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The Economy Slows; The Real “New Normal”

The virus’ resurgence has caused more business disruptions, raising the specter of a renewed economic slowdown.  Spending and income numbers have mainly been negative in Q4, and the much hoped for stimulus relief package is now stuck on the president’s desk.

The Economy

“Drop in Spending, Higher Claims Cloud Outlook for Growth,” WSJ, 12/24/20, A1.

  • Restaurants: -3.7% November (M/M); -0.6% October
  • Hotels/Motels: -8.7% November (M/M); -4.4% October
  • Movie Theaters: -17.2% November (M/M); -94.1% Y/Y

Consumer spending in November fell -0.4% reinforcing last week’s report of a fall in November retail sales.  Household income also contracted by a hefty -1.1% (consensus was -0.3%, so a big miss).  This was the third drop in four months, and running at a -10% annual rate since August.  Since February, the economy has been buoyed by government transfers, i.e., money borrowed from future generations, and, over this period, household income is actually up by 2%.  Those transfers and the resulting consumer spending pulled the economy from Q2’s abyss.  But, those transfers have just about run their course, as rising unemployment claims have been telling us for the past few weeks.  Thus, the urgency for the CARES supplement, which, as of this writing, is in limbo.

While we see a struggling economy in November’s data, all the signs point to further slowing, especially in the states that have put additional business restrictions in place.  The Conference Board’s Consumer Confidence Index fell to 88.6 in December.  It was 92.9 in November, and the consensus for December was for a rise to 97 (likely, those who were forecasting were influence by the record highs in the stock indexes).  Just for context, this number was 132.6 in February.  The real keys here are home buying, auto buying, and vacation plans.  The table shows these:

Buying IntentionsDecemberNov./Oct.
Home5.2%7.5% Nov.
Auto9.1%11.1% Nov.
Vacation34.0%44.9% Oct.

Auto buying intentions are at the second lowest point in a decade (see chart), while home buying desires are at a 13-month low (second chart).  In the actual home buying arena, existing sales fell -2.5% in November.  Worse, median prices were up 15% Y/Y, limiting affordability despite low interest rates.  (And, Fed Chair Powell, in his latest presser, said he doesn’t see any “excesses!”). 


Total Initial Claims (ICs), both state and PUA programs, did fall slightly in the latest data week (ending December 19), but, as the chart shows, this is still elevated from what it was in early October, another sign of the Q4 sluggishness.  The fall in claims was most likely due to many simply not looking for work or simply putting off applying for benefits because of the holidays.

I suspect we will see a renewed uptick in employment claims in January, at least at the state level.  (If Trump doesn’t sign the stimulus bill, the PUA programs abruptly end – their last day being Sunday, December 26, and those 14 million on the PUA programs (self-employed small business people and gig workers) are simply out of luck (SOL). 

The Real “New Normal”

The vaccines are here and are being distributed.  That’s the good news.  But, there are too many who still believe that post-pandemic, the economy will go back to its 2019 “normal.”  The reality is that the post-pandemic “normal” will be quite different from its pre-pandemic predecessor.  One example is the Commercial Real Estate (CRE) market where companies are abandoning office space at a spectacular rate.

“US Office Space Dumped After Success of Working From Home,” FT, 12/24,20,  p. 7.

The office space market will take years to recover, if ever.  So too, with increasing reliance on package delivery and internet shopping since the start of the pandemic, shopping malls are likely to struggle.  Look for some remaking of those properties.

Another example of significant change is in movie entertainment.  All the major theater chains are struggling for survival with revenues down -94% Y/Y.  Pre-pandemic, movie theaters enjoyed a 90-120 day exclusivity period with Hollywood’s latest releases, especially the blockbusters.  But, after several recent announcements, the major film studios have decided (at least for the foreseeable future) to simultaneously release new blockbusters to the streaming media at the same time as they are released to the theaters.  For example, Wonder Woman 1984 premiered on HBO Max on Christmas day.  Based on expected changes in consumer behavior, this will have a dramatic impact on the movie theater industry.


The resurgence of the virus has caused another economic slowdown, perhaps a double-dip recession.  We will likely see higher levels of layoffs and unemployment as January unfolds.  Recent comments by Fed Chair Powell has assured financial markets that the Fed has their back.  Likely the deteriorating state of the economy will elicit more Fed money printing as their balance sheet grows.  Financial markets are “all-in” with that idea, and, in fact, are addicted.  

The actual enactment of the $900 billion stimulus would help.  The longer it takes to get enacted, the more serious will be the economic slowdown.  And there is still much we don’t know, including the effectiveness of the vaccines, the take-up rate, the length of time to herd-immunity, and what the “new normal” looks like for various sectors.  It goes without saying that those who bet correctly on the “new normal” will be winners in the post-pandemic world.

Robert Barone, Ph.D.

December 28, 2020

Robert Barone, Ph.D. is a Georgetown educated economist. He is a financial advisor at Four Star Wealth Advisors. www.fourstarwealth.com. He is nationally known for his writings and Robert’s storied career includes his having served as a Professor of Finance, a community bank CEO, and a Director and Chairman of the Federal Home Loan Bank of San Francisco. Robert is currently a Director of CSAA Insurance Company (the AAA brand) where he chairs the Finance and Investment Committee. Robert is the co-portfolio manager of the UVA Unconstrained Medium-Term Fixed Income ETF (FFIU).


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