DR. RAJEEV DHAWANDIRECTOR

Preliminary Economic Update

Presented at the AUBER RoundtableVia Zoom • June 4, 2020

FOMO (Fear of Missing Out)

Morphs intoFOGO (Fear of Going Out)

Source: Financial Times, May 16, 2020

How Risk-Averse Are People?

0

5

10

15

20

25

30

35

Next month Next 2-3 months Next 6 months > 6 months Uncertain

9-Apr 24-Apr 8-May

(%)When Would You Feel Comfortable Going to a Restaurant? 

Russia China Oil (OPEC)

Europe

ECB

U.S. Stock Mkt & Bond Mkt

DC Politics

US Consumer Investment

The Macro Model

FederalReserve

Emerging Markets

The  Macro ModelNEW

Commodities

Japan Central Bank

Today’s Questions

1. Can the fall travel season be salvaged?1. How many people can safely ride an elevator?2. When will meetings of 100 people happen?3. When will people demand elective medical procedures?4. When will international travel resume w/0 quarantines?

2. Will deflation be followed by inflation or vice versa?

3. Is the 10-year bond rate heading for 2.0%? When?

4. What do the above 3 questions mean for the shape of the recovery?

IVIIIIIIIVIIIIIIIVIIIIIIIVIIIIIIIV20112010200920082007

16200

16000

15800

15600

15400

15200

15000

($ bil.)Real GDP During the Great Recession

Recovery Shapes: V, U and In-Betweens

IIVIIIIIIIVIIIIII198119801979

6950

6900

6850

6800

6750

6700

6650

($ bil.)Real GDP During the 1980 Credit Controls

IVIIIIIIIVIIIIIIIVIIIIII198319821981

7400

7300

7200

7100

7000

6900

6800

6700

($ bil.)Real GDP During the 1981-82 Recession

V

U

IVIIIIIIIVIIIIIIIVIIIIIIIVIII1976197519741973

6100

6000

5900

5800

5700

5600

5500

($ bil.)Real GDP 1973 Oil Shock

Source: Wall Street Journal, March 7, 2020

COVID-19’S Economic Puzzle

Here we have a disease for which we have no vaccine, no treatment…We don’t fully understand transmission, we don’t fully understand case mortality.

Michael RyanExecutive Directorof the WHO Health Emergencies Programme

How Have Retail Sales Fared Since February?

APRMARFEBJANDEC20202019

140

120

100

80

60

40

20

0

(Index)Retail Sales and its Components

Total Nonstore Discretionary Grocery Restaurants

Retail Sales ($ Billions)

Feb ’20 Apr ‘20 Drop

Total 527.2 403.9 ‐23%

Motor Vehicle 105.4 68.5 ‐35%

Nonstore 68.9 78.4 +14%

Grocery & Booze 64.4 71.0 +10%

Gasoline 41.3 24.6 ‐41%

Healthcare 30.0 26.7 ‐11%

Discretionary

Food Service 65.4 32.4 ‐51%

Gen. Merchandise 59.9 50.8 ‐15%

Bldg. Materials 33.3 32.0 ‐4%

Clothing etc. 22.1 2.4 ‐89%

Furniture 10.1 3.3 ‐68%

Electronics 8.2 2.8 ‐66%

Alternate Data Source

Source: www.tracktherecovery.org

Source: Transportation Security Administration (TSA), EFC Calculations

TSA Checkpoint Travel Numbers

‐100%

‐90%

‐80%

‐70%

‐60%

‐50%

‐40%

‐30%

‐20%

‐10%

0%

1‐Mar 11‐Mar 21‐Mar 31‐Mar 10‐Apr 20‐Apr 30‐Apr 10‐May 20‐May 30‐May

Total Traveler Throughput Percent Change (1 Year Ago ‐ Same Weekday)

‐2.74

‐0.37

‐0.46

‐0.97

‐0.98

‐1.33

‐1.44

‐2.11

‐2.13

‐7.65

‐21.7

‐25 ‐20 ‐15 ‐10 ‐5 0

Other

Wholesale Trade

Education

Construction

State/Local Govt.

Manufacturing

Healthcare

Retail

Professional Services

Leisure/Hospitality

Total

Labor Market Carnage: COVID-19 vs GR

(#, Mil.)

COVID‐19 Pandemic (April 2020)

Restaurants

‐0.6

‐2

‐0.1

‐2.4

‐1.2

‐1.5

‐0.6

‐8.5

‐9 ‐7 ‐5 ‐3 ‐1 1

Other

Wholesale Trade

Education

Construction

State/Local Govt.

