by Calculated Risk on 3/15/2020 07:33:00 PM

First, from Goldman Sachs today:

“[W]e now expect real GDP growth of 0% in Q1 (from +0.7%), -5% in Q2 (from 0%), +3% in Q3 (from +1%), and +4% in Q4 (from +2¼%), with further strong gains in early 2021. This takes our 2020 GDP forecast down to +0.4% (from 1.2%).”

Goldman Sachs currently thinks the recovery will be in Q3 and be fairly rapid.   I think the timing is unknown, and the recovery will probably be tepid at first - and then pickup.

With the sudden economic stop, and with many states  shutting down by closing down schools, bars and restaurants - combined with the sluggish government response, both on testing and fiscal stimulus - my view is the US economy in now in a recession (started in March 2020), and GDP will decline sharply in Q2 (as Goldman Sachs is forecasting). The length of the recession will depend on the course of the pandemic, and that is unknown at this time. Unfortunately the usual leading indicators aren't useful with this type of event.

Weekend:
• Schedule for Week of March 15, 2020

• Fed Cuts Rate to Zero in Emergency Meeting

Monday:
• 8:30 AM: The New York Fed Empire State manufacturing survey for March. The consensus is for a reading of 4.4, down from 12.9.

• 10:00 AM: State Employment and Unemployment (Monthly) for January 2020

From CNBC: Pre-Market Data and Bloomberg futures are limit down: S&P 500 are down 142 and DOW futures are down 1,243 (fair value).

Oil prices were down over the last week with WTI futures at $30.03 per barrel and Brent at $31.88 barrel.  A year ago, WTI was at $59, and Brent was at $66 - so oil prices are down about 50% year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.21 per gallon. A year ago prices were at $2.54 per gallon, so gasoline prices are down 33 cents per gallon year-over-year.

by Calculated Risk on 3/15/2020 05:04:00 PM

From the Fed:

The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. Available economic data show that the U.S. economy came into this challenging period on a strong footing. Information received since the Federal Open Market Committee met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2 percent objective.

The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals. To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The Committee will also reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Open Market Desk has recently expanded its overnight and term repurchase agreement operations. The Committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Randal K. Quarles. Voting against this action was Loretta J. Mester, who was fully supportive of all of the actions taken to promote the smooth functioning of markets and the flow of credit to households and businesses but preferred to reduce the target range for the federal funds rate to 1/2 to 3/4 percent at this meeting.

In a related set of actions to support the credit needs of households and businesses, the Federal Reserve announced measures related to the discount window, intraday credit, bank capital and liquidity buffers, reserve requirements, and—in coordination with other central banks—the U.S. dollar liquidity swap line arrangements. More information can be found on the Federal Reserve Board's website.
emphasis added

by Calculated Risk on 3/15/2020 08:11:00 AM

Expectations are that the FOMC will reduce the Fed Funds rate 100bps to a target range of 0 to 1/4 percent at the meeting this week. This is in response to the COVID-19 pandemic.

For review, here are the December FOMC projections.  In general the data has been close to expectations, however the economy has come to a sudden stop - and the projections for 2020 will probably change significantly.

Forecast for Q1 GDP have mostly ranged between 1% and 2%, however many sectors will be hard hit in March, and Q1 GDP will probably be close to 0%.   It seems likely that GDP in Q2 will be negative, so I expect the FOMC to revise down their 2020 forecasts significantly.   They might revise up their 2021 forecasts.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2020	2021	2022
Dec 2019	2.0 to 2.2	1.8 to 2.0	1.8 to 2.0

¹ Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 3.5% in February.   With the impact of COVID-19, the unemployment rate will probably increase over the next several months - maybe longer.  I expect the FOMC will revise up their Q4 2020 unemployment forecast.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2020	2021	2022
Dec 2019	3.5 to 3.7	3.5 to 3.9	3.5 to 4.0

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of January 2019, PCE inflation was up 1.7% from January 2019.   With the sharp decline in oil prices and the economic stop in March, PCE inflation will probably be revised down for Q4 2020.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2020	2021	2022
Dec 2019	1.8 to 1.9	2.0 to 2.1	2.0 to 2.2

PCE core inflation was up 1.6% in January year-over-year.    It seems likely core inflation will also be revised down for Q4 2020.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2020	2021	2022
Dec 2019	1.9 to 2.0	2.0 to 2.1	2.0 to 2.2

by Calculated Risk on 3/14/2020 10:21:00 AM

There are some sectors that will be hit hard over the next several months: hotels, airlines, restaurants, movie theaters, sporting events, and convention centers.   People will probably avoid these places as part of social distancing.

