of $100 billion still available in that program. And I think what we're going to see from policymakers is the expansion of eligibility for that, for PPP. I think we're going to see the opportunity for borrowers who perhaps received a loan in the first round of PPP then maybe have some path to getting additional funds because under the current, or the original structure you can only apply for one PPP loan. 

So I think there's the possibility that we'll see more of that. I think they'll be, perhaps, some restrictions around the size and scale of the loans, and the size and scale of who may borrow those loans, or may receive them. And then, I think forgiveness will be another piece that will be real.  

There's active discussions right now to find a way for blanket forgiveness of certain borrowing threshold, that's an agreement that can be reached, obviously there's some concern and worry that there would be fraud underneath that type of structure, but again, the hue and cry for enhancements and slash improvements to small business lending programs are real, and I would expect-- I've seen some draft bills and I think I've spoken to some of the Senate offices that are working on it, and I think we will see expanded small business relief in the next stimulus package by early August. 

Great. Thanks a lot. Moving to the consumer-- and Matt, this one's for you as you're getting your head around a whole lot of data-- we've seen elevated personal savings rates during COVID. And what do you think the eventual use of these funds will be realized?  

Yeah. So just like everything else we've been describing, there's many wild swings around personal income, which also includes a calculation of the savings rate, which does get, I will admit, does get revised away. But even households whose financial situations haven't been disrupted and-- the shut down and stay-at-home orders over the spring definitely reduced the ability to spend, hence the federal support through those stimulus checks. In some cases, it also largely saved. 

You can see this in the savings rate. This question is, which actually spiked from, I think, about 8% before the pandemic to over 30% in April. And I think it came back down into the lower 20s in May, but still high.  

So looking ahead, I'm sure there's likely to be release of some of this pent up demand as reopenings continue. But what I'll also say, with finances severely weakened by, for many households, I think the key to a sustained rebound in spending. And income later this year is definitely going to be continued rehiring. So look for some pent up demand, but I don't think it's the top piece to watch. 

Interesting. All right, thank you. And then, we've all seen our digital activity pick up in terms of how our consumers and businesses are accessing their finances and their money. John, this question's for you. What do you see brick and mortar business activity? Do you see that's changing, specifically in banking, giving our changing behaviors with respect to access to digital?  

Yeah, Betsy. [COUGHS] Yeah, excuse me. I think you're exactly right. I mean, we just had our earnings call today and we talked about the number of digital transactions and the amount of loan closings that we do digitally. Basically, that number, three, four years ago was non-existent. A couple of years ago it was 25%. Now, it's about half of our loans are now closed all digitally. 

So it shows you how this environment is just accelerating everything from a digital standpoint. Not just in banking, but I think across multiple industries. You don't even have to look very far to see how that is taking shape. And so all these things are accelerants to more digital-like activities.  

And I think where it ends up being an impact is really on a couple of things. First of all, real estate, in terms of where people have locations and things like. There certainly will have to be physical location no matter what industry you're in, if you're in a retail-facing industry. But perhaps you need to be more nimble, perhaps it's a smaller square footage and all that sort of thing. So I think it has real estate implications, certainly. 

For example, we're going to be dropping our branch count by over 15% net number. So we're going to be growing in certain areas, then shrinking, probably, more heavily in others. So the account for nimbleness, I think, is important. And I think it also will reduce, in some cases, some additional operational and back office jobs, and businesses will be putting those resources more in sales-oriented roles, would be my guess. So that's fundamentally how the businesses will shift, and we've seen see this pandemic as just an accelerant to those trends that we've been seeing lately.  

Great. That's very helpful. Thank you. I think we have time for one more quick question. And this one's to John. 

The Fed's been very active, as you mentioned. But what does that mean for investment products that commercial businesses utilize, such as commercial paper, T-bills, money markets, those kind of products? What are your thoughts on that?  

Yeah. There's no good answer here. I think Matt said it best, it's, what's the least bad option here? With the Fed being a massive buyer of things and being involved in many markets, you see interest rates go to very low levels. 

And that's no different on credit-like related products, such as commercial paper, and money markets, and all that sort of thing. Those yields are falling very low, and we anticipate will continue to fall low. Short of another recession where credit spreads widen out, or a regained recession, I should say, we just, we don't see it. We see rates continuing to fall, and all investment products are going to be under pressure during this, that lower for longer that we talked about. So that's how I would answer that question, Betsy.  

Great. Thanks. Thanks so much. And I think that really wraps up the questions as well as our time. I think you guys have given us a whole lot to think about and we really appreciate your insights today. I do want to remind the participants that this has been recorded, and you will get a copy or a replay of that recording to your emails. So to the extent you or your colleagues missed the session, feel free to replay it. 

And thank you all, once again, for your participation. I know your time is very valuable, and we hope you got some insights today that you can use in your daily activities. So that concludes our session today, and again, thank you all. Stay well and healthy.  

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July, 2020

Economic, political and policy insights

U.S. Bank leaders discuss outlook for 2020 and early 2021.

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