Weekly Update for May 4, 2020

Brad StevensUncategorized

Welcome to May.  Let us hope the worst of the impact from Covid 19 is behind us and things begin to pick up.  Of course today being Star Wars Day, the traditional greeting is in order  — May The Fourth Be With You!

The US can be said to be in a recession.  The first quarter GDP numbers indicated a contraction in GDP of roughly 5%.  While first quarter GDP was running at a positive 2% before mid February, the magnitude of the drop in business from late February through March erased any possibility of a continued expansion in the economy.  The definition of a recession is two consecutive quarters of negative economic growth.  With the early numbers from April it is unlikely that US Economy will breach a positive number for economic growth, particularly with the head winds of trying to restart the economy over the next two months.

Many industries remain idled.  The impact of new requirements regarding social distancing will leave many companies considering if they can ever reach a break even point again.  Business models have changed and may never go back to what they were.  If eateries are required to halve the number of tables, effectively cutting the maximum revenue they can achieve, will they still be able to make a reasonable profit?  Many industries live on narrow margins and cutting revenues by the amount that would be required by new laws may make operations unfeasible going forward.  Thus, the second quarter will show a contraction leaving the US in a recession. 

The big question is how long will it take before we have a positive economic quarter?  Some experts are saying we can bounce back in quarter 3 this year with the fourth quarter being much stronger.  I am not quite that optimistic.  There are three concerns.  First is the pace in which we reopen.  If certain regions or states delay reopening much longer, the impact of slow economic growth will creep deep into the third quarter.  Second is the level in which companies reopen.  Many business owners have run out of resources and will not be able to reopen.  The level of corporate bankruptcies will be the indicator or exactly how many businesses we lost that will not be replaced.  This will have a wash over effect on commercial real estate as the number of vacancies will explode.  The whole idea of re-purposing shopping centers now becomes a critical factor.  Lastly, without the herd immunity that needed to be developed, the virus has the probability of striking again this Fall.  Unless a vaccine is developed quickly, those of us who quarantined and kept well, will likely be exposed this Fall or will face another shut down as the virus spreads again.  Sweden decided to bet on herd immunity, keeping their economy open and allowing the population to become exposed.  Remember being a kid, when one family got the chicken pox all the mom’s ran their kids over to get exposed so it could be over with?  Sweden took that approach.  If there is a second wave, we will see if Sweden had the right idea.

The April ISM report was pretty much as expected.  The numbers were not off the chart bad, but the comments in the report are concerning.  ISM activity dropped from 49.1 in March to 41.5 in April.  New orders fell from 42.2 to 27.1.  Back logs are gone.  Production fell from 47.7 to 27.5.  Only two industries of the 18 showed growth, one of them being paper products, read face masks.  The rest were all down in significant ways.  One leading indicator industry, Packaging was listed as having no backlog and limited new orders for May.  That is not a good sign that manufacturing will kick back in anytime soon. 

The indications are beginning to show that this could be a three or four quarter recession.  Business failures will likely exceed the great recession numbers over the next year. 

Have a good week, personally I am looking forward to eating hot food in a restaurant and not cold take out in my car. 

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