Pollack: Yo-yo cycle

& Company

September 14, 2020

The Monday Morning Quarterback
A quick analysis of important economic data released over the last week

As we discussed a few weeks ago, the general pattern of COVID-19 and its effect on an economy appears to be similar around the world:
Reported COVID-19 infections escalate in an area.

That results in a closure of parts of the economy where the experience involves crowds.

That results in a decline in the number of newly reported cases over the following weeks.

Due to better numbers, the economy reopens, at least in part.

People, especially younger adults, start to act as if COVID-19 is not a part of today’s reality anymore. Because of this, the infection rate rises and cases in that area again escalate.

As a result, parts of the economy must close down again.
And the yo-yo cycle continues.

Some places are successful for a while. Some will hopefully be successful on a long-term basis. Some seem to be on the right track after a tough lesson. Arizona, at present, is one of those places that seems to be on the right track. All of the state’s major COVID metrics have been trending in the right direction over the last two months.

As can be seen by what is happening on college campuses around the country, at many schools, even those with few live classes (while the students are back at college, they largely have remote classes) this pattern is being repeated. The result has been a spike in cases in certain areas. Hopefully, this can be brought under control quickly. Fortunately, most students who recently contracted COVID will soon recover. As to whether they spread the disease to their parents or grandparents remains to be seen. But, when you combine this with the beginning of the annual flu season, it has the makings of some dicey reporting in what is also a politically charged period.

Many may likely confuse COVID-19 with the regular flu. This could put pressure on hospitals and doctors offices. It could get messy. To avoid this will require good testing and common sense. Let’s see what happens.

Last week’s economic data suggests that the third quarter will be significantly better than the 2nd quarter. The Blue Chip panelists are saying they expect a 24.0% (at an annual rate) gain in the 3rd quarter. But, much of that results from gains in May and June rather than strength in the summer. The consensus forecast suggests that there were weaker conditions in August and September due to the end of the CARES Act. Had congress not left millions of workers hanging while they played politics with workers’ financial futures, the results would have been better. Overall, the latest U.S. GDP estimates point to a slowdown in the rate of growth after a big 3rd quarter gain.

Most of the effect will be on consumer spending. Even with large support programs the economy is likely to be hampered by COVID-19 in ways that are counter intuitive. While spending on goods has rebounded sharply (inflation adjusted goods spending is now 6.8% above pre-COVID levels) that spending represents only about one-third of consumer spending and a little over 20% of GDP. Spending on services (this accounts for two-thirds of consumer spending and 45% of GDP) is still 10% below pre-COVID levels. Hopefully, this will change and services spending will reengage as the service sectors of the economy reopen. But, as with anything with crowds at present, it will take a vaccine and therapeutics to get service spending back to normal.

As for other economic news, initial claims for unemployment showed little improvement. The Blue Chip believes that real GDP will decline by 4.6% this year and grow by 3.8% next year. The number of job openings shot up in July to 6.6 million. Consumer prices remain low. Revolving credit (think credit cards) continues to decline while non-revolving credit (think auto and other durables debt) continues to grow. And mortgage applications were up.

In Arizona, initial claims for unemployment insurance fell slightly. And the housing market continued to expand as August single family permits were up over 14% from a year ago.

U.S. Snapshot:
Initial claims for unemployment insurance were flat last week. Expectations were for a 40,000 person fall in the numbers. There may be technical reasons for the lack of a decline. But, it seems like we’ve reached a temporary slowing in terms of putting people back to work, at least for a while. Is this now a structural issue? Is there a disconnect between what/where the jobs are versus where the employees are or their training? Perhaps. Stay tuned in.

The latest Blue Chip Economic Forecast suggests that real GDP will grow rapidly in the third quarter. It would have grown more rapidly than it will in the 4th quarter were it not for the lack of a follow up to the Cares Act. The group sees 2020 real GDP declining by 4.6% and 2021 real GDP growing by 3.8%. It’s tough to forecast when you don’t know when a vaccine and therapeutic will show up. It would be a game changer if it is widely accepted by the public.

The number of job openings shot up in July as the labor market came back to life following the original shutdown. In July, there were 6.6 million unfilled jobs. That compares to 6.0 million in June and 7.2 million a year ago. Hiring fell to 5.8 million in July from 7.0 in June and 6.0 a year ago.
Consumer prices rose by 0.4% in August compared to July. They now stand 1.3% above a year ago. The base rate of inflation (consumer prices less volatile food and energy) was also up 0.4% for the month and 1.7% above a year ago.
Consumer credit showed encouraging signs in July after taking some big hits during the worst months of Covid-19. It still remains well below February levels. Revolving credit (credit cards) posted another decline but it was very modest. Nonrevolving credit (autos and student loans) bounced back and are likely to continue to grow. Overall, consumer credit was up 0.3% for the month and was up 0.7% from a year ago.

Arizona Snapshot:
Initial claims for unemployment insurance was down very slightly and are now 240% above a year ago vs. nationally which is up 325% from a year ago. Nationally, the total number of initial claims since mid-March equals about 39.8% of March employment. In Arizona, initial claims represent 30.2% of mid-March employment.

According to the Home Builders Association of Central Arizona, Greater Phoenix housing permits were up 14.4% in August to 2,544 units. This compares to 2,224 permits in August 2019.

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.

For more information, contact –

Elliott D. Pollack & Company
5111 N. Scottsdale Rd, Suite 202,
Scottsdale, AZ 85250

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September 2020