Looking Ahead – Twelfth of Never
This week featured some brightening glimmers of hope from the frontlines of the battle against the coronavirus pandemic – flattening infection curves and encouraging declines in mortality rates in a few key Covid-19 hotspots, as well as some (cautious) indications from respected public health officials that while the worst may not yet be behind us, the trends are showing the way to real improvement over the coming weeks and months. Some of the grimmest estimates for the human toll of the virus are being revised lower and the race for a vaccine is supplying a dose of hope that the world will be back to the status quo ex ante soon enough.
The narrative of a quick return to normal is understandably harder to believe for individuals that are over 50, are immunocompromised, or have family members under the same roof that fall into those vulnerable categories – for these many millions of Americans, the light at the end of the tunnel is far more distant. Even for the young and healthy, much care must still be taken in resuming normal activities lest secondary infection spikes occur. This dispiriting second wave of Covid-19 has hit Singapore, for instance, despite robust testing data, contact tracing, symptom tracking, etc. all of which is still a work in progress here in the US.
There is broad criticism that not enough was done in the US to prepare for a pandemic of this magnitude and policymakers cannot afford to compound the problem by failing to plan for the possibility of a “long tail” of the virus fighting effort, as we discussed in last week’s Looking Ahead. Fed liquidity provisions may be unlimited but they cannot solve a private sector and household solvency crisis. Muscular fiscal expenditures can provide an offset but, for example, with only a relatively small percentage of US small businesses able to access the PPP loans, and an average loan size of $150k, it is easy to see how more long-range planning will be needed if the economy is only able to recovery gradually and fitfully, as overseas evidence suggests.
The White House and Congressional leaders have already flagged infrastructure spending as a potential part of the pandemic relief packages, but more immediate needs, like topping up the small business lending facility, have pushed it down the list of priorities thus far. We believe infrastructure will not fall off the agenda this time and should be a feature in CARES 2.0 – but in what form?
“Infrastructure week” has been a laugh line in DC for the past few years, as anyone with an appreciation of the impaired political incentives, lengthy timelines, technical challenges, and myriad of other difficulties knows just how impossible a major federal infrastructure program has seemed, beyond another run-of-the-mill highway bill. We too believed that a major federal infrastructure push would not happen until the twelfth of never, but that is what time it is now.
Wrangling over allocation of trillions of dollars among specific projects is a bridge too far (pardon the pun) and giving money to the states directly for infrastructure outlays would understandably see that cash spent to fill short-term budgetary gaps. The Treasury should instead seek relatively more modest funding to establish a federal infrastructure bank as part of the CARES 2.0 package, find some office space for it at 1500 Pennsylvania and start staffing it up, doing planning, identifying projects, seeking approvals, etc. This is less splashy than a big dollar amount but more effective over the medium-term. Anyway, the projects themselves are too long-range to be part of any short-term relief but would come in very handy if the US economic restart needs some additional impetus six months to a year from now.
Critics say that it is impossible to start infrastructure projects in the middle of a pandemic, and they are right – the long timelines involved in these massive undertakings ensure that the infection peak will be behind us before anything really gets going on the ground (nothing is shovel-ready, as the Obama administration discovered). And what better time to fix public transportation when far fewer people are taking it or bridges and roads when there is less traffic? The same goes for our parks and recreation areas. Anyone who has tried to do a video conference for work while their children are engaged in remote-learning on their iPads knows connectivity is a big issue. The list of needs is long, as everyone knows.
In short, planning for adverse medium-term economic outcomes is not defeatist – it is prudent. There is an unacceptably high risk that the massive job losses we are experiencing will extend into a more chronic condition. Infrastructure can be part of the solution, but the groundwork needs to be started as quickly as possible. And if not now, then truly never.
Looking ahead to next week, US and China economic data is in focus. Stay safe and well!
