This release confirms that COVID-19’s unprecedented adverse shock to the economy brought an end to the longest economic expansion in U.S. history. Consumer spending declined sharply, contributing -5.3 percentage points to the first quarter’s contraction. This rapid shift in consumer spending shows that Americans are dramatically curtailing expenditures as the Nation responds to COVID-19. But just as consumers cutting back drove the first quarter’s GDP decline, they will also contribute to the economic recovery—showing the importance of policies that support American workers and businesses.

This drop in GDP serves as an early indicator of the costs of the American and global economies shutting down in response to COVID-19. To put a 4.8 percent contraction in perspective, the figure below plots quarters with negative annual GDP declines since the series began in 1947.

Falling consumer spending has major effects on overall GDP growth, as it accounts for roughly 68 percent of GDP. The sharp decline in consumer spending was driven by suppressed spending on services and durable goods, with a partial offset from positive spending on nondurable goods. The service sector alone contributed -5.0 percentage points to overall real GDP growth, with particularly sharp annualized declines in household spending on healthcare services (-18.0 percent), transportation (-29.2 percent), recreation (-31.9 percent), and food services and accommodations (-29.7 percent).

Consumers also sharply curtailed spending on durable goods, which contributed -1.2 percentage points to overall GDP growth. Annualized declines in household spending on motor vehicles and parts (-33.2 percent) and furnishings and household equipment (-6.4 percent) were particularly steep. The declines in both services and durable goods spending were partially offset by growth in spending on nondurable goods, which was entirely driven by the largest ever quarterly surge in consumer spending on at-home food and beverages (25.1 percent). Given COVID-19’s risks, it is not surprising that these spending patterns were observed.

Despite the major challenges posed by COVID-19, the United States is in a strong position to recover as the public health threat recedes. Prior to COVID-19’s spread, GDP and job growth were exceeding pre-2016 election expectations, the strong job market was pulling Americans off the labor market’s sidelines, measures of business and consumer optimism were at or near historic highs, and wages were rising—especially for lower-income Americans. Furthermore, among G7 countries, the United States had the strongest real GDP growth from the fourth quarter of 2016 to the fourth quarter of 2019. Over that period, the U.S. rate of growth was more than a full percentage point above the other G7 countries’ average.

While a sharp decline in household spending takes a toll on the economy, consumers can also respond to positive economic changes as they respond to public health risks. Last year, when consumer confidence reached a 20-year high, elevated consumer spending accounted for roughly 80 percent of real GDP growth. The potential for and necessity of a strong rebound is one reason why the Trump Administration has worked with Congress to keep people attached to their work, and enacted financial supports for those who lost their jobs or were temporarily furloughed.

COVID-19 has also led to a whole-of-government response to bridge the current gap between a historically strong economy and the coming economic recovery. Federal policies that support workers and job creators should help limit negative effects on the economy in the second quarter as States restart their economies and let their residents return safely to work.

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One moment the market is rallying upward and the next it has lost footing and sliding downward. This whipsaw has investors dizzy and unsure of direction. You want to be cautious here and not jump in. There are plenty of headwinds ahead.

Following the devaluing of the Yuan and labeling China as a currency manipulator the 10-year Treasury keeps falling closer to inverting with the 2 year. The 3 year and 7 year have already inverted last year. This is one of the many warning signs starting to flash that a recession may be close. Some of the other signs are the increase in layoffs, decrease in corporate expenditures and slower GDP. Leading economic indicators have fallen for several months. This is one of the many measurables that the Federal Reserve are monitoring and basing their decision on. This is why many other firms and I believe that the Fed are not finished lowering rates. 

100bps reduction in interest rates by the Federal Reserve next year has the highest probability right now in current projections. I make the argument that the Fed’s normally do not make a new move in the reverse direction only once. A new move has a very high probability of a follow-up move in the same direction and subsequent moves after that still have a high possibility also. For the Federal Reserve to move the data of the slowing economy in the United States and globally were definitely taken into account. 

Can the Fed’s or will the Fed’s lower rates fast enough to keep the economic engines going. In hindsight leaving the rates at 0% which was unprecedented, from 2008 to 2015, may have created a systematic groove that should have been treated and increased more delicately. I’m not here to argue those points but to shout be patient. The market has dropped but has not crossed the 10% correction threshold. For the S&P 500 that is the low 2,700’s. I would start nibbling into your positions around this range. I believe the market will overshoot this as it did last winter. Re-assess what you want to buy and at what price. I recommend looking at the first, second and third deviations of those positions. Nibble near each one of these. It is an easy systematic approach that has a bases behind it. This is where investing runs on statistics. The lower deviation you can buy a position the more risk you remove from your investment.   

Advice for the bondholders if I haven’t beaten it into your skulls. Right now, you should review the duration or length of your holdings. Swap them out for longer duration ones. If you believe rates are going to continue to drop off the next twelve to eighteen months then lock the higher interest rates in now. This will allow you to avoid any further interest rate risk. I don’t want you to earn zero percent again on your money. Don’t nibble here. Take your full intended position or transition. Doing nothing this August is a bad idea. Get smart and work on your strategy.                

Andrew F. Kotyuk, CIMA* is CEO and Principal of Alpha Wealth Management LLC

For questions or investment topics, please email me afkotyuk@alpha-wealth.com.WHAT TO DO IN THIS MARKET

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