Navigating the Covid19 Unnatural Disaster October 19 2020

Navigating the Covid-19 Unnatural Disaster October 19, 2020

“… You’re No Business Cycle” n Economy “in a good place” (3. 5% unemployment and stable inflation with no obvious financial imbalances) prior to the economic quarantines. No recession in sight. n Washington authorized the release of up to $4 trillion, 20% of GDP, for lifelines. n The global treat elicits a global policy response. n Real GDP back to 98% of where we would have been by October, recovering 80% of the ground lost in March and April: o Car sales and car production, other than fleet activity (rental car business), returns to normal; o Consumer activity returns to normal by summer; o Capital goods production other than aircraft climbs back to normal; o Residential real estate surges to new highs. n Labor market recovers 60% of March/April losses by September o Unemployment surges than retraces in 5 months what usually takes 5 years n Financial distress (delinquencies, rent payments, etc. ) is muted. n Stock market surges to a record high n No new quarantines despite summer Covid-19 flare-up. n Retail sales of apparel, restaurants, and travel depressed n Air travel and ancillary business (car rental, hotels, amusement parks) dead in the water. 2

Natural Disaster Vs. Business Cycle n The script of a business cycle … o Deep financial distress; o Decade-long recovery. n The script of a natural disaster … o Turbulent but fast-moving rebound; full recovery likely within two years of initial social distancing quarantines. o Muted financial distress. o No obvious threats to the stock market. Companies in the digital arena thrive. 3

Global GDP Road Map (CIB) Annualized% change from the previous quarter Percent change over the four quarters of each year Source: Economic Research, Corporate Investment Bank, JPMorgan Chase & Co. 4

Key U. S. Economic & Market Metrics (CB) THE U. S. ECONOMY THE FEDERAL RESERVE & THE MARKETS Annualized percent change, unless noted otherwise Percent, unless noted otherwise Gross Domestic Output (GDO)¹ Gross Domestic Product (GDP) Final sales 2019 Q 4/Q 4 2020 Q 2 _____ Q 3 Q 4/Q 4 2. 1 -32. 5 35. 3 -0. 6 2. 3 -31. 4 35. 0 -0. 6 0. 5 Fed Funds Target Now End 2020 (10/02/20) (12/31/20) 0 -¼% Market View³ Forward OIS at the Dec 2020 FOMC Meeting 2. 8 -28. 1 26. 1 Consumer Spending 2. 5 -33. 2 42. 5 2. 1 Business Fixed Investment 1. 4 -27. 2 14. 1 -4. 8 48. 5 -287. 0 14. 8 -144. 6 62. 2 -280. 8 28. 8 -129. 8 -16. 9 -2. 2 -10. 0 -12. 0 2 -yr Treasury Note 2. 0 -32. 6 38. 3 3. 1 0. 13 0. 14 5 -yr Treasury Note 1. 9 -33. 5 35. 5 -0. 5 0. 28 0. 91 10 -yr Treasury Note 0. 70 1. 12 1. 64 2. 18 -0. 94 -1. 07 2. 42 2. 62 Inventory Change ($ bn ar) Nonfarm ($ bn ar) Farm ($ bn ar) Memo: Excluding Government Gross Domestic Income (GDI) Aggregate Hours Worked 1. 2 -41. 3 28. 0 -2. 8 Nonfarm Payrolls 1. 4 -40. 0 22. 9 -3. 3 Average Monthly Change (‘ 000) 178 -4, 427 1, 304 -280 Industrial Production -0. 7 -43. 2 40. 7 -3. 4 Manufacturing Output -1. 1 -47. 0 57. 0 -3. 7 Unemployment (% at end) 3. 51 11. 10 6. 99 81 40 57 57 LF¹ (ave mn ch since 2007, ‘ 000) Chain PCE Prices (% oya²) 1. 6 0. 9 Dec 2020 Euro Dollar Futures Rate - ¼ Point Inflation Buffer 10 -year TIPS JPM Investment Grade Debt Spread 5 (basis points) JPM High-Yield Debt Spread 5 (basis points) 1. 17 1. 23 Yen / U. S. Dollar 105 110 Wilshire 5000 (float adjusted) 0. 8 0. 5 3. 7 1. 9 3. 7 -12. 8 -14. 3 -5. 6 Forward P/E 6 Current P/E 7 Core CPI (% oya²) Petroleum (WTI, $/bbl, quarter ave) 6. 37 525 Energy (% oya²) FRBD¹ PCE Trimmed Mean (% oya²) 150 6. 88 618 Chinese Yuan / U. S. Dollar 2. 0 172 U. S. Dollar / Euro Food (% oya²) Excluding Food & Energy (% oya²) 0. 070 ⅛ 0 -¼% FOMC View (Median)4 Central Tendency Range of Forecasts 1. 6 1. 1 1. 7 1. 8 1. 96 1. 87 1. 86 N/A 2. 3 1. 2 1. 7 Forward P/E 6 60 38 40 55 Current P/E 7 S&P 500 6. 790 6. 840 34, 255 36, 813 14. 1 16. 6 19. 9 16. 5 3, 348 3, 600 14. 7 31. 9 16. 4 Sources: U. S. Departments of Commerce and Labor; Federal Reserve Board. Notes: bold italics are forecasts; “bn”=billions; “ar”=annual rate; “oya”=ch. from 12 months earlier; “TIPS”=Treasury Inflation Protected Securities. ¹ Real Gross Domestic Output (GDO) is the average of real GDP and real GDI growth, “LF” refers to the labor force and FRBD is the Federal Reserve Bank of Dallas; ² Percent change from 12 months earlier; ³ Forward Overnight Index Swap (OIS) rate at the December 2020 FOMC meeting; 4 As of the September 15 -16, 2020 FOMC meeting; 5 Versus the 10 -year Treasury yield; 6 Ratio to after-tax GDP profits two years ahead (earnings assumed to grow 6. 8 percent annually); historically this P/E nears 14 at cycle peaks, excluding the unprecedented multiples in the late 1990’s; 7 Versus current earnings Note: GDP forecasts are JPMorgan Chase/Commercial Bank forecasts and differ from the forecasts on the previous table, which are forecasts of the Investment Bank economic team. 5

