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Q1 GDP: Staring Into The Abyss

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Pictured: The US economy at the end of February. Warner Brothers

The Next Step Is A Doozy

The preliminary Q1 GDP report, just issued, is a bit of a strange beast. All indications are that January was a decent month, and February a little softer, but still roughly on the lukewarm ~2% annual pace of real GDP growth we’ve been on this entire cycle. The virus was already here as February rounded to a close, but like Wile E. Coyote before the inevitable happens, gravity only started working when we all collectively looked down at all the empty air underneath us. There is a lot of air, and we are far from the bottom.

So the quarterly numbers do give us some hints to the depth of what happened in March, but that only accounts for roughly a third of the quarterly average numbers that BEA reports. Moreover, the big demand collapse did not happen until mid-March, so it is really only the final two weeks driving all that.

Fortunately, income, consumption and inflation measures are also monthly, and the rate of change here is staggering. The March over February numbers on consumption and inflation are eye-poppers. But again, the big changes did not happen until the middle of the month, so we are really only looking at half a month of demand shock.

The picture we get is the largest month-to-month change in consumer behavior ever. I’m not sure there will ever again be something quite like this from a macroeconomic perspective.

April and May will be worse.

The Two Things That Scare Me The Most

Yes, it’s starting to get to me.

There are two things that are scaring me in the data, one short term, one long term. The Fed is providing an unprecedented amount of liquidity, starting with almost $1.9 billion in QE since March 11. Let’s break down what’s happening:

Federal Reserve.

From top to bottom:

  • Red: “Fed Loans” is the discount window, plus the 4 currently running special facilities.
  • Yellow: The Treasury keeps a checking account at the Fed. They subtract from reserves when they stock up through tax payments and debt auctions. They add to reserves when they spend. They are doing a lot of both, but as you can see, their account has risen $704 billion in the 7 balance sheets since March 11, most of that in April.
  • Green: The Fed’s repo facility was a much bigger part of the story, but is now a small net drag on reserves since the March 11 balance sheet.
  • And the big giant blue blob, QE. It will continue to grow, albeit at a decelerating pace. This week the pace of QE will be $40 billion per week, which was the previous weekly record, set back in 2011.

When we net that out and compare it to the change in reserves since March 11, it is unmistakable that all the liquidity is sitting in bank vaults.

Federal Reserve. Green columns are the net of the previous chart.

116% of provided liquidity is sitting in banks’ reserve account, earning 0.1% IOER.

There is so much uncertainty that banks think their best bet with all this cash is to take the 0.1% IOER and see what the next day brings. I do not blame them. This has to have started the conversation about a slightly negative IOER.

Me, 4/6/2020

Keeping the banks liquid in a crisis is extremely important, but so too is keeping credit flowing, and there is not nearly enough. The banks are terrible transmission belts for Fed policy in a crisis. They become risk-averse and hoard cash. I do not blame them; so do I.

With Q1 corporate reports coming in, we got a little visibility on this:

  • JPMorgan (JPM): EPS down 70% QoQ. Built up provision for credit loss by $10 billion to $23 billion.
  • Bank of America (BAC): EPS down 46% QoQ. Provision for credit loss up $6 billion to $16 billion.
  • Citigroup (C): EPS down 51% QoQ. Provision for credit loss up $4 billion to $6.4 billion.
  • Wells Fargo (WFC): EPS down 98% QoQ. Provision for credit loss up a modest $1.7 billon to $11 billion. They likely didn’t do more to salvage their $0.01 EPS.

And this was only as of March 31. Banks have added another $500 billion to reserves since then.

But even more troubling is early confirmation that this event will reinforce the background of secular stagnation we were in even before the virus — low growth, low inflation, low rates, and central banks seemingly powerless to reflate.

For those of you who have been reading my macro articles for any length of time, you already know I’m pretty obsessed with this chart, even before the current circumstances. The blue line is the personal savings rate — savings as a percent of disposable personal income. The red line is the monthly average interest rate of the 10 year Treasury. The last time the savings rate was as high as it was in March, the 10 year paid 13.4%. It currently pays around 0.6%. The interest rate no longer drives decisions to save.