Manufacturing

Healthcare

Retail

Professional Services

Leisure/Hospitality

Total

Great Recession (2008‐09)

Restaurants

(#, Mil.)

Consumption Spending by TypeRetail Sales ($ Billions) Feb ’20 Apr ‘20 Drop (%) Drop ($)

Total 13,488 10,923 ‐19% ‐2,565

Durables (13%) 1,808 1,329 ‐26% ‐479

Furniture & Equip. 416 319 ‐23% ‐97

New Vehicles 540 366 ‐32% ‐174

Recreational Goods 602 512 ‐15% ‐90

Non Durables (23%) 3,032 2,691 ‐11% ‐341

Clothing & Shoes 407 209 ‐49% ‐198

Gasoline 445 298 ‐33% ‐147

Groceries & Alcohol 891 906 +2% +15

Services Total 8,701 6,947 ‐20% ‐1,754

Accommodations 100 21 ‐79% ‐79

Restaurants 732 385 ‐47% ‐347

Financial Services 516 529 +3% +13

Education 254 235 ‐7% ‐19

Recreation 518 207 ‐60% ‐311

Transportation 445 228 ‐49% ‐217

Utilities 309 328 +6% +19

Healthcare 2,297 1,367 ‐40% ‐930

JUNMAYAPRMARFEBJANDECNOVOCTSEPAUGJULJUN20202019

5

4

3

2

1

0

-1

(%)

1-Day Non-Financial Commercial Paper RateA2/P2 and AA

A2/P2 AA

Source: Wall Street Journal, April 18, 2020

Charlie MungerVice Chairman, Berkshire Hathaway

No, they aren’t. The typical reaction is that people are frozen.

Take the airlines. They don't know what the hell’s doing. They're all negotiating with the government, but they're not calling Warren.

Are Companies Calling Berkshire for Capital?

JUNMARDECSEPJUNMAR20202019

2.5

2.0

1.5

1.0

0.5

0.0

(%)

30-Day Commercial Paper SpreadA2/P2 vs. AA

Source: Federal Reserve, April 2020

Fed Policy Support During COVID-19

Program/Facility Targeted SectorP, DL, or SPV *

Treasury Support ($, Bil.)

Capacity ($, Bil.) Date(s) 

Current Balance ($, Bil.)

CPFF Commercial Paper SPV $10 NA 03/17 $12

PDCF Primary Dealers/Liquidity DL $0 NA 03/17 $7

MMLF Money Market Mutual Funds SPV $10 NA 03/18 $33

TALF Asset‐Backed Securities SPV $10 ≤ $100 03/23 ‐

PMCCF, SMCCF Corporate Debt SPV $75 ≤ $750 03/23 ‐

MSELF, MSNLF Small & Mid‐Sized Businesses SPV $75 ≤ $600 03/23, 04/9 ‐

PPPLF Small Business Bank Loan ‐ PPP DL $0 NA 04/6 $49

MLF Municipal Debt SPV $35 ≤ $500 04/9 ‐

Discount Window Banks DL $0 NA 03/15 $18

CB Swap Lines Central Banks/Dollar Liquidity DL $0 NA 03/15, 03/19 $449

FIMA REPO Facility Foreign Monet./Treasury Liquidity DL $0 NA 03/31 ‐

Asset Purchases Treasuries, Agency MBS P $0 NA Several $2,099

REPO Agreements s/t Loans to Finance Intermediary DL $0 NA Several $181

TOTALS $215 >$1,950 $2,848

* P: Purchases, DL: Direct Lending, SPV: Special Purpose Vehicle

-50

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250

300

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450

-2.0

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4.0

6.0

8.0

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12.0

14.0

16.0

Sept 4 Sept 18 Sept 25 Oct 2 Nov 6 Dec 18 Jan 8 29-Jan 5-Feb 13-Feb 27-Feb

Liquidity Pumping by the Fed – Phase I

(%)

Stock Market Performance & Repo Operations, Since Sept. 4, 2019($, Bil.)

Repo Operations - Right

Increase inBalance Sheet - Right

S&P 500 - Left

Source: EFC calculations based on data from Bloomberg

0

500

1000

1500

2000

2500

3000

3500

-20.0

-15.0

-10.0

-5.0

0.0

5.0

27-Feb 19-Mar 2-Apr 23-Apr 7-May 14-May 21-May Latest

Liquidity Pumping by the Fed – Phase II

(%)

Stock Market Performance & Repo Operations, Since Feb. 27, 2020($, Bil.)

