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   Brian Wesbury
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  Miscalculating Risk: Confusing Scary With Dangerous
Posted Under: Research Reports

The coronavirus kills, everyone knows it. But this isn't the first deadly virus the world has seen, so what happened? Why did we react the way we did? One answer is that this is the first social media pandemic. News and narratives travel in real-time right into our hands.

This spreads fear in a way we have never experienced. Drastic and historically unprecedented lockdowns of the economy happened and seemed to be accepted with little question.

We think the world is confusing "scary" with "dangerous." They are not the same thing. It seems many have accepted as fact that coronavirus is one of the scariest things the human race has ever dealt with. But is it the most dangerous? Or even close?

There are four ways to categorize any given reality. It can be scary but not dangerous, scary and dangerous, dangerous but not scary, or not dangerous and not scary.

Clearly, COVID-19 ranks high on the scary scale. A Google news search on the virus brings up over 1.5 billion news results. To date, the virus has tragically killed nearly 100,000 people in the United States, and more lives will be lost. But on a scale of harmless to extremely dangerous, it would still fall into the category of slightly to mildly dangerous for most people, excluding the elderly and those with preexisting medical conditions.

In comparison, many have no idea that heart disease is the leading cause of death in the United States, killing around 650,000 people every year, 54,000 per month, or approximately 200,000 people between February and mid-May of this year. This qualifies as extremely dangerous. But most people are not very frightened of it. A Google news search for heart disease brings up around 100 million results, under one-fifteenth the results of the COVID-19 search.

It's critical to be able to distinguish between fear and danger. Fear is an emotion, it's the risk that we perceive. As an emotion, it is often blind to the facts. For example, the chances of dying from a shark attack are minuscule, but the thought still crosses most people's minds when they play in the ocean. Danger is measurable, and in the case of sharks, the danger is low, even if fear is sometimes high.

Imagine if an insurance actuary was so scared of something that she graded it 1,000 times riskier than the data showed. This might be a career-ending mistake. This is exactly what people have done regarding COVID-19: making decisions on fear and not data.

According to CDC data, 81% of deaths from COVID-19 in the United States are people over 65 years old, most with preexisting conditions. If you add in 55-64-year-olds that number jumps to 93%. For those below age 55, preexisting conditions play a significant role, but the death rate is currently around 0.0022%, or one death per 45,000 people in this age range. Below 25 years old the fatality rate of COVID-19 is 0.00008%, or roughly one in 1.25 million, and yet we have shut down all schools and day-care centers, some never to open again! This makes it harder for mothers and fathers to remain employed.

All life is precious. No death should be ignored, but we have allowed our fear to move resources away from areas that are more dangerous, but less scary, to areas that are scary, but less dangerous. And herein lies the biggest problem.

Hospitals and doctors' offices have had to be much more selective in the people they are seeing, leaving beds open for COVID-19 patients and cutting out elective surgeries. According to Komodo, in the weeks following the first shelter-in-place orders, cervical cancer screenings were down 68%, cholesterol panels were down 67%, and the blood sugar tests to detect diabetes were off 65% nationally.

It doesn't stop there. The U.N. estimates that infant mortality rates could rise by hundreds of thousands in 2020 because of the global recession and diverted health care resources. Add in opioid addiction, alcoholism, domestic violence and other detrimental reactions from job loss and despair. It's tragic.

The benefits gained through this fear-based shutdown (if there really are any) have massively increased dangers in the both the short term and the long term. Every day that businesses are shuttered, and people remain unemployed or underemployed, the economic wounds grow more deadly. The loss of wealth is immense, and this will undermine the ability of nations around the world to deal with true dangers for decades to come, maybe forever. We have altered the course of economic growth.

Shutting down the private sector (which is where all wealth is created) is truly dangerous even though many of our leaders suggest we shouldn't be scared of it. Another round of stimulus is not what we need. Like a Band-Aid on a massive laceration, it may stop a tiny bit of the bleeding, but the wound continues to worsen, feeding greater and more elaborate intervention. Moreover, we are putting huge financial burdens on future generations because we are scared about something that the data reveal as far less dangerous than many other things in life.

A shutdown may slow the spread of a virus, but it can't stop it. A vaccine may cure us. But in the meantime, we have entered a new era, one in which fear trumps danger and near-term risk creates long-term problems. It appears many people have come to this realization as the data builds. Hopefully, this will go down in history as a mistake that we will never repeat.

Brian S. Wesbury, Chief Economist
Strider Elass, Senior Economist

RealClear Politics, May 22, 2020

Posted on Tuesday, May 26, 2020 @ 3:30 PM • Post Link Share: 
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  Coronavirus High Frequency Data

 

Sources: First Trust Advisors, Department of Labor, Redbook Research, Box Office Mojo,  Association of American Railroads, American Iron and Steel Institute,  Hotel News Now, Opentable, Transportation Security Administration, Energy Information Administration

1 Data for level, year ago level, and month ago level are all YOY % changes.

2 Data is provided daily instead of weekly.

3 Data shows year-over-year seated diners at restaurants on the OpenTable network across all channels: online reservations, phone reservations, and walk-ins. % change month over month is the current reading minus the month ago reading.

