“That’s the hard part about risk. Try as you might, it’s very hard to predict where it might come from. And especially when it might pop up.”
–Robert Calhoun & Matt Powers, "How to Spot the Next Market Avalanche," Jan. 6, 2020
What a year. We can say with some certainty that it will be studied for decades to come. The spread of the coronavirus and our response to it — large-scale lockdowns and social distancing — shook the economy at a pace and scale nobody has ever seen before.
When those future economists and investors look at the data, they’re going to struggle in a number of ways, not the least of which will be this: What do we do with these charts?
Economic data in 2020 broke a lot of charts. Regular readers of this column know that Broken Charts has been something of a theme for us. So today we will flip through a veritable chart book of the best (worst?) examples.
There are plenty of charts we can never use again without COVID-adjusting the y-axis. Maybe the most popular is the graphic charting U.S. gross domestic product. The media is used to reporting the quarterly numbers as a quarter-over-quarter annualized number (seasonally adjusted, of course). We never liked this method, and maybe the chart below will convince others that a simple year-over-year method would work best. "Good riddance," say your authors.
Look at that chart! The so-called Lockdown Recession made a molehill out of the mountain that was the Great Recession, and previous recessions in the postwar period are barely blips.
Annualizing the change of an annualized flow measure never made much sense anyway. From the look of this graph, we recovered all of the second quarter's unprecedented loss in an unprecedented gain. In fact, there remains a 3.5% gap between the GDP of the fourth quarter of 2019 and the third quarter of 2020, about equivalent to the worst of the 2009 recession. There’s still a ways to go.
Which brings us to unusable chart No. 2. The labor market went through dramatic changes in 2020. April’s 21 million loss in employment is still stunning. No one could have expected a time when we would need to shut down entire industries, but it happened. And the chart of the monthly change in nonfarm payrolls will never be the same.
As the initial wave of cases crested and fell, and we learned more about the virus and how to operate, jobs came back. First quickly: Eleven million jobs were regained by August. Then slowly: We’ve dropped to a pace of adding 500,000 per month in the last three months, with November seeing a disappointing 245,000 gain. Don’t be surprised if December has a negative sign in front of the number.
Economists spent a large amount of time in 2020 trying to come up with the best description for the “shape” of the recovery. It was an alphabet soup of a year, with V's and L's and U's and even K's. But given this large third wave of new cases and the fact that economic data points like retail sales and unemployment claims are already rolling over, all of that talk may be premature. We might end up calling it a double-dip recession.
The main driver of the recovery in 2020 was the Coronavirus Aid, Relief, and Economic Security Act, beyond a shadow of a doubt. The CARES Act was an unambiguous win and truly unprecedented. The fact that personal incomes grew in spite of 21 million losing employment in a single month is astonishing and surely saved millions of businesses from bankruptcy, along with countless households from eviction and starvation. The chart below shows the unprecedented income support provided by government social benefits in 2020.
The success of the CARES Act makes the lack of further fiscal support that much more remarkable. As we write, the government continues to debate a new — and smaller — package. It may already be too late for many struggling households and businesses.
As mentioned above, the stabilization of retail sales by June is remarkable, and it's entirely attributable to government income-support measures. But it’s not all gravy. While on aggregate retail spending has been up by 4% to 6% year over year in the second half of the year, there have been big winners and big losers, and not many in between.
The COVID-friendly home goods, cars, grocery store spending and hobby equipment to keep one busy at home have all been on a tear. Most of all, online spending has benefited, with nonstore spending up 30% year over year! This has been a boon for the industrial real estate sector, but caused plenty of suffering for traditional retailers on the wrong side of social-distancing measures.
The most affected were obviously bars and restaurants and clothing stores (who needs clothes when you’re at home in sweatpants all day?), which saw 50% and 80% declines, respectively. They seem to be fading once again as virus cases are reaching new records across the country in December. Just look at the chart below. Never did we think we’d have to adjust the axis of a retail sales chart down far enough to include a negative 100%, but here we are.
Similarly, hotels haven’t caught a break at any stage of this recovery. The chart below tracks year-over-year changes in revenue per available room, the hospitality industry's standard measure of revenue. The chart looks very similar to those "most-affected retail sales" categories in the prior graph, but saw a much smaller bounce during the back half of 2020.
The hit to hotel cash flows has been a double whammy (a technical term in the hotel space). Leisure travel was obviously discouraged during a pandemic, and business travel was sharply curtailed. While leisure travel should return to normal in a post-pandemic world, increased online connectivity in the workplace may lead to a more permanent shift lower in weekday business travel.
STR, a CoStar hotel research and analytics company, expects that RevPAR this year will decline by around 50%, the steepest decline ever recorded. That said, the 2021 RevPAR increase of 30% will likewise be the strongest single year of RevPAR growth the industry has ever seen. Obviously, the comparable is a rather easy one.
Vaccination news was well received by operators and owners alike, but the reality is that it will take until at least the third quarter before the healthy, fully functioning business travel crowd will benefit from a "shot in the arm" (so to speak) and hit the road again.
Looking ahead to 2021 is a real challenge. While the next few months will likely be rough ones, there is potential for enormous growth in the back half of the year as we finally enter into a post-pandemic world. It’s looking like 2021 could be as interesting as 2020, but hopefully in a very different way. We will take our first stab at the outlook after the new year.
The Weeks Ahead
CoStar Economy will take the week off for the holidays. While we're gone, new data releases will be slow but no less consequential. Personal income and spending data for November will be released Wednesday, revealing whether the retail sales print for the month was a harbinger of more bad data to come.
Consumer confidence data provided by the Conference Board on Tuesday and the University of Michigan on Wednesday will similarly reflect COVID fears heading into the winter months. These are also the first post-election reports, so we could get some interesting insights on how households are thinking about a Biden/Harris administration.
The following week will likely be even quieter, and also holiday-shortened. The most notable release will be the Chicago PMI view of the area's activity for December, which comes out Dec. 30.