I intentionally waited until after Election Day to write this update,
not knowing it would become Election Week.
I was hoping that the politics would have died down, but that was not to
be. The markets are taking it all in
stride, rallying strongly for most of this week and they seem more grateful for
the prospect of a divided Congress, i.e, gridlock, where the Senate is retained
by Republicans to counterbalance the Democratic House than by the outcome of
the Presidential election outcome. The
markets believe the chance of tax hikes, repeals of tax cuts, and gigantic
initiatives are greatly diminished.
Stock prices are rising strongly, but bond prices have fallen from their
highs. A great GDP growth number for the
third quarter of +33.1% last week and a large, 1% drop in the unemployment rate
to 6.9% today have left fixed income investors thinking that the worst may be
over for the economy. But the ever
present threat of COVID-19 lingers, with cases rising around the world.
The Ongoing Pandemic & The Economy
Strict lockdowns in our area were lifted in June, but there are still
restrictions on many segments of the economy, such as bars, restaurants, the
travel industry, entertainment, sporting events, and the like. Many schools are conducting hybrid and
virtual classes. Life has gone on, but
has not returned to normal. Our behaviors
have changed with fear of the virus. Did
you manage a vacation over the summer?
Many people would say, no, they did not want to travel.
Jamie Dimon, CEO of JP Morgan Chase, said recently that we need to
reopen the economy, safely of course, and especially in New York City. Stop the economic devastation from the
lockdowns. He encourages leaders to let
businesses reopen, so they can generate revenues and rehire employees. He encourages those employees to go into the
office, although he admits that some work-from-home will become a permanent
change. He also thinks kids should
return to their classrooms at school.
There are lingering effects that are restraining economic growth. Despite the improvement in the unemployment
rate to 6.9% from its high of 14.7% in April at the height of the lockdowns,
there still remain 10 million jobs lost since the pandemic began. That leaves many on unemployment
compensation, unable to pay rent or mortgages.
Small businesses are behind in rent and building owners have sought
deferrals of their payments to lenders.
If people can get their jobs back, they can possibly refinance their
mortgages in this exceptionally low rate environment. Moody’s estimates that there is $70 billion
in back rent across the nation. Think
for a minute about how huge that number is.
GDP surged by +33.1% (annualized) in the third quarter, after
devastating declines of -31.4% in the second quarter and -5.0% in the first
quarter. Our economy remains about 3.5%
lower than its peak in the fourth quarter of 2019. The Federal Reserve estimates that fourth
quarter growth will be +6.0%, so we may get back. By the way, our economy has done better than
all other nations; for example, Europe is 4.3% under their fourth quarter
peak. Even if we “get back” to earlier
GDP dollar levels, it will have been an uneven recovery, with many individuals
and businesses still struggling without adequate revenues. The Federal Reserve has pledged to keep
interest rates low until we reach full employment, which I estimate at 4.0%,
and inflation averages above its target of 2.0%.
This is very significant, in that Fed Chairman Powell finally threw out
the Phillips curve. The Fed seemingly
relied on this curve in that every time unemployment got low, they screamed
inflation! So now they are prioritizing
full employment and will switch to “AIT,” or average inflation targeting,
allowing the inflation rate to exceed their target for a period of time, rather
than raising rates as they did from 2015 to 2018 chasing inflation that never
Bucks & Montgomery
Unemployment rates soared after the lockdowns began in March, 2020. Our area did not escape the devastation. The national unemployment rate peaked at
14.7% in April and has steadily declined to 7.9% in September and 6.9% in
October. For a time, from April to
August, our counties were trending 2% to 3% higher than the national average,
which was worrisome. Thankfully, this
has corrected at least into September, when the national average was 7.9%,
Bucks was 7.1%, and Montgomery was 6.6%.
The housing market is robust across the nation. Prices on a year-over-year basis are
accelerating, especially as people are migrating from cities to suburbs and
state to state and are trading up to newer or larger homes as the pandemic
progresses and they spend more time at home.
