Over the prior week, Arizona has been in the news for reasons which are not the best. Between the increase in COVID-19 cases as well as the number of fires burning throughout the state, this has not been the best week for the state.
On Monday, I was driving with Francis and between his Beatles songs, he kept telling me to look at the sky as there were waves. It was not until I came to a red light that I saw what he was looking at. While not instantly recognizable, I could see how it did look like there were waves in the sky. These ‘waves’ were created by the smoke from the Bush Fire which is burning to the east of Phoenix. Combine smoke with wind and while unfortunate, you can see various designs in the sky. Francis just so happened to see waves.
Upon seeing the smoke and knowing about other fires in Tucson as well as other parts of the state, it got me thinking how fires have similarities to our economy. Forest fires are a natural part of the ecosystem, what are unnatural are wildfires. The Forest Service may schedule controlled burns to burn off dead and excess material. They know when and where the burn will occur and the desired outcome for the burn. Interestingly, it is only through fires where some pinecones can disperse their seeds as the cones need the high heat to melt the resin holding them shut.
We can look at how COVID-19 has affected businesses like the effects of forest fires. For example, the opening and closing of restaurants can show the entire burn cycle, from new growth after a controlled burn to the ultimate outcome with some restaurants closing. Like in a forest fire where a seed is dropped from a pinecone, the same action can apply to the restaurant owner who decides to take the opportunity to open. Due to various factors potentially including the food or service quality, even in good economies, some restaurants will close, thus the controlled burn concludes.
Even controlled burns, as well as fire caused by nature, can erupt into a wildfire where we see more immediate damage. This damage includes not only the forest, but unfortunately includes private property. This damage can have long term effects to the ecosystem and the people it directly affected.
The Great Recession of 2007-2009 could be characterized as a wildfire. While there were numerous causes for this particular recession, one cause dealt with the amount of debt individuals took on. This debt was most noticeable in the housing market. While our economy did make it through this period, this ‘wildfire’ did have some long-lasting affects.
Looking at our current economic environment from a 30,000-foot level, it could still be viewed as a controlled burn. Controlled in the sense various local and state governments have adopted measures to shut down their economies to stop the spread of the virus. Depending upon locations throughout the country, some economies are starting to reopen while others may need to slow down their reopening. Time will tell how the national economy will do; however, some local economies may do better than others.
As reported today, consumer spending increased 8.2% from the prior month. This is a positive sign as consumer spending accounts for nearly 70% of the economy. There is still much unknown about the long-term effects to our economy, however we continue to see reports of discussions concerning additional fiscal stimulus while at the same time the Federal Reserve has said they expect policies will be accommodative in the foreseeable future. Both of these reports are positive.
The market as measured by the S&P 500 was down approximately 2.9% this week.
Please continue to stay safe and healthy. If you have a few moments look to the sky and try to see the world through the eyes of a three-year-old.
Chris Zeches, CFP®