ELLIOTT D. POLLACK
& Company
FOR IMMEDIATE RELEASE
May 4, 2020
The Monday Morning Quarterback
A quick analysis of important economic data released over the last week
This is what the Founding Fathers were referring to when they called America “13 laboratories”. Except now it’s “50 laboratories”. As the country starts to open back up, (more than 30 states appear to be easing restrictions and others will likely soon do so), we will get to see what works. And this will happen faster (but not fast enough) because of so many different approaches being tried. Have faith in the private sector’s ability to figure what will work best quickly. One thing is for sure: there will be good ideas and bad ideas. The good ideas will win out (unless the government mandates the opposite).
Most states are opening slowly and cautiously. This will result in an economic recovery that is slow and tentative. The shape of the recovery at the present time is unknowable. There are too many factors that are uncertain. But, the game has started. The charts below are from an article by McKinsey and Company from a little over a month ago. These are still valid. But, the chances of a “V” shaped recovery are low at this point. The chances of a “U” shaped recovery also appear to be more limited as time goes by. As George Hammond from the University of Arizona called it, it will more likely be a Nike Swoosh. I think it will be a Swoosh with a lot of bumps and dips along the way. Time will tell.
This will not be easy for most industries. There are supply chain constraints. Many small businesses will not reopen. People may have changed their habits in ways that hurt certain types of businesses (getting on a plane for Europe or going to a crowded resort at any time soon?). People are likely to save more and spend less than pre-COVID-19. There are lots of factors that will come into play. This goes for those who remained employed during the crisis as well as those who were compensated through the CARES Act. The good news is that most, but not all, Americans will be active participants in the recovery as it occurs. While the CARES Act is far from perfect, I hate to think of what things would look like without it. While there will be issues related to the cost of the Act, those issues are not immediate.
For too many, the government either got there too late or the design of the CARES Act didn’t provide the expected safety net. For example, there are about 32-33 million businesses in the U.S. The great majority (like all but 20,000) employ less than 500 people. In fact, 76% have no employees. These are sole proprietorships, independent contractors, consultants and those who freelance for larger companies (like most real estate agents). In addition, of the 7.8 million businesses in the U.S. that have employees, 4.3 million have 4 employees or less. This is where the Act falls down. It is designed for those companies with employees and where those employees make up the largest portion of cost. Yet, the implementation (a very difficult task at best) has been slower than most would have liked. For many businesses, but especially small businesses, revenues have gone to about $0. But, rent, utilities and other non-employee costs continue. Since the Act limits how much of the money paid out can go for non-employee costs, those companies with few or no employees are less likely to survive. My guess is that when the dust settles, 20%-30% of pre-COVID-19 businesses will not reopen.
There are other issues that will continue until a vaccine or drugs to mitigate the Coronavirus materialize. Can a restaurant survive at the low level of capacity that social distancing mandates? The answer is problematic unless you have one heck of a take-out business. How about retail stores? How about the unintended consequences of those laid off due to COVID-19? Many will likely receive more from unemployment than they would get by working. I know of a case where a hotel owner wants to reopen six hotels but can’t find enough employees that will come back to work because it would mean a pay cut for them.
The bottom line is that we are at the very beginning of a long haul. Don’t expect miracles. But, the economy will recover. It will not recover in a straight line. It will not be very rapidly and not without setbacks. But, at least the game has restarted.
As for last week’s data, more is relevant to the post-COVID-19 world. While initial claims for unemployment insurance declined somewhat, it was still very high. The layoff number is now at least 30 million and climbing. Real GDP in the first quarter fell at a surprisingly large rate when you consider that 10 or 11 of the 13 weeks in the quarter were pre-shutdown. Consumer confidence in April fell significantly. The April ISM manufacturing data shows a manufacturing recession. And pending home sales fell in March. In Arizona, initial claims for unemployment insurance also declined but were still more than 16 times year earlier levels. All of this should have been expected.
U.S. Snapshot:
• Initial claims for unemployment insurance were 3,839,000 for the week of April 25. While this is down 603,000 from the week of April 18, it is still 1,569% (that’s right-16 times) above a year ago. This brings the total initial claims in the six weeks since the Coronavirus pandemic started to over 30 million. There is no end in sight. At this point, 12.4% of the U.S. workforce is covered by unemployment insurance. Once all the claims are approved, the number will be considerably higher.
• Real GDP for the 1st quarter of 2020 fell by 4.8% at an annual rate. This occurred even though more than the thirteen weeks in the quarter were before the stay at home and business closure mandates were issued. This suggests that the 2nd quarter will be far worse. The weakness was widespread across segments. Consumer spending, business investment, exports and inventories contributed to the decline while residential investment, government spending and imports were partial offsets. Real disposable income growth fell from 1.6% to 0.5%. The savings rate rose to 9.6% from 7.6%. The recession we are now in began in March. It will be severe and is entirely a result of the necessary attempt by government to control the Coronavirus pandemic.
• The major takeaway from the Federal Open Market Committee’s post-meeting statement is that policymakers believe COVID-19 now poses significant risk to the economic outlook over the medium term. This is different from the March statement that focused on the near term implications. The Fed anticipates keeping rock-bottom rates until the economy weathers COVID-19. This goal is a bit fuzzy other than it suggest that the Fed will do everything it can to support the economy.
• The Conference Board consumer confidence index fell sharply from 118.8 in March to 86.9 in April. In April 2019, the index stood at 129.2. The present conditions index fell from 166.7 in March to 76.4 in April. This is the largest drop on record. The Expectations index actually rose from 86.8 in March to 93.8 in April.
• The ISM’s manufacturing index fell to 41.5 in April from 49.1 in March. A year ago, the index stood at 53.4. Any reading below 50 suggests that the manufacturing sector is in a recession.
• The NAR pending home sales index fell in March to 88.2 from 111.4 in February and 105.4 a year ago. The reading was taken after the coronavirus induced shutdown began.
Arizona Snapshot:
• Initial claims for unemployment insurance increased by 52,581 for the week of April 25th. While this was down from the 72,457 the previous week, it was still up 891% from a year ago. Since March 21st, 474,285 people have filed initial claims. This represents 15.8% of those employed in March and suggests that the unemployment rate for the state is now in the high teens.
• Even though operations at Sky Harbor International Airport in Phoenix were not impacted until later in March, enplanements were down 46.3% for the month compared to a year ago and deplanements were down 47.7% over the same period. This will look good compared to the April figures.
About EDPCo
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.
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Elliott D. Pollack & Company
5111 N. Scottsdale Rd, Suite 202,
Scottsdale, AZ 85250
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