The Monday Morning Quarterback
A quick analysis of important economic data released over the last week
We might only be in the 5th inning with respect to the COVID-19 battle. And we might be facing some very tough innings before it’s over. But, given what’s occurred in the last few weeks, we now know how the game will likely end and also about when it will too. It’s no longer reasonable to think of this being an extra inning game where a vaccine with low efficacy forces us to wait for herd immunity along with better therapeutics and better testing to try a project when this might end. We now know that this will end soon—-probably by the third quarter of 2021. We also now know that the efficacy rate of the vaccines that should shortly be approved is an unbelievable 90+%. We now know that Operation Warp Speed has far exceeded expectations. We now know that 75 million Americans are likely to be vaccinated with both doses of the vaccine by the end March and that by the third quarter most Americans who want the shots will be able to get them. Herd immunity or something similar will occur. There are still questions. But, unless there is a major screw up, the end is in sight.
For the economy, this is huge. It creates a timeline as to when the economy can start on the road back to normalcy. It also means that as tough as the next seven or eight months might be, those months will be an aberration. So, while the fourth quarter of 2020 will be weak as measured by real GDP and while the first quarter might also be down due to the re-shutdown of the parts of the economy, things will bounce back quickly after that.
By spring, shutdowns could be a thing of the past. As the economy reopens, people will spend money because their savings rate has been so high. They will spend because most of those unemployed due to COVID-19 will be able to regain employment. They will spend because a follow-up to the CARES Act seems highly likely and will help those buried in debt due to being laid off regain solvency. They will spend because an infrastructure rebuilding program is likely to pass congress. And given the large gap between potential GDP and actual GDP, the stage is set for rapid economic grow that will be very strong (probably in the third and fourth quarters) and will be followed by not quite as strong but still above normal growth at least through 2023.
This, by the way, was destined to occur no matter who was elected President. The difference will be seen in regulatory policy and higher taxes that will affect incentives and costs. But, in the near term, growth will only be marginally slower. In addition, if Janet Yellen is confirmed as treasury secretary, there will likely be an unusual period of cooperation between the Fed and the Treasury. This, candidly, means that short term rates are likely to stay low for a long, long time. This will result in a lower cost of debt for the treasury. Given the platform of the Democratic party, you can expect a larger deficit and more deficit financing. The Federal check book will know few limits. At some point we will pay the piper for this. But, not now.
What you should be focused on is how to survive over the next two quarters and how to best meet the huge pent up demand that we will face once most (probably 60%-75%) of Americans get vaccinated. And it is also everyone’s job to keep being vigilant between now and then in terms of your own safety so you are here to enjoy what will most assuredly be a great recovery and continued expansion.
Also look for some plan to aid small, medium and even some large businesses that got into trouble due to COVID-19 necessitated shutdowns. It is estimated that about one-third of small businesses will not survive COVID-19. The good news is that the entrepreneurial drive of many Americans will most assuredly result in a surge of new small businesses over the first 2 years after COVID is brought under control.
So, again, ignore the news about the poor economy over the next couple of quarters. It is unavoidable and transitory. Focus on the period that will follow. Indeed, nationally we have already recovered almost 55% of the jobs lost due to government mandated shutdowns. In Arizona, we have recovered almost two-thirds of those jobs. And that has occurred even though hotel occupancy is down 21.6% from a year ago, air travel is down 54.3%, trips to retail and recreation is down 18.6%, and seated diners are down 34.4% over the last year. Keep in mind that virtually all of those indicators will return or exceed February levels very quickly once vaccinations are available for enough Americans.
In that regard, while priorities might change, it is presently expected that the vaccines will be given to the following groups in the following order:
- 21 million health care workers
- 87 million essential workers
- 100 million adults with high risk medical conditions
- 53 million others who are 65 and older
- 69 million covering everyone else
So, before I get into last week’s news, I have one suggestion for you. Ignore it. And ignore most of the data over the next several months. It doesn’t matter much. Turn off CNN. Turn off Fox. Turn off MSNBC. Don’t get your news from Facebook or Twitter. At least for now. Focus on this episode of history coming to an end. Be careful. Avoid crowds. Wear a mask. Social distance Wash your hands. And get inoculated when you can.
Despite last week being a short business week, there was lots of data. Initial claims for unemployment insurance rose as expected. Given that some states are extending shutdowns, more people will be filing. Third quarter real GDP rose at record levels after declining at record levels in the second quarter. Personal income was down for the month but well up from a year ago mainly due to the CARES Act. The personal savings rate remains well above normal. All measures of consumer confidence fell. New home sales remained strong. And home prices continued to rise at a rapid rate.
In Arizona, hotel occupancy remained well below year earlier levels. In Greater Phoenix, home prices were up more than 11% from a year ago.
U.S. Snapshot:
- Initial claims for unemployment insurance rose 30,000 to 778,000 claims for the week ending November 21st. Given the surge in COVID-19 cases throughout most of the country, labor markets will likely continue to weaken. Thus, expect initial claims to continue to rise. As we approach year end, risks are mounting that millions of unemployed workers will lose access to their UI benefits. Both the PUA and PEUC programs are set to expire at the end of the year. About 13 million workers are still receiving benefits under those programs. Most, but not all, receiving those benefits will lose them unless the federal government and state governments act soon.
- The pandemic has created unprecedented volatility in real GDP. The record-shattering 31.4% decline (annual rate) in the second quarter was followed by a record-breaking 33.1% gain in the third quarter. That gain reversed 75% of the prior decline and was unrevised from initial reports. Look for continued volatility. Just not quite as much volatility. Also keep in mind that this “recession” is not a real recession. It is the shutdown of an economic expansion by the government due to forces beyond anyone’s control. This will end soon.
- Personal income contracted in October. It fell 0.7% from September but remains 5.5% above year ago levels. Declining transfer payments, especially unemployment benefits, were the major reason for the decline. Disposable personal income also declined modestly from September (-0.8%). It is up 6.2% from a year ago. Personal consumption expenditures were up 0.5% from September and down 0.6% from a year ago. The personal savings rate was down slightly from 14.6% in September to 13.6%. This is still well above the 7.2% rate of a year ago.
- Both major measures of consumer confidence fell in November. The Conference Board’s consumer confidence index fell more than expected from a revised 101.4 in October to 96.1 in November. The University of Michigan consumer sentiment index fell from 81.8 to 76.9 over the same period. Consumer confidence is under pressure from the resurgence in COVID-19 cases and the resulting pauses and reversals of reopenings.
- NAHB’s Housing Market Index reached a record high level of 90. This is up from 85 in October and 71 from a year ago.
- New home sales, while down modestly from 1,002,000 million annualized units in September to 999,000 in October, remain at a very high plateau. The housing market remains strong as sales and starts have been trending higher. The minor decline in October new home sales is not concerning particularly given the noticeable upward revisions to sales in September.
Arizona Snapshot:
- Statewide lodging performance in Arizona showed stronger occupancy in October. Occupancy was up to 55.4%. In September, it was 51.5%. Even so, this is down 21.9% from the year earlier occupancy rate of 70.7%.
- According to the S&P/Case-Shiller Home Price Index, home prices in Greater Phoenix were up 11.4% in September compared to a year ago. They were up 1.9% from August. This is a result of the massive supply/demand imbalance in housing. This problem is not likely to be resolved quickly.
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.
