The model was updated as of April 17, and the projected deaths came down - way down, for some states. The overall projected toll for the U.S. was down more than 8,000, to about 60,000, a drop of more than 10%. For Kansas, the projection fell from 555 to 187. The current total for Kansas is 84, and we're pretty much at the peak of our curve here in the Sunflower State. So the model's latest forecast may be close to being accurate, at least in some states and for the nation: if you're at the peak, you'd expect cases to roughly double by the time the curve gets back down to zero new fatalities.
However, the model is still way off in several states. You can look at various metrics and see which states those are. So as more data comes in, the numbers will continue to come down, and the time to flatten will continue to shorten.
The assumption that full social distancing would be maintained through May was relaxed in light of the phased plan to re-open America. The current assumption reads:
Current social distancing assumed until infections minimized and containment implemented
What's significant about that, you ask?
The modelers relaxed the social distancing assumptions, and projected deaths came down.
What? How is this possible? Simple. Remember that data informs models. And at the point of the latest update, the model had four more days of data since the most recent previous iteration. A larger amount of data than in any prior period between updates, because the numbers became staggering as we approached the apex of the curve in most states, including those with the highest numbers. So all of that data informed the model that -
We can relax the mitigation protocols, if we're smart about it, and it won't lead to a widespread horror-movie scenario in which every American dies.
(Note: if you're among those who believe we need three times the number of tests, or a proven vaccine, before we can safely re-open, reading further would probably be a waste of your time. None of the real experts - Drs. Fauci, Birx, Giroir and Adams - agree with that. And, if you're one of those who believe that they are all just puppets controlled by Bad Orange Man, don't bother with a mask. Your tin-foil hat will save you. When the rest of America re-opens gradually, and in phases, feel free to stay at home until the vaccine is available. But your fear, in the face of contrary evidence from the experts, doesn't give you the right to impose that sentence on the rest of us.)
I've believed for a while now that the model projections would become better aligned with the actual data only after the curve peaked in every state, and that appears to be correct. In other words, the model will only become accurate when we reach the point where a model is no longer needed. Hindsight is 20/20. And 2020 will be hindsight.
Now, on to the economy. For a while, I was fearful that a V-shaped recovery would be impossible. I'm a bit more confident now. Before I explain why, let me discuss some of what I've heard from other sources, which is the reason behind this post, to clear the air.
Some are saying that this will be the worst economic catastrophe in the history of the U.S., and that recovery will take years, if it ever happens. They're saying they base this on "the data." I'd love to see the data they're looking at, because I can find no indicator that supports this view. If you can, please send it my way.
Yes, it's bad - more than 21 million Americans have filed first-time claims for unemployment insurance in the last five weeks. (During the Great Recession, the total was more than three times that number.) Ongoing claims will exceed 10 million claimants when the next number prints on April 23, as of April 11. The unemployment rate for April, which will be released on May 1, is going to be ugly. There will be a contraction in GDP for the first quarter, followed by an extremely sharp contraction in Q2, and it may also be negative in Q3, and possibly Q4, but Q2 will likely be the worst. That would mean a 12-month recession - about average in duration by historical standards.
One observer said that this would be worse than 9/11. So let's look at that dark time in our history, and use the stock market as a gauge of how fast things went down, how far they went, and how long it took to recover.
September 11, 2001 came five months after the dot-com recession had ended, and it resulted in another decline in GDP for the quarter during which it occurred, effectively extending the recession. And then GDP growth rebounded in the last quarter of 2001, and was up nearly 4% in the first quarter of 2002. It dropped again, to almost zero by the third quarter of that year, before recovering fully.
So yes, this is worse than 9/11. While 9/11 was catastrophic for our nation, its impact on our economy was far from catastrophic, and was brief.
Let's look at the stock market for the whole of the 2000-01 recession. The S&P 500 fell by about 40%, and that decline took 22 months. It was four years before the index recovered to 80% of its value at the pre-recession peak.
