William D. Johnston

Chairman

Economic Commentary

As we have done for the past seven months, we will begin by checking in with the New York Federal Reserve Weekly Economic Indicator (WEI) index that attempts to measure data focused on labor, production and consumption. As much as is humanly possible, the data is real time and designed to measure GDP relative to other dates or moments in time. It is a useful tool in that it provides us a snapshot of the trend in GDP change and an opportunity to assess that change year over year, month over month and week over week. The latest release provided through the Fed’s interactive site registers a WEI of -4.81 and a thirteen weekly moving average of -5.97. For perspective, the WEI bottomed at -11.45 on April 25 of this year. In layman’s terms, what does this data tell us? Simply put, our economy plummeted to depression-like activity during the first thirty days of the United States COVID-19 pandemic crisis with economic activity relative to labor (employment), production and consumption functioning at a negative 11.45% level. We can contrast that level of activity to any period of time we want. As an example, in February the WEI finished at +1.58% and finished the full year of 2019 at +2.34%. The drop in employment, consumption and production was precipitous and dramatic. Progress in the WEI index has been incremental but steady. A recovery from -11.45 to the current -4.81 is not inconsequential and the trend remains in the right direction. We can see the specific details of the WEI index in unemployment at 8.41% with continuing claims for benefits registering 11.2 million workers while those requesting new or initial claims rose 837 thousand (down from the previous weeks recording of 870 thousand). We can expect these numbers to turn more negative as the PPP (payroll protection plan) ceases and large furlough announcements work though the system such as those announced by three major airlines this morning. Prior to those announcements, consumer confidence rose to 101.8 as announced by the conference board, which is a significant jump from the previous reading of 86.3. In fact, the 15.5 level increase marks the single largest increase since 2003. Business private investment remains weak at $2.4 billion which is essentially at the same level as 2015. Demand for goods and services will need to increase consistently for business investment (software, tooling, fixed equipment, etc.) to pick up, but will certainly help with growth sustainability when it does move in the right direction.

Housing data was very strong as the National Realtor Association revealed existing home sales grew by 2.4% followed by U.S Census Bureau release of new home sales at 1,011,000. This is up 4.8% from July’s 883,000 units and a whopping 43% increase year over year. All of these strong results were reflected in the Case-Shiller housing index (HPI) of 221.63. We always caution that dramatic increases in individual economic data releases need time to “ settle” to understand if the increase or decrease reported is a significant trend in place; however, by any reasonable analysis the housing sector is strong with inventory in both new and existing units at very low levels.

The economic trends are in the right direction and we should continue to see incremental reductions in unemployment as new and existing claims show similar incremental reductions each reporting period. Understandably, for the nearly twelve million still unemployed and those who recently have lost jobs as the PPP plan expires, incremental growth is a very tough landscape as rent, mortgage and groceries are not incremental or discretionary expenses.

At this writing the House Democrats and Republicans remain about one trillion dollars apart on the next round of stimulus as the Democrats plan seeks $2.1 trillion and the Republicans seem augured in at $1.0 trillion. The big dollar items are keeping them from passing the bill to the Senate. The single largest hang up seems to be the proposal by the Democrats to provide $500 billion in aid to state and local governments, which the Republicans oppose. Republicans have offered about the same in education funding, but provide 2/3rds benefit to schools that have opened for in-class instruction and also want the school district funding to be shared with private schools. Of the two largest differences, aid to state and local funding will get support from congresspersons who are receiving local at-home pressure to rescue state and municipal budget needs while the education issues seem tougher to solve because they are more embedded in ideology. In the end, a stimulus package of somewhere between $1.5 to $1.75 trillion seems likely to pass as it gets both parties to Election Day, allowing both to avoid any negative data points between now and then.

Ideology seems a perfect term to take us to our remaining topics of COVID-19 and the Presidential Election. There will be less than 30 days between the time that you receive this newsletter and the federal election. There are not likely to be any significant things learned about either between now and then. The trends in place with respect to COVID-19 are likely to remain in place and most but a very few have chosen who they want to be elected to the Office of President of our country.

For most of my financial career I have studied data. It has always helped me understand things that are both relevant and interesting to me. To some, it is boring, but to me it has always been a pursuit that is exciting and engaging. It isn’t lost on me that the political and economic worlds are intertwined and that two individuals can and often do observe the same set of data points and come to completely different conclusions. Often times it is helpful to set the expectations for why you are searching data sets, why are they important to your question?

