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https://www.nbclosangeles.com/news/coronavirus/how-tax-deferments-are-just-the-start-to-helping-the-economy/2239094/

The Link to the UCLA Ziman Center Version of "Sum of All Fears"

Below is the link to the UCLA Ziman Center version of my "Sum of All Fears" report. It has a comment on real estate AND all of the figures are available on their pdf format.

https://www.anderson.ucla.edu/documents/areas/ctr/ziman/UCLA_Economic_Letter_Shulman_03.17.20.pdf

"The Sum of All Fears," UCLA Anderson Forecast March 2020 Interim Forecast

As we noted in our quarterly March report, the forecast represented an “attempt to distill incomplete and rapidly evolving information into a framework about the future course of the economy.” We now have new information that has confirmed the coronavirus is spreading rapidly, the travel and recreation sectors of the economy are shutting down, oil prices continued to plunge in response to the Russian war on the American fracking industry, credit spreads have widened dramatically thereby tightening financial conditions and stocks remain volatile with a downward bias.

As a result we have changed our forecast. Simply put we believe that when the business cycle dating committee of the National Bureau of Economic Research meets they will note that the 2020 recession began this month. Significant increases in Federal spending to support individuals and industries damaged by the coronavirus and a new program of quantitative easing by the Fed will limit, but not avert the decline in economic activity that we foresee. In summary our new forecast is as follows:

·        Real GDP declines by 6.5% and 1.9% in 2Q and 3Q, respectively. Growth rebounds in the 4Q a 4% clip.  (Figure 1)

·        Social distancing causes real consumption to fall by 7.8% in 2Q. (Figure 2)

·        Real Business Fixed Investment declines throughout the year. (Figure 3)

·        Two million jobs are lost between 1Q20 to 1Q21. (Figure 4) 

·        The unemployment rate rises from 3.6% to 5.0%. (Figure 5)

·        The Fed responds with a zero interest rate policy and QE. (Figure 6)

·        Inflation remains muted. (Figure 7)

Note: No Figures in this post.

"Corona Virus: Supply Shock and Demand Shock," UCLA Anderson Forecast, March 2020

This forecast was put together on March 1 and represented our thinking at the time. Subsequent to that the Saudi oil price war broke out and the COVID-19 pandemic intensified and the U.S. government policy response has been found wanting. Thus if we were to do the forecast today we would likely have declines in real GDP in the second and third quarters of this year.

The realization that the coronavirus known as COVID-19 has the potential to wreak havoc with the global economy hit the securities markets like a shock wave in the last week of February. Just as we thought that after the signing of the USMCA agreement and the temporary truce in the U.S.-China trade war would put both the U.S. and the global economy on the path to moderate growth in 2020 and beyond, we were struck with the realization that the public health emergency would morph into an economic emergency as portions of the Chinese, South Korean, Japanese and northern Italian economies began to shut down.

What makes COVID-19 different from the prior epidemics SARS (2002-03), MERS (2012), Ebola (1976- ) and especially H1N1 (swine flew of 2009-10 which killed 12,500 Americans alone) is that although less fatal, it is potentially far more contagious. It is in the contagious nature of COVID-19 that triggered the economic shutdowns that have become so disruptive to the global economy. Remember China is far more integrated into the global economy than it was during the SARS epidemic.

In the last week of February the U.S. stock market as measured by the S&P 500 decline by 11.5%, its biggest decline since the height of the financial crisis in October 2008; the yield on the 10-year U.S. Treasury bond dropped 35 basis points to a record low of 1.15% and oil prices plummeted. (See Figures 1, 2 and 3) As a result we tore up the forecast we were about to present and very quickly produced what you are about to read. And as a consequence take this forecast as an attempt to distill incomplete and rapidly evolving information into framework for making reasonable judgments about the future course of the economy.

Figure 1.  S&P 500, 1MAR19 – 28FEB20

Source: BigCharts.com

Figure 2. 10-Year U.S. Treasury Yield, 1MAR19- 28FEB20

Source: BigCharts.com

Figure 3. West Texas Intermediate Crude Oil – Front Month Contract,        1MAR19-28FEB20

BigCharts.com

We view the COVID-19 epidemic and likely pandemic to work as both a supply shock and a demand shock on the economy. It affects supply by shutting down factories making critical products and decreases demand for travel, hotel and recreational services. For modeling purposes we looked at the demand response to the 9/11 event in 2001 to get sense of the magnitudes. On the supply side we looked at the risks to automobile, clothing and capital goods production.

