Recession Clouds On Trump’s Horizon

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The above pictorial from Visual Capitalist does a good job depicting some of the segments and how broad COVID-19 could impact the U.S. and global economies. Industries ranging from the airlines, hotels and car rentals; sports and concert events; schools going to distance learning or pretty much any business that has a large number of people attending or situations where one sits close to another person (such as office environments, restaurants and movie theaters) could be thrown into a tailspin.

While overall consumer spending, which is almost 70% of the U.S. economy, has been healthy for a decade, it only grew at a 1.7% rate in the December quarter. If consumers pull back from traveling, going out to restaurants, attending sporting events (most of them have been cancelled or postponed) or engaging in many forms of normal economic activity COVID-19 could have a tremendous impact on the economy.

While the U.S. economy only relies on trade for about 13% of GDP, the global impact from COVID-19 will ripple to pretty much every country, which in turn negatively affects the U.S.

With business investment declining year-over-year for the past three quarters, the impact from the COVID-19 looks like it could throw the economy into a recession.

Size of the economy

U.S. GDP has grown by $95 to $99 billion quarter-to-quarter for the last three quarters. On a $19 trillion economy this has led to yearly GDP growth rates of 2.0% to 2.1% for the June to December quarter’s.

With the dollar growth of just under $100 billion quarter-to-quarter only accounting for 0.5% of the total economy, it won’t take much to move from a growth mode to a negative situation.

Previous downturns in the economy

To get a feeling for what GDP results will be it is worthwhile to look at previous downturns. Here are figures from the Tech Bubble, September 11 and the Great Recession.

The Tech Bubble burst between March 2000 when the NASDAQ hit its peak and early 2001 when the economy contracted quarter-over-quarter. From an overall economic perspective the bubble bursting only had a limited impact on the total economy.

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  • GDP fell $38 billion in the March 2001 quarter
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  • GDP growth rate declined 1.1% on a year-over-year basis
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  • GDP rebounded and grew $77 billion in the June quarter
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  • GDP growth rate increased 2.3% on a year-over-year basis

The terrorist attack on September 11 occurred about six months later and initially shocked the economy. However, it also only created a one-quarter downturn.

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  • GDP fell $55 billion in the September 2001 quarter
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  • GDP growth rate declined 1.7% on a year-over-year basis
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  • GDP rebounded very quickly and grew $36 billion in the June quarter
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  • GDP growth rate increased 1.1% on a year-over-year basis

Between the March 2008 to June 2009 quarter’s the Great Recession caused the economy to shrink in five of six of them. To get a feeling for how bad it was here are the results from the three worst quarters.

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  • GDP fell $91 billion in the March 2008 quarter
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  • GDP growth rate declined 2.3% on a year-over-year basis
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  • GDP fell $339 billion in the December 2008 quarter
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  • GDP growth rate declined 8.7% on a year-over-year basis
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  • GDP fell $172 billion in the March 2002 quarter
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  • GDP growth rate declined 4.5% on a year-over-year basis

If COVID-19 has anywhere close to the Great Recessions impact, GDP could show a negative rate in the March quarter since it started late in the quarter and be substantially greater in the June quarter if it continues during the spring and into the early summer.

JP Morgan’s revised estimates are for the U.S. to contract by 2% in the March quarter and by 3% in the June quarter.

Shoppers are stocking up

Shoppers are out in force stocking up on paper goods and non-perishable foods. At the Costco close to where I live the area that normally holds hundreds of shopping carts was barren. When a few would show up they were gone in a minute or two.

While the current situation will benefit a few businesses, if consumers keep this up there will be a huge impact to the almost 70% of the economy that is dependent on them.

Delta airlines is slashing flights, capital spending and headcount

Delta announced on Friday, March 13, that it was:

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  • Reducing capacity by 40% over the next few months, more than after 9/11
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  • Nearly eliminating flights to continental Europe for the next 30 days, which could be extended
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  • Parking up to 300 aircraft
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  • Reducing capital spending by at least $2 billion
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  • Offering voluntary short-term, unpaid leaves as well as an immediate hiring freeze
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  • Substantially reduce the use of consultants and contractors

With President Trump announcing that the U.K. and Ireland will also have travel restrictions, Delta will almost assuredly curtail flights there.

Delta will not be the only airline that implements these types of programs. While airlines are one of the hardest hit industries from COVID-19, along with the Trump Administration’s initiatives these cuts will occur across other industries.

Apple closing all its stores outside Greater China

Apple announced on Friday, March 13, that it would be closing all of its retail stores outside of Greater China until Friday, March 27. The company also said that, “All of our hourly workers will continue to receive pay in alignment with business as usual operations.”

Gene Munster at Loup Ventures estimates that this could cost Apple $600 million to $1.2 billion in revenue for the March quarter, which is on top of the other challenges the company is facing from COVID-19.

Rail traffic starting to see an impact from COVID-19

The Association of American Railroads or AAR tracks railroad traffic. In its latest weekly data Senior Vice President John T. Gray said, “Comparing rail traffic from one week to another must be done with caution because many different factors can come into play, especially in the winter when the weather can play a big role. That said, rail intermodal loadings last week were down noticeably more than the norm over the past year. With the number of ships arriving at West Coast ports from Asia down sharply due to the coronavirus, it stands to reason that railroads are beginning to feel an impact too, at least in terms of intermodal. It’s impossible to quantify that impact with precision.”

Cass Information Systems and Stifel research publish monthly data on shipping volumes and the cost of freight. Its February information included, “January may have been the bottom, but the coronavirus concerns leave open the possibility of a ‘double dip’ or at least a delay in improvements. Of concern, the Port of Los Angeles just reported a 23% year-to-year drop in imports for February.”

February’s traffic was 7.5% lower than a year ago. While it is a slight improvement from January’s 9.4% decline, keep in mind that February’s result was against easy comps since traffic a year ago also fell year-over-year (red circle).