Pro Perspectives 6/15/20

June 15, 2020

The media continues to bait readers and watchers with sensational "second wave" and virus “cases spiking" headlines. 

But there continues to be no story there.  The data doesn't match the headlines. 

For a point of reference, let's take another look at Arizona hospitalizations.

We looked at this last Thursday.  And you can see, nothing has changed. There is less than a handful of COVID hospitalizations in a state with a population of 7 million. 

So, for those looking to project another economic shutdown from a second wave.  Not only does the data not support it, but the administration has already made it clear that there will not be another shutdown. 

With that, we have some certainty.  The trajectory for the economy is clearly UP from here.  It's a matter of how much. 

Let's do some math to see how the full year might look. 

First, with two estimates of Q1 GDP already in, the economy is reported to have contracted by a 5% annualized rate in the first quarter.  So, over a twelve week period, three of those weeks were under nation-wide stay-at-home orders.  That's  one-fourth of the quarter, in what many people would consider to be in the state of economic stand-still.  

But as we know, the economy still operated.  Many worked from home. People shopped for groceries.  Delivery drivers delivered. Products moved. Essential utilities were operational.  There were winners and losers, but consumers continued consuming. The economy was still moving.  So, instead of a down 20% first quarter, the economy only lost 5% (annualized rate).  

Let's put that in perspective.  Our economic output was on pace to be about $22 trillion this year (current dollars).  The contraction in the first quarter cost us about $275 billion.  

Now, this perception of economic stand-still has also created an extremely overly pessimistic view on what Q2 GDP will look like.  At the moment, the Atlanta Fed is looking for down 48%, and the consensus view of economists has been tracking lower, now forecasting something close to down 35%.  

If we extrapolate from Q1, we should see something closer to down 20%.  But even if we took consensus view of down 35%, we get something close to a $2 trillion loss in economic output.   

That's a big number.   But remember, we have $3.3 trillion in fiscal stimulus now working through the economy.  And the Fed has pumped $3 trillion into the system since March.  That's a total of $6.6 trillion.  And it's estimated that, with the Fed's other facilities, the Fed could inject up to another $3 trillion+.  We don't have to do the math to see that the response is far greater than the damage, thus far.  

So, the big question is, what will the second half of the year look like?  The Conference Board, a think tank made up of public and private corporations and organizations, is projecting a bounce back of +20% (annualized rate) for the economy in the second half.  Even if the second half GDP were to be flat relative to a year ago (i.e. no growth, no contraction), this is all setting up for a lot of excess money to be sloshing around the economy.