Now, let's look at the even deeper, and longer, Great Recession. The S&P fell by 50%, and it took 15 months to fall from peak to trough, and 18 months to recover 80% of its pre-decline value. (That recovery was accelerated by the most unprecedented fiscal and monetary stimulus in U.S. history.)
As a result of the government response to COVID-19, the S&P fell by about 34%, from a record high to its trough.
Folks, that decline took less than five weeks. And it has already recovered 80% of its pre-decline value - in less than four weeks. (And we have again seen unprecedented fiscal and monetary stimulus, with more likely to come. How we pay for it is another conversation.)
Five weeks, peak to trough. Four weeks, trough to 80% recovered. Can you say V-shaped?
We're not out of the woods yet, but I'm extremely confident that we've seen the bottom of the market in this crisis, barring some cataclysmic Hollywood-esque spike after re-opening that kills millions. Which I don't believe will happen, and neither do the real experts.
We could keep looking at data, but readers of this blog know that I'm a big fan of anecdotal economics - that we can perceive more from observing the world around us than we can forecast using models. So let's look at some anecdotal evidence.
What sectors of the economy have been hit the hardest? Let's start with restaurants. As of a couple of weeks ago, a reported 30,000 restaurants had closed permanently. A projection I saw was that, by the end of May, that total would jump to 110,000, roughly 10% of America's restaurant locations. And 70% of U.S. restaurants are single-location operations - mom and pop places.
My lovely wife and I have been picking up food from local restaurants every few days. And what we've experienced is having to redial the restaurant's phone number for several minutes before we get through. Wait times of an hour or more before the meal will be ready. Restaurants running out of some popular items before peak dinner time. Having to wait more than a half hour from the scheduled pickup time before the food is ready. Lines of cars at pickup time.
Why? Demand. Restaurants are reporting that sales are about 50% of normal, just from carry-out and delivery. That won't sustain them long-term. But it's pretty darn good considering the circumstances, and it's a clear indication that people want to eat out again. When those restaurants re-open for dine-in service (on a limited basis due to social distancing), they'll be as packed as they're allowed to be. And they'll have to hire some wait staff back. When they're able to fully open again, they will be packed, with longer than normal wait times. And they'll have to fully staff back up. Based on current projections (which are still too far out), and the phased re-opening guidelines, I expect that to happen sooner than the doomsayers think.
Another indicator is the stocks of restaurant holding companies. I bought several of them at the market bottom. They're all up between 40% and 52%.
In two weeks.
Let's look at cruise lines. Carnival's stock (which I also bought at the bottom) is up 55% in two weeks. Royal Caribbean (which I already owned, but bought more of) is up 45%. Even though the CDC recently extended its stranglehold on the industry through early July (which only applies to ships sailing in American waters, so there will still be some sailings in other locations before the CDC order expires).
Why? The largest cruise-specific travel agents are reporting that bookings for 2021 are up by double digits over 2019. Part of the reason is the generous credits the cruise lines are offering cruisers who've had to cancel due to the shutdown. They're offering those credits in lieu of refunds in order to maintain cash. An industry analyst has said they can remain afloat (pun intended) even if cruising were to not resume until January 2021, which is highly unlikely.
Cruisers are loyal. They love to cruise. They're anxious to be able to cruise again. I should know - my lovely wife and I have cruised more than 20 times, and we will certainly cruise again. We've been on cruises with people who have taken well over 100 cruises. We met one guy from Australia who said he spends three months a year cruising.
What about airlines and hotels? Delta's stock is up 27%. Hilton is up 70%. Park Hotels, which spun off from Hilton to manage some of its higher-end properties, like the Hilton Midtown in Manhattan and the Hilton Hawaiian Village on Waikiki Beach, has doubled from its low. So there's clearly future demand for travel, including staying in high-end hotels. (In most recessions, luxury spending is the last thing that recovers.)