As a result we are assuming a two quarter hit to real GDP growth in the second and third quarters of this year with very modest increases of 1.3% and 0.6% respectively compared the 2% plus growth we previously forecast. (See Figure 3)  That would put 2020 growth on a fourth quarter to fourth quarter basis to a low 1.5%. You can view our forecast as the midpoint between the coronavirus having a very minimal effect to it causing a full blown recession. Time will tell.  Very slow growth combined with the ending of temporary employment associated with the 2020 census will lead to about a drop of 300,000 jobs in the third quarter. Thereafter we anticipate employment growth to resume. (See Figure 4) Concomitantly the unemployment rate is forecast to increase modestly from 3.5% in the first quarter to 3.8% in the third quarter. (See Figure 5) As an aside, do not be misled by the very strong 225,000 job gain reported for January which was influenced by unusually warm weather throughout the country. (See Figure 7)

Figure 4. Real GDP Growth, 2011Q1 -2022Q4, Percent Change, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 5. Payroll Employment, 2011Q1 -2022Q4F, Change in Thousands, SA

  

U.S Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 6. Unemployment Rate, 2011Q1-2022Q4F, Percent SA

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 7. January 2020, Average Temperature Divergence

Source: National Oceanic and Atmospheric Administration

Monetary Policy to Become Super-Accomodative

Monetary policy is not a cure for COVID-19 nor a vaccine for COVID-19. It cannot reopen factories in China or Italy and it cannot convince frightened people to travel, but it might reduce fears that something worse could happen to the economy and might alleviate the pain of stressed business facing supply shortages. We expect that the Fed will cut its benchmark federal funds rate by a full 50 basis points in the second quarter, from the current mid-point of 1.625% to 1.125%. We do note that as of March 2 the futures markets were expecting cuts on the order of 75 basis points.

Figure 8. Federal Funds vs. 10-Year U.S. Treasury Bonds, 2011Q1 – 2022Q4F, Rates

Sources: Federal Reserve Board and UCLA Anderson Forecast

Further the balance sheet expansion process that the Fed undertook last September to solve a “plumbing problem” in the all-important repo market will, instead of winding down as planned, continue.( See Figure 9 ) Simply put the interaction between the Dodd-Frank regulatory regime and Fed’s reserve requirements left the system short of reserves. And although the reserve replenishment programs is not exactly like the three quantitative easing programs of the past decade, it sure looks like it on the chart.

Figure 9. Federal Reserve Bank Assets, 18Dec07 – 26Feb20, In $Millions

Source: Federal Reserve Board via FRED

At least in the short-run the Fed will be able to aggressively ease. Inflation remains quiescent and is likely to remain below its 2% target as measured by the consumption deflator. Here we chart the more familiar consumer price index which runs higher than the deflator.(See Figure 10) Further it is likely that the Fed will make its inflation target symmetric which means that prior undershoots will be offset by an overshoot in the inflation rate meaning that the near term target going forward could very well be 2.5%. Another wrinkle to Fed policy is the potential for Trump acolyte Judy Shelton to receive Senate confirmation for a seat on the Federal Reserve Board.  Put simply, she doesn’t play well with others. However the supply shock coming from COVID-19 and continued trade issues with China have caused many businesses to rethink their global supply chains into thinking more local. Thus over the long run de-globalization may work to increase inflation.

Figure 10. Consumer Price Index vs. Core CPI, 2011Q1-20122Q4F, Percent Change a Year Ago

Sources: Bureau of Labor Statistics and UCLA Anderson Forecast

Consumption Growth Slows to a Crawl and then Rebounds

Since 2014 Consumer spending has been the mainstay of the economy. However the shock of the virus will likely dampened consumer spending in the second and third quarters with growth stalling out at 1.3% and 0.7%, respectively. (Figure 11) Thereafter we expect a rebound with automobile sales lagging as a result of credit problems in that sector.

