The 2020 Economic Review and Outlook for Mark Schniepp Director - - PDF document

3/ 3/26/ 26/20 20 1

The 2020 Economic Review and Outlook for

The U.S. and California

Mark Schniepp Director

Mar March 25, 2020 2020

1

Agenda

1)

What we know to date about

• -- COVID 19

2)

What’s happening to the U.S. and California economies

3)

How long is the economic damage: the outlook for 2020

• -- given what we know as of 3-25-20

4)

Risks for the Santa Clarita Valley

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4,000 8,000 12,000 16,000 20,000 24,000 28,000 32,000 36,000 40,000 44,000 1/22 1/29 2/5 2/12 2/19 2/26 3/4 3/11 3/18 3/25

Daily New Worldwide COVID-19 Cases

January 22, 2020 -- March 25, 2020

total new cases per day

3

15,000 30,000 45,000 60,000 75,000 2/14 2/19 2/24 2/29 3/5 3/10 3/15 3/20 3/25

COVID 19 Cases

cases February 14, 2020 -- March 25, 2020

Italy

South Korea U.S.

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3/ 3/26/ 26/20 20 3

100 200 300 400 500 600 700 800 900 2/14 2/18 2/22 2/26 3/1 3/5 3/9 3/13 3/17 3/21 3/25

Daily New COVID-19 Cases / South Korea

February 14, 2020 -- March 25, 2020

total new cases per day

5

Immediate Status of COVID-19

• We remain in a panic state
• The COVID-19 case growth rate in the U.S.

continues to rise, exceeding the Italian growth rate of new cases

• Escalating in Europe: Spain and Germany
• Fastest case growth rate is in New York state
• Abating in South Korea and Singapore
• No new internal cases in China, last 5 days . . .

.

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For

• rbes, March 19, 2020

7

Status of COVID-19

• In China, their economy is ramping up, first

slowly but now more quickly

• More than 90% of all victims have recovered
• The supply chains are being restored

– Over 95 percent of enterprises back in operation

• Apple has re-opened all 42 of it’s stores in

mainland China

• Starbucks re-opened in Wuhan and will have

90 percent of stores open by next week

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What you should know about the U.S. Economy

q Pre-virus, there was not much negative economic news affecting the 2020 forecast q The stock market recorded record highs q The unemployment rate was at 3.5 %

q The economy was poised to only slow a little this year:

to 2.0% (from 2.3% in 2019)

q Uncertainty from the U.S. China trade war was a dissipating cloud over the economy . . .

q Especially after Phase I was signed on 1-15-20

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3 4 5 6 7 8 9 10 11 Jun-65 Apr-72 Feb-79 Dec-85 Oct-92 Aug-99 Jun-06 Apr-13 Feb-20

Unemployment Rate / US

percent June 1965 -- February 2020

50 year low

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0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 Feb-08 Feb-10 Feb-12 Feb-14 Feb-16 Feb-18 Feb-20

Housing Starts / U.S.

millions of units, SAAR

February 2008 -- February 2020

Highest level since 2006

11

95 98 101 104 107 110 113 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20

Index of Leading Indicators / U.S.

index 2010 = 100 February 2015 0 -- February 2020

breakout to the upside in January - February

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But everything turned on a dime

• The economy faces an unprecedented shock,

all within a 3 week period:

q COVID 19 hit the Securities Market like a shock wave ! Now, it’s the economy . . . . q Investors are spooked by the uncertainty of containment and unknown extent of economic damage q The Fed first did an emergency 50 BP FFR cut q Then another emergency cut to zero percent to ease credit demands during the crisis

13

18,000 19,500 21,000 22,500 24,000 25,500 27,000 28,500 30,000 9/25/19 10/30/19 12/5/19 1/13/20 2/19/20 3/25/20

Dow Jones Industrial Average

the last 125 days . . . . . to March 25, 2020

index

19 19 day y peri riod: 33 33 percent decline !