In the first place, the thing that pinned my ears back even before all this is that divergence of the two lines after the last recession. For 3 decades, the savings rate and the 10-year rate pretty much mirrored each other, declining from 1982 onwards. This makes perfect sense; a lower interest rate discourages saving and encourages debt spending. That’s exactly what we saw in that 30 year period, and the US consumer was the great driver of GDP growth not just in the US, but globally.

Even before Q1, real GDP growth this entire cycle had been limp.

The red line is the median annual real GDP growth rate from 1950 to 2009, including 10 recessions. It is 3.5%. The green line is the median from 2010 to 2019, including no recessions, and it is only 2.4%. The longest cycle on record, but we never once breached 3% real GDP growth. The previous cycle was also nothing to write home about.

The reason is that the two engines of GDP growth – consumption and investment – have slowed their growth. Starting with consumption:

Personal consumption expenditures as a percentage of GDP. The red line is the 2019 average.

After decades of outpacing the rest of the economy, US consumers stalled out in the current cycle and flatlined. With less being consumed, there was less to invest in:

Gross private domestic investment as a percentage of GDP. The red line is the cycle peak at around 18%.

Investment was crushed in the last recession, and never really fully recovered, with its peaks well below the other cycles. With demand for capital low from both households and firms, and supply high from savings, interest rates continued their downward trajectory

So we see a huge shift in preferences for savings versus consumption around the last recession, where the propensity to save the marginal dollar of income increased dramatically. Even after the initial spike abated in 2012, the savings rate continued to rise, while interest rates continued to come down.

Economists have three explanations for this:

  1. Demographics: Workers work the same number of years as before, but have much longer retirements, so they are forced to self-insure against running out of money in their 80s or 90s. You are likely here at Seeking Alpha for this exact reason.
  2. Income inequality: The very poor spend every dime of income. The ultrarich can only spend so much on private jets and islands, and save almost all their income. Everyone else is somewhere in the middle, but the general relationship holds: the higher the income, the higher the savings rate. Since more income is going to upper percentiles of the income distribution chart, more is being saved.
  3. Policy: In 1980, we had a capital supply side problem. Interest rates had to be sky-high to attract enough savings to feed the demand for capital. Many policies were created to encourage capital supply at lower rates: lower marginal rates on high-earners, lower capital gains tax rate, retirement savings accounts, health savings accounts, etc. But now supply side is our entire toolbox, and we have the opposite problem – a demand side issue.

While I agree with these, they don’t explain the very obvious shift in preferences displayed in that chart. Every recession sees the savings rate come up briefly as households reduce consumption and get their balance sheets in order, but this one was different.

What economists ignore are the psychological effects. The last recession came less than 6 years into the recovery, and was sharp and unexpected. It highlighted the nature of income shocks in the globalized economy, and that very sharp rise in the savings rate from 2008-2012 is what resulted from the new prudence and thrift.

Think of the median Millennial, born in 1988.

  • At 13, they saw 9/11.
  • Their teen years were dominated by two failed wars, and then a massive financial crisis as they were about to enter the workforce.
  • Their 20s were dominated by the political Thunderdome of the Obama years, and a very slow recovery.
  • As they were about to hit 30, enter Trump, and all that came with him.
  • Now all this.

This may ultimately be the thriftiest generation of all time, even eclipsing the Great Depression generation.

So to sum up:

  • Short term, banks are not doing enough lending. Every week, more companies are in danger of going under, and reserves keep rising.
  • Long term, I believe this whole event will create an even higher propensity to save, further dampening consumption, investment and GDP growth.
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Data Notes on the GDP Report

  • I always give a warning about any report with the words “advance” or “preliminary” in it. They’re there to tell us that the data will likely be revised to some degree, sometimes very large revision. Never is that more true of this report, especially the March monthly numbers we will be spending a lot of time with. I expect unusually large revisions to this Q1 report.
  • I will be using annualized monthly growth rates some here. Keep in mind that means compounding the monthly rate, so it can grow very quickly.