Figure 11. Real Consumption Expenditures, 2011Q1-2022Q4F, Percent
Change, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Housing Comes Alive

Although far from booming housing starts are ratcheting up on the order of 100,000 units a year. Instead of a previously forecast 1.25 million/year, we now envision starts to come in at somewhat above 1.35 million units a year. (See Figure 12) Rising income and the allure of 3.25% 30-year fixed rate mortgages are beginning to overcome the supply constraints caused by local zoning and do not forget that the low interest rate environment is bringing a torrent of money into the rental apartment market as investors hunt for yield in yield starved world. Indeed, in some states, local zoning restrictions are being relaxed and that in the long run will enable housing starts to return to its historical run rate on the order of 1.4-1.5 million units/year. Far from a boom, but much better than the recent history.

Figure 12. Housing Starts, 2011Q1 – 2022Q4F, In Thousands of Units, SAAR

Sources: U.S. Bureau of the Census and UCLA Anderson Forecast

737-Max Deliveries to Rescue Business Fixed Investment

We are assuming that Boeing’s long grounded 737-MAX airplane will soon be certified to fly and deliveries will start taking place in the third quarter. Thus the full year decline in nonresidential fixed investment will soon come to an end. (See Figure 13) Those deliveries will likely offset the effects coming from the virus. If we are wrong here the outlook for the second half will decidedly worsen. Of course a lion’s share of the gain in fixed investment will be offset by a reduction in inventory levels. Just to note a good part of the recent weakness in this sector is coming from substantial declines in structures for the oil and gas industry as low oil and gas prices weigh on the decade long fracking boom.

Figure 13. Real Business fixed Investment, 2011Q1- 2022Q4, Percent Change, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Government Spending: The Good News and the Bad News

To look at the 3%+ real growth in federal government purchases (excludes entitlements) from 2018-2020 you would think the Democrats were in power, yet under a Republican administration we are witnessing dramatic growth in both defense and nondefense purchases. (See Figure 14) Contrast that to five years of annual declines from 2011-2015 under the prior Democratic administration. As a consequence instead of being a drag on real GDP growth, federal government purchases have been highly stimulative.

Figure 14. Real Federal Government Purchases, 2011Q1 – 2022Q4 F, Percent Change, Annual Data

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

The bad news is that the party will likely end in 2021 as the growth in government purchases crawl to a halt. Here we that the increases in public health spending associated with the virus will not be substantial. Defense spending is peaking and assuming gridlock in Washington in 2021, nondefense spending will be under pressure, but nowhere near the budget cuts the Trump administration has proposed. Further as a result of the late 2017 tax cuts and the increases in spending, the federal deficit will exceed a trillion dollars a year for as far as the eye can see. (See Figure 15)

Figure 15. Federal Deficit, 2011 – 2022F, In $Billions, Annual Data

Sources: U.S. Office of Management and Budget and UCLA Anderson Forecast

Conclusions

The forecast presented herein represents our very preliminary estimate of the impact of the Coronavirus on the U.S. economy. For the time being we view our 1.5% forecast for real GDP growth on a fourth quarter to fourth quarter basis as a midpoint between a minimal effect and a full blown recession. At this stage it is hard to model out the full effects of the supply and demand shocks that are now hitting the economy. In response we anticipate that the Fed will cut its policy rate by 50 basis points from 1.625% to 1.125% and interest rates will remain low for the entire forecast period. The one bright spot in response to the low interest rates will be a much stronger housing market than we previously forecast. Of course it goes without saying that this year’s presidential election, like 2016’s, will increase the risk of untested economic policies being put into place in 2021.

Bernie Sanders is a Mean Stubborn Old Man

I just watched Bernie Sanders prove that he is a mean-spirited stubborn old man. Instead of gracefully bowing out of the Democratic nomination in favor of front runner Joe Biden, he chose to continue his civil war against a clear majority of the Democratic Party. His stubbornness will not change the ultimate outcome of Joe Biden's nomination, but every day he stays in the race is one more day where he is helping Donald Trump. Instead of being a statesman he will end up being remembered as a sore loser.

The whole theory of his case has collapsed in front of him. To be sure he brought new voters into the process, but those new voters voted against him in size. He fails to understand that just like the 2018 congressional elections, suburban Mom's along with a very strong African-American vote is driving Biden's wins.