Here is some restaurant data from OpenTable (HT FBC)

Click on graph for larger image.

This data shows the year-over-year change in diners as tabulated by OpenTable for the US, the states of Washington and New York, and a few impacted cities (Seattle, San Francisco, and Boston).

This data is through March 12, 2020.

Seattle and San Francisco saw a dramatic decline starting at the beginning of March.     Starting a few days ago, restaurant traffic is declining sharply just about everywhere.

Clearly the US will need to help the employees (and owners) of these impacted sectors.

by Calculated Risk on 3/14/2020 08:11:00 AM

The key reports this week are February Retail Sales, Housing Starts and Existing Home sales.

For manufacturing, the February Industrial Production report and the March NY and Philly Fed manufacturing surveys will be released.

The FOMC meets this week, and is expected to reduce the federal funds rate to a target range of 0 to 1/4 percent (100 bps reduction).

----- Monday, Mar 16th -----
8:30 AM: The New York Fed Empire State manufacturing survey for March. The consensus is for a reading of 4.4, down from 12.9.

10:00 AM: State Employment and Unemployment (Monthly) for January 2020

----- Tuesday, Mar 17th -----
8:30 AM: Retail sales for February is scheduled to be released.  The consensus is for a 0.2% increase in retail sales.

This graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail and Food service sales, ex-gasoline, increased by 3.9% on a YoY basis in January.

9:15 AM: The Fed will release Industrial Production and Capacity Utilization for February.

This graph shows industrial production since 1967.

The consensus is for a 0.4% increase in Industrial Production, and for Capacity Utilization to increase to 77.0%.

10:00 AM: The March NAHB homebuilder survey. The consensus is for a reading of  74, unchanged from 74.  Any number above 50 indicates that more builders view sales conditions as good than poor.

10:00 AM ET: Job Openings and Labor Turnover Survey for January from the BLS.

This graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Jobs openings decreased in December to 6.423 million from 6.787 million in November.

----- Wednesday, Mar 18th -----
7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:30 AM: Housing Starts for February.

This graph shows single and total housing starts since 1968.

The consensus is for 1.500 million SAAR, down from 1.567 million SAAR.

During the day: The AIA's Architecture Billings Index for February (a leading indicator for commercial real estate).

----- Thursday, Mar 19th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for 218 thousand initial claims, up from 211 thousand the previous week.

8:30 AM: the Philly Fed manufacturing survey for March. The consensus is for a reading of 10.0, down from 36.7.

----- Friday, Mar 20th -----
10:00 AM: Existing Home Sales for February from the National Association of Realtors (NAR). The consensus is for 5.50 million SAAR, up from 5.46 million.

The graph shows existing home sales from 1994 through the report last month.

by Calculated Risk on 3/13/2020 02:54:00 PM

I just spoke with a tile sub-contractor who mostly does remodels. He was completely booked for the next several months, and all of his jobs have cancelled for the next 8 weeks.

He has a great reputation - and a good network - and he has been busy for years.  These cancellations caught him by surprise. He will have to layoff his workers until he finds work.

This story is happening all across the country. This is a sudden stop for the US economy like nothing I've ever seen.

It might take a week or two to show up in the weekly unemployment claims report, but we are going to see a sharp increase in claims.   Since this week was the BLS reference week for the March job report, the crisis will probably not have a huge impact on the March report.