The United States is viewed by most with envy with respect to standard of living, economic opportunity, advancements in education, technology, healthcare and, of course, our individual rights and liberties. It would I think be logical to compare our COVID-19 pandemic “performance” with similar comparables. There are 36 members of the Organization for Economic Cooperation and Development (OECD) which was established in 1961 by the largest and most developed countries in the world. China was not included and is not in the OECD today either. My question is: how have we performed? How do we stack up with the other largest and most advanced economies of the world? The comparison should, of course, be per capita, as we are much larger with respect to population than any of the other members except India. I’ve included some data from Nick Juhle’s (our Director of Research) most recent COVID-19 update.

On a relative performance basis how have we performed?

Total virus cases in the U.S are 2/3rds higher per capita than the average of OECD countries

Deaths per capital are currently 50% higher than the average of OECD countries

New case rate per capita is 3 x’s the average of OECD countries.

Current deaths per million is twice as high as OECD countries.

On a relative country by country basis only Singapore and the Czech Republic have larger cases per capita than the US, only six have larger death rates per capita than our country and only Sweden and the UK have higher new deaths per capita rates than we do.

Lastly, our unemployment rate from March through August was 10% higher than the average of the OECD sample set. As I look at the data set, my sense is that we should, could and can do better. We continue to see where large group settings become super spreader centers. Routinely the analysis reveals that lack of mask usage, lack of social distancing and contact discipline were the cause of replicated infections. Time can be an advantage if we allow it to be. Wishful optimism causes us to look for “silver bullets” like a vaccine by December or herd immunity, neither of which is reality based. Is there a commonality among those in the OECD that allow them to outperform the United States with respect to the pandemic? At the core, it would be their lack of politicizing policy to slow, treat and eradicate the disease.

The election is nearly 30 days from when you will be reading this commentary. I encourage all to vote. Common among almost everyone is that this election is really important. We should expect higher voter turnout as a result. The lens that I look through is mine and will be either similar or different than yours. The potential beauty of our democracy is that every four years we get to elect the next President of the United States of America and it is the collective wisdom of the ballot box that reveals who our President will be. Elections have consequences and impact public policy. Nick Juhle and Dan Rinzema of Greenleaf Trust conducted a fabulous webinar viewed by hundreds regarding the history of Presidential elections and the economy as well as financial markets. Their rightful conclusion was to vote with your ballot and not your wallet because over the entire history of our country there has been precious little difference in the economy and markets no matter which party held the presidency.

The lens I look through is mine and includes the following (it is perfectly fine if you don’t read on):

  • I believe civility is powerful and a beautiful teacher.
  • I believe that civil rights do not end at the border of any state. The civil rights I was born with are the same as any US Citizen either born or naturalized.
  • I believe America is among the greatest nations in the world and I want America to be great but I also want it to be great for everyone.
  • I believe that with respect to education and health care and human as well as civil rights it should not matter what zip code you were born into and until it doesn’t we must work to fix that.
  • I believe in freedom of and from religion. Everyone is free to believe and practice their faith and everyone is also free not to. Political leaders’ faith should make them better people, not despots forcing ideology on others.
  • I believe in the beautiful right to protest that is wonderfully witnessed in our country’s history. Protesting is a fundamental right of citizenship. Violence against property and persons are crimes and should be prosecuted. Vilification of protestors, campaigns against free press credibility and purposeful erosion of faith in the ballot box are all consistent tactics utilized by authoritarian dictators throughout the history of the world in their attempts to retain power.
  • I believe in and love our mixed capitalistic democratic system. It is neither pure capitalism or pure socialism but rather a blend that allows the appropriate regulation for critically important protections while also rewarding true entrepreneurial spirit and capital risk taking so important for our growth in GDP and the advancement of our society and standard of living.
  • I believe that we must invest in our education, infrastructure and health systems.
  • I believe that global warming is real and impacted by the tremendous growth in the globe’s population. Smart policy should reward global sustainability and the required transformation of jobs to support that sustainability.
  • I believe in the concept of a “More Perfect Union” and believe that to accomplish that goal we must eliminate racism and that to do so is both patriotic and essential to achieving “A More Perfect Union.”

To those who continued to read, remember it is my lens and clearly personal to me and not disrespectful to yours. Please vote.

COVID-19 Updates

As of October 25

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