US economy and stock markets have hit a post-COVID 'rock bottom,' and smartphone data show a stealthy mini-recovery is developing
Sheltering in place was the commerce killer but after Easter, people got hopping again, according to data from their smartphones
Brooke's Note: Remember that incredible book "The Russians" by Hedrick Smith published in 1984. I read it in college and recall being fascinated by its reveal of Russia's secret economy--the black market. It was a whole world of supply meeting demand, illegally, but with a healthy wink-wink from the government. It helped give Russians at least a little more prosperity than we could see from the outside. It's that book chapter that came flashing back upon reading Jeffrey Young's latest RIABiz column. He's sticking by his previous column's guidance that we will most likely -- imperfect distancing aside -- roughly follow the economic trajectory of other countries with Covid-19 crises. But Young is offering a new wrinkle. To the extent that the US economy is now rebounding, you can thank Americans taking it upon themselves not to take sheltering in place quite so literally. Adapting to "lockdown" orders, a sort of underground economy is beginning to lift us up -- with big implications.
Dawn always follows the night, even in the darkest days of the Covid-19 economy. Almost all but unnoticed, that dawn is near, and our smartphones are reflecting the light.
Allow me to explain.
The US economy went through a rolling shutdown in March. Seattle was the first to “social distance” (early March), followed by New York City (week of March 16), and most other parts of the country in the next two weeks. Distancing meant don’t leave home.
As a result, sales for retail and other “people to people” businesses had collapsed by the first week of April. Until now, the global financial crisis (GFC) had been the economic and market meltdown of our lifetime.
It started in the summer of 2007, slowly spread from institution to institution. It took a year before Lehman Brothers finally failed in Sept. 2008, causing international capital markets to collapse.
COVID is more infectious and more destructive than even the GFC: it took less than a month to do two or three times the damage to the economy that the GFC did in a year and a half.
The equity market, reflected by the S&P 500, peaked at 3,386 on Feb. 19 this year and lost 33% in five weeks to its trough on Mar. 23 (2,237). It has since gained back about 500 points, or 43% of the decline.
The market has plateaued in the last two weeks. It needs more than the Fed slashing the benchmark rate to zero and the distant promise of a vaccine for investors to take faith.
But we think good news can be found in the form of an emerging constructive restlessness. The US economy is starting to reopen as people find ways to buy and sell services.
Forget about non-farm payrolls, forget about housing starts, and forget about pathetic, hopelessly lagging quarterly GDP. Their relevance is on leave.
The mobility of the populace is now the premier economic indicator. And, it's trackable. We know in micro detail how many people are staying at home all day; how many are leaving once, twice, or more. a day; where they go when they do leave and we can see this for every zip code in the country.
In short, people are starting to move from place to place much, much more.
Our source of ground truth on the American consumer is the location of smartphones. Together with our data partner, Veraset, we can examine on a daily basis changes in the rates Americans are sheltering at home, based on anonymized nationwide summaries of cellphone movement patterns.
And we can see where they go when they leave their homes, which is a good proxy for spending.
Our bottom line is that people began to move around more right after Easter, which coincided with the rock bottom in retail spending. Signs of better activity since then have cropped up, at least in some regions of the country.
In normal times, no economist -- never mind readers of columns -- would care about rays of light as small as these. But given that the market Armageddon was directly caused by people sheltering in place, it should matter that a lot if people are beginning to move about.
In New York City, for example, the number of people staying home all day has increased by about 60% from normal levels. New York shut down first, but by late March, most places followed that were not already distancing.
Visits to retail establishments got crushed. By late last week, visits to grocery stores and warehouse clubs were down about 42% from normal. Visits to pharmacies and automotive shops were down about 57%.
Restaurants were at about 68% and clothing stores 79%. Retail visits as a whole were down 54%. These declines are “rock bottom” for retail. They were basically hit around April 10 and haven’t worsened since then.
Since about Easter, however, the economy has started to reopen.
