Using 2020 Hindsight: The Emerging “New Normal” Picture
The year finally ended, and, as has been typical, the latest data continued to be downbeat.
Despite the weak economic data, the equity market ended the year at all-time highs. The S&P 500, at 3,576 was up 10.5% for the year after falling 34% in the February/March period, quite the reversal.
The current market mantra is that, with the vaccines now in distribution, and despite issues there, by spring/summer consumers will feel confident enough to return to some pre-pandemic spending habits, and second half 2021 economic growth will be “V” shaped. Given the data, this looks like wishful thinking.
As the New Year begins, there are significant changes already in process that will shape what the “New Normal” will look like economically. Three such changes are: 1) the rapid exodus of businesses and wealthy individuals from high tax/high cost states; 2) the flagging demand for office space in major U.S. cities; and 3) significant changes in the way Hollywood distributes its wares.
The week ended December 26th showed 1.15 million new unemployment claims, still sky high. There was a fall of -32K in the state unemployment programs and an -88K fall in the PUA (Pandemic Unemployment Assistance) programs. The fall in these numbers is, no doubt, due to holiday issues as opposed to any real progress. The accompanying chart at the top of this blog shows that Initial Claims (ICs) are still significantly above 1 million/week. They are certain to get worse in January.
In addition, total state and PUA Continuing Claims (CCs) are still hovering near 20 million (see chart and table) as of mid-December. Think of this in terms of a labor force of about 165 million. That means a real unemployment rate of more than 12%.
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- Pending Home Sales, a leading indicator, fell -2.6% M/M in December;
- New Home Sales were down -11% M/M in November and down four months in a row;
- The University of Michigan Consumer Sentiment Survey showed significant declines in both home and auto buying intentions;
- The latest NY Fed Credit Access Survey indicates a contraction in consumer credit has begun, not exactly what is needed to spur growth in an economy whose GDP is 70% consumption;
- The NY Fed found that 72% of surveyed executives said business conditions were below normal in December and expect no improvement for the next six months.
- The regional Fed services indexes are shown in the table below – detect a pattern?
As indicated above, equity markets closed 2020 at record highs. History indicates that market valuations are at nosebleed levels. But, history also shows that nearly all major market corrections are central bank induced. Since the Fed has pre-announced “accommodation” through 2023, a major correction appears to be a low odds bet, and, while something in the 10%-15% range may occur, the Fed will surely intervene before it goes too far. After all, this Fed believes that the “wealth effect” of higher equity prices will “trickle down.” The fact that it hasn’t done so over the past 14 years of easy money, and the fact that income inequality is worsening, doesn’t seem to play in this Fed’s arena.
So, given such Fed support and the introduction of the vaccines to the populace, the current market narrative is that in such a low rate environment, a return to “normal” corporate profits will result in “V” shaped growth in the second half of 2021. Once the virus is defeated, pent-up demand will cause consumers to spend, spend, spend. Thus the “V.”
The “V” Does Not Stand For “Viable”
This view is flawed because it has generalized that all consumption was suppressed. The following table shows January through November 2020 spending on selected semi-large and large consumer items and what one would expect in a “normal” January-November period:
The shift from consumption of services to the consumption of goods during the pandemic may very well have satiated demand for such items. As a result, in the upcoming scenario of “return to normal,” the growth rates of these significant items are likely to be below their historic norms. Thus, the “V” may turn out to be more of a “u.” Clearly, this logic is not in today’s equity market.
The “New Normal” Begins to Take Shape
The length of the pandemic is now eliciting economic actions; actions that will surely shape the post-pandemic “New Normal.” It appears that high taxes and high costs of living in some states are driving individuals and businesses to find more monetary/business friendly places to live, especially in an environment where work from home (WFH) is possible.
Likely everyone reading this is aware that Tesla’s TSLA Elon Musk has moved from his Bel Air CA home to Texas, as that fact made news headlines. Musk is not the “exception.” The reality is that individuals and businesses moving to more business-friendly and lower tax environments isn’t just a trend, it appears to be a tsunami. The table shows the movement of some significant companies and individuals. Note that TX and FL are the key receiving states while CA is the big loser.
The Austin, Texas Chamber of Commerce has a list of companies that moved there in 2020; 120 in total, creating 15,833 new jobs. Of the 120 companies, 24 of them were set to hire 100 or more employees, of these 24, only six moved/expanded to Austin from within Texas. Of the other 18, 10 came from California and 4 from the state of Washington (one each came from GA, MI, India, and the U.K.). Such business moves from high tax/high cost states to lower cost/lower tax ones will be the hallmark of the “New Normal” that 2021 will usher in!
In the Commercial Real Estate (CRE) market, companies are abandoning office space at a spectacular rate. The Christmas Eve headline in the Financial Times read: “US Office Space Dumped After Success of Working From Home,” (FT, 12/24,20, p. 7). The office space market will take years to recover, if ever. So too, with increasing reliance on package delivery and internet shopping since the start of the pandemic, shopping malls will continue to struggle.
Another significant difference in how “normal” will look is occurring in movie entertainment. All the major theater chains are struggling for survival with revenues down -94% Y/Y. Pre-pandemic, movie theaters enjoyed a 90-120 day exclusivity period with Hollywood’s latest releases, especially the blockbusters. But, after several recent announcements, some major film studios have decided (at least for the foreseeable future) to simultaneously release new blockbusters to the streaming media at the same time as they are released to the theaters. For example, Wonder Woman 1984 premiered on HBO Max on Christmas day. Others have altered their policies to give theaters a much shorter exclusivity period. How it shakes out is anyone’s guess. But one thing is for sure; this will have a dramatic impact on the movie theater industry.
Markets are looking beyond the downbeat economic issues that will likely result in flat Q4 GDP growth and perhaps negative growth (double dip recession?) in Q1. Markets have assumed that vaccines will result in the defeat of the virus and “pent-up” demand will cause a “V” recovery in 2021’s second half. The data show that consumers spent heavily on some big-ticket items in 2020, indicating that demand for such items may be temporarily satiated. This could very well impact the “V” shaped recovery scenario.
In addition, trends are now emerging which give us some clues as to what the “New Normal” may look like as time passes. One such trend is the rapid exodus of businesses and wealthy individual from high tax/high cost states to more business-friendly ones. At this time, the states of exodus don’t seem to be taking actions to reverse that direction. Other insights into the “New Normal” can be gleaned from the headlines regarding excess office space and how the entertainment industry will distribute its wares.
One thing is crystal clear: “Normal” won’t look anything like it did last February.