Repo Operations - Right

Increase inBalance Sheet - Right

S&P 500 - Left

Source: EFC calculations based on data from Bloomberg

Consumer Confidence & Recessions

Source: Data from HIS Markit

(Index: 1966 = 100)

’00     ’01     ’02     ’03     ’04     ’05      ’06      ’07     ’08      ’09     ’10     ’11      ’12      ’13     ’14     ’15 ’16      ‘17     ‘18      ’19   ‘200

20

40

60

80

100

120

140

160

Source: Speech by Chair Powell, May 13, 2020

Jerome PowellChairmanFederal Reserve

recovery.

But the recovery may take some time to gather momentum,and the passage of time can turn liquidity problems into solvency problems.Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.

Powell Greenlights Additional Fiscal Actions

JUNMARDECSEPJUNMARDECSEPJUNMARDECSEPJUNMAR2020201920182017

2.5

2.0

1.5

1.0

0.5

0.0

(%)

Implied Inflation Rate10-Year Treasury Less 10-Year TIPS Rate

IMF Warns of Global Rise in Public Debt

Government Deficits Set to Rise

‐18 ‐16 ‐14 ‐12 ‐10 ‐8 ‐6 ‐4 ‐2 0 2 4

Russia

India

Brazil

China

Emerging Economies

Germany

Japan

Italy

UK

France

Canada

US

Advanced Economies 20202019

Source: Data from IMF

(% of GDP)

What Will Happen to Interest Rates?

Source: Longer‐Run Economic Consequences of Pandemics, FRBSF Working paper 2020‐29

The State of Current Inflation

What Will Actually Prevent Inflation From Igniting?

How Does Covid-19 Recovery Looks?

IVIIIIIIIVIIIIIIIVIIIIIIIVIIIIIIIVIIIIII20232022202120202019

2400

2200

2000

1800

1600

1400

($ bil.)Medical Spending (COVID-19 Episode)

APRMARFEBJANDECNOVOCTSEPAUGJULJUNMAYAPRMARFEBJAN20202019

120

100

80

60

40

20

0

(Index, Jan 2019=100)Auto Sales Dropoff: US versus China

U.S. China

Quarterly Annual

Q2‐20 Q3‐20 Q4‐20 Q1‐21 Q2‐21 Q3‐21 Q4‐21 Q1‐22 2020 2021 2022

Real GDP (%) ‐41.8 3.4 1.0 5.7 4.6 4.0 9.8 3.4 ‐9.5 0.4 6.1

Consumption (%) ‐48.8 13.1 7.4 3.7 3.8 5.5 13.9 4.4 ‐10.7 1.6 7.0

Investment (%) ‐33.1 ‐25.9 ‐3.8 ‐2.4 ‐1.7 ‐1.2 0.0 8.0 ‐13.1 ‐6.6 5.8

Auto Sales (mil.) 10.9 11.9 12.0 12.2 12.4 12.6 12.7 13.7 12.5 12.5 14.1

Housing Starts (mil.) 0.815 0.865 0.876 0.818 0.837 0.876 0.886 0.942 1.006 0.854 1.121

Job Gains (‘000) ‐28,900 ‐3,712 2,255 4,232 3,244 2,287 2,306 1,583 ‐21,828 994 8,588

Crude Oil ($/bbl)  26.8 33.4 35.0 39.6 34.3 40.4 42.6 48.9 35.2 39.2 54.2

CPI ‐3.3 2.3 2.2 1.9 2.1 1.9 2.0 3.0 0.9 1.7 2.8

Core ‐ CPI 1.2 1.9 0.9 1.0 1.1 0.9 1.1 1.4 1.9 1.1 1.5

Real U.S. Dollar (%) 23.3 4.0 7.7 4.5 ‐7.3 ‐5.8 ‐7.7 ‐7.0 7.3 1.6 ‐6.6

10‐year T‐Bonds 0.7 0.7 0.9 1.2 1.4 1.7 1.8 2.1 0.9 1.5 2.2

Fiscal Deficit(bil. $)/% of GDP ‐4,110 ‐4,645 ‐3,434 ‐2,953 ‐2,823 ‐2,751 ‐2,528 ‐2,503 ‐17.3% ‐13.9% ‐11.1%

US Forecast Summary, May 2020

IVIIIIIIIVIIIIIIIVIIIIIIIVIIIIIIIVIIIIII20232022202120202019

155

150

145

140

135

130

125

120

115

(mil.)Employment (COVID-19 Episode)

IVIIIIIIIVIIIIIIIVIIIIIIIVIIIIIIIVIIIIII20232022202120202019

20000

19000

18000

17000

16000

($ bil.)Real GDP (COVID-19 Episode)

How Does Covid-19 Recovery Looks?

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