by Calculated Risk on 3/09/2020 11:39:00 AM

I'm not forecasting a recession, just moving to Recession Watch for the first time since 2006.  Note: In early 2007, I moved from Recession Watch to forecasting a recession that started in December 2007.

As I noted in Predicting the Next Recession, the usual leading indicators are not useful if there is "a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons".

The reason I'm moving to Recession Watch now is a combination of the COVID-19 pandemic, and the response to the pandemic of the current administration.

Leadership is key in a crisis.   Information should be clear, transparent, and accurate.   Action should be proactive.

Usually the CDC leads the world in responding to a health crisis. However, the CDC was caught flat-footed this time.   Testing for COVID-19 should already be ubiquitous and free for all (not just those with insurance).    It appears testing will increase dramatically over the next several weeks, but the administration still needs to make testing free for all (otherwise the uninsured will avoid the test and spread the disease).

And the administration should have fiscal policies ready to go to address the economic impact of the health crisis. Here are my suggestions: Fiscal Policies to Address COVID-19. There is news out this morning that White House advisers will have a list of policy options for Mr. Trump today. My sense is the administration will slow track a fiscal response and try to embrace ineffective policies. For example, enacting corporate tax cuts would be bad policy - it would take many months to have an impact, and the cuts would target the wrong segment of the economy.

Before predicting a recession, we need to see how this unfolds.  Perhaps COVID-19 will be seasonal like the flu and the economy will bounce back in the Summer.  If that is the case, we will have time to prepare for a probable resurgence of the disease in the Fall.    But that is a thin thread to pin our hopes.

by Calculated Risk on 3/09/2020 09:37:00 AM

From CNBC: Oil prices plunge as much as 30% after OPEC deal failure sparks price war

Oil prices plunged after OPEC’s failure to strike a deal with its allies regarding production cuts caused Saudi Arabia to slash its prices as it reportedly gets set to ramp up production, leading to fears of an all-out price war.

Click on graph for larger image

The first graph shows WTI spot oil prices from the EIA. (Prices today added).

According to Bloomberg, WTI is at $32.55 per barrel today, and Brent is at $35.68.

Prices collapsed in 2008 due to the financial crisis, and then increased as the economy recovered.   Oil prices collapsed again in 2014 and 2015, mostly due to oversupply.

Currently demand has weakened due to the COVID-19 pandemic, and Saudi Arabia is apparently going to increase production.

The second graph shows the year-over-year change in WTI based on data from the EIA.

Six times since 1987, oil prices have increased 100% or more YoY.  And several times prices have almost fallen in half YoY.

Currently WTI is down 42% year-over-year.

by Calculated Risk on 3/09/2020 08:39:00 AM

The weather boosted employment gains in again in February. The question is: how much?

The BLS reported 190 thousand people were employed in non-agriculture industries, with a job, but not at work due to bad weather. The average for February over the previous 10 years was 380 thousand. The median was 294 thousand.

The BLS also reported 667 thousand people were usually full time employees, but were working part time in February due to bad weather.  The average for February over the previous 10 years was 2.02 million.  The median was 1.08 million.

Both of the series suggest weather negatively impacted employment less than usual (boosting seasonally adjusted employment).

The San Francisco Fed estimates Weather-Adjusted Change in Total Nonfarm Employment (monthly change, seasonally adjusted). They use local area weather to estimate the impact on employment. For February, the BLS reported 273 thousand jobs added, the San Francisco Fed estimates that weather adjusted employment gains were 240 thousand.  Still solid, but there have been weather related gains the last three months of close to 160 thousand.

So we should expect some payback in coming months.

by Calculated Risk on 3/08/2020 06:18:00 PM

For health updates please see the CDC website: Coronavirus Disease 2019.

A huge economic story is the collapse in oil prices.

Weekend:
• Schedule for Week of March 8, 2020

• Fiscal Policies to Address COVID-19

Monday:
• No major economic releases scheduled.

From CNBC: Pre-Market Data and Bloomberg futures: S&P 500 are down 112 and DOW futures are down 930 (fair value).

Oil prices were down over the last week with WTI futures at $30.23 per barrel and Brent at $31.97 barrel.  A year ago, WTI was at $56, 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 $2.36 per gallon. A year ago prices were at $2.47 per gallon, so gasoline prices are down 11 cents per gallon year-over-year.

by Calculated Risk on 3/08/2020 12:40:00 PM

First, some good news on the flu from the CDC:

"Key indicators that track flu activity remain high but decreased for the third week in a row. Severity indicators (hospitalizations and deaths) remain moderate to low overall …"

It appears flu season is starting to wind down, and that will lessen the burden on our healthcare professionals.

And on testing, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases said on Meet the Press this morning:

"early on, there were some missteps" … "But right now I believe 1.1 million tests have already been sent out. By Monday there’ll be an additional 400,000."

IMPORTANT: See the entire interview with Dr. Fauci here: Fauci: Those 'vulnerable' to coronavirus should limit travel and crowd exposure (second video is full interview). Listen to his comments on testing! (first couple of minutes).  Dr. Fauci is transparent, honest and factual.

