Another week, another slate of really awful looking economic data. I mean really bad. To be sure, Initial Jobless Claims were better than they were the previous week, and some people are taking a measure of solace in fewer people are applying for unemployment insurance each. However, at 2.981 million applicants last week, saying things are improving there is almost like saying: “Boy, aren’t you lucky? You only go hit in the head with a 90-mph slider, and not his 95-mph two-seamer. Whew. Can you imagine what it would have felt like to take one of Nolan Ryan’s 100-mph fastballs to the melon? Yeah, you sure are lucky. It could have been worse, a lot worse. By the way, you should really wear a helmet next time. Hey, dude, did you hear me? Wake up. I am talking to you.”
Maybe that analogy was a wee bit hyperbolic. Then, again, maybe it wasn’t.
Outside of analogies about beanballs, it is hard to put some of these reports into context. There simply hasn’t been a precedent for this; such an immediate stop in economic activity. Many of the data series honestly look like the charts hit a brick wall. We are talking about ‘all-time lows’ and ‘historic one-month declines.’ That sort of stuff; we have never seen this, ever.
As such, while I would love to be in increasingly shrinking camp of folks predicting or otherwise calling for a V-shaped economic recovery, I just can’t envision a scenario where we all just go back to normal. You know, behaving like nothing just happened; picking up right where we left off. Perhaps it will happen, but, then again, how could it?
A V-shaped recovery would, almost by definition, have to entail going from a complete closing to a complete reopening. That is the only possible way to have that type of ‘snapback.’ An immediate stop and then quick start back up. Please indulge me again, as I use another analogy.
Assume you are on a residential street with a speed limit of 25-mph. You approach a stop sign, brake for 3 seconds, and accelerate through the intersection. How long will it take for you to get back to 25-mph? All other things being equal, probably not that long, right? What is that, maybe 3rd gear? You can think of this as a V-shaped recovery.
Now, assume you are on the interstate going, say, 70-mph. You seen road cones ahead which are forcing 3-lanes of traffic into 1. The DOT is repairing a bridge, and traffic has ground to a halt. The workmen and their equipment are positioned at the very front of the bridge, which is over a mile long. To “let them work…let them live” and allow for the workers to progress during the day, the DOT has turned the entire 3-lane bridge into 1-lane. Then, to make traffic orderly coming off the bridge, it has positioned road cones out for 2-miles which slowly turn the road back into 3-lanes. That isn’t so difficult to imagine, as I am sure we have all ‘been then and done that’ on numerous occasions throughout our driving histories.
THAT, I would argue, is the current situation, and I would further argue we are still on the bridge…maybe halfway across, perhaps, if that. Basically, there is still plenty of slow going ahead of us. However, it isn’t insurmountable. We will cross it. We will get back up to speed, to 70-mph (or more). However, clearly, it isn’t going to be a V-shaped stoppage and reacceleration. Far from it. Nor does it look quite U-shaped. It looks a little different. The term the media using is a ‘Nike swoosh,’ and maybe that is a good comparison or visual. Frankly, I can’t think of one much better. A toboggan going down a 15-20° incline (or is it a decline in this instance)? That is getting a little too cute by half, I think.
So, what is the real purpose of today’s newsletter?
I suppose the purpose is to get folks to understand this, the economic recovery, is very probably NOT going to be V-shaped or as robust as people would like. We have had a major, massive jolt to the system, and localities are reopening their economies in stages, piecemeal as it were. Companies aren’t quite sure how to budget for the remainder of the year, and will likely freeze a lot of previously budgeted 3Q and 4Q projects and hiring to ‘make up’ for lost revenue in 1Q and 2Q. Right now, we still don’t know how bad this will be.
Further, we also don’t have a good grasp on what businesses will truly be able to reopen after being shuttered. The mom & pop restaurants and retail. The already beleaguered department and mall store chains. The small businesses who had been operating paycheck to paycheck or off the owner’s credit cards. Will the government programs really be enough for them to stay open, permanently? Will the $1,200 relief checks be enough to stave off the landlord or mortgage holder? If so, for how long?
As I type, I don’t think anyone has good answers, because, and this is a HUGE because, no one really knows how our behavior has changed or will be changed because of COVID19. How much will we eat at restaurants in the future? How long will it take us to get back to the same level as, say, 2019? Is it immediate? V-shaped? Maybe, but I wouldn’t bet too much on it. How about shopping? How soon before you start filling all those wants and needs? Are you going to go to the bricks & mortar retail shop? The locally owned place or online or at the big box retailer? You ready to go back to the crowded, dark theaters? Cram into sweaty bars or sporting venues? Rub elbows and shoulders at a festival? Get on a plane and fly across the ocean? Across the country? Use Airbnb? Do you feel comfortable with the homeowner’s cleaning and sterilization procedures? How about at the Hilton or Marriott? You ready to go jump back into their sheets, not knowing who was in the same bed the previous night. Wearing the same terry cloth robe hanging up in the closet? Care to hop into an Uber, Lyft, or cab right now, hoping the person in the car prior to you didn’t have some funky disease? That the person driving it has kept on their mask the entire time; didn’t let it down or take it off in between ‘fares’? Want to get on the subway? The Metro? A crowded bus?
A guess if you have to do so, right? Trust me, there are any number of scenarios such as these which we still have left to answer. One person changing their behavior is no big deal. However, it IS a big deal if EVERYONE changes their behavior, even if just a little. Heck, 10-20% would have dramatic economic ramifications. Consider this quote from the movie “Doctor Zhivago,” when Yuri’s brother, Yevgraf, sees him pulling down a wooden fence for fuel:
“I told myself it was beneath my dignity to arrest a man for pilfering firewood. But nothing ordered by the Party is beneath the dignity of any man. And the Party was right: one man desperate for a bit of fuel is pathetic; five million people desperate for fuel will destroy a city.”
And so it will be when the economy come out the other side of this pandemic, when it crosses over the proverbial bridge and merges into traffic, finally getting back up to speed. Hmm. That our behaviors will change is all but a foregone conclusion. But for how long? Months? Quarters? Permanently? Intuitively, this will vary from person to person. For some, they might snap-back to normal, just like that. Others might be forever changed. The remainder, and dare I say the majority, will take some time to return to what was previously their normal. That makes sense, at least it does to me.
As such, after looking at another week of really strange looking economic data and guessing at human behavior (like I did in that last paragraph), yeah, I can’t ‘get to’ a V-shaped recovery or even a U-shaped one. Too much would have to change from the current situation AND people would have to move in lockstep with one another. Neither is likely. Therefore, the remaining best option is likely the Nike swoosh, which is still okay. If you can get used to the concept, you will be able to better sleep at night.
Have a great weekend!
John Norris
Chief Economist
As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.