Avalon Advisor’s chief economist and author of “After Normal: Making Sense of the Global Economy”, Sam Rines joins Tony Nash for the 14th episode of QuickHit, where we discussed the L, U, and V recoveries in different states and industries. He also shares some interesting data on traffic congestion, CPIs, car sales, and food prices — and what these data mean for investors, businesses, and people. And what trend is he seeing to pop back up in travel and leisure?
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Show Notes
TN: I’m trying to figure out when and how do we come out of this? We have our models, we have our views on things. But I read your stuff every day and what are you thinking? Where are we right now? Are we early, mid, late? Where are we now and where do you think will go in the next few weeks or months?
SR: So I think the answer is all three. We call it LUV in the Time of COVID. There will be an L-shaped recovery, a U-shaped recovery, and a V-shaped recovery depending on whether you look at Texas or Florida or Kentucky. Whether its manufacturing or services. Everything has its own shape. So we’re early on some, middle on some, and late on others.
On the overall employment side, we’re probably past peak pain. At this point, you’re mostly having unemployment benefits a hindrance to bringing people back to work, not help people keep afloat. That’s not true everywhere. Certainly, there are places that are still shut down and those people still need those unemployment benefits. But places like Texas that are reopening to a certain degree like Florida and Georgia. It’s difficult to bring people back to jobs that pay less than the enhanced unemployment benefits.
One interesting piece of the puzzle though is the continuing unemployment claims and you’ve begun to see the states that open actually begin to roll those down. So people are coming off those unemployment slowly. It’s not happening quickly. Florida is one of the exceptions that Florida came off extremely fast. I think that’s going to be one of the stories that’ll pick up pace over the next three to four weeks. There’s a decent chance that if we’ll continue to have these types of numbers for continuing claims. There’s a decent chance that the May unemployment number will be the worst number we see this year. You begin to improve pretty quickly. The June number, we don’t take that survey for another few weeks. That’s more than likely going to be better than May in terms of unemployment beginning to come down. So we think it’s a mixed bag. But employments probably going to improve from here.
TN: That’s good news, I hope. There are a lot of service jobs and blue-collar jobs that were laid off in the first waves. Is that right?
SR: Yeah most of them. The interesting thing is it’s fairly easy to social distance within most manufacturing facilities. So manufacturing, theoretically, can snap back a little bit faster than the services side of the economy. The services industry is going to be the laggard here. But the service industry is also the majority employer, far more important on the employment side of manufacturing.
TN: You keep an eye on things like traffic patterns and restaurant usage. What are you seeing as the rate at coming back and then what does that say about things like food prices or gasoline consumption?
SR: It’s snapping back very quickly on the driving side of things. That’s snapping back much faster than public transit, airlines, etc. You have the U for airlines and mass transit. But you have what appears to be a pretty sharp V in driving. Congestion is almost back to normal levels in places like Houston during rush hour. Texas generally is back towards its baseline according to most of the metrics.
The RV sales are through the roof. People still want to go on vacation. And if you can’t and don’t want to get on a plane and go to Cabo, you get in an RV and go to the Grand Canyon. It’s just another way to get out of the house. I got to a little bit of trouble for saying it. But I’ll say it again, if you keep boomers off of cruise ships, they’ll find a way to still go places and still have fun in retirement. They’re not just gonna stay up. They’re not just going to stay cooped up in their house. And the interesting thing about that is an RV is not a small investment for most people. So I think that travel might have more legs than people are really giving credit for. Camping might actually make a come back here versus your more crowded areas, particularly within that boomer crowd.
TN: Back to the 70s for camping. We hear about food shortages with meat and we also hear about storage for crude oil. With more activity, are you seeing faster drawdown with crude oil? Are you seeing anything happening there in terms of food?
SR: So with crude, we’re beginning to see drawdowns and I’m not sure that it’s faster than we anticipated. But gasoline particularly has picked up much faster than people anticipated. That drawdown will be much faster, much stronger and have longer legs than was anticipated. On the overall demand side for oil, it’s a harder picture to paint. Aviation fuel is a significant driver on the margin of usage within the US. A lack of that is offsetting any bullishness on the gasoline side. Those will probably balance each other out for the most part as we move forward and you have a drawdown that’s relatively in line with what we were anticipating a few months ago.
On the food side, you’ve seen a snapback in restaurants for Texas in particular. We are back to, give or take 55 percent usage for restaurants. We have 50% occupancy allowed in Texas. That appears to be pretty close to maxed out. At least restaurants, we get reservations. We’ve seen some interesting things on the eat-at-home food side. We dug through the CPI, the inflation data pretty carefully and found that the food at home was getting increasingly expensive in a way that we hadn’t seen in a long time. Eggs were getting expensive. Meat was getting expensive. Fresh fruits and vegetables are getting expensive and they were accelerating at a pretty rapid pace.
It does look like we’re going to have some pretty good crops. It doesn’t look like we’re going to have trouble on that front. So we shouldn’t have the pricing pressure emanating from that side, which is good.
The critical aspect is going to be how do we get the beef demand back up to the point where you actually have cattle ranchers wanting to not cull their herds and therefore drive state prices higher. I think that’s going to take more states opening restaurants like New York, California, and other big steak consuming areas of the country reopening and really beginning to drive that incremental demand.
Another fun note is I grew up in New Hampshire. Lobster is an important part of eating there. And lobster prices plummeted to the point where lobstermen decided they probably shouldn’t even go out and they were selling for two to four dollars a pound on the side of the road.
TN: Let’s just take a minute and we’re sitting in October 1st. We’ve gone through Q2. It was carnage. We’ve gone through Q3 and we’re looking back on Q3 versus Q2. What are you thinking at that point, October 1st of this year? Help me understand a little bit of that based on your perspective today.
SR: Based on my perspective today, I’ll probably be sitting in Boston, hopefully having a client meeting at a lobster that’s more expensive than three bucks, looking back and wondering how we missed the pickup that was happening in June and July and how the pockets of things that were doing much better than anticipated.
It’s worth noting according to one of the data sources I used, auto sales are actually picking back up rapidly from down, north of 60% for new cars and used cars. New autos only down, I’d call it the high 20% range from a year ago. Used cars down single digits from a year ago, on a volume basis. That kind of snapback in different pockets of the economy is going to be what I’m looking back and wondering how I missed whatever it might be whether it was people wanting to get back on cruises. I don’t think they’re going to want to give back on cruises. I don’t think people are gonna jump back on planes very quickly.
I think we have a 911 type of recovery. Three years, give or take there. I think that’s the mindset to use. But there will be something that just completely catches me off guard in terms of the speed and rapidity that it comes back, or with the L-shaped, it’s just never coming back. One thing I think we’ll catch a lot of people off-guard is the pivot on the margin from hotels to homes. Renting at home instead of renting a hotel. Being spaced away from people, having the pool to yourself. I think there will be trends like that that have become pretty clear whether or not they have legs by October and I think that’s probably one of them.