The Impact of the Corona Virus And Why I Can’t Wait for 2021
I have been following America’s economy for more than 60 years and I have documented some extraordinary events over that time but nothing has prepared me for what I have witnessed in 2020. The corona virus, since March, has become the world’s leading economic indicator and if some scenarios unfold as many economists believe, we could see an economy that sometimes makes no sense. I am devoting this column to the oddities we are experiencing in today economic universe.
First on my list is an industry that is near and dear to all of us in the home goods trade and that’s housing. Housing is one of the largest sectors in our economy and every new home sale creates demand for most of the products sold by our dealers. So what is odd about this business today?
Well, sales of existing homes were up 24.7 % in July and 13.4% in August and prices were up 8.5%, in the middle of a pandemic! In the face of the greatest job loss in U.S. History! With the largest decline in consumer spending ever! With so many homeowners unemployed and reduced personal spending, you would not expect to see home sales growing so rapidly. What most economists were predicting was a lag in sales. So what is driving this extraordinary spike in sales? Interest rates are at historic levels, a 30 year fixed mortgage is in the low 2% range, the fed fund rate is .25% and there is an extreme undersupply of homes, all these forces hit at this moment to keep economists completely off guard. Here is another surprising number, The Builder Confidence Index, which is a reliable predictor of a rise in housing starts, has doubled since April. I will be watching for the next shift in this industry.
Next is a leading economic indicator economists use to predict business cycles, the sale of automobiles. You might ask, what is so odd about car sales, well, through August, car and truck sales are down 19.8% from last year but the price of autos is breaking all time records. Economic theory would suggest a 20% drop in demand would spur car dealers to cut prices in order to move old inventory, however as the pandemic has curtailed many buyers from the market, those still in the market for a car, have cut back on many other luxuries in their lives are now splurging on bigger, costlier vehicles. Also because interest rates on autos are at all-time lows, gas prices are depressed and there is limited stock, consumers are stepping up to more expensive trucks and SUV’s. I have never witnessed auto sales like this. See the graph below.
Here is another interesting impact of the virus we didn’t expect or at least use in our estimates for any type of economic expansion or contraction. If you have been on your local highways recently, one thing you have noticed is how easy it is to get in and out of any big city near where you live. We witnessed over the past six months, one of the largest slump in commuter travel since Henry Ford sold cars to the masses. I live near Portland Oregon and the average commute time has been cut by 50%, so Covid 19 has greatly reduced the time we spend on the highways. Economists ae estimating that American workers who were commuting every day in their cars are saving $758 million dollars a day, if you project that number out during the months of the pandemic here in the U.S. it amounts to a cumulative savings of $90.9 Billion dollars. This research comes from an article I read in the Pittsburg Post-Gazette about the freelancing platform, Upwork. In the piece, the chief economist at Upwork, Adam Osimek says the “The savings comprise things like brakes, tires, gas, oil changes, electric charging and other repairs as well as societal costs, such as congesting and pollution.” I would never have guessed that this level of saving for consumers could have been a result of a pandemic, it is counter intuitive.
Here is another anomaly that I find so fascinating, while Americans are buying houses at a record pace and spending more on cars, the pandemic is changing behaviors in a way that can create habits that could carry on for years. We have cut out travel on airplanes by 78%, hotels by 50%, and restaurants by 68%, sporting and concerts by 85% and clothing by 47%. All that money is not just going into housing and cars, Americans are saving cash at historic levels. In the graph below you can see that we are saving money at levels we never thought possible. In April alone saving rate for Americans was 33.7%, this is more than four times what it was prior to the pandemic. It is a positive barometer that consumers have money to spend now and in the next cycle. As most of our readers have experienced, the appliance, electronic, furniture and mattress businesses are growing dramatically as we are spending more time at home and improving our household environment.
The last oddity of our economy is the federal debt. At the start of 2020 the debt held by the public was $22.8 trillion and economists were predicting it would grow to about $32 trillion in 10 years. Enter the corona virus and now the public debt stands at nearly $26.8 trillion. Many traditional economists believed that a debt so huge would ravage the economy by creating massive inflation and spike an interest rate increase. Instead, in spite of the historic rise in debt, inflation has remained below 2% and the Fed Fund interest rate is .25%. This level of governmental stimulus spending, now approaching $6.6 trillion, will juice the stock market and should help the economy recover quickly. As I have predicted both in my presentations and articles in the past nine years, the size of the debt is not something we need to worry about now or in the immediate future. Here are the facts, through quantitative easing the Fed has purchased almost $2 trillion worth of Treasury notes, that action has provided the liquidity the Treasury needs to rapidly expand the debt without any serious negative consequences. The IMF (International Monetary Fund) in a directive last month, predicted that foreign governments, pension funds and other investors will continue to buy up American Treasuries even in the face of our staggering debt. As long as that is the case, we don’t have to worry.
So where does all this leave us, this is a very uncertain time for our economy with a discordant amount of variables. I never could have predicted any of these events with all my classroom and worldly experience in this field, so if you are feeling overwhelmed, you not alone. As we approach the fall, there are more possible impacts from the corona virus. Will the virus still be with us as a part of the first wave? Will there be a second wave? Will colder weather and spending time indoors create more cases, which will lead to more hospitalizations and deaths? Will there be a seasonal flu along with covid 19 that is now being called a possible twindemic?
If there can be such a thing as good news, at least in our business, appliances, furniture, electronics, mattress and home remodeling will continue to grow. That is at least what my crystal ball is telling me today. Good luck and good selling.