The Forest, Before The Trees

Before we dig down, let’s take a look at what the report looks like from a wide angle view. Real GDP was down 4.8% annualized in the quarter, not the worst ever like so many things, but certainly in with a rough crowd.

The red line is -4.8%, Q1 2020

Breaking it down to it’s component parts, consumption dominates, but not in a good way:


Real PCE brought the entire economy down 5.3% by itself. The largest saving grace was the corresponding collapse in imports, which are subtracted from GDP.

But as we will see, the inflation-adjusted numbers are only telling part of the story.

To let you know where were are headed, here were the big winners and losers in the quarter by contribution to the headline number:

And by nominal dollars:

And away we go.


Things are moving so fast that it’s hard to remember that we have only been in the thick of it for a very brief period. Liquidity issues began popping up at the beginning of March when firms all hit up their revolvers at once, whether they needed it at that moment or not. They were also hoarding cash. But the large scale layoffs and furloughs did not begin until the week of March 15-21.

The number for initial unemployment insurance claims for the week ending March 14 was still normal.

The numbers are still dramatic, and April’s will be again. But it is nothing like the movement we see in consumption and prices in March. The evidence is that even in the first half of the month consumers were tightening up their spending, even if their incomes had not yet declined.

This chart is private wages, which is where most of the nominal decline came from. Government wages are steady, for now.

After a pretty decent January and February, with 4 strong months out of 5, income from private wages came way down in March. 37% may seem like a lot, but recall these are annualized rates. And they are nothing compared to what we see in consumption and prices.

This was, of course, the largest month over month nominal drop in private wages ever, and the third largest by percent:

Widening out to all sources of income:


Outside of private wages, the biggest contributor here was small business (sole proprietor, pass-through) income, down 64% annualized in March. This is the largest month over month decline ever:

Of course the big positive number comes from government benefits spurred by the fastest MoM rise ever in unemployment benefits, and it’s not close:

Interestingly, rental income remained strong, so most households and firms made rent on March 1. We see a similar rise in rent payments on the PCE side.

Turning to where the income went, the growth in savings is off the chart. This one is not annualized, because if I did, savings would be up over 31,000%


Taxes aside, all that is worrisome. I’ve already addressed the issues of savings versus consumption preferences, and we see that really reinforced here. But that interest payments number is a bit frightening as well. This was this was the largest MoM drop in that line ever:

Most of household debt is mortgages, but a quick look at the PCE table tells us that like with rentals, people largely paid their mortgages in March.


So it is unclear what type of debt was not being paid to the tune of about $3 billion in March, but if I had to wager, I would say auto or student.

Disposable personal income was down by $28 billion in March, or 21% annualized. This was driven by large reductions in wage and small business income, offset by lower taxes and higher social benefit payments, including $3 billion in new unemployment payments (again, just for about 2 weeks).


To sum up:

  • March saw unusually large declines in private wage income, offset a little by unemployment benefits.
  • A giant chunk of the money that was earned was saved.
  • We will get more clarity with the jobs report this week, and April personal income at the end of May.


Personal consumption makes up about 70% of GDP, so it is almost always the big driver, never more so than in this report. Because the price changes are so nuts, we’re going to look at changes in nominal consumption rather than inflation-adjusted, and prices separately. For consumption, we will be sticking with the non-annualized rates of change, because if I annualized them, many services categories would be down 100%.

Nominal PCE was down $94 billion in March, or -7.5% MoM. Services is where the big hit came:


Looking at percentage change, durables looks even worse, but services account for two thirds of all PCE. Nondurables was driven by groceries and household nondurables, offset by most everything else.


Zeroing in on some of the durables categories, we see a lot that was to be expected


In the first three categories, we see that large purchases are being at least put off for now. The difference is major and small appliances tells the tale — no new fridges, but everyone got a breadmaker.

Also note, as per Tim Cook’s discussion of Apple’s (AAPL) business in Q2, home computing is back, with PCs and tablets up, and phones down.

But the big nut in durables is of course vehicles, with vehicle sales alone accounting for 60% of the nominal loss in durables, and 13% of the nominal loss in all PCE. The dynamics going forward are not good, and we’ll discuss that a little below.


