Coronavirus – Thoughts for Disney, the Economy and Beyond

by Ray Keating

Commentary

DisneyBizJournal.com

March 9, 2020

The U.S. stock market dropped by more than seven percent today, and Italy’s prime minister announced late this afternoon that the entire nation is on lockdown. 

I’m not an alarmist when assorted scares pop up. In fact, I usually fall in line with those criticizing the media for drumming up unwarranted fear. However, when one looks at the mortality rate for the coronavirus – especially compared to the flu – and its rate of infection, concerns about the coronavirus warrant attention.

And then you get someone like Niall Ferguson writing a piece with some serious warnings in today’s Wall Street Journal. Ferguson is a smart and sane fellow – a historian – and his piece is sobering. Consider a few key points:

• “This new coronavirus—which is not influenza—appears to have a higher R0 and a much higher mortality rate. That rate is almost certainly lower than the World Health Organization suggested last week (3.4%), but it is still much higher than for H1N1. South Korea, which probably has the most accurate data given its aggressive testing regime, reports 50 deaths from 7,313 infections, a mortality rate of 0.68%. If as many Americans catch Covid-19 as caught swine flu, the death toll could exceed 440,000.” (Emphasis added.)

• “At first, the number of cases outside China did not grow exponentially. But that changed in February. Three weeks ago, the number was doubling every eight days. Now it is doubling every five days.”

• “According to Messrs. Pastor-Satorras and Vespignani’s Global Epidemic and Mobility model, the United States is the fifth-likeliest country to import Covid-19 from abroad—after Thailand, Japan, Taiwan and South Korea. If the U.S. turns out to have proportionately as many cases as South Korea, it will soon have some 46,000 cases and more than 300 deaths—or 1,200 deaths if the U.S. mortality rate is as high as Italy’s.”

• “Network effects are the reason it is anything but dumb to worry about the novel coronavirus. Not only is it spreading much faster than most Americans realize; it is also disrupting global manufacturing supply chains as well as all the economic activities that depend on travel and proximity.”

• “Finally, cable news and online social networks can be relied upon to disseminate alarmist and downright fake stories about the pandemic... That aspect of the panic is indeed dumb. But that doesn’t make it smart to underestimate the scale of the Covid-19 pandemic—a perfect illustration of the vulnerability and fragility of our networked world.”

If you can read Ferguson’s piece in full, I would suggest doing so.

My economist take?

Even if Ferguson is off base – and let’s hope and pray that he is – there likely will still be very real costs for the U.S., including on the economic front. U.S. economic growth already was sluggish over the past three quarters – averaging a mere 2.1 percent rate – and in each of those quarters, business investment declined, and trade ranked as a drag on the economy as well. None of that will improve in 2020, and is likely to get worse, particularly during the first half of this year, along with the consumer reining in spending. That means each of the major segments of our economy point to a recession arriving very soon – if it’s not already started.

For a company like Disney, it faces a triple threat. 

First, Disney’s international exposure – which normally serves the company well – ranks as something of a negative in this environment. With theme parks already closed in Japan, China and Hong Kong, it’s hard to fathom – at least at this point – that Disney’s parks in Paris, Florida and California will not have a period of being closed. 

Second, and this obviously plays off the first point, Disney is a travel and leisure company – again theme parks, hotels, and cruise ships – and that’s an industry destined to be hit extremely hard in this scenario.

Third, a general recession naturally spells trouble for Disney as well. Indeed, one could argue that the best case scenario for Disney would be the coronavirus not spreading as widely as some assume, and the company only facing a hopefully shallow, short recession.

If there is a plus for Disney in this scenario, it would be Disney+. After all, if more people are stuck at home, then Disney+ is an entertaining diversion.

Over the coming months, it’s going to be a matter of degree for individuals, families, and businesses like Disney – from this being another emergency that turns out to be grossly overblown to the troubling view served up in Niall Ferguson’s piece.

Ray Keating is the editor, publisher and economist for DisneyBizJournal.com, and author of The Disney Planner 2020: The TO DO List Solution and the Pastor Stephen Grant novels. He can be contacted at  raykeating@keatingreports.com.

Disney and the Economy: Downside Concerns

by Ray Keating

News/Analysis

DisneyBizJournal.com

January 31, 2020

The Walt Disney Company cuts across industries, covering retail, travel, theme parks, movies, television, online streaming, and more, not to mention being a global enterprise. So, this diversified company can seize on assorted opportunities and benefits when U.S. and global growth are strong. And while Disney also has considerable exposure to economic woes and uncertainties, industry and regional diversification can aid the firm in weathering economic storms.

Right now, the risks for a company like Disney tilt to the downside. Consider some key issues, facts and trends.

• U.S. Growth. Contrary to claims from a variety of talking heads on television and in politics, the U.S. economy remains a mixed bag. For example, while the U.S. labor market is tight, economic growth has slowed. Fourth quarter 2019 real GDP (just reported on January 30) grew by 2.1 percent (annualized rate). That replicated the 2.1 percent growth in the third quarter, and wasn’t substantively different from the 2.0 percent rate in the second quarter. Consider that the post-World-War-II U.S. growth rate averaged 3.2 percent (and better than 4 percent during non-recession periods). Particularly troubling for the U.S. is that business investment has declined for three straight quarters now, which not only negatively affects current growth, but future growth as well.

• Trade Troubles. The anti-free-trade policies of the Trump administration have been a key negative for the U.S. economy. U.S. real export growth was non-existent (0 percent) in 2019, while imports barely edged forward (1.0 percent). As I noted in another analysis on trade policymaking, “The result has been that trade has shaved a significant 0.5-to-0.7 percentage points off of average overall real U.S. economic growth – if not more when you factor in the reach of trade across sectors, including the role that the trade war has played in the recent decline in business investment.”

• Consumer Slowing. Given the ills on the business investment and trade fronts, the consumer has been the key source for growth in the U.S. recently. However, real personal consumption expenditures growth slowed in the fourth quarter, from 4.6 percent in the second quarter 2019 to 3.2 percent in the third quarter and 1.8 percent in