Posted on Tuesday, May 26, 2020 @ 11:58 AM • Post Link Share: 
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  New Single-Family Home Sales Increased 0.6% in April
Posted Under: Data Watch • Home Sales • Housing

 

Implications:  New home sales surprised to the upside in April, easily beating consensus expectations and surpassing even the most optimistic forecast by any economics group.  The headline gain of 0.6% might not look impressive, and at any other time it probably wouldn't be, but remember that April was the height of lockdowns and social distancing nationwide.  That said, sales are still down 19.5% from January and 6.2% from a year ago, so the housing market is clearly still feeling some pain, though today's report signals it may be beginning to stabilize earlier than expected.  Affordability is probably the main factor putting a floor under activity.  Fed liquidity measures have helped fully reverse the spike in mortgage rates that happened in aftermath of the US virus outbreak, and rates now once again sit near a record low.  Meanwhile, the median sales price for a new home has been falling the past two months and is now down 8.6% versus a year ago.  However, this doesn't seem to be due to a significant overhang of finished new homes waiting for buyers.  In fact, all the increase in the inventory of unsold new homes in the past year has been for homes where construction has yet to start.  The inventory of unsold homes that are either under construction or finished is still down from a year ago.  Given the downward pressure that lockdowns and social distancing are having on construction, we do not expect an oversupply of homes anytime soon.  As a result, home prices bounce upward in the next several months.  In other recent housing news, the Case-Shiller national home price index, which measures prices for existing single-family homes, rose 0.5% in March and was up 4.4% from a year ago.  In the past year, prices are up the fastest in Phoenix and Seattle, while up the slowest in Chicago and New York.  Meanwhile, the FHFA index, which measures prices for homes financed by conforming mortgages, increased 0.1% in March and is up 5.9% from a year ago. 

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Posted on Tuesday, May 26, 2020 @ 11:36 AM • Post Link Share: 
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  Signs of Economic Life
Posted Under: GDP • Monday Morning Outlook

This year's experiment with government-imposed lockdowns has been a fiasco.  We should have been focused on sealing-off nursing homes and limiting mass indoor events, while the vast majority of businesses that were shutdown could have kept operating, with natural social distancing.

Now, as most people (those that are not elderly or immuno-compromised) realize their health risk is lower than earlier hysterics suggested, and as states loosen up on government-imposed restrictions, green shoots of economic life are appearing.  Rail car traffic, hotel occupancy, motor vehicle gas purchases, and air travel are all still down substantially from a year ago, but all have also moved off their lows. 

For example, US rail freight carloads are up 3.2% from a month ago, while hotel occupancy is up 9.0%.  Gas purchases are up 27.8% from a month ago, confirming what everyone already knew just from driving around.  The number of passengers passing through TSA checkpoints rose to 267,451 this past Sunday, versus a Sunday low of 90,510 on April 12, a near tripling of passenger activity.  Yes, this past Sunday was a holiday weekend, but last Sunday (May 17) was already up 180% from the low.

In order to tell whether the overall economy is starting to recover, we're looking for confirmation from unemployment claims and federal tax receipts.  The bad news is that new claims for unemployment insurance remain at extremely elevated levels.  However, new claims are down substantially from the 6.9 million filed in the last full week of March, we suspect some portion of new claims are fraudulent, and that some recent new claims reflect a backlog from people who lost their jobs in prior weeks.  Typically, the average level of initial claims for a month peaks two months before the economy hits bottom.  April looks like it was the highest month for initial claims, which signals an economic bottom should come in June.   

What is also exceedingly clear is that this recession is not like previous ones.  So, we're also watching continuing unemployment claims, which keep rising.  Typically, these peak around one month after the economy hits bottom.  So, if they peak soon, that's a very good sign the economy is already growing again.  Unfortunately, continuing claims haven't peaked yet, and probably won't do so until at least June.        

Another way to assess the overall health of the economy is by monitoring the daily flow of income and payroll tax receipts the federal government is getting through withholdings from paychecks.  Using tax receipts to figure out economic trends can be tough, as withheld amounts are volatile from day to day, with big effects based on the day of the week as well as the day of the month.  And the pattern of the days in a month changes from year to year (for example, how many Mondays each month has), making comparisons that much tougher.

However, the calendar from 2015 closely resembles the calendar for 2020.  Ten of the twelve months have the same number day on the same day of the week (leap year in 2020 means January and February are different), making comparisons much easier.