- US Economic Data
- Bank of Canada
- China Economic Data
US Economic Data: Brace for impact
The Covid-19 shutdown has made certain datapoints more important than in the past, MBA Mortgage Applications, being a perfect example, which will be released on Wednesday. In the week ended April 3rd applications declined 17.9%, following a 15.3% rise in the previous week. Refinance applications dropped 19.4% and applications to purchase a home fell 12.2%, the lowest since 2015.
Later in the morning Retail Sales for March will be the focus of the market. February sales dropped 0.5% month-on-month (m/m), following an upwardly revised 0.6% increase in January and missing market expectations of 0.2%. This was the largest decline in trade since December 2018, as consumers cut back spending on a range of products, including motor vehicles & parts, furniture, electronics & appliances, building materials and clothing. Receipts also declined at gasoline stations and restaurants & bars. Excluding automobiles, gasoline, building materials and food services, retail sales were unchanged after increasing by 0.4% in January.
Industrial Production for March follows. IP in February increased by 0.6% m/m, recovering from a revised 0.5% in January. Manufacturing activity edged up 0.1%, boosted by a large gain for motor vehicles and parts, while production of civilian aircraft fell sharply. In addition, utilities output jumped 7.1%, as temperatures returned to more typical levels following an unseasonably warm January.
Wednesday also includes the NAHB Housing Market Index for April. March fell to 72 from 74 in February. The current single-family sub-index declined to 79 from 81; the sub-index for home sales for the next six months dropped to 75 from 79 and prospective buyers also went down to 56 from 57. It is important to note that half of the builder responses were collected prior to March 4, so the recent stock market declines and the rising economic impact of the coronavirus will be reflected more in this report.
Thursday brings the now all-important Initial Jobless Claims. In the week ended April 4th, the number of 6.6 mil Americans filed for unemployment benefits, compared to the previous week’s record high of 6.87 mil, well above expectations of 5.25 mil. The latest increase brought the total reported in the last three weeks to close to 17 mil, as the coronavirus crisis deepened. Continuing jobless claims hit 7.46 mil in the week ended March 28th, also the highest on record. The last week’s number may be underestimated as many states are struggling to process high volumes of claims.
Bank of Canada: Rates gone south in the great white north
Wednesday brings the Bank of Canada (BoC) Interest Rate Decision. On March 27th the BoC slashed its benchmark interest rate by 50bps to 0.25% in an emergency meeting. The move follows a similar margin cut on March 13th and brings borrowing costs to its effective lower bound aiming to support the economy and the financial system amid the coronavirus pandemic. The Committee also launched a Commercial Paper Purchase Program to help to restore a key source of short-term funding for businesses and said that will begin acquiring government securities in the secondary market until the economy recovers. Policymakers added that they are closely monitoring economic and financial conditions, in coordination with other G7 central banks and fiscal authorities and will take further action if necessary.
Chinese Economic Data: GDP = growth destroying pandemic
On Monday we will begin with China Balance of Trade and Foreign Direct Investment (FDI) data for March. February unexpectedly showed a trade deficit of $7.09 bil in January-February 2020, missing market expectations of a surplus of $24.6 bil. This was the first trade gap since March 2018, reflecting the severe impact of the rapid spread of COVID-19 outbreak to the country’s economy. Year-on-year, exports slumped 17.2% to $292.5 bil, while imports shrank 4% to $299.54 bil. China’s trade surplus with the US for the first two months of the year stood at $25.37 billion, much lower than a surplus of $42.16 billion in the corresponding period a year earlier. Meanwhile, FDI tumbled 8.6% y/y $19.26 bil, in the first two months of 2020 due to Covid-19 outbreak and the Lunar New Year holiday. For February, FDI plunged 25.6%.
Thursday’s focus will be on First Quarter 2020 Chinese GDP. In the fourth quarter 2019 the Chinese economy grew 6.0% y/y, the same as in the previous quarter. This remained the weakest growth rate since the first quarter of 1992, amid trade pressure from the US and sluggish demand from home and abroad. For the full year 2019, the economy grew by 6.1%, the slowest pace in 29 years, but still within the government’s target of 6 to 6.5%. Consensus expectations are for growth to remain at 6%.