Nondurables is more mixed because of all the household nondurables, including food and beverage. This was offset by giant declines in two of the large categories, clothing and gas.


Services is where the real pain comes, accounting for 88% of the March nominal loss in PCE. What you see above is the main subcategories. We see giant MoM declines across the board — remember, these are not annualized — and it gets worse when we dig down.

The big dog that hasn’t barked yet is housing. It looks like most people made rent and mortgage payments in March, but we don’t know about April, and I think that will look much worse when we get those numbers at the end of May.

Let’s dig into some of these


Just about every category in health care got destroyed in March, and it was responsible for 36% of the nominal loss in PCE, as it is a huge part of the economy. The good news here is that it is easy to imagine this sector bouncing right back.


We see some really giant negative numbers in transportation services. Note the divergence of vehicle leasing, which was flat, and rentals, down 42%. We have already seen Hertz (HTZ) hire restructuring advisors. A fire sale of rental cars would be a disaster for the auto business, already in a bad place.

It’s hard to see these bouncing back fully until people are more comfortable in close quarters.


Along with transportation, the worst MoM numbers come in recreation services. None of these are surprising, but I would have thought there would be more of a boost for the two TV services. Maybe in April.


Along with the giant declines in restaurants, bars and hotels, the “Other services” category, which is quite big, also saw large declines. The biggest single gainer in percentage terms was your broker, who saw record volumes on exchanges in March. Finally, non-USPS delivery saw a huge MoM bump.

Interestingly, the nominal declines in restaurants and bars was almost exactly matched by the increase in groceries. People gotta eat.


Moving to the smallest of the services categories:


Here we see an array of other services which are also being killed. I think we can expect a quick bounce back in some of these, except for legal, accounting and employment.

Finally, the biggest percentage declines of all, international travel. Oof.


Looking at the top losers by dollars, it is dominated by services, but durables, gas and clothing rear their heads.


The winners list is much shorter.


In percentage terms, the losers are dominated by services:


I could have kept going, but I cut it off at -40% MoM. The winners are concentrated in nondurables. And your broker, who had a nice month.


To sum up March consumption:

  • Consumers turned away from large durables in droves.
  • This was offset some by groceries and household nondurables.
  • The real demolition came in services. Some of these we can see bouncing back, like health care, but others I am more skeptical about.
  • The big dog that hasn’t barked yet is housing.
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Get ready for more insane charts. Normally for inflation we look at YoY numbers, but I want to focus in on the sharp moves in consumer prices in March. Compare these annualized rates to the Fed’s 2% annual inflation target for reference.

Beginning with the top line and the major groupings:

I should have titled these as “deflation”. PCE deflation was -3.2% annualized in March, but this was heavily influenced by the demolition of gas prices, as you see with PCE energy, which is literally off the chart. Core PCE deflation, which excludes food and energy, was down a more modest -1%, but still down. This was driven largely by slack durables demand, and cratering prices.

Interestingly, the one area in durables that did not see demand crater, tools and hardware for home and garden, saw prices rise at a dramatic rate.

Like in consumption, it’s a more mixed bag in nondurables

While prices were way down in the category, this was driven primarily by gas prices (off the chart) and clothing, two of the larger subcategories. But we also see giant price increases in our in-demand nondurables, including a 28% annualized inflation rate on building your victory garden.

As you might expect, we have some wild numbers in services:

There’s a lot to unwrap here. Despite the total destruction of demand in health care, recreation, food, personal care and social services, prices held up, and in some cases inflated very fast. I’m not really sure what to say about that, since it’s very counterintuitive.

On the other hand, transportation services and hotels (off the chart) are deflating exactly as we would expect in this environment.

And again, the big dog that hasn’t barked is housing. Also, call your broker (off the chart) and ask him or her to take you to lunch when this is all over.

To sum up:

  • Prices have declined rapidly in goods, driven by durables and gas.
  • Surprisingly, many services where demand tanked saw prices rise in March. Not so for transportation services and hotels.


Sadly, this is where the monthly numbers end. For most of Q1, the big thing concerning US companies was dealing with the supply chain disruption from China. The demand shock did not come until March. Here we will be also switching back to inflation-adjusted numbers, as the quarterly investment price indexes were not showing much abnormal behavior yet.

