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Weekly Economic and Financial Commentary: Something in the Air

U.S. Review

Something in the Air

  • Fears of an escalating coronavirus outbreak reached the United States this week, as a Washington state man became the first confirmed domestic case and the international total reached more than 800.
  • We expect any short-term economic impact to be limited and concentrated in East Asia, but the U.S. economy is certainly more vulnerable to shocks at this stage in the cycle. Sentiment matters.
  • On the home front, December existing home sales rose a solid 3.6% to a 5.54 million-unit pace as the housing market renaissance continues.

Something in the Air

Fears of an escalating coronavirus outbreak reached the United States this week, as a Washington state man became the first confirmed domestic case and the international total reached over 800. We expect any short-term economic impact to be limited and concentrated in East Asia—see our initial report and page 4 of this report for more detail. The 2003 SARS outbreak is perhaps the most relevant comparison, but the coronavirus is reportedly not as deadly and containment methods today are ostensibly more effective. On the other hand, a simple historical comparison misses the fact that retail spending, travel and personal consumption are a much more important driver of the Chinese economy today, 16 years later, a potential downside risk to estimates of a virusinduced economic deceleration.

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The focus this week on epidemiology rather than economics is not unwarranted. The heightened financial market attention to medical reports out of central China did indeed have a lot to do with the scarcity of new economic data, but it is also true that the U.S. economy is more vulnerable to shocks in the 11th year of the expansion. Seemingly far-off events—an Asian virus outbreak or the killing of an Iranian general—can spark a rapid deterioration in sentiment, which can quickly affect spending habits and the real economy. Thus, while a cold look at the numbers suggests no reason to panic—the single U.S. case of coronavirus is dwarfed by the 6,600 deaths from the flu already this season, according to the CDC—it is fear that can have an outsized impact on the economy, particularly at this stage of the cycle.

The World Economic Forum in Davos also got its usual dose of media attention, but passed without major fanfare as the assembled politicians and business executives expressed confidence in the global economy. The IMF was slightly less optimistic, reducing its global growth forecasts for 2019 and 2020 by 0.1 percentage point to 2.9% and 3.3%, respectively. It similarly downgraded its U.S. forecasts to 2.3% and 2.0%, still the highest among the G7. On the sidelines, President Trump turned his attention from China to the EU, again threatening tariffs if a deal isn’t reached before the election. EU officials promised to retaliate.

On the home front, December existing home sales rose a solid 3.6% to a 5.54 million-unit pace as the housing market renaissance continues. Lower mortgage rates have brought buyers back into the market, particularly in the South and West, where population and employment growth remain the strongest. The rebound in existing home sales follows a string of positive housing reports and will have sizable pass-through effects, including realtors’ commissions and remodeling spending. Inventories are extremely low, however, which is driving price appreciation higher again— the median single-family home price rose 8.0% year-over-year in December—which is spurring more construction. Housing starts reached a 13-year high in December and builder optimism is holding near 20-year highs. With this backdrop and no discernible uptick in jobless claims, the housing market is clear for further gains.