We don't know how long this will last, but China is only now slowly recovering - so this might last for several months or even longer.  Stay healthy!

by Calculated Risk on 3/13/2020 01:53:00 PM

There are some sectors that will be hit hard over the next several months: hotels, airlines, restaurants, movie theaters, sporting events, and convention centers.   People will probably avoid these places as part of social distancing.

I already track weekly hotel occupancy data from STR, and the occupancy data is starting to show a sharp decline due to COVID-19.   I'll also be posting updates on monthly visitor and convention traffic in Las Vegas.

For high frequency data, I'm going to start tracking domestic box office numbers from Box Office Mojo every Friday.

Click on graph for larger image.

This data shows cumulative domestic box office for this year (red) and the maximum and minimum for the previous four years.

This data is through the week ending March 12, 2020. (The last few weeks were revised slightly)

There are many factors impacting box office numbers, but this will give an idea if people are avoiding theaters. Note that some potential block busters have been moved to the Fall, and that will keep down box office sales.

Currently 2020 is tracking close to the minimum of the previous four years, but hasn't collapsed yet.

by Calculated Risk on 3/13/2020 11:28:00 AM

A few excerpts from Merrill Lynch research:

The economy will flirt with recession in the coming months with negative GDP in 2Q, we believe. Growth is expected to remain soft in 3Q with recovery starting thereafter.
…
We now expect the Fed to cut 100bp at the March FOMC meeting, bringing rates to zero.
…
Based on BAC aggregated card data, we estimate that retail sales ex-autos contracted by 0.2% month-over-month (mom) seasonally adjusted in February. At first glance, it seems pretty good, all things considered. However, remember that the retail sales aggregate is not a comprehensive measure of consumer spending as it excludes most services with the exception of restaurants. Importantly, it does not include travel-related services which have declined meaningfully over February. On a monthly and seasonally adjusted basis, airline spending tumbled 11.2% mom, lodging down 9.1% mom and cruises down 18.6% mom in February.
emphasis added

Note that that data was for February. March will be much worse.

Goldman Sachs also expects the Fed to cut rates to zero:

We now expect the FOMC to cut the funds rate 100bp on March 18, a faster return to the crisis-era 0-0.25% rate than under our previous call for two 50bp steps in March and April.

by Calculated Risk on 3/13/2020 10:06:00 AM

From the University of Michigan, Surveys of Consumers chief economist, Richard Curtin:

Consumer sentiment fell in early March due to the spreading coronavirus and the steep declines in stock prices. … The component of the Sentiment Index that posted the greatest loss involved judgements about prospects for the economy during the year ahead; this component fell by 29 points, accounting for 83% of the total point decline in early March. … While the most effective containment efforts are widespread closures and self-isolation, those same actions have the largest negative impact on the economy and significantly increase the probability that the pandemic will be followed by a recession that lasts longer than the virus.

Not a huge decline - yet.

by Calculated Risk on 3/12/2020 03:39:00 PM

Note 1: This is not Mortgage Equity Withdrawal (MEW) data from the Fed. The last MEW data from Fed economist Dr. Kennedy was for Q4 2008.

Note 2: There have been reports showing an increase in cash out refinances, but it isn't showing up significantly in the Fed's Flow of Funds report.

The following data is calculated from the Fed's Flow of Funds data (released today) and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity - hence the name "MEW" - and normal principal payments and debt cancellation (modifications, short sales, and foreclosures).

For Q4 2019, the Net Equity Extraction was $29 billion, or a 0.70% of Disposable Personal Income (DPI) .

Click on graph for larger image.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.

Note: This data is impacted by debt cancellation and foreclosures, but much less than a few years ago.

MEW has been mostly positive for the last four years. With a slower rate of debt cancellation, MEW will likely be mostly positive going forward - but nothing like during the housing bubble.

The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding increased by $86 billion in Q4.

For reference:

Dr. James Kennedy also has a simple method for calculating equity extraction: "A Simple Method for Estimating Gross Equity Extracted from Housing Wealth". Here is a companion spread sheet (the above uses my simple method).

For those interested in the last Kennedy data included in the graph, the spreadsheet from the Fed is available here.