Short Note on Demand

May 27, 2020

Around the world, strategists, economists, business owners and almost everyone else are wondering what demand might look like.   Travel demand is one of the hardest hit areas, but this morning a comment by the CEO of RyanAir caught my attention.

With equity prices just 8-10% from their all time highs set in February, the CEO of RyanAir, Michael O’Leary commented that they have a big surge in holiday bookings.  That big surge should be put into context:

They expect to be flying 40% of their fleet at 50-60% of the seats full.  Put another way, that is about 25% of capacity.

A cursory look at McDonald’s offered the following information about possible expectations.   Before the COVID crash, about two-thirds of sales were made via the drive thru and since that number has approached 90%.  It is not clear if sales have increased or decreased, but a decrease is probable in most parts of the world.

In similar fashion, hotel occupancy was reported earlier this week and is running at about 32%.   According to STR, a firm specializing in data for the hospitality sector, that is down about 54% from last year.  Earlier this month, Fitch reported that they expect a 60% drop in European occupancy rates (to about 30% total occupancy) this year.

Meanwhile in another hard-hit industry, retail, there is limited data so far, but a recent story about Gwinnett Place Mall in Georgia suggests that things are a bit slow.  As Georgia was one of the first states to re-open it will be watched closely and there is no evidence of a ‘V’ recovery so far.

The chart below shows national retail and food service sales monthly, including data for April.

Retail sales - 20200527

It is worth noting that there is a disconnect.  When looking at personal consumption expenditures, the March 2020 data suggests expenditures were only down about 7.3%.  Nondurable goods showed significant increases, likely caused by the stockpiling of food and other basic needs prior to the lock down.  Plenty of durable goods were still acquired; $4.7 billion worth in the US, down just 2.2% from the prior month and up on a year-over-year basis.

A decline of 7% is still an extremely weak showing and during the 2008/2009 period, PCE declined by no more than 3% while equity prices were off by as much as 56%.

Personal Consumption Expenditures Monthly - 20200527

Of course equity prices can remain misaligned with fundamentals for long periods, but the current discrepancies appear unprecedented and when the fundamentals and equity prices re-align themselves it is likely to be dramatic.

Addendum – much of the gains in the market have been attributed to market leaders such as Amazon, Netflix, etc.  The so-called ‘stay at home’ plays.   As the economy begins to open up, there is a good chance that smaller retailers and service providers will take away revenue from these large companies and fight vigorously on price to win customers and get revenue in the door.   This will likely hurt profitability for all market players and take some of the air out of the market for these equity market leaders.




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