Tracking the Crisis
The Great Financial Crisis gathered like a slowly building storm long before it caught the attention of most of us. Quant models failed in the summer of 2007, LIBOR spiked a few months later, and then the Auction Rate market froze in January/February of 2008, concurrent with the first-ever inversion of the Municipal bond yield curve. All of this was well before the failure of Bear Stearns in May 2008, let alone the cascade of failures kicked off by Lehman Brothers the following September.
In contrast, this COVID-19 inspired economic crisis has hit like a tsunami over just a few short weeks, unemploying millions around the globe, freezing consumer spending, disrupting supply changes, paralyzing energy markets, and otherwise disrupting life as most had come to know it. While we know that the global economy is being upended, most of the metrics analysts use to track the economy rely on monthly or even quarterly data. It is just too slow. Over the past six weeks, over 30 million Americans have lost their jobs and yet the official unemployment rate of 4.4% is still based on data from the week of March 12.
Given our desire to have more timely information, we were impressed by the High-Frequency U.S. Economic and Virus Tracker developed by our colleagues at Bloomberg. Though Syntrinsic has made a few modifications to Bloomberg’s original concept, we appreciate their innovative effort and hope that you find the information interesting.
This heat map enables us to gather an array of perspectives on this quickly moving public health and economic crisis. While we do not recommend trading on this kind of information, it can be helpful to see in closer-to-real-time how the crisis is impacting health, government policy, the economy, and the financial markets.
Those who wish to better understand the calculation methodology of the metrics can reference our appendix at the end of this piece. In the meantime, let us share a few observations apparent from the Tracker.
- Prior to the crisis, the U.S. economy was strong and financial markets continued to build off a remarkable 2019. That strength provided a solid base going into the crisis but also accentuates just how dramatically the economy has ground to a halt. Record low unemployment became record-high unemployment in just two months.
- As often happens in an economic crisis, the financial markets have felt the crisis first. By the third week of March, U.S. equities had fallen by over 30% and the financial conditions index bottomed. And yet at that point, the number of new COVID-19 cases had not even reached 100,000 per week, the number of oil rigs online had barely budged, and steel production was still humming along. Even as COVID-19 cases, unemployment, and economic malaise have grown steadily, the equity market and financial conditions index have been improving for six straight weeks.
- Early in the crisis, and well before meaningful fiscal stimulus had been launched, the U.S. Federal Reserve (the Fed) aggressively worked to stabilize stressed markets that dramatically impact the liquidity of bond and cash markets. Their effort is reflected in part in the improvements to the U.S. Financial Conditions index.
- There are data points unavailable that would be immensely helpful in understanding the impact of the crisis. We would like to better understand the number of children no longer in the child-care system or forced to experience school at home and the number of families thus impacted. This data would help us better understand the pressures being faced by parents and other care givers who are trying to do their jobs while also responsible for caring for and educating their children. We also would want to know how many people are experiencing cuts in pay and benefits, and ideally, the cost of those cuts. While most people who have lost 20%, 30% or more of their income are in better position than those who have been furloughed or lost their jobs, those income losses percolate throughout the economy and stymie a meaningful recovery.
Tracking the Path Forward
Most of the metrics in the High-Frequency US Economic and Virus Tracker represent lagging indicators that will not predict the end of the crisis but will show it happening in hindsight. A few of the metrics—the Consumer Comfort Index, The Financial Conditions Index, and even the S&P 500—tend to be forward-looking and may offer some predictive value, though it will take time to see if their signals are indeed accurate.
Still, the most powerful use of the Tracker is simply to serve as one more tool for understanding what is happening, recognizing the complexity inherent in the situation, and using the information to make informed personal and business decisions.
Section 1: The Virus
The first section of the tracker (1) monitors new weekly COVID-19 cases confirmed in the US as well as an index of government response to the virus. Sourced through Bloomberg and John Hopkins University, monitoring of new confirmed cases gives an indication of success on “flattening the curve.” Although confirmed cases are limited by testing capacity and access, it appears new cases have stabilized around 30,000 new cases per day. It is too early to call a pattern, but stabilization and eventual moderation of new cases may provide guidance for authorities on gradually re-opening more sectors of the economy.