The latest national CoreLogic home price index for September, 2020 was
+6.7% year-over-year. Bucks and
Montgomery counties are close to that for September, according to Zillow, at
+6.4% and +5.5% year-over-year, respectively.
Projections for 2021 are at about +7.0% for all, driven by new trends in
migration, smaller than normal housing inventories, and extremely low mortgage
Our regional economy, covered by the Philadelphia Federal Reserve’s
Third District, is doing well into the fourth quarter. Their published indices, the Philly Fed and Philly
Fed Non-Manufacturing, both rose in October, to 32.3 and 25.3,
respectively. Backlogs for both are
lagging and weak, at 8.3 for the regular index and only 4.0 for the
non-manufacturing one. Not surprisingly,
the quick recovery could give way to slower growth as we move forward.
Federal Reserve Chairman Jerome Powell put it best: The outlook for the economy is
“extraordinarily uncertain.” When the
election is finally behind us, we can work on the things voters said were their
priority- the economy, the pandemic, and health care. A stimulus bill from Congress to aid
individuals, small businesses, and devastated industries such as airlines,
which have been completely crippled by COVID-19, seems a strong possibility
before year-end. That may have factored
in to the Fed’s projection of +6.0% GDP in the fourth quarter, followed by
+4.0% in 2021. Much hinges on the
pandemic, therapeutics, and vaccines.
We will have low interest rates for at least three years, as promised by
the Federal Reserve. Many economists think
that rates will stay near zero for the next five to seven years. Remember, it took the Fed seven years to
raise rates from the zero bound after the Great Recession of 2008. When they finally tightened in December,
2015, core inflation was at +1.5% and unemployment was at 5.0%. Thankfully, the Fed pushed the final Phillips
COVID-19 is our number one uncertainty.
Are vaccines on the way soon?
Four companies, including, Moderna, J&J, AstraZeneca, and Pfizer-
have their vaccine in late stage clinical trials, and most are taking risk to
produce vaccines in case they are successful and approved to save time in
getting them to the people.
Now, I will continue my rant about huge amounts of debt being added by
the US Government. Year-to-date, there
was $4 trillion of new debt issued, bringing the outstanding total to $27.2
trillion, or 127.6% of GDP. Economic
growth has been proven to slow when debt-to-GDP exceeds 90%. It is no coincidence that growth was in the
low 2% range since 2009, when debt was sustained at over 90%. The one benefit of that time period was that
it was the longest, although lowest growing, economic recovery since World War
II at 127 months. If we managed to have
growth of 2% during that time, I think once the “lockdown” rebound is over, and
we resume “normal” growth, I think GDP will be less than 2%, due to the
continuing increase in the debt-to-GDP ratio.
That may be our new “normal.”
Finally we are all weary and tired of lockdowns, capacity limits, and
travel bans. I keep thinking of one of
my favorite quotes by Ernest Hemingway: “There
are only two places in the world that you can live happy. At home and in Paris.” One
can only dream!
Large Hadron Collider Update
For those of you who have known me and read my quarterly updates for
years, you may remember my favorite machine, the Large Hadron Collider, the
17-mile long circular tunnel built deep under the mountains in Switzerland,
where all kinds of physics experiments and smashing of atoms take place.
The Collider, which is now over 12 years old, was down for maintenance
for the past several years, but news about its activity has started again. Previously, researchers in 2012 discovered
its most famous particle, the Higgs Boson, which is a key building block of the
universe. In October of this year, they
observed the decay of these particles for the first time. They are now looking for mini black holes,
and possibly parallel universes.
Recently, scientists created matter from high speed light. And they are looking to take the power in the
Collider up to 9.5 TeVs, or Tera-electron volts. Each TeV is one trillion electron volts. It’s crazy how scientists can work with
atomic particles. Stay tuned!
Thanks for reading!
Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with Penn Community Bank and its predecessor since November, 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.