by Calculated Risk on 3/16/2020 04:57:00 PM

Let's thank all the heroes in this fight. Especially the healthcare workers that are at serious risk (two ER doctors are in critical condition) and the first responders.

Let's also thank all the people working at the grocery stores and pharmacies - and working in the supply chain to keep us fed and bring us goods.

And all the people working at the restaurants (it will probably be just pickup and delivery soon) and delivery people bringing other goods.

And all the people going to work practicing safe distancing (please keep making toilet paper!).

And for the utility workers keeping the power on and the internet working.

And all the people working from home.

And all the people staying at home are heroes too.

Thank you!

by Calculated Risk on 3/16/2020 01:24:00 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.

Here is some restaurant data from OpenTable:

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 updated through March 15, 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.

As of yesterday, San Francisco was off 72% YoY, Boston was off 70% YoY, and Seattle was off 62%.  Going forward, restaurants are closing in many states (or going to half occupancy).

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

by Calculated Risk on 3/16/2020 10:26:00 AM

From the BLS: Regional and State Employment and Unemployment Summary

Unemployment rates were lower in January in 5 states and stable in 45 states and the District of Columbia, the U.S. Bureau of Labor Statistics reported today. Eleven states had jobless rate decreases from a year earlier, 1 state had an increase, and 38 states and the District had little or no change. The national unemployment rate, 3.6 percent, was little changed over the month but was 0.4 percentage point lower than in January 2019.
...
North Dakota had the lowest unemployment rate in January, 2.3 percent, while Alaska had the highest rate, 6.0 percent. The rates in Alaska (6.0 percent), Illinois (3.5 percent), Nevada (3.6 percent), New York (3.8 percent), Oregon (3.3 percent), and Washington (3.9 percent) set new series lows. (All state series begin in 1976.)
emphasis added

Click on graph for larger image.

This graph shows the number of states (and D.C.) with unemployment rates at or above certain levels since January 1976.

At the worst of the great recession, there were 11 states with an unemployment rate at or above 11% (red).

Currently only one state, Alaska, has an unemployment rate at or above 6% (dark blue). Note that Alaska is at a series low (since 1976).  Four states and the D.C. have unemployment rates above 5%; Alaska, Louisiana, Mississippi and West Virginia.

A total of seventeen states are at a series low: Alabama, Alaska, Arkansas, California, Colorado, Florida, Georgia, Idaho, Illinois, Maryland, Nevada, New York, North Dakota, Oregon, South Carolina, Tennessee and Washington

by Calculated Risk on 3/16/2020 08:37:00 AM

From the NY Fed: Empire State Manufacturing Survey

Business activity declined in New York State, according to firms responding to the March 2020 Empire State Manufacturing Survey. The headline general business conditions index fell thirty-four points to -21.5, its lowest level since 2009. The new orders index dropped to -9.3, pointing to a decline in orders, and the shipments index fell to -1.7. Delivery times lengthened slightly, and inventories increased. Employment levelled off, and the average workweek declined. Input price increases were little changed, while selling prices increased at a slower pace than last month. Optimism about the six-month outlook fell sharply, with firms less optimistic than they have been since 2009.
...
The index for number of employees fell eight points to -1.5, indicating that employment levels were little changed over the month. The average workweek fell to -10.6, a sign that the average workweek was shorter.
emphasis added

This was well below the consensus forecast, and the outlook is the worst since 2009.

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!