People want to travel again. I travel extensively for work, and I have a trip scheduled in late May - to Jacksonville, where the beaches have already been re-opened, but with limited access and social distancing requirements. I'll need to book a plane ticket. I'll need a hotel room and a rental car. I'll need to eat out, if possible, or at least pick up restaurant food. I'm also going to St. Augustine on business in mid-June. And I expect to make my usual round of four client visits in August, as well as several on-site engagements that were postponed and need to be scheduled. It's not like this won't happen until 2021 or 2022.
Note that the media headlines screamed, "Jacksonville Opens Beaches the Same Day Florida Deaths Peak." Not only is that not true - deaths in Florida peaked on April 14, and the Jacksonville beaches re-opened four days later - but Duval County, where Jacksonville and its beaches are located, has experienced only two deaths in the last seven days. They've had 15 overall, in spite of a population of about one million. And, they closed some public spaces, like malls, later than most cities. Of course, the media omitted those facts.
Another anecdotal indicator is the wave of protests in various states, clamoring to open things up. Are the protesters engaging in risky behavior in some cases? Yes. But that isn't the point. The point is that the protests themselves are evidence that large numbers of people are ready to see things open back up. We need to follow the gating and phasing guidance to do it safely (probably - we don't really know for sure whether it's necessary, so we err on the side of caution). But it's clear that most Americans are concerned that we risk burning down the village to save it, and they don't want the political football game to continue.
Also worthy of consideration is the aforementioned stimulus. Government spending is one component of GDP. So not only is the stimulus helping various sectors of the economy to survive, it will put a floor under GDP declines.
For a final indicator that combines anecdotal and data evidence, let's look at the banking sector. They're anticipating increased loan losses from individuals who default on credit cards, auto loans and mortgages, and from businesses that default on commercial loans. How ugly do they believe it's going to get?
Banks and credit unions set aside reserves as a buffer against the credit risk that they all assume - the risk that borrowers will default and the bank will have to charge off the unpaid balances. These reserves are called the allowance for loan and lease losses, or ALLL. To fund the ALLL, they set aside a portion of their income. That portion is called the provision for loan losses, or PLL. (Don't worry about the distinction - it's a function of accounting.)
So lenders are going to be increasing their PLLs to fund the reserve that they'll likely need to use to cover the cost of loan defaults - the ALLL. In effect, they'll be pre-funding their credit losses out of current income.
My clients are credit unions. Let's take a look at one of them, as an example. This client is located in a sand state that was hard-hit during the housing collapse that precipitated the Great Recession. Its housing market dropped 40% from from mid-2007 to mid-2012, and only last year recovered that full decline.
In 2007, as home prices began to fall, my client's PLL as a percent of total loans was about 1%. In 2008, they more than doubled it, to 2.2%. They increased it again in 2009 by another percentage point, maintained it in 2010, then were able to reduce it by half in 2011 as credit losses subsided.
This year, they plan to again double their PLL from last year. However, last year it was less than half of one percent of total loans, so this year they'll be taking it to just under 1% - about the same level as in 2007, before the housing collapse began.
In other words, while they expect conditions to worsen on the order of the change from 2007 to 2008, they don't anticipate credit losses at the level of what they were in 2008 - not by a long shot.
At my client's request, I analyzed their assessments of recession and related risks, and my analysis validated their projected increase in the PLL. A colleague conducted a similar analysis across all of our clients, which produced similar results to my analysis. So expected credit losses are pretty consistent across lenders, and a heck of a lot less than during the Great Recession.
The upshot of all of this is that this is likely to be a very sharp, but not longer than average, recession. It is affecting, and will affect, certain sectors of the economy, and leave others relatively unscathed. Millions have lost their jobs, but not permanently. Millions more remain employed, and their pay has not declined. As I've noted before, there is no sector of the economy that will not come back. That isn't the case in every recession. And the businesses that do close permanently, such as the mom-and-pop restaurants, may re-open. (Locally, GoFundMe pages have popped up to help some popular restaurants re-open. If that's happening here in flyover country, it's happening everywhere.) If they don't, others will crop up to take their place, because the demand is there.
America will be fine.
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