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Supply and Demand Issues

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Supply and Demand Impacts

q We started with a supply issue

q Shipping containers filled with products for American businesses not coming from China q Travel bans limiting tourists into the U.S. q Then the forced closures of businesses

q That evolved into a demand shock q The stock market collapse affects household wealth; Consumers aren’t spending due to

q The wealth effect q Losing their jobs, and q just plain uncertainty about the future

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Supply and Demand Impacts

q Tourists aren’t spending because

q they’re not here, and q everything is closed anyway

q Heavily impacted sectors include:

q Airlines, hotels, restaurants, retail stores . . . . q All spectator entertainment venues q Truck drivers and warehouse workers q And now: bars, gyms, personal care

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What Impacts we can see to date

q A rapid 30 percent decline in the Stock Market q Lack of travel and visitor spending

q Planes less than half full, or not flying at all . . . q Tumbleweeds blowing through hotel lobbies . . .

q The great Coronavirus shutdown

• f public events (more on this to come . . . .)

q Fed cuts rates to near 0 percent q Flight to safety sends long term interest rates to historical lows

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q Initial runs on Costco, Target and all grocery stores for toilet paper, canned goods, produce, fresh meat, bread, rice . . . . q Continued empty grocery store shelves q Empty stores, empty downtowns, no traffic q Longer delivery times from Amazon q Oil prices have tumbled ! q Oil company stock prices down 50 percent, right along with airline stock values

What Impacts we can see to date

19

10 25 40 55 70 85 100 115 130 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 Mar-20

West Texas Intermediate Crude Oil Price

dollars per barrel

March 2002 -- March 20, 2020

18 year low

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The Great COVID 19 Shutdown

q NBA season suspended q March Madness cancelled q All California schools closed - next 3 weeks q All high school sporting events suspended q UC System in-person classes cancelled q Disneyland theme parks closed, CA and Florida q New York Broadway shows closed q Major League Baseball season delayed

21

The Great COVID 19 Shutdown

q 2020 Summer Olympics postponed to 2021 q Music festivals like Coachella postponed q Other entertainment events cancelled q Conventions cancelled q Conferences cancelled or postponed q Travel from Asia, Europe into US, banned q All Bars, restaurants, wineries, breweries . . . . q Shelter-in-place enacted in ½ of U.S. so far . . .

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Jobs most at risk

q Food services and drinking places q Most of the retail trade sector q Amusement and recreation q Spectator sports, sporting goods q Motor vehicle parts dealers q Accommodation and Hospitality q Health and personal care stores q Air, water, and ground transportation q Trucking q Business and administrative support services

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q At airlines, airports, hotels, restaurants and bars, . . . . at all public meeting places

q All staff at all sports venues, their suppliers, food concessions, fitness centers, salons q Layoffs of trucking and warehousing workers due to less imported products from China and fewer deliveries to restaurants, hotels, and bars

q Because of all the closures, there is less to transport, store, and deliver

q Idled workers from shelter-in-place mandates

Observed Layoffs to date

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3/ 3/26/ 26/20 20 13 13

50 100 150 200 250 Mar-05 Sep-07 Mar-10 Sep-12 Mar-15 Sep-17 Mar-20

Initial Claims for Unemployment Insurance California

Weekly: March 21, 2005 - March 21, 2020 thousands

• f claims

Great recession

Last week ending last Friday

25

200 300 400 500 600 700 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Initial Claims for Unemployment Insurance U.S.

Weekly: March 2015 - March 21 , 2020 thousands

• f claims

More than triple, the previous week

Last week ending last Friday

26

3/ 3/26/ 26/20 20 14 14

50 56 62 68 74 80 86 92 98 104 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Consumer Sentiment / University of Michigan

March 2011 -- March 2020

index 1985=100

This reading will collapse and confirm a bearish sentiment . . .

27

q Sharp and sustained declines in consumer spending are occurring now due to staying at home, being out of work, and/or the wealth effect q most travel and all recreation, amusement q In-store retail goods/services, x food, medicine q à automobiles, and larger durable goods

q A recession occurs if these effects on demand are severe or prolonged

q Severity rises with the length of the shut down period deemed necessary for containment

Observed Impacts we are seeing

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3/ 3/26/ 26/20 20 15 15

20 40 60 80 100 10/20/19 11/8/19 11/27/19 12/16/19 1/4/20 1/23/20 2/11/20 3/1/20 3/20/20

What Californians Google

October 20, 2020 -- March 20, 2020 index

“ Recession ”

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q Interruptions of durable good supplies

• -- iphones, other electronics, farm equipment

q Construction delays from interrupted supplies

• f building materials from China

q Small and mid-size business bankruptcies q Continued “shortages” at grocery stores q Oil and gas facility shutdowns all over the country and more layoffs . . . ..