What we see is collapsing investment in the nonresidential categories, offset by accelerating growth in single-family residential construction. We’ll see how long the latter lasts soon enough.


But these numbers merely look like a continuation of the incoming trend — all the nonresidential categories headed down fast, and residential investment surging.

So it’s hard to say we are see the effect of the virus here, or whether this is just a continuation of incoming trends. But regardless, this is not a pretty picture. This was the incoming situation I discussed, with consumer demand and investment soft compared to previous periods:

  • From 1966 to 2009, a period including 7 recessions, the median annual growth rate for real PCE was 3.5%. From 2010 to 2019, with no recessions, the median growth rate has been 2.6%, exactly what 2019 came in at.
  • From 1966 to 2009, the median annual growth rate for real fixed investment was 5.6%. Since 2010, it has been 4.3%. It was 1.3% in 2019, a year when the economy was supposedly roaring.

So unless we see some large revisions next month, I am inclined to believe there’s not a lot of information here regarding investment in the current environment, like we got for consumption and prices. We will have to wait for the Q2 report in three months for clarity most likely, but I believe these are all headed straight down.


In trade, the incoming environment was one of slowing trade due to the trade war. Since imports are subtracted from GDP, and they were declining faster in either real or nominal dollars than exports, the net was a small tailwind for GDP.


Exports were being kept above zero by oil exports, but of course that has come to a screeching halt now, though oil exports remained strong in Q1. The topline numbers:

Breaking that down a bit more, beginning with exports:

Travel is the biggest mover, and it’s very much unclear when that turns around. The largest positive mover was petroleum, and that will be a giant negative number in the Q2 report. This is likely not getting better.

Turning to imports:


Travel is again the biggest mover, and in fact the lists looks very similar, especially the largest five negatives in each. I don’t know what else to say here except that the outlook is bleak, especially with a president who is not a big fan of trade to begin with.


Before I start, I want to clear up some confusion about what is being measured in the government GDP tables. There are two parallel but different measures of US economic activity. There is GDP, which has the most detail and information, and what is most commonly used: Consumption + Investment + Net Trade + Government. This measures the economy from the buyer’s side — who is spending the money.

The other measure is GDI, gross domestic income, which measures the income of the different sectors of the economy — who is receiving the money. The personal incomes section above comes from GDI, not GDP. The headline numbers of two measures are generally very close.

In GDI, all government spending is counted directly — someone receives it. But government spending is in a half-and-half situation with GDP. What is being counted is “consumption and investment,” which basically means anything a government pays to a contractor — everything from paper clips to aircraft carriers. So in the first place, GDP does not cover government employees’ wages, only the stuff they buy, either for the government or themselves.

But there is another very large portion of government spending, especially big right now, that does not get counted directly in GDP. I’m speaking of transfer payments, both to households and firms. This and government payrolls only get counted in GDP when the money is either consumed, invested or traded by the recipient. If none of those happens, the money lives in GDP purgatory until one does.

So GDP does not cover the full extent of the government’s effect on the economy — here, GDI is superior. We’ve already covered some of it from the personal income side, but the corporate income tables are a month behind, so we don’t know what March looks like there yet.

My point is that GDP does not have a lot to say about what is happening regarding government spending right now. It added 13 basis points to GDP growth, well below the 2 year incoming average of 39 basis points. Beyond that we have to look elsewhere, and I’ll be back to discussing that all next week.

Case Study: Vehicles

I want to do a quick case study so you can see the many problems arising for industries in all this. I chose vehicles for several reasons:

  • At 3.6% of all consumption, it’s a pretty big deal
  • They show up strong in consumption, trade and investment
  • We get an extra level of detail on vehicles.

Another reason is the vehicles are smack dab in the middle of the new thriftiness I discussed at the top. New vehicles are unique in that they compete with large inventories of used vehicles. In fact, used vehicle consumption, notably light trucks and SUVs, has been growing much faster than new ones:

That’s the annual growth rate for real PCE in new vehicles in blue, and used light trucks/SUVs in red. As you can see, since 2013, the used truck growth rate has been much higher. In 2019, used truck/SUV real PCE was up 10.5% while new vehicles were down 1.1%. This slack demand for new vehicles in 2019 led to ballooning inventories that had held up for over a year, and were just starting to clear despite flat sales.

