Details Matter

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As I write this column, the country is in the middle of the COVID-19 crisis, with almost 900,000 cases and over 49,000 deaths in the US to date. SARS-CoV-2, the virus that causes Coronavirus (COVID-19) has wreaked havoc from a national health perspective, as well as an economic perspective. But before I discuss the economic crisis, allow me to share background details of the virus itself.

Viruses, and the diseases they cause, often have different names. For example, HIV is the virus that causes AIDS. People often know the name of a disease, but not the name of the virus that causes it. Viruses are named based on their genetic structure to facilitate the development of diagnostic tests, vaccines, and medicines. Diseases are named to enable discussion on disease prevention, spread, transmissibility, severity, and treatment. In this case, the novel (new) coronavirus disease, which is spread via the SARS-CoV-2 virus, has been named “coronavirus disease 2019” which is abbreviated “COVID-19”.

Why do I spend my opening paragraph discussing these nuanced details of COVID-19? Because details matter and there are those in the country right now that gloss over details, attempting to paint a picture of the reality they want the rest of America to believe. It behooves us then to “know enough to know the difference” as you have heard me say before, and this is the premise upon which I provide this month’s economic update – details matter because the truth is in the details.

Economic data from the early stages of the Great Shutdown finally arrived this week, and they are as bad as I feared. ‘Worst on record’ is about to become an all-too-common refrain in my commentary. Retail sales plunged 8.7% in March, as a 26% surge in grocery store sales (stockpiling of essential foods and toiletries that will not be repeated) was drowned out by historic declines in both durable and nondurable discretionary spending. However, even this understates the decline in personal consumption, as retail sales don’t include hotel stays, airline or movie ticket sales, all of which fell to near zero by the middle of the month. This end of the quarter drop-off in activity means Q1 GDP growth will likely be mildly negative, but Q2 GDP will be a disaster—which I expect to decline by 20-25%, or possibly more. My estimates for the remainder of the year is that GDP will be increasing in Q3 and Q4 but will not quite make up for the entire Q2 decline.

The downside risk to my GDP estimate is if layoffs continue to exceed expectations. In the past five weeks, over 26 million people (nearly 15% of the U.S. workforce) have filed for unemployment insurance. Thankfully, layoffs in directly affected industries have likely already peaked—a business can’t close twice, for example—but they will likely be picking up in non-directly affected industries as firms come to terms with the extent of the hit to aggregate demand and cut back on expansion plans. And while it is true services are being hit harder, manufacturing is getting pummeled. Industrial production fell over 5% in March, which is the most since the United States demobilized after the Second World War. Meanwhile, the New York and Philly Fed indices point to the ISM manufacturing index falling to between 30 and 35 (a score below 50 generally means we’re in recession). Even housing starts fell 22%, despite a lot of activity in the first half of the month, causing homebuilder confidence to post its largest one-month drop ever.

If there was any juice in the housing market in early March, it dried up by month’s end. Home sales had strong momentum headed into March. In the three months through February, single-family existing (about 90% of total) and total new home sales showed their strongest pace since late 2006. But, when stay-at-home orders began in the middle of March, prospective buyers withdrew from the market even earlier amid the selloff in equity markets and to adhere to initial social-distancing guidelines. There are anecdotal reports from all over the country of sellers canceling open houses and buyers walking away from closings. The housing market is not at the center of the current economic storm, but the current environment certainly limits demand prospects; after all it is hard to visit a future home from the confines of your existing one. Home sales will fall as demand remains anemic for quite some time, which is unwelcome news since the green industry is correlated heavily to the housing sector.

Now there are early talks of loosening the “shelter in place” restrictions in certain parts of the country. The key question on restarting the economy is what will be the shape of the recovery curve? That is, will it be a V, U, or L-shaped recovery? Many are hoping for a v-shaped recovery. Essentially that assumes that when the shelter-in-place rules are lifted, the customers will return immediately, and employees are ready and able to provide the products and services customers need.

For most companies, however, it will take some time for customers to return and for business to be back to normal. Businesses that were open during shelter-in-place will have an advantage as they were already in operational mode. For others, it will take some time to return employees to work who have been furloughed and restart facilities which had been shut down. Customers may have also shifted priorities so will come back more slowly. Thus, a slower U-shaped recovery is more realistic for most companies. For some sectors, the recovery will even more of an L-shaped curve. For those sectors, not only has business dropped off, but it’s unclear if it will ever recover (e.g. cruise lines).

The green industry, while impacted greatly, will likely see a U-shaped recovery. Of course, a lot depends on how effectively we start opening things back up. If we do it right (with plenty of tests and tracing capabilities in place), then I would anticipate positive economic growth during the second half of 2020. If we don’t, then we’re in for second wave of COVID-19, accompanied by additional stress on the economy, and the need for additional relief packages. I will address this in more detail in future columns.

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