• - of oil and gas extraction workers and support crews

Further Impacts we WILL see

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q Major runs on stores for food and toilet paper are boosting retail food store revenues q Lower oil prices are a big positive for the American consumer

q And low oil prices are still a negative to the U.S. economy impacting taxes, revenues and jobs

q Amazon is hiring 100K workers to facilitate the rapid and massive switch to online purchases

Are there any Benefits ?

Ma MarketWatch 3-21 21-20 20

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q 7-11 hiring 20,000 workers, and Kroger, 10,000 q CVS announced plans to hire 50,000 q Pizza Hut, Papa Johns and Dominos need 20,000 delivery drivers badly q Healthcare industry is ramping up in overdrive

q Healthcare is larger than retail trade, hospitality, airlines, or recreation

q Demand for respiratory equipment is generating hiring in manufacturing

Are there any Benefits ?

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q Census is hiring 500,000 workers q Stay at home workers are creating record surges in Internet demand. Sonic, Cox, Comcast q Census is hiring 500,000 workers q Lower interest rates will ultimately boost the housing market further . . . will stay low

Are there any Benefits ?

33 3.0 3.5 4.0 4.5 5.0

Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Nov-18 Mar-19 Jul-19 Nov-19 Mar-20

30 Year Fixed Rate Mortgage

rate April 2017 -- March 19, 2020

3.65 3.65 %

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4.6 4.8 5.0 5.2 5.4 5.6 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20

Existing Home Sales / U.S.

February 2015 -- February 2020

millions of sales, SAAR

35

150 200 250 300 350 400 450 500 Aug-12 Jun-13 Apr-14 Feb-15 Dec-15 Oct-16 Aug-17 Jun-18 May-19 Mar-20

Volume Index of Loans for Home Purchases / MBA Survey

August 12, 2012 - March 13, 2020 index of volume

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3/ 3/26/ 26/20 20 19 19

500 1,500 2,500 3,500 4,500 5,500 6,500 7,500 8,500 9,500 Aug-12 Jun-13 Apr-14 Feb-15 Dec-15 Oct-16 Aug-17 Jun-18 May-19 Mar-20

Refinance Index / MBA Survey

August 12, 2012 -- March 13, 2020 index of volume

37

2,000 3,000 4,000 5,000 6,000 7,000 8,000 Jan-05 Sep-06 May-08 Jan-10 Sep-11 May-13 Jan-15 Sep-16 May-18 Jan-20

Job Openings / U.S.

January 2005 -- January 2020 thousands

• f jobs

7 million job openings

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Ca California

Wh What about:

39

327 389 425 476 428 346 346 252

200 250 300 350 400 450 500 2012 2013 2014 2015 2016 2017 2018 2019

Jobs Created / California

2012 -- 2019

thousands

• f jobs

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3.5 4.5 5.5 6.5 7.5 8.5 9.5 10.5 11.5 12.5 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15 Jan-20

Unemployment Rate / California

percent January 1995 -- January 2020 seasonally adjusted

3.9 3.9 %

41

California: Just before the outbreak

q The economy was strong and vibrant q Lowest unemployment rate on record q Existing home sales rising again q Home prices also rising after 2019 respite q Tourism was surging . . . with a rising share attributed to foreigners including Chinese q Lodging Occupancy at record levels in San Francisco and Los Angeles Counties

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300,000 600,000 900,000 1,200,000 1,500,000 1,800,000 1935 1947 1959 1971 1983 1995 2007 2019

Total Anual Recreational Visitors Death Valley National Park

number of visitors

1935 -- 2019

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California: Engines of Growth

q Broad-based job creation from all sectors q Technology is the principal engine

q Bay Area and LA Metro regions

q New Development extraordinarily strong

• - Apartment building in principal metro areas
• - Office and Hotels surge in No & So California
• - High Speed Rail project continues . . . .
• - Fire rebuilds in Northern California

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2 4 6 8 10 12 14 16 18 20 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019

Investment in New Commercial & Industrial Structures / California

1979 -- 2019

billions of dollars

45

200 400 600 800 1,000 1,200 1,400 2/21 2/24 2/27 3/1 3/4 3/7 3/10 3/13 3/16 3/19 3/22 3/25

COVID 19 Cases / California

Bay Area

cases February 21, 2020 -- March 25, 2020

Southern California

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Who’s Impacted in California ?