Test kits are just one part of the equation on testing.   We also need testing capacity.   Tests need to be ubiquitous, and free for all. Medicare is already paying for the tests, and most insurance companies have said they will pay for the tests. The Federal Government needs to step up and pay for the tests for the uninsured (with no citizenship requirement).

Currently qualifying for a test is too restrictive (due to the lack of test kits and capacity).   It should be easy to qualify (those that have symptoms, or close contact with someone with COVID-19, or healthcare workers and first responders, or staff at retirement communities and those that frequent those communities should all be able to obtain tests on demand).

On fiscal policy:

1) The Federal Government should immediately announce that tests are free for the uninsured.

2) For those that test positive (but don't need hospitalization), the experts should determine how to isolate them. If their employers will not pay for their time off, then the government should pay. We don't want people avoiding tests because of the costs or the fear of lost income.

3) Sick people should not go to work.  If the company does not pay for sick leave, the Government could have a program of sharing part of the sick leave (say 50% with the company).   This is important for part time workers.  Companies like Trader Joe's have already announced that part time employees can take sick leave.

4) We need to proactively expand unemployment insurance. (Note: There would be triggers for this program, so if we get lucky, and COVID-19 is seasonal, then this program would have minimal fiscal impact.) The idea is to increase the amount paid (based on various triggers) and to include parents with school closures (to help with child care).

4a) Based on certain triggers, the Federal Government would pay an additional 60% of whatever the state is paying for unemployment insurance (if the state is paying $300 per week, the Federal government would add $180 per week). (Note: The 60% is just an arbitrary number).   The requirement that people are looking for work would be waived (this is not a financial issue - it is a health issue)

Triggers could be based on an increase in the 4-week average of unemployment claims above a certain threshold (like 250K), or industry triggers (workers in leisure industries such as airlines, hotels, etc. could qualify), or there could be geographical triggers based on a serious regional outbreak of the virus.  So this wouldn't go into effect until certain triggers happen.

4b) On school closures, the Federal Government would pay a parent both the state share and the 60% extra.   School closures are easy to verify.   There should be a "reduction in hours" clause, so a person can keep working during a school closure, and still receive some benefits.

4c) There should be a provision to extend the benefits (entirely paid by the Federal government) if the crisis is still ongoing.

This type of program is targeted and builds confidence.   One of the concerns during a downturn is that people will slow their spending because they become worried about their financial situation if they lose their job.   This will alleviate that fear somewhat.

5) Based on economic data, the Federal Government should be prepared to get money to everyone.  One suggestion is to significantly lower payroll tax withholding, from former Fed economist Claudia Sahm:

The easiest way is to cut federal tax withholding for the next two months. In 1992, George H. W. Bush issued an executive order, employers used the new withholding tables, and within weeks people got a bump in their paychecks. It worked, people spent the money.

It is important to be proactive on fiscal policy so that we are prepared if the situation deteriorates quickly.

by Calculated Risk on 3/07/2020 08:11:00 AM

This will be a light week for economic data.

The key report scheduled for this week is February CPI.

----- Monday, Mar 9th -----
No major economic releases scheduled.

----- Tuesday, Mar 10th -----
6:00 AM ET: NFIB Small Business Optimism Index for February.

----- Wednesday, Mar 11th -----
7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:30 AM: The Consumer Price Index for February from the BLS. The consensus is for no change in CPI, and a 0.2% increase in core CPI.

----- Thursday, Mar 12th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for 215 thousand initial claims, down from 216 thousand the previous week.

8:30 AM: The Producer Price Index for February from the BLS. The consensus is for a 0.1% decrease in PPI, and a 0.2% increase in core PPI.

12:00 PM: Q4 Flow of Funds Accounts of the United States from the Federal Reserve.

----- Friday, Mar 13th -----
10:00 AM: University of Michigan's Consumer sentiment index (Preliminary for March).

by Calculated Risk on 3/06/2020 06:27:00 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 some impact from 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 previous four years.

This data is through the week ending March 5, 2020.

There are many factors impacting box office numbers, but this will give an idea if people are avoiding theaters.

Currently 2020 is tracking close to 2019.

by Calculated Risk on 3/06/2020 02:52:00 PM

From Merrill Lynch:

We mark to market our 1Q GDP forecast up to 1.5% from 1.0%, while taking down 2Q GDP by 0.6pp to 1.0% and 3Q GDP 0.2pp to 1.4%, reflecting wider disruption from the COVID-19 spread. [Mar 6 estimate]
emphasis added

From Goldman Sachs:

Based on the downward revision to January wholesale inventories and the declines in US and global trade volumes, we lowered our Q1 GDP growth forecast by two-tenths to +0.7% (qoq ar). [Mar 6 estimate]

From the NY Fed Nowcasting Report

The New York Fed Staff Nowcast stands at 1.7% for 2020:Q1 and 1.3% for 2020:Q2 [Mar 6 estimate]

And from the Altanta Fed: GDPNow

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2020 is 3.1 percent on March 6, up from 2.7 percent on March 2. [Mar 6 estimate]

CR Note: These early estimates suggest real GDP growth will be between 0.7% and 3.1% annualized in Q1.

by Calculated Risk on 3/06/2020 02:19:00 PM

From the Association of American Railroads (AAR) Rail Time Indicators. Graphs and excerpts reprinted with permission.