Census Bureau

The consumer market for new vehicles is supplemented by companies making equipment investments, but that formerly very high growth rate has also come down

So coming into all this, the vehicle business was hardly healthy. New vehicles were losing out to used ones with consumers, with obvious problems for the manufactures, but also the dealers, who had to offer top dollar on used truck trade-ins to provide inventory, cutting into margins.

Then March happened:

These are not annualized numbers. Roughly 30% of the retail vehicle business evaporated in March. Prices followed:


And investment in vehicles also cratered in Q1:


Pretty much the same, about 30%. Real exports were down 5% annualized in the quarter and real imports down 9%.

There is a glut of vehicles


On top of all that, the new thriftiness is about to double down on the automakers — we are likely about to see a flood of used inventory hitting the market. In the first place, one of the few scary places in the consumer debt data is auto debt, now at over 7% of disposable personal income.

Many of these are likely to default, putting those vehicles into used car lots. And then we have Hertz. A fire sale by creditors would balloon used inventories tremendously. Citigroup estimates that their fleet is worth $10 billion, with 21% of the fleet from GM (GM), 18% Fiat-Chrysler (FCAU), 12% Ford (F) and 10% Kia. About 17% of the fleet has buyback clauses from the manufacturers. That’s plenty of woe to spread around.

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But things are so bad in the auto market that a liquidation may not be the best way to go. From Moody’s downgrade of Hertz:

Given the unprecedented market dislocation and the currently illiquid market for used-vehicles, certain ABS [Hertz’ asset-backed notes] noteholders may wish to extend some form of lease payment relief to Hertz to avoid a fire sale of the entire fleet of vehicles. [notation added]

This is a big giant mess that is not getting better any time soon, and almost 4% of PCE. And this is the tip of the iceberg. Other businesses may not have the breadth of challenges as vehicles, but the complex nature of getting back above water, and the new thriftiness are going to hinder everyone.

Summary Bullets For The Lazy Reader

Look, we’re all busy. Who can blame you if you scrolled fast to get here?

  • While firms were dealing with the supply shock from China all quarter, the domestic demand shock did not come until very late. The worst of it did not begin until the middle of March, so we are only looking at half a month of very, vey bad, averaged in with the rest. The tables that are provided as monthlies are helpful, but even that only captures half of it.
  • Overall the picture is the most dramatic month-to-month shift in consumer behavior ever.
  • Private wages declined dramatically in historical fashion, though not to the extent of consumption. This tells us that households may have been tightening up before the layoffs and furloughs even began.
  • Small business income also saw record declines.
  • The personal savings rate hit 13.1%. The last time it was that high was 1981, when the 10 year note paid 13.4% interest. Thrift and prudence will abound in the near and medium term, and maybe long term as well.
  • Some $3 billion in personal interest payments were not made in March compared to February. Evidence is that it was not mortgage payments, so my best guess is student or auto.
  • Consumption declined across a broad swath of goods, concentrated in durables. This was offset somewhat by groceries and household supplies.
  • Services, two thirds of consumption, is where the real trouble was, across a broad range of services: health care, food, hotels, recreation, transportation, personal care, and professional services.
  • The declines in restaurants and bars was matched by the increase in groceries.
  • The largest percentage declines came in the international travel categories.
  • Goods prices are on a wild ride, declining rapidly in the areas where we see slack demand. Gasoline is the biggest decline in price.
  • In contrast, even some of the heavily affected services like recreation did not see price decreases, and rather saw price increases. It will be interesting to see if this holds up in April.
  • In both consumption and prices, the big dog that has not barked yet is housing, which is 20% of PCE and 14% of all GDP. I expect the April number to tell a very different story than the on-trend March numbers.
  • In investment, what we see in Q1 is the acceleration of exiting trends with residential flying and nonresidential tanking.
  • While firms were dealing with the supply shock from China all quarter, the demand shock did not come until late, so it is unclear where the investment line items go in Q2. My guess is straight down.
  • Trade was pretty disastrous in the quarter. Real imports were down 15% annualized and real exports, buoyed still by petroleum exports in Q1, were only down 9%. The party for US oil exports is over, at least for now.
  • The GDP report does not have much to say about government’s effects on the economy. Back with those reports next week.