If I were Chuck Schumer, I would tell Bernie that if the Democrats retake the Senate he will not get a committee chairmanship. Simply put in the words of his hero Leon Trotsky, Bernie is about to enter the dustbin of history.*

*- Bernie supported the Trotskyite Socialist Workers Party in the 1980 presidential election.

My Amazon Review of Henry Hemming's "Agents of Influence...."

Churchill’s Man in New York

On the 36^th floor in the Rockefeller Center International Building (630 5^th Avenue) at the elevator bank for the offices of Capital Research there is a small plaque commemorating the work of William Stephenson for his efforts to bring the United States into the war against Nazi Germany. It was out of those offices in 1940 and 1941 that Stephenson ran a vast apparatus to influence an isolationist America to enter the war. 

Henry Hemming tells the story of how a boy who was born in Winnipeg, Canada’s red-light district grew up to be a World War I ace flier, established a successful business in the booming 1920s British radio industry which then morphed into a European-wide investment company. The information network that he established caught the eye of MI-6 led to his recruitment to head-up British efforts in the United States. What makes the book especially interesting is that William Stephenson was the author’s grandfather’s godfather. So in a way through family lore, Hemming is connected to his protagonist.

It is in New York that Stephenson establishes a far reaching network that encompasses the pro-intervention Century Group, Wendell Willkie and future advertising mogul David Ogilvy who was then working for the Gallup Poll. His most important connection was with Bill Donovan whom he convinces of the need for the U.S. to establish a centralized intelligence agency and it is with that connection Stephenson gets access to the White House. Stephenson schools Donovan on the art of intelligence. Donovan initially establishes the Office of Information Coordination, which morphs into the Office of Strategic Services and then in 1947 becomes the CIA.

Stephenson faces off against his German counterpart Hans Thomsen who out of the German Embassy was in the business of funding pro-German groups, funding supportive Congressmen, most notably Hamilton Fish of New York and feeding speech and newspaper article ideas to the pro-German aviator Charles Lindbergh.  

We see that in 1941 Stephenson engaged in the same tricks that the Russians used in the 2016 elections.  He generates “fake news”, funds pro-intervention groups, sabotages pro-German and anti-intervention groups, forges documents and plants articles in the New York Herald Tribune which for all practical purposes became an arm of British intelligence. Along the way we meet song writer and expert forger Eric Mashwitz and Ian Fleming who would later write the James Bonds spy novels.

Hemming, utilizing recently declassified sources, tells Stephenson’s life story with great verve. It still remains a wonder how Stephenson pulled everything together and managed to move American public opinion, along with the facts on the ground and in the Atlantic, towards intervention prior to Pearl Harbor.

For the full Amazon URL see: https://www.amazon.com/review/R17KRNE7A0VOBM/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

Biden Rises from the Dead

Left for dead a week ago Joe Biden swept from victory to victory on Super Tuesday. His coalition was built on very strong support from African-Americans and suburban white women. That coalition proved durable throughout the south, Texas, Minnesota and yes, Elizabeth Warren's Massachusetts. To be sure Bernie Sanders was correct in the notion that he would bring new voters into the process, but those new voters turned out in size to vote against him. He reminds me of an old business acquaintance of mine who created a massive a disparate coalition around him, unfortunately he got people who never agreed on anything to turn against him.

Yes, Sanders did well in California and Colorado where there were a large proportion of Hispanic voters, but not as well as the earlier polls predicted. Biden will have his work cut out for him to bring this large voting bloc into the fold. His problem will be, as my very lovely and very brilliant wife informed me, is that throughout Latin America there seems to be a proclivity for populists on the Left (Chavez) and populists on the Right (Peron). Sanders seems to be benefiting from this historical connection.

On the other hand there is much that voters don't know about Sanders and when they find out they will be far from pleased. For example Sanders views Medicare for All as a compromise from the complete nationalization of the entire healthcare industry, doctors included. He is also against private charity because he believes that the government should fulfill all of society's responsibilities to the poor. I wonder how all the Sanders supporters who work in nonprofits will feel about that.

The primary season is not over, but if Tuesday's results hold Biden should be able to do very well in Florida and Arizona and beat Sanders in Michigan, a state he won against Hillary in 2016. Thus the way is open for him to go into the Democratic convention in Milwaukee with a clear majority.