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Will The Corona Virus Trigger A Recession?
Will The Corona Virus Trigger A Recession?
As if waking up to an economic nightmare, investors see headlines like these and many others flashing across their Bloomberg terminals:
- Facebook says Oculus headphone production will be delayed due to virus
- Apple extends country wide store closing for another week
- Foxconn delays iPhone production
- Qualcomm cuts production forecast due to virus uncertainty
- Starbucks announces China store closures through Lunar New Year, uncertain when they may reopen
- US Steel flashes a warning of a cut in demand
- Nike shoe production halted
- Under Armour missed on sales, and their outlook is weak. They partially blamed the Corona Virus outbreak.
- IEA forecasts drop in oil demand this quarter- first time in a decade
The seemingly never ending list of delays, disruptions, and cuts rolls on from retail to high technology. Even services are impacted as flights and train trips are canceled within and to and from China. While some technology-based services are provided over the Internet service, restaurants, training, and consulting, as examples, must be performed in person. Manufacturing operations require workers to be at the factory to produce products. Thus, manufacturing is much more acutely affected by quarantines, shutdowns, transportation disruption, and other government actions.
It is as if an economic tsunami is rolling over the global economy. China’s economy was 18 % of world GDP in 2019. For most S & P 100 corporations, the Asian giant is their fastest growing market at 20 – 30 % per year. Even more critical, China has become the hub of world manufacturing after entering the World Trade Organization in 2000. Over the past two decades, U.S. corporations have relocated manufacturing to China to leverage an inexpensive labor force and modern business infrastructure.
Source: The Wall Street Journal – 2/7/20
Prior to the epidemic, world trade had begun to slow as a result of the China – U.S. trade war and other tariffs. World trade for the first time since the last recession has turned negative.
Is Inflation Really Under Control
Is Inflation Really Under Control
Recently, analysts have been discussing the pros and cons of using negative interest rates to keep the U.S. economy growing. Despite this, Fed Chairman Jerome Powell has said that he does not anticipate the Federal Reserve will implement a policy of negative interest rates as it may be detrimental to the economy. One argument against negative interest rates is that they would squeeze bank margins and create more financial uncertainty. However, upon examining the actual rate of inflation we are likely already in a ‘de facto’ negative interest rate environment. Multiple inflation data sources show that actual inflation maybe 5%. With the ten year Treasury bond at 1.75%, there is an interest rate gap of – 3.25%. Let’s look at multiple inflation data points to understand why there is such a divergence between the Fed assumptions that inflation is under control versus the much higher rate of price hikes consumers experience.
In October, the Bureau of Labor Statistics (BLS) reported that the core consumer price index (CPI) grew by 2.2% year over year. The core CPI rate is the change in the price of goods and services minus energy and food. Energy and food are not included because they are commodities and trade with a high level of volatility. However, the Median CPI shows a ten year high at 2.96% and upward trend as we would expect, though it starts at a lower level than other inflation indicators. The Median CPI excludes items with small and large price changes.
Excluding key items that have small and large price changes is not what a consumer buying experience is like. Consumers buy based on immediate needs. When a consumer drives up to a gas pump, they buy at the price listed on the pump that day.
