Common Cents & Broken Records on November 20, 2020

If you are of a certain age, you are probably familiar with the expression: “sound like a broken record.” When an audio record (be it glass, plastic, or vinyl) had a significant scratch or crack in it, the needle on the phonograph would get stuck, pushed back a little, and then stuck again. As a result, a broken record would play the same snippet of a song over and again until you put the needle past the imperfection. Voila.

As a result, if you say the same thing over and again, you sound like a broken record. There is my little history for today for anyone under, say, 35 years of age reading this. This is important because I am going to sound (or write) like a broken record today, and I apologize for it in advance.

This week, I had the occasion(s) to make several brief commentaries on the economy to different groups. The message was, and is, pretty clear: the necessary ingredients for economic growth are in place. Period. Energy prices are low, and that has always been good for the consumer driven US economy. Interest rates are also very low, which, intuitively, should be good for the average US consumer. While net interest margins have been squeezed in 2020, the yield curve is still positively sloped. This means banks can borrow money from depositors for less than where they can lend it out. While bankers might bemoan lower spreads, there are still spreads to be had. As a result, there is plenty of liquidity in the US financial system.

I won’t bore you with every detail and every economic report. So, let me leave you with this: the biggest threat to the US economy, as I type this and it isn’t even close, is government-mandated economic lockdowns. End of discussion. Unfortunately, due to the interconnected nature of the national economy, what happens in, say, California or New York doesn’t necessarily stay there. A sharp downturn in economic activity in our more populous and prosperous states has a ripple effect, or domino if you like.

What is the old expression? When the US sneezes, the rest of the world catches a cold? Well, you could arguably say the same thing about California in relation to the rest of the country, as it makes up a little less than 15% of the US economy. Maybe you could say the same thing about Texas and New York too, each a little over 8%. Combined, those 3 states alone represent over 30% of US GDP and over 26% of the country’s population.

So, if and when Governors Newsom, Cuomo, and Abbott issue ‘stay at home’ orders or target certain industries for closure in an effort to beat back the COVID19 virus in their respective states, it is highly probable folks in Peoria and Des Moines will eventually feel it. With that said, it doesn’t seem as though Gov. Abbott in Texas is as trigger-happy with ‘locking things down’ as the other two. As an aside, I honestly don’t see how the citizens in California and New York can tolerate the willful dislocation of their economies.

To that end, yesterday, the Department of Labor issued the weekly ‘Initial Jobless Claims’ report. It does so every Thursday, except for Federal holidays, just a quick FYI. The release showed 743,460 Americans filed an initial jobless claim for the week ending on November 14th, not seasonally adjusted. Of those, 158,989 were in California and another 43,299 in New York. Combined, that is 202,288 initial claims in those two states, or 27.2% of the total. However, their combined populations are only 17.8% of the nation’s total (including territories…which are included in the claims report as well).

If you are keeping score at home, you will notice the numbers in California really skew the averages, as it represented 21.4% of claims despite being 12% the population. For its part, New York was around 5.8% and is around 5.8%, right on the screws. However, when you take out the outlier on the West Coast, New York’s numbers increase to 7.4% of claims relative to being 6.7% of the adjusted population.

Then there are ‘continuing claims.’ Last week, 23.3% of the country’s ‘continuing claims’ were from California, and 7.4% were from the Empire State. Here we have two of the biggest, most vibrant and dynamic economies in the world, not just in the United States, and their unemployment claims are worse than the national average. It doesn’t seem fair to the workers in those states, at least it doesn’t to me.

Conversely, here in Alabama, little old, poor Alabama, we accounted for 1.2% of last week’s ‘initial claims’ and, get this one, only 0.40% of ‘continuing claims.’ That isn’t too, too bad since 1.5% of Americans call the Yellowhammer State home. So, let me be the first from Alabama to say: “You are welcome Gov. Newsom.” Bwahahaha.

Until we get a widely distributed vaccine, which will put an end to them, government-mandated economic lockdowns are THE biggest near-term threat to the US economy. It isn’t liquidity. It isn’t bank capital. It isn’t the yield curve. It isn’t interest rates. It isn’t energy prices. Nope, none of the usual suspects are culpable here…just the politicians.

So, let me close with a couple of thoughts. First, I don’t believe these politicians are out to destroy their economies, at all. In fact, I believe they have good intentions to slow the spread of COVID19 in there respective states. Now, what was that expression my father taught me” The road to where is paved with what exactly? Second, I have long maintained politicians get too much credit for the good times and too much blame for the bad. I might have to quit saying that IF our nation’s politicians decide to lock down the US economy again like it did during the 2nd Quarter. Let’s hope they don’t.

But there I go again, sounding like a broken record.


Have a great weekend

John Norris

Chief Economist


As always, every opinion expressed herein is mine and mine alone, and can change at any time without warning. Also, nothing in here should be construed as an offer to buy, sell, or otherwise provide financial services of any type.