The COVID-19 Government Tracker (2) is sourced from the University of Oxford and collects information on various common policy responses governments have taken and scores the stringency of those measures. With a score of 0-100, the index tracks 17 indicators from publicly available information, including containment and closure policies (i.e., school closures and travel restrictions), economic policies (i.e., income support and stimulus measures), and health system policies (i.e., robustness of virus testing and emergency health care investment). Monitoring the index can give a sense of the degree of economic lockdown as the virus initially spreads and, going forward, a sign of recovery.
Section 2: Real Economy
The next section of the high-frequency tracker monitors various economic activity gauges for a pulse on the US consumer. Initial jobless claims (3), measured in thousands of new US workers applying for unemployment during the week and sourced from the U.S. Department of Labor, gives the most up-to-date pulse on employment minimal delay. Since mid-March, new jobless claims have spiked to 30 million. With a workforce size of approximately 160 million, the measure gives a timelier sense of unemployment prior to the official report for mid-April unemployment that will be released in early May.
Weekly mortgage applications for home purchases (4) provide a measure of the U.S. housing market. Sourced from the Mortgage Bankers Association and stated as a percentage change since early January, the measure is one of the few weekly data sets that reflects the health of the housing market.
Public transit use (5) and restaurant bookings (6), sourced through Moovit and OpenTable respectively, measure consumer behavioral change due to the virus. Stated as an annual percentage change, consumers’ ability and willingness to use public transportation and dine out not only reflect government-imposed restrictions, they also will indicate how quickly consumers re-engage these activities once stay-at-home orders are lifted.
Related to this, consumer confidence indicates consumers’ willingness to spend and their economic outlook. The University of Michigan and Conference Board are two sources we typically rely on to monitor consumer confidence; however, both provide only monthly data. The Bloomberg Consumer Comfort Index (7), produced by Langer Research Associates, is based on the 4-week moving average of a weekly, random-sample survey of 250 US adults. The survey asks how consumers feel about their personal finances, the economy, and the buying climate. Ranging on a scale of 0-100, with higher numbers indicating strong consumer confidence, the Index has fallen quickly since early January, falling from the upper 60s to low-40s. For reference, the Index hovered in the mid-’20s during the depths of the Great Financial Crisis.
Sourced from Baker Hughes and stated as a percentage change of the number of rigs in operation from early January, US Oil Rigs (8) monitors the US shale industry’s reaction to falling US oil prices. As oil extraction becomes increasingly unprofitable, U.S. oil rigs shut down, impacting jobs and overall U.S. economic production and growth. Similarly, as lower demand for travel and industrial production leads to less U.S. energy consumption, the build-up of US crude oil inventory (9) measures the supply/demand imbalance in oil markets. Sourced from the Department of Energy and measured in millions of barrels (excluding U.S. strategic reserves), inventory also indicates how close we are to reaching oil storage capacity, which is estimated by the Energy Information Administration at 653 million barrels.
Meanwhile, U.S. steel production (10), measured as a percentage change from early January, is one of the few available high-frequency gauges of US industrial production. Sourced through the American Iron and Steel Institute, the gauge indicates manufacturing has been severely impacted by the COVID-19 crisis.
Section 3: Financial Markets
Financial markets reflect investor sentiment while providing perspective on potential rising investment opportunities. The YTD performance of the Standard & Poor’s 500 Index (11), which was down from its February peak nearly 30% the week ending March 20, reflected investor fears for the outlook for corporate America as the virus spread. Though the S&P 500 has since risen substantially, with uncertainty remaining high, the measure will likely be volatile in the coming months.
Oil prices (12) indicate how markets are reacting to the supply/demand imbalance within oil production. Based on the active contract WTI crude oil week ending price/barrel, the dramatic fall in oil prices since the beginning of the pandemic shows investor worry. At the extreme, which we have witnessed briefly, prices can go negative if investors believe storage capacity will be filled. This would force additional production closures across the energy industry.
Financial Conditions Index (13) is a broad measure of US financial market
health. The components of the index include U.S. equity price levels and
volatility, various bond spreads to the 10-Year U.S. Treasury, including Baa
corporate bonds, U.S. high-yield bonds and U.S. municipal bonds, and several
money market-related spreads.