• All restaurants, bars, wineries, breweries,

closed for public gathering on March 15

• Governor Newsome orders shelter in place for

Bay Area on March 15

• Rest of California is ”shut in” on March 19
• Only the “essential critical infrastructure

workforce” can remain at work

• How many people are impacted ?

47

11.8 0.9 12.7 5.0

2 4 6 8 10 12 14

Essential Jobs Not Essential but can Work from Home Total Jobs Operational Jobs Expected to Shut Down

Job Market Impact of Pandemic 'Shelter in Place' California

March 20, 2020 to End of 'Shelter in Place' millions

• f jobs

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400 800 1,200 1,600

Mining & Nat. Resrouces Transportation &… Utilities Information Management Real Estate & Rental Other Services Manufacturing Wholesale Professional & Technical Arts and Entrtainment Administrative Support… Retail non-food stores Accomodation & Food

Jobs at Risk from Pandemic Shutdown and 'Shelter in Place' Period / California

March 15, 2020 to End of 'Shelter in Place' thousands of jobs

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What and how long is the damage?

• The current extent and expected length of the

economic damage is entirely driven by the public health issue

• Tell me how long until containment or for how

long we’re at home, and I’ll give you a reasonable assessment of the damage

• Right now, it’s speculation based on our own

assumptions of the great pandemic shut down

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This year’s Outlook

Are we in a Recession ?

51

Initial Forecasts through March 20

1) JP Morgan:

• 3 percent in Q2

2) Deutsche bank:

• 13 percent in Q2

3) IHS Markit:

• 8.3 percent in Q2

4) UCLA Anderson:

• 6.4 percent in Q2

5) UBS:

• 10 percent in Q2

With 7 percent unemployment

6) Goldman Sachs:

• 24 percent in Q2

7) Bank of America

• 12 percent in Q2

Also: 1 million jobs lost in Q2 alone

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COVID-19 Scenarios

1) Virus appears contained by mid- April with much fewer daily case outbreaks

1) -- Supply chains restored by late April 2) -- Travel bans lifted in May 3) -- Spectator events resume in May 4) -- People rush to plan their summer travel

2) Pandemic Peaks in late April; with containment achieved by late May

1) Shelter-in-place orders removed in May 2) Airlines, other travel, all events restored in June

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COVID-19 Scenarios

3) Pandemic Peak: June 1 Containment by end of June Restoration of economy by August 1

• - U.S. suffers negative GDP growth in 2020 Q2
• - and likely 2020 Q3

The decline in the stock market alone will reduce GDP growth this year by more than 1 percentage point.

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• 9.0
• 6.0
• 3.0

0.0 3.0 2018Q4 2019Q4 2020Q4 2021Q4 2022Q4

Real Gross Domestic Product Growth / U.S.

2018 Q4 -- 2022 Q4

percent change

Pessimistic Scenario

forecast

we are here

Optimistic Scenario

55

3.3 3.6 3.9 4.2 4.5 4.8 5.1 5.4 5.7 6.0 2018Q4 2019Q4 2020Q4 2021Q4 2022Q4

Unemployment Rate / U.S.

2018 Q4 -- 2022 Q4 percent

Optimistic Scenario Pessimistic Scenario

forecast

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2020 Economic Forecast Summary

• 2 principal scenarios: optimistic and pessimistic
• Even if the shutdown was called off on

April 1, there would be much slower growth

• There are serious supply limitations

but the attendant decline in demand from consumer-workers losing their jobs, income and wealth is staggering

• It’s clearly a mega-contraction in the economy
• But is it a recession?

57

2020 Economic Forecast Summary

• That’s up to the NBER
• But because this shut down is unprecedented

and so severe, it’s likely they will call one beginning now and continuing until the contraction is clearly over

• However, an official recession could potentially

be averted if we ramp up enough in May and June to overcome the current bloodbath that is impacting half of March and likely most

• f April

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2020 Economic Forecast Summary

• Because interest rates will remain low through

2020 this will help housing and other interest

rate sensitive sectors lead the recovery. . .

