With soft patches in economic data, which is very normal in any recovery, there is additional concern over rising COVID cases accompanied by hope of a new stimulus package due any day now. There’s a lot to unpack so far this week, so let’s get to it…
Soft Patches in Economic Data, but Fundamentals Holding Steady. Sometimes it’s hard to see things when you’re in the heat of the moment (or, pandemic in this case). Throughout history, we have seen soft patches in economic data that do not turn out to be anything more than just that – a temporary “soft” patch. If we look back at 2011, we experienced this after we had already emerged from the 2008 Financial Crisis a year and a half earlier. In the months of June, July, & August of 2011 all of the following economic data points had worsened on a month-over-month basis:
GDP (0.9 in July ’11 vs 1.7 in April ’11)
Wages (+1.9% in Aug ’11 vs +2.3% in July ’11)
Unemployment (9.1% in June ’11 vs 9.0 in May ’11)
Housing Starts (585k units in Aug ’11 vs 623k units in July ’11)
Consumer Sentiment (55.8 in Aug ’11 vs 63.7 in July ’11)
National Financial Conditions Index (0.05 in Aug ’11 vs -0.33 in July ’11)
S&P 500 Index (-20% from 07/22/11 to 08/08/11)
Right now what we have is certain states not managing their situation effectively and it’s causing the national statistics to decline. For example, the Markit Manufacturing PMI Index (preliminary) showed a flat result (56.5) versus last month (56.7). It was better than expected, but when we compare that to the Philly Fed Manufacturing Index, it was down considerably (11.1 for Dec vs 26.3 in Nov) - Pennsylvania being one of those states that has implemented draconian lockdowns. Today, Weekly Jobless Claims were much higher than expected and last week’s number was revised higher (885k claims vs 862 claims last week). Yet, 35 states showed a decline in claims, but two states on lockdown – CA & IL – both had outsized increases in claims. The Empire State Index, another state (NY) on lockdown, showed a decline to 4.9 in Dec from 6.9 in Nov. A lot is being made of consumers not spending money on holiday items, and the numbers so far are indeed disappointing. While the final numbers on holiday sales won’t be known for a few more weeks, what is apparent is that consumers are being very responsible during the pandemic. According to S&P/Experian, consumer credit defaults are down to 0.46% from 0.94% at this same time last year. In addition, defaults on 1st mortgages, bank cards, and auto loans are all lower this year than this same time last year. Meanwhile, the Housing market continues to be resilient. Building Permits and Housing Starts each exceeded expectations and were higher than the pervious month. Despite the soft economic data, the National Financial Conditions Index continued to improve last week and is at the lowest point since before the pandemic.
Where are We on the Virus/Vaccines/Stimulus? First, it would appear that Congress is close to reaching an agreement on COVID stimulus. The two main sticking points have been removed and both sides have said they are close to a resolution. However, both sides have stated that negotiations could go into the weekend. Our argument is that another round of stimulus is not necessary, rather, re-opening all states for full business (more on that later) is the answer. That being said, it looks like a stimulus package is imminent, with individual stimulus checks going to individuals in the amount of $600-700. Second, the Moderna vaccine was approved by the FDA’s independent panel and looks to be on the same track as Pfizer one week prior. Distribution of Moderna’s vaccine looks to initially be as many as 6 million doses, starting on Monday. So far, 5.9 million doses of Pfizer’s vaccine have been distributed around the U.S. this week. The U.S. has an agreement to receive another 20 million doses of Pfizer’s vaccine each month through March 31st. Third, the country's response to the virus has to be targeted and rational – not causing the destruction of people’s livelihoods. Obviously, every death or case is someone’s loved one. However, policies have to be developed for the good of all 330 million U.S. citizens. Lockdowns are affecting our economy (see previous comments) and have not proven effective against the virus. The following charts show GA vs. CA and FL vs. NY. What's the point? FL & GA are not on lockdown, while CA & NY are. You’ll notice the increase in cases & hospitalizations, on a percentage basis, are nearly identical. By the way, CA is now leading the nation in new COVID cases with the strictest lockdown requirements.
If you recall my comments above, the states on lockdown are causing the economic data to come in with soft patches. Yet, if these states would just open up, it would cause GDP to skyrocket and the need for stimulus to be eliminated. The 9 states on lockdown make up 39% of U.S. GDP, worth more than $7 trillion in goods & services. Getting these states back on line will repair the “soft” patch in no time!
The silver lining is three-fold: a) Vaccines will help reduce the number of cases – how long will that take, no one has the answer, but vaccines have proven throughout history to be effective; b) People are tired of lockdowns and the surveys & data show as much – Apple Mobility Data shows that Driving activity is inching back up (transit & walking data has similar trends); c) The tide appears to have turned in the Midwest, which was a region that initially led the 3rd spike in COVID cases, as the Thanksgiving holiday does not appear to have caused more daily cases in the Midwest 3 weeks later and the 7-day averages are dropping across the country (last week 26 states showed increases in cases - this week only 10 states show increases in cases).