Before we address our dire economic status we need to mourn the terrible toll caused by the coronavirus pandemic. More than 1 million Americans have tested positive and 60,000 have died. During the Civil War, President Abraham Lincoln established Thanksgiving. Our current calamity deserves another national holiday.
The coronavirus pandemic triggered a major decline of our gross domestic product, the broadest measure of goods and services in the economy. The GDP fell at a 4.8% annual rate in the first quarter of 2020, ending the longest economic expansion on record. We can expect much worse. Economists predict the GDP to decline at an annual rate of 30 percent in the second quarter. Such a decline would be reminiscent of the 1930’s Great Depression’s travails.
About 3.8 million Americans filed for jobless benefits last week. More than 30 million people have filed for unemployment claims in the last six weeks.
In response, Fed Chairman Jerome Powell promised to use “its full range of tools to support the U.S. economy in this challenging time.” The Fed could pump at least $6 trillion into our economy by the end of the year. Our economy will require additional spending from Congress and the Fed to ensure a robust recovery. Powell does not believe this is the time to be concerned about the national debt. Instead, he said: “This is the time to use the great fiscal power of the United States to get through this with as little damage to the longer-run productive capacity of the economy as possible.” He called it “heartbreaking” to witness millions of job losses.
To date, Congress and President Trump have created aid packages of more than $2.6 trillion in the last two months. Economists believe that until we develop a vaccine for COVID-19, such expenditures could only mitigate the coronavirus’s economic devastation. We need to be mindful that America did not recover from the Great Recession for three years and the Great Depression for a decade.
Misery’s plate is full. Its cup runneth over. Schools, factories, shopping centers and churches have closed. Both imports and exports have declined sharply. Business spending on software, research, and equipment fell at an 8.6% annual rate.
Europe’s economy in the first quarter declined even more than the U.S. Christine Lagarde, president of the European Central Bank, said: “The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime.” Europe’s contraction augurs more economic pain for America.
More companies have suspended or canceled their dividends than at any time since 2001. David Lafferty, chief market strategist at Natixis Investment Managers, said: “We are going to see a massive pullback among companies attempting to hoard capital or bowing to political pressure.”
The boards of directors of companies face a dilemma. On the one hand, dividends are a way for companies to reward their shareholders and signal their resilience to the investment community. On the other hand, companies such as Exxon and Chevron have outlined plans to reduce investment spending in order to keep their dividends. Capital investment reflects confidence in the future and improves their long-term business prospects by improving their existing productive capacity.
Dividend aristocrats, companies that have even increased their dividends for at least 25 years, have resiliency. We need to take off our hat to Procter and Gamble and Johnson & Johnson, which have increased their dividend for more than 50 years.
President Lincoln recognized the immense suffering caused by the Civil War. He specifically mentioned the widows and orphans, mourners and the injured. Nevertheless, he felt that it was important to be thankful for what we have and thankful for living in America.
Sarasota resident Ernest "Doc" Werlin spent 35 years in fixed income as a trader and corporate bond salesman, including time as a partner at Morgan Stanley in charge of corporate bond trading. Send suggestions and comments to firstname.lastname@example.org. Read past columns at heraldtribune.com/business/columns.