You’ve seen most of the outlook at the top of this article. We were already creeping into a secular stagnation syndrome: low growth, low inflation, low rates, and the Fed unable to reflate. I believe this event will accelerate the thriftiness that resulted from the last recession, and we will begin to look more and more like Japan, as will much of Europe.

For the bulls out there who see this flood of money coming from the Fed and Treasury, and think this will save us, please listen to the man in charge of flood control.


This time, now, is going to be a time of sharp contraction in economic activity, high unemployment, personal consumption expenditures have declined sharply, business investment as well, unemployment moved up. We’re going to see economic data for the second quarter that’s worse than any data we’ve seen for the economy… So, then we will enter this new phase, and we’re just beginning to maybe do that, where we will, formal measures that require social distancing will be rolled back gradually and at different paces in different parts of the country. And, in time, during this period, the economy will begin to recover. People will come out of their homes, start to spend again. We’ll see unemployment go down; we’ll see economic activity pick up. And, you know, when will that be? It’s very hard to say. But let’s just say, for this purpose, that it’s in the third quarter. So, as I mentioned earlier, that could be a fairly, you know, a large increase. Given the size of the fall, the increase could also be substantially large, although it’s unlikely that it would bring us quickly all the way back to pre-crisis levels. Of course, this is the period as well, that carries the risk of new outbreaks of the virus, something we really want to avoid. I think then, after that period, at some point, you will have, you know, the kind of formal social distancing measures will be gone, but you’ll still be left with, probably, a level of caution on the part of people who will worry and probably keep worrying for some time. [emphasis added]

– Jerome Powell, April 29, 2020

Let’s look at the big negative drivers of March PCE, and try and figure out where recovery happens and how.

Starting from the left

  • Health care services is one place I think we can easily say that there is a good chance for a 100% recovery. This is especially good news considering the hit it took in the quarter. But any recovery here will likely be offset by declines in the housing services lines.
  • Food and accommodation services is tricky. We have seen that restaurants and groceries cancel each other out, so what is good for the restaurant industry is bad for supermarkets. That’s a wash. Hotels will see some recovery, but air travel will likely be limited for some time, so that will keep numbers down. How many hotels are viable at partial capacity is an open question.
  • Durables are less clear, beginning with autos, about a quarter of the category. As we have seen, the sector is in real trouble. Nothing was holding people back from ordering a new dishwasher during all this, so I am skeptical that we will see a hard bounce here.
  • Recreation services are one of the places we saw the largest declines. These are clubs, theaters, amusement parks, stadiums and arenas, where social distancing is just about impossible at full capacity. These will all have to operate at partial capacity at best until there is a vaccine. Many of these are not viable at partial capacity.
  • I’m going to lump transportation services and the two foreign travel categories together here. These are the largest percentage declines we saw. The economics of all of these services rely on people getting into cramped quarters, and the same space being reused by multiple people over the course of a single day. They are petri dishes, and there’s a good reason I get a cold every time I fly back east. At best they can operate at partial capacity, and many are not viable as such.
  • Clothing and footwear will rebound, but there are still giant wholesale inventories here, so that needs to clear as well.
  • “Other” services are hard to gauge, as it’s a large grab bag of stuff, but it is almost 9% of all consumption, so what happens here is important.
  • Gasoline is not recovering any time soon.
  • I think it’s reasonable to expect personal care and clothing to have a more or less full rebound.
  • A slower economy means less need for employment agencies, lawyers and accountants, so professional services will likely not see a full rebound. Funeral directors will be working overtime, however.

It’s hard to say how that adds up, but it looks pretty bleak to me. So get ready for the Nike swoosh logo recovery — a sharp dive down and a slow grind back. I don’t think we return to nominal 2019 levels until 2022.

Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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