Q1 2020 GDP Numbers: What's Holding, What's Folding

Summary

• Q1 2020 GDP fell at an annual rate of 4.8% because of the COVID-19 disruption, but the numbers are not entirely doom and gloom.
• Usual suspects such as airlines, travel, capital goods, and a few more industries have been badly impacted.
• However, a few industries are all set to cash in and emerge as leaders after the disruption.
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I could end the deficit in five minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of congress are ineligible for reelection.

- Warren Buffett

Think about it – the lockdown in states began around the middle of March 2020 and the GDP fell at an annual rate of 4.8% for the entire Q1 2020. That’s one heck of a sledgehammer blow – imagine the impact if we were to close down for, say, 2 months in a quarter! The stock market anyway pooh-poohed the report because the Fed had just dunked it in an ocean of almost-free money.

Image Source: U.S. Bureau of Economic Analysis

As early as Feb. 2, 2020 – before the virus reared its ugly head – I had warned about a fall in consumer spending in The Lead-Lag report and also tweeted about it. Even at that time, it did seem that the GDP was at a tipping point. Then the virus came along and pushed everything over.

Image Source: Twitter

The Q1 2020 fall in GDP may look devastating but everything is not painted black. A few sectors are holding firm in this carnage among sectors that are folding. Let’s look beyond the numbers and check what lies beneath.

What’s Folding

1. Durable Goods: In March 2020, new orders for durable goods dived 14.4% month over month. It represented the sharpest fall since August 2014. The demand for new motor vehicles fell by 41%, and defense orders dropped 15.8%. Other than these two, the hit was marginal (0.2%).

2. Primary Care Services: Hospital and outpatient services have decreased because of the dangers of COVID-19 transmission. Many patients and doctors have switched to telemedicine and it seems this trend will continue until the coronavirus vaccine is discovered. A Commonwealth Fund study has found that visits to ambulatory practices declined 60% in the period between March 15 and April 15, 2020.

3. Travel, Restaurants, Hotels, and Recreation: It’s a quadruple whammy for the travel, restaurant, hotel, recreation, and gaming business – virus scare, social distancing, sealed borders, and meat shortage. Even after these businesses open in a limited way, their revenues will take time to return to business as usual.

Restaurants can add a home delivery module to their business or a grocery vertical. But that’s something the recreation and hotel industries cannot do. This segment is likely to see a lot of pain going forward.

4. Airlines: IATA estimates that passenger revenues could fall by $314 billion if the restrictions last for 3 months. This would wipe out 10 years of profits of the entire industry and create tens of thousands of job losses. The U.S. Congress has provided $58 billion funding to support the industry, but there’s no telling if this will be enough. As I write this, there’s news that Warren Buffett has sold out all his airline stocks.

5. Commercial Property: Leasing activity witnessed a decline of 18% in Q1 2020, and it is expected to worsen in Q2. Operators using flexible offices have pink-slipped their staff and are renegotiating rents. Many operators have shut shop. Retail too has witnessed a sharp decline – and many analysts are predicting the death of retail. I find this buzz highly exaggerated, though Q2 2020 is likely to witness worsening prospects.

6. Capital Goods: COVID-19 has hit the capital goods industry hard and S&P estimates that the economic contraction will result in massive revenue and EBITDA declines for capital goods manufacturers. The virus is likely to roil this industry’s fortunes for the whole of 2020.

What’s Holding

1. Nondurable Goods: Sales of most nondurable goods have skyrocketed. The lockdowns helped accelerate sales of prescription drugs, food, cleaning products, beer, personal products, etc. However, clothing and footwear sales dropped sharply.

Image Source: FRED

2. Technology Sector: The lockdown has witnessed a rise in online shopping, cloud computing, online streaming services, digital payments, remote work, distance learning, telemedicine, 3D printing, robotics, COVID-19-related patents, and 5G companies. The virus is strangling the economy with one hand and lifting the technology sector with the other.

3. Single-Family Residential Units: The sale of single-family residential units did well in Q1 2020. Falling interest rates may have spurred buyer interest. However, growing unemployment, poor economic outlook, and the desire to be in cash until a vaccine is discovered may take its toll on the housing sector in the short term. Housing starts plunged 23.3% in March 2020 – and there’s little doubt the trend will continue in Q2.

Summing Up

From all indications available as of May 3, 2020, it seems likely that developing a COVID-19 vaccine will take some time – and no one knows how long. Till this vaccine is found, the situation will remain fluid.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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