Total U.S. rail carloads fell 7.3% (73,058 carloads) in February 2020 from February 2019, their 13th straight decline, but the decline disappears if you take away coal and grain (whose carloads tend to rise or fall for reasons that have little to do with the state of the economy).
...
U.S. intermodal originations fell 8.9% (96,897 units) in February 2020 and 7.0% (167,978 units) in the first two months of 2020. Around half of U.S. intermodal comes from international trade. Supply chain disruptions related to the coronavirus outbreak may have played some unquantifiable role in February’s decline, but intermodal has been falling for more than a year, so more is going on, including economic uncertainty and trade frictions that pre-date the virus.
emphasis added

Click on graph for larger image.

This graph from the Rail Time Indicators report shows the six week average of U.S. Carloads in 2018, 2019 and 2020:

Total originated carloads were 7.3% lower, or 73,058 carloads, in February 2020 from February 2019, their 13th consecutive year-over-year monthly decline. Total carloads averaged 231,771 per week in February 2020. That’s the lowest for any month since 1988, when our data begin.

Coal bears most of the blame. Carloads of coal in February were down 67,770 carloads, or 21.1%, their biggest percentage decline since mid-2016.

The second graph shows the six week average of U.S. intermodal in 2018, 2019 and 2020: (using intermodal or shipping containers):

U.S. intermodal originations were down 8.9%, or 96,897 containers and trailers, in February 2020, their 13th straight decline. Weekly average originations in February 2020 were 249,421, the lowest for February since 2015. Year-to-date volume through February was down 7.0%, or 167,978 units. If, as the American Association of Port Authorities recently suggested, cargo volumes at many U.S. ports will fall by 20% or more in Q1 2020 from Q1 2019 because of the coronavirus, it might be a while before U.S. intermodal volumes move back into growth mode.

by Calculated Risk on 3/06/2020 10:41:00 AM

The headline jobs number at 273 thousand for February was well above consensus expectations of 175 thousand, and the previous two months were revised up 85 thousand, combined. The unemployment rate decreased to 3.5%. Note: It appears weather boosted employment in February - I'll have more on this later.

Earlier: February Employment Report: 273,000 Jobs Added (266,000 ex-Census), 3.5% Unemployment Rate

In February, the year-over-year employment change was 2.409 million jobs including Census hires.

Average Hourly Earnings

Wage growth was at expectations. From the BLS:

"In February, average hourly earnings for all employees on private nonfarm payrolls increased by 9 cents to $28.52. Over the past 12 months, average hourly earnings have increased by 3.0 percent."

This graph is based on “Average Hourly Earnings” from the Current Employment Statistics (CES) (aka "Establishment") monthly employment report. Note: There are also two quarterly sources for earnings data: 1) “Hourly Compensation,” from the BLS’s Productivity and Costs; and 2) the Employment Cost Index which includes wage/salary and benefit compensation.

The graph shows the nominal year-over-year change in "Average Hourly Earnings" for all private employees.  Nominal wage growth was at 3.0% YoY in February.

Wage growth had been generally trending up, but weakened in 2019 and early 2020.

Prime (25 to 54 Years Old) Participation

Since the overall participation rate has declined due to cyclical (recession) and demographic (aging population, younger people staying in school) reasons, here is the employment-population ratio for the key working age group: 25 to 54 years old.

In the earlier period the participation rate for this group was trending up as women joined the labor force. Since the early '90s, the participation rate moved more sideways, with a downward drift starting around '00 - and with ups and downs related to the business cycle.

The 25 to 54 participation rate decreased in February to 83.0%, and the 25 to 54 employment population ratio decreased to 80.5%.

Part Time for Economic Reasons

From the BLS report:

"The number of persons employed part time for economic reasons, at 4.3 million, changed little in February. These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs."

The number of persons working part time for economic reasons increased in February to 4.318 million from 4.182 million in January.   The number of persons working part time for economic reason has been generally trending down.

Part time workers will be something to watch over the next several months.

These workers are included in the alternate measure of labor underutilization (U-6) that increased to 7.0% in February.

Unemployed over 26 Weeks

This graph shows the number of workers unemployed for 27 weeks or more.

According to the BLS, there are 1.102 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 1.166 million in January.

This was the lowest level for long term unemployed since December 2006.

Summary:

The headline jobs number was well above expectations, and the previous two months were revised up.  The headline unemployment rate decreased to 3.5%; however wage growth slowed to 3.0% year-over-year. Overall this was a solid report, although there was probably some boost from the weather.