And what does it show?  In the first three months of 2020 (January through March), withheld income and payroll tax receipts were up 19.7%.  That's roughly what we'd expect given economic growth and inflation from 2015 to 2020.  But receipts in April 2020 were up only 2.6% versus April 2015, showing how economic activity fell off a cliff.  The good news is that, so far in May (through the 21st), these receipts are up 2.9% versus May 2015.  That's less bad than the April comparison, and "less bad" signals more economic activity.

The recession started in March and is the deepest since the Great Depression.  However, it may also be the shortest.  A full recovery is a long way off.  We won't see the level of real GDP we had in late 2019 again until late 2021.  We might not see an unemployment rate below 4.0% until 2024.  With every passing day, the lockdowns take an increasing toll; the sooner they end, the better.

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist  

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Posted on Tuesday, May 26, 2020 @ 10:44 AM • Post Link Share: 
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  M2 and C&I Loan Growth
Posted Under: Government • Fed Reserve

 

Source: St. Louis Federal Reserve FRED Database

Posted on Tuesday, May 26, 2020 @ 8:06 AM • Post Link Share: 
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  Existing Home Sales Declined 17.8% in April
Posted Under: Data Watch • Home Sales • Housing

 

Implications:  Forget about existing home sales for a minute.  Initial unemployment claims came in at 2.44 million last week, continuing the recent spate of extremely high readings since March.  However, initial claims have dropped for seven weeks in a row after peaking at 6.87 million in late March, including a decline of 249,000 last week.  We are also following continuing claims, data for which lag initial claims by one week.  Continuing claims hit a record high of 25.07 million two weeks ago and are likely to rise again in next week's report.  At present, we are forecasting that continuing claims peak in late May or early June, signaling a bottom for the overall US economy. Turning our attention back towards housing, existing home sales in April posted the largest monthly drop since 2010.  We expect more softness in the near term as social distancing and government-mandated lockdowns weigh on activity, although April was likely the weakest month for sales.  While it's true that many realtors are using virtual-tour technology to show homes to potential buyers, most people still want to see things in-person before they make one of the biggest purchasing decisions of their lives.  Current quarantine restrictions and social distancing measures are also going to hold back a recovery in the inventory of existing homes, as fewer potential sellers list their properties.  Inventories in April were down 19.7% versus a year ago (the best measure for inventories given the seasonality of the data).  The good news is that demand for existing homes is strong enough that 56% of homes sold in April were on the market for less than a month.  One other interesting piece of data in today's report was that despite all the disruptions, the median price of existing homes rose 2.2% in April and is now up 7.4% in the past year, an acceleration from the 3.5% gain over the 12 months ending in April 2019.  This is in sharp contrast to the 2008 Financial Crisis when the pace of home price growth began falling well ahead of the recession. The coming months will continue to offer us a murky picture of the housing market.  However, we expect a rebound in activity as states continue to reopen and people get back to work.  In other news this morning, the Philly Fed Index, a measure of East Coast factory sentiment, rose to -43.1 in May from -56.6 in April. While the negative reading still signals contraction, it also means things were getting worse at a slower rate. This may not seem like much to cheer, but it's a necessary step before output starts improving.

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Posted on Thursday, May 21, 2020 @ 10:48 AM • Post Link Share: 
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  Corona Virus, Stocks, and the Economy
Posted Under: Employment • GDP • Government • Markets • Video • Fed Reserve • Interest Rates • Spending • Stocks • Wesbury 101
Posted on Thursday, May 21, 2020 @ 9:31 AM • Post Link Share: 
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  Coronavirus High Frequency Data

 

Sources: First Trust Advisors, Department of Labor, Redbook Research, Box Office Mojo,  Association of American Railroads, American Iron and Steel Institute,  Hotel News Now, Opentable, Transportation Security Administration, Energy Information Administration

1 Data for level, year ago level, and month ago level are all YOY % changes.

2 Data is provided daily instead of weekly.

3 Data shows year-over-year seated diners at restaurants on the OpenTable network across all channels: online reservations, phone reservations, and walk-ins. % change month over month is the current reading minus the month ago reading.

Posted on Thursday, May 21, 2020 @ 9:17 AM • Post Link Share: 
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  Coronavirus and Economic Update 5/20/20
Posted Under: GDP • Government • Markets • Video • Fed Reserve • Spending • Bonds • Stocks
Posted on Thursday, May 21, 2020 @ 9:01 AM • Post Link Share: 
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  Coronavirus High Frequency Data

 

Sources: First Trust Advisors, Department of Labor, Redbook Research, Box Office Mojo,  Association of American Railroads, American Iron and Steel Institute,  Hotel News Now, Opentable, Transportation Security Administration, Energy Information Administration

1 Data for level, year ago level, and month ago level are all YOY % changes.

2 Data is provided daily instead of weekly.

3 Data shows year-over-year seated diners at restaurants on the OpenTable network across all channels: online reservations, phone reservations, and walk-ins. % change month over month is the current reading minus the month ago reading.

Posted on Tuesday, May 19, 2020 @ 12:38 PM • Post Link Share: 
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These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial advisors are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
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