Elliot D. Pollack & Company

March 2, 2020  

The Monday Morning Quarantine! 

A quick analysis of important economic data released over the last week.

CORONAVIRUS: Let’s put this in perspective.  Some say it’s the classic definition of a Black Swan event. The “unknown unknown”.  It is an extremely rare and unpredictable event with severe impact that cannot be predicted beforehand though after the fact many will claim it should have been.  Such an event can cause significant damage to the economy.  In this case, it could be a game changer, at least in the short term. On the other hand, while the Coronavirus is a terrible thing and may cause significant damage, most of the effects are likely to remain short term from an economic standpoint. How many people will be affected remains to be seen. Most will recover.  Some, unfortunately, will not.  Yet, it is not comparable to history’s devastating pandemics like the Black Death. 

It could cause significant dislocations in the short term, but, the CDC and others have the virus’s DNA and will likely be able to get it under control sooner rather than later. There will be effects.  Fewer people could go to stores, theatres, sporting events, concerts, travel by air, etc. There could be significant short term disruptions to the global supply chain as quarantined workers in China are prevented from returning to assembly lines thus depressing the supply of goods that go into other goods that, therefore, can’t be supplied. The reality is that we just don’t know the extent of such an effect because we don’t know exactly what products might be affected or the extent to which there are redundant supply chains. Certain goods will become unavailable or in short supply until the closed factories reopen.  It could get worse if the virus spreads in the U.S. But, will likely be temporary.  This flu season will end.  And, most likely, we will be better prepared by next flu season.  

Economically, we have a conundrum.  Incomes continue to rise in real terms.  Employment continues to grow as well. Consumer confidence, at least through current readings, remains very high.  Obviously, these things could change quickly.  But, the usual signs of recession are simply not here at the present time.  The FED will do its usual thing.  Lower rates and more quantitative easing are in store.  Yet, the FED can’t fix a broken supply chain or calm concerns about health and safety.  It can, though, ensure that liquidity conditions remain supportive so that companies can get necessary funding to weather the storm. So, my take is that while things could get worse temporarily, those TV pundits out there spreading paranoia for ratings will look more like Chicken Little than the Oracle of Delphi.  Yes, there will be dislocations economically.  Yes, this will definitely have economic effects.  Yes, there could be a mild recession.  But, it will not be caused by normal weaknesses in the economy.  If it does occur, it will likely be short and shallow.  This alone could justify the violent reaction of the stock market.  While nothing is certain in the current environment, the best bet is that most of the disruption will be temporary.  This is not the time to panic.  

U.S. Snapshot: Please note that most of the following data was collected before the Coronavirus became recognized as a significant factor internationally.  I am publishing this to show just how good the economy looked when the data was collected.  The only significant data collected last week was related to interest rates and the likely reaction of the FED to the virus. Now that the Coronavirus is spreading outside of China at a more rapid rate, investors have become concerned that a large cut in global GDP could occur.  While this has more to do with supply chain problems than anything else, GDP will also be affected by changes in consumer behavior.  The concern has been lower interest rates and a slightly inverted yield curve. In fact, the 10-year treasury bond sold to yield 1.25, the lowest rate on record.  The good news is that viruses don’t do well in hot weather and summer is fast approaching. Both major measures of consumer confidence were up.

The Conference Board Consumer Confidence index rose to 130.7 in February.  That was up from 130.4 in January and down slightly from 131.4 a year ago.  While the current conditions part of the reading fell modestly, the expectations component was up enough to offset the decline.  The University of Michigan Consumer Sentiment Index rose to 101.0 in February.  That was up from 99.8 in January and 93.8 a year ago. Personal income rose 0.6% in January and stood 4.0% above year earlier levels.  This was a good performance. Disposable personal income also rose 4.0% over year earlier levels and 0.6% over December levels.  Personal consumption expenditures rose 0.2% for the month and 4.5% over a year ago.  As a result, savings rates rose to 7.9% from 7.5% in December. New home sales soared 7.9% to the highest level since July 2007.  This level is 18.6% above a year ago. While the level was high in part because of the warmer than usual winter weather in many parts of the country, it is still good news.  Inventory levels remain low.  Thus, the outlook remains favorable. The NAR pending home sales index jumped to 108.8 in January.  That’s up from 103.4 in December and 102.9 a year ago. Real GDP in the 4th quarter rose at an annual rate of 2.1%.  This was in line with expectations.  It won’t take much damage created by the Coronavirus to push things negative in the 1st quarter of 2020.

Arizona Snapshot: Lodging performance in the state continued to do well in January. Occupancy rose to 66.2% from 60.1% in December and 65.7% a year ago.  Demand was up 2.4% from a year ago while supply was up 1.8%. According to the S&P/Case-Shiller home price index, housing prices in Greater Phoenix rose 0.6% in December when compared to November and were up 6.5% from a year ago.  Again, this is a reflection of a significant imbalance between supply and demand.  Housing remains in short supply.

Elliott D. Pollack & Company (EDPCo) offers a broad range of economic and real estate consulting services backed by one of the most comprehensive databases found in the nation. This information makes it possible for the firm to conduct economic forecasting, develop economic impact studies and prepare demographic analyses and forecasts. Econometric modeling and economic development analysis and planning are also part of our capabilities. EDPCo staff includes professionals with backgrounds in economics, urban planning, financial analysis, real estate development and government. These professionals serve a broad client base of both public and private sector entities that range from school districts and utility companies to law firms and real estate developers.  

For more information, contact – Elliott D. Pollack & company
7505 East Sixth Avenue, Suite 100
Scottsdale, Arizona 85251

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