• Inflation remains a non-issue
• Construction (which there is a lot of right now)

is less impacted by supply chain and will also help to power regional economies back to life

• Layoffs persist from between 6 weeks and 4

months pushing the unemployment rate sharply higher

59

California Forecast Summary

• Workers in transportation, retail and

leisure/hospitality sectors significantly impacted

• Job layoffs, furloughs or suspensions could

affect up to 5 million workers

• Logistics jobs decline but less severely
• There will product delays to consumers in Q2
• Unemployment rises to near 7.0 percent by

the end of 2020

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• 900
• 600
• 300

300 600 2018Q4 2019Q4 2020Q4 2021Q4 2022Q4

Job Creation / California

2018 Q4 -- 2022 Q4 thousands of net jobs forecast

Pessimistic Scenario Optimistic scenario

61

3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 2018Q4 2019Q4 2020Q4 2021Q4 2022Q4

Unemployment Rate / California

2018 Q4 -- 2022 Q4 percent forecast

Pessimistic Scenario Optimistic Scenario

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Good news: Stimulus/Rescue Package

• The deal was made just last night . . .
• $2 trillion: unprecedented in size and scope
• $ 1,200 in helicopter money to most adults
• $ 367 billion in loans to small business
• $ 500 billion in loans to distressed companies
• $ 500 billion in loans to cities and states
• $ 600/week additional unemployment benefit
• $ 130 billion to hospitals

63

V

More Good News . . . .

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Potential Delays to the Recovery

q A V-shaped recovery does not mean immediately q The economy is like an ecosystem: ramping up from devastation could take 6 months q Can prior airline itineraries be reestablished quickly? q The converted supply chains have to be reconverted back

q From trucking to grocery stores and Costco to trucking back to Red Lobster and Applebees

65

Potential Delays to the Recovery

q Supply chains need to be restored from China

• - Will the network be in place to reabsorb the surge
• f inbound products to distribution centers?

q What about the demand ? q Re establishing worker supply chains internally

• - Will everyone be available to return to their
• ld job ?
• - Will there be delays due to worker quarantines?

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Potential Delays to the Recovery

q Can construction projects resume seamlessly? what about new projects in which plans for Q3 and Q4 starts were delayed by stay-at-home workers ? q What about supply and demand coming from small and medium size businesses that were forced to quit during the shutdown ? q 2 to 3 months = some form of normality

q But full efficiency = 6 to 9 months

67

Wh What about ut the Santa Clarit rita Va Valley ?

How How i is i s it be being im impacted b by COVI VID 19 19 ?

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What about the Santa Clarita Valley ?

q The largest employer is shut down q Princess Cruises shut down q Healthcare like Henry Mayo and COC are included in the essential workforce q Manufacturing enterprises in the Santa Clarita Valley are also mostly essential, and largely exempt from shelter in place

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Santa Clarita Valley

q Less traffic on interstate 5 q City will incur significant losses of sales

taxes, bed taxes, parking fees, film revenues

q retail and recreation sector suffer largest impacts q Warehousing for e-commerce is benefitting q Because new development was a meaningful engine of current growth, this interruption is especially significant;

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Santa Clarita Valley

• However ALL construction is part of the

essential critical infrastructure workforce

• “Construction Workers who support the

construction, operation, inspection, and maintenance of construction sites and construction projects (including housing construction)”

q Where are the job impacts by sector; what kind of dollar loss is at risk ?

71

33,500 62,200

15 30 45 60 75

Shut Down Could Remain Operational

Job Market Impact of 'Shelter in Place' Santa Clarita Valley

March 20, 2020 to End of 'Shelter in Place'

thousands

• f jobs

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2,000 4,000 6,000 8,000 10,000

Transportation & Warehousing Information Management Utilities Professional & Technical Other Services Real Estate & Rental Wholesale Manufacturing Arts, Entrtainment, Recreation Administrative Support Retail Accomodation & Food

Job Impacted by Shut Down During 'Shelter in Place' Period / Santa Clarita Valley

jobs March 20, 2020 to End of 'Shelter in Place' Period

73

1.3 3.6

1 2 3 4

Shut Down Could Remain Operational

Income Impact of 'Shelter in Place' Santa Clarita Valley

March 20, 2020 to End of 'Shelter in Place'

billions

• f dollars

27 27 % 10 108 M

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www. www.cal aliforniaf aforecast ast.com

COVI VID 19 19 Upd pdates

For Ec Economic Updates Re Regarding t the he Co Coronavi virus us

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The Ec Economic Impact to date of

COVI VID 19 19 Th Thank k you fo for wat atch ching ng

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