Back Home by End-2021 Unemployment rate (percent of the labor force) Sources: Haver Analytics; U. S. Department of Labor; Federal Reserve Board. Updated through September 2020 (unemployment) and September 16, 2020 (FOMC). 6

And Making Pretty Good Progress So Far Deviation of the unemployment rate from the business cycle low point (percentage points) Note: The unemployment low point of each cycle is lined up to February 2020. Sources: Haver Analytics; U. S. Department of Labor. Updated through September 2020. 7

Small Businesses Bore the Brunt Nonfarm payrolls (number) Employment at small business establishments (number) Sources: Haver Analytics; U. S. Department of Labor; Homebase. Updated through September 2020 (employment) and September 4, 2020 (Homebase) 8

But the Upheaval Was/Will Be Temporary Unemployment and “temporary layoff” (thousands) Sources: Haver Analytics, U. S. Department of Labor. Updated through September 2020. 9

Jobs Are Only Half the Story Unemployment (percent of the labor force) Sources: Haver Analytics; U. S. Department of Labor. Updated through September 2020. 10

Because PPP Helped … 11

… Put Folks Back and Now Reopenings Help Nonfarm payrolls (thousands) Recipients of regular state UI program benefits (thousands) Sources: Haver Analytics; U. S. Department of Labor; Updated through September 2020 (payrolls) and October 3, 2020 (claimants). 12

P. S. Claimants, Not Claims, Know the Story Jobless claims and recalls (‘ 000) Recipients of benefits from regular state UI programs (‘ 000) Sources: Haver Analytics; U. S. Department of Labor. Updated through September 26, 2020 (extended benefits), October 3, 2020 (claimants), and October 10, 2020 (claims). 13

A Visual Roadmap to Organize UI Data John Michael Kohler, 1883 Jobless Claims Recipients of Unemployment Benefits Recalls (Not Published) 14

Self Employment Is Back Self-employment (thousands) Sources: Haver Analytics; U. S. Department of Labor. Updated through September 2020. 15

Income Transfers (“Paid Leave”) … The Consumer Is Ready to Roll (billions of dollars annualized) Sources: Haver Analytics; U. S. Department of Commerce. Updated through August 2020. 16

… Help Explain This Sources: National Multifamily Housing Council. Updated through September 2020. 2918

Retail Sales Collapsed … Retail sales (millions of dollars monthly) Sources: Haver Analytics; U. S. Department of Commerce. Updated through August 2020. 16

… and Now Are Back … Retail sales (millions of dollars monthly) Sources: Haver Analytics; U. S. Department of Commerce. Updated through August 2020. 16

… but Savings Will Unlock Deferred Activity Retail sales and saving buildup (millions of dollars) Sources: Haver Analytics; U. S. Department of Commerce. Updated through August 2020 (saving) and September 2020 (retail sales). 16

… Propelled This Real GDP (billions of chained 2012 dollars) Sources: Haver Analytics; IHS Market. Updated through August 2020. 17

But There’s a Big Divide Real GDP (billions of chained 2012 dollars) Nonfarm payrolls (thousands) Sources: Haver Analytics; IHS Markit; U. S. Department of Labor. Updated through August 2020 (HIS) and September 2020 (BLS). 19

One More Big Hurdle to Clear … Number of people arriving to the U. S. over the most recent 12 months Sources: Haver Analytics; National Transportation and Tourism Office. Updated through July 2020. 20

… and It’s More About Psychology Number of passengers departing from the 10 busiest U. S. airports Sources: Haver Analytics; Selected airports. Updated through July 2020. 21

But One Sector’s Pain Is Another’s Gain 21

Weighing the Cost & Fiscal Rescues Real GDP (billions of chained 2012 dollars) $1. 5 Billion Daily Loss of Income Currently Sources: Haver Analytics; Macroeconomic Advisers; Federal Reserve Bank of New York. Updated through July 2020 (GDP). 22

Tracking the Production Side 48

Tracking the Demand 48

APPENDIXES 54

REGIONAL PERSPECTIVES 54

A View of the Neighborhood Nonfarm payroll employment (ratio to 2000 Q 4) Sources: Haver Analytics; U. S. Department of Labor. Updated through August 2020 (state) and September 2020 (U. S. ). 48

Alabama Nonfarm payroll employment (ratio to 2000 Q 4) Sources: Haver Analytics; U. S. Department of Labor. Updated through August 2020 (state) and September 2020 (U. S. ). 48

Alabama’s Unemployment rate (percent of the labor force) U. S. 7. 9 (Sep) Al Sources: Haver Analytics; U. S. Department of Labor. Updated through August 2020. 48 5. 6 (Aug)

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