High Small Business Confidence?
The government is working on helping small businesses deal with the coronavirus. Normally, the NFIB small business confidence index rising from 104.3 to 104.5, which is in the top 10th percentile in the 46 year history of this report, is a positive. But this just shows small firms didn’t see the negative catalyst coming.
It’s surprising how confident they were because the coronavirus was in the news in February as well. Apparently we will need to wait until the March report to see confidence wane considerably. If confidence doesn’t wane, we can officially say this virus panic was overdone. Personally, I can’t see a scenario in which it doesn’t decline sharply.
Within the report, it says, “The strength of the small business sector continues to power economic growth and the record long expansion. Spending and hiring remain historically elevated. Yet all the talk is doom and gloom in the financial news. The Federal Reserve has piled on with a surprise inter-meeting 50-basis point rate cut, but in February, the regular course of commerce continued on main street with the exception of a few “hot spots” where the spread of the coronavirus caused elevated disruptions.”
Two catalysts of further weakness are if the hot spots grow in size and scope and if the media hype causes people who aren’t in the hot spots to stop spending. Obviously, if the cases in Westchester spread to New York City, there will be a huge impact on the economy. The number of coronavirus stories far exceeds any health scare in the past 20 years.
On the positive side, this report supports my previous point that the economy was in great shape before the virus hurt growth. January was a great month. February was weaker, but it wasn’t terrible. It’s not entirely clear if the modest weakness is February was caused by the coronavirus or if it was normal volatility in the data.
March and April economic reports will show the largest impact, assuming this gets under control over the next 6 weeks. It will be exciting to see the Thursday jobless claims report from the first week of March. Most are guessing that it won’t show a spike in claims.
The list below shows the changes to small business confidence in February. As you can see, there was an 8% improvement in expectations for the economy to improve. That confidence probably will be hurt by the coronavirus, but surely these firms already knew it was coming a few weeks ago when this survey took place.
Small businesses will get a boost from a temporary payroll tax cut which might be enacted to deal with the negative shock to the economy. There was a 3% increase in the net percentage expecting improved credit conditions. It rose to -1%. This definitely doesn’t include the big decline in the Bloomberg financial conditions index. That segment of the report should fall very sharply in March.
March Data Should Be Terrible
Even though the Atlanta Fed GDP Nowcast shows Q1 growth will be 3.1%, Goldman Sachs appears to be anticipating a big decline in activity as it lowered its expectation from 0.9% to 0.7%. That’s likely recessionary. Some of the bears might need to raise their estimates because it appears the February data is mostly fine. March would really need to fall off a cliff to counteract a strong January and a solid February.
Q2 growth could be worse than Q1 depending on how long this lasts. Bank of America just lowered its expectation for 2020 global growth from 2.8% to 2.2% and said “risks are very much to the downside.” It also said it doesn’t rule out a moderate recession scenario where global growth falls to 1.4%.
It remains to be seen if the Chinese economy recovers before America sees a dip. So far, China hasn’t come close to fully recovery, but America hasn’t had any weak reports yet. Personally, I see greater risk of a global recession than an American recession. We already know that China’s economy took a major hit in February. It’s also very likely that Italy, Iran, and South Korea took a hug hit in March.
It’s less obvious when and how bad the American economy will be hurt. There haven’t been shutdowns and we don’t know how many cases there have been. We only have non-traditional data to work with like the chart below shows. As you can see, the chart shows domestic movie box office receipts from 2017 to 2020. Receipts have seen major divergence in the week of March 8th as they fell 40% from their 3 year average.
China Hasn’t Fully Recovered
We’re now seeing anecdotal accounts that northern Italy is in a severe bind as health care systems can’t deal with the number of cases. And there’s also stories about the Chinese economy coming back online. However, China isn’t close to back to normal. It might not get back to normal until April. Number of Macau daily visitors has increased from the trough in February, but it’s still down 90% from where it was in January.
The chart below shows the Beijing traffic congestion index from the past 3 years as compared to 2020. This index has barely recovered from its trough after the Lunar New Year. Clearly, traders are expecting a rebound because the Shanghai Composite is up huge since its crash early in February. Now, I’m not saying it won’t happen. But, if the other economies impacted by the virus are also slow to recover, there will be a global recession.
Despite all the negative press about the coronavirus in February, the NFIB small business confidence index was very strong. Bad news is movie sales are down 40% from the prior 3 year average. Let’s see if sales get even worse as the number of news stories on the pandemic increases. China’s economy hasn’t come close to fully recovering from the virus. Many expect its March data to be better than February, but still be very weak.
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