The economy may have hit rock bottom and is poised for a slow recovery from the effects of the coronavirus, says Gene Goldman, chief investment officer for Los Angeles-based Cetera Financial Group.
Goldman says the current economic crisis, which has seen more than 40 million people file unemployment and gross domestic product decline precipitously, is unlike prior recessions in that it involves both a collapse in supply and in demand. Production of goods ceased sharply in March and consumer spending ground to a halt as restaurants, factories and shops closed and people were closeted in their homes. But, there are signs that with gradual reopenings in many states and restrictions on movement being lifted, that the economy is beginning to show early signs of coming back.
He cautions, however, that consumers will be cautious and that a second wave of the virus which might occur in the fall and winter would pose new concerns, although there might not be a shutdown similar to that which occurred this spring.
“Whenever we have a dislocation in the economy like a big shutdown, things change in consumer behavior,” Goldman says. “The Great Depression is a great example. After the depression, we became a nation of savers, we started putting more cans of soup in the cabinet.”
Goldman adds, “Will we spend as much at restaurants? Maybe a different type of spending will take place.”
Goldman spoke recently with U.S. News about COVID-19 and the economy. The conversation has been edited for length and clarity.
Is there anything in particular that has surprised you about this COVID-19 pandemic, either positively or negatively in terms of what’s happened to the economy?
First of all this crisis is different, it’s a supply and demand shock at the same time. Obviously on the supply side, we’ve seen factories closing, restaurants, people not going to malls. You think about 2008, that was more of a demand side shock, where unemployment jumped and people just stopped spending money.
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The last time we saw a supply and demand shock at the same time was kind of the mid ’70’s, you know, where we had unemployment jump dramatically, when we saw OPEC raise prices and shut down oil supplies and you saw the ramifications which I do think are similar to what we will see going forward. We’ll see potentially higher inflation, possibly stagflation. But I think the biggest shock that we saw was in the first quarter, GDP fell 5 percent. But the economy was only shut down for two weeks so this shows the severity of the economic destruction that we saw. It was the beginning of an economic disaster. But with all that said, we do see some positives going forward.
Well, obviously the stock market and consumer confidence bumped up a little bit, admittedly off a very low number.
It’s funny, definitely. I think the data is now catching up to the stock market. But our thesis that we have been laying out is three things. Number one, a U-shaped recovery. It will be a slow, gradual comeback. My second prediction is market volatility as the markets weigh the good and bad news but we don’t see the markets hitting the March 23rd lows because there’s too much stimulus in the economy and the third thing we’re seeing is a rotation to different equity sectors.
Whenever you have a dislocation in the market there’s always a rotation. We saw this for example after Y2K in the early 2000s no one liked technology, everyone avoided technology stocks. After the 2008 recession, technology became a market leader.
We’ve been saying the economic pain is very front-end loaded so we saw March was ugly, April was even uglier but then we’re seeing the low point or the data is getting less bad. You can look at jobless claims, it’s heart wrenching that we’ve lost 39 million jobs in the last nine weeks.
But it’s less and less each week and that’s a good sign. If you look at some of the manufacturing surveys, there’s two surveys out there that people don’t pay too much attention to but we like a lot. One is the Empire State manufacturing survey and the other one is the Philly Fed. They’re very tiny surveys but the first look at the current month’s data.
Both were negative, both were below zero but they’re coming off of their lows that we’ve seen in prior months. Just looking at mortgage applications we saw today up straight six straight weeks, purchase volumes are now back to February levels. You look at even hard data like TSA checkpoints, you know, something like this last Sunday (May 17), we saw 253,000 people. That’s the highest since March 24th and follows the lows seen around 90,000 per day in mid-April. Even Google search trends, we’re watching that daily and they are suggesting some consumer optimism. People are asking when will bars open, when can I go to restaurants, when can I go shopping. To your point about consumer confidence, it’s true that it has bounced off of lows – consumer confidence has dropped definitely but nowhere near the lows compared to prior recessions.
You would think given the traumatic shutdown of the economy it would be a lot worse but this shows that either people realize that the job losses may be temporary as there’s evidence that a lot of people are just being furloughed or the fact that the consumer was in really good shape coming into this economic pullback. Then you’re seeing it obviously in the financial markets. The markets tend to price in events about six to nine months in advance. For example, copper is up a lot for the last few weeks.
It’s a real time indicator as to what the economy is doing. A lot of people say well it isn’t just used in pennies or Moscow Mules, but it’s a real time economic indicator as the average home contains over four hundred pounds of copper and the average car contains about 50 pounds of copper.
What do you think will change about the economy because of the pandemic? How we go about business or consumers purchasing goods?
Whenever we have a dislocation in the economy like a big shutdown, things change in consumer behavior. The Great Depression is a great example. After the depression, we became a nation of savers, we started putting more cans of soup in the cabinet. I think obviously we are going to be just cautious. Will we spend as much at restaurants? If you look at April income versus personal spending, you’re seeing the savings rate increasing. Maybe a different type of spending will take place.
One thing we are looking at is the potential for more socialist type of schemes. Even prior to this pullback, you’ve seen a spread between the wealthy versus the lower income and even many billionaires have come out and said I’m making too much money. I should not be making this much money. That’s why you’ve seen candidates like Elizabeth Warren and Bernie Sanders gain some popularity.
With the data coming out, you’re seeing the hardest hit people are really the poorest people. I think you’ll see some type of a wealth transfer or a reduction in terms of the wealthy versus lower income.
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Do you think a second wave of the virus will come and what will that mean for the economy?
I do believe a second wave will come but it’s just what will happen to the economy and how the government will react.
If you look at data in Brazil and I know Brazil’s having health care issues and so on but you know, Brazil is going into the fall now, and they’re seeing a sharp pickup in cases, so you look at Brazil you look at some of the southern countries. There’s data in China, it’s starting to see a little bit of a second wave and Korea, so we do believe in a second wave. But will the economy get shut down? I don’t know.
I think there’s still debate on whether shutting down the economy worked. Social distancing definitely worked. But there’s debate on whether shutting down the economy. Did we actually do more good or more bad? It’ll be a textbook case down the road to see what actually happened but I do believe we’ll continue these sort of different things, wearing masks and social distancing but I’m a little skeptical we will shut the economy.
Historically, the United States has led other countries out of recessions. But there’s some indication China and other Asian countries have done better handling this and are seeing a modest amount of a rebound in their economies. Do you think that we might see an east to west situation with the economy rather than the U.S. leading everyone out of it.
Part of it was low oil prices and everything right now is really dancing in China. The thing about China is they have experience dealing with viruses. They know what to do, quarantining, social distancing, combining fiscal and monetary stimulus. This is what China did. Obviously, it’s a communist nation so they can quarantine people more easily but they kind of gave us the game plan of what to do. That’s partly why they came out faster than we have. The structure of their economy, they’re benefiting from super low oil prices. And they’re 17% of the global economy so they get better, the global economy is better.
Do you think the role of technology in the economy will continue or do you think that other industries might benefit and come out of this in a better posture than they were before?
I do believe technology is going to continue to do well because you can’t stop the importance of information access, mobility, time saving, all these things but other sectors are going to start doing better and we’re seeing it, like with financials. Financials tend to be one of the best performers coming out of recession and financials have really underperformed. The other sector there is industrials with infrastructure spending and supply chains shifting.
Obviously, health care has had a good run. But health care spending in the first quarter was down about 18 percent, people weren’t going to hospitals, not doing surgeries, not going to dentists. We do expect health care to bounce back. Some data came out recently about dentists reopening. It’s not like you need to go and get double teeth cleaning but like getting a crown.