The massive coordinated easing by the Fed and other central banks sets the stage for an eventual recovery in the economy and stock market. But, the knee-jerk stock market sell-off shows that the central bank action may have stoked fears that the near-term economic situation is worse than thought. (The evidence is not yet clear cut, however, as discussed below.) Whether this interpretation of the policy moves will persist is hard to say. The stock market could be in for wild swings again this week.
A sustained market recovery probably requires evidence that the virus' spread has peaked. This would spark expectations that the extraordinary actions by governments, sports organizations and companies to restrict group activities and global travel will end soon. And, as an added bonus, the extraordinary fiscal and monetary stimulus would fuel the snap-back of pent-up demand. To be sure, a return to normalcy could take several weeks or months, presumably. But the market would likely rally before then in anticipation of a recovery in economic activity. Similarly, an announcement of a vaccine also could trigger a rally, even though its availability would probably be months away.
The economic impact of the coronavirus should show up in March data. But, these data are, for the most part, several weeks away from being released. Curiously, a negative impact is not yet seen in the latest Unemployment Claims data, which are the broadest of the high frequency data. Both Initial and Continuing Claims still indicate a strong labor market in early March. Some large companies are continuing to pay workers despite the drop-off of business, which is helping to hold down Claims while keeping the labor market tight.
This week's US economic data are mostly for February and are expected to be strong. Consensus looks for +0.3% m/m in Ex Auto Retail Sales. They could be boosted by hoarding of food and household supplies in anticipation of the virus. And, people may not have curtailed going to restaurants as yet. Consensus expects a solid 0.4% m/m increase in February Industrial Production, but the risk is that it will be even stronger (based on Total Hours Worked in Manufacturing). February Housing Starts/Permits are expected to be little changed from the high January levels. And, February Existing Home Sales are seen rising. The one March report will be the Philadelphia Fed Manufacturing Index. Consensus looks for a pullback, but to a still-high 28 from 36.7 in February. This would not signal a major hit to this sector.
A significant contraction in consumer spending would push Real GDP Growth into recession. The table below shows the main components of consumption that would seem to be directly affected by actions to avoid the virus. A 20% drop in this spending would subtract $220.3 Bn from consumption, resulting in a 4.5% pt subtraction from annualized Q220 GDP Growth. A 30% drop would subtract 6.7% pts from Q220 GDP Growth. To be sure, there could be offsets. For example, if people eat out less, they would buy more food for consumption at home (hoarding is still going on in March, according to anecdotal evidence). And, there could be a shift to more on-line purchases if people are afraid to go to the malls. So, these calculations could be on the high side with respect to what will actually occur.
Real Consumer Spending
(annualized level, bn of constant $)
Q419 -20% -30%
Air Transportation 104.9
Food Services 608.3
Hotels 103.8
Admission to Spectator Amusements 67.8
Amusement Parks 60.4
Foreign Travel to the US 156.2
Total 1101.4 -220.3 -330.4
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