In the days since April 12, we see a modest, but clear, decline in the number of people staying home all day. There are regional variations, but it seems to be happening across the country.
Total retail visits were steady or showing very small increases in the West, Southwest and Southeast regions. It’s a tentative movement, and it may simply be a response to improving spring weather. Or, the mass of people in “the crowd” may be perceiving reduced risk as infection growth rates have fallen in their states.
On the move
Our working theory is that relief from lockdown will come when isolated populations pass a critical threshold of willingness to shoulder the risk of leaving home. Increases in discretionary consumer retail visits will offer leading signs of the nation’s return to more normal spending patterns.
We can also scan the data for signs that people are doing the things they used to do. For example, we can see how many people visit truck stops. With the public’s movement so curtailed, most of the people who visit truck stops now are actual truckers, hauling stuff across the country to the rest of us.
A look at the locations they visit before and after they visit truck stops can tell us a lot about freight patterns. In addition, truck stop visits will be a tip-off of a return to more normal activity.
Pre-COVID, a lot of people who are not truckers stopped. After they get gas and the daily special, they go to different places than a trucker. So when we detect that non-truckers are once again visiting truck stops, we will know that the crowd is on the move and that the economy is normalizing.
This means that if a country “distances," it will slow infections in four weeks, begin to move around again in two weeks and get on a clear path to normalization in two more weeks.
This timing has been remarkably consistent across a diverse set of countries--China, Korea, Hong Kong and Singapore for starters. Even Italy (small firms in supply chains of “essential” industries) and Spain (construction) have reopened parts of their economies.
In the US, Seattle (distancing in early March, infection slowdown by early April) and New York City (distancing in second week of March, infection slowdown in second week of April) are on the same timeline. Mobile phone location data show that they are entering the second stage).
I am more confident in the judgment that the US is beginning to recover because the timing follows what we have seen in many other countries. In a few more weeks, the path to recovery should be much clearer. With the market dipping again, it is not taking normalization into consideration on this timeframe.
That is why real-time location and movement data are such important market indicators.
They show us whether the economy is generating enough cash before rent and other fixed costs come due and tap out cash balances. We think that macro forecasts are bearish enough, and the markets will rally as recovery unfolds. But it is going to be a day-by-day struggle for the time being.
And longer term?
After the recovery becomes more embedded, the focus will shift to what type of an economy it will be, and what can our favorite indicator – movement – tell us about it.
Will it be more robust, and “anti-fragile?" Or will we overlearn the lessons of the specific COVID-19 pandemic, “fight the last war” and optimize our response to another COVID-19, but be vulnerable to shocks of a different kind? It makes a lot of difference for the markets.
We hope that the shock makes us even less fragile, but that is not guaranteed.
We think the US economy will become even more of winner-take-all. The survivors are ones with cash and capital – generally large firms. And ones with good access to Washington – generally large firms.
Our economy will become more concentrated. That can hardly be good for the market as a whole.
That’s just my expectation; we can track it by looking at mobile data.
When visits to the grocery store recover, will it be to local grocers in business before COVID-19, or only Costco and a few other large stores?
When visits to restaurants recover, will patrons go to innovative local restaurants that have sprung up over the last decade, or to a small number of large, and very hygienic establishments?
When spending on clothing, hardware and knickknacks recovers…will consumers flock back to Main Street, or shop at online retailers?
The essence of an anti-fragile and innovative economy is competition and decentralization so that the crowd chooses the winners and the losers.
Hopefully that healthy dynamic is what we get back.
Jeffrey Young is CEO and co-founder of DeepMacro LLC, a company that provides early, independent assessment of economic conditions across the developed and emerging world. His career includes stints as global head of FX Research and Strategy at Citigroup, and economist for Japan at Salomon Brothers and its successors, based in Tokyo (for 12 years). Experience in both systematic and discretionary economic and FX and FI analysis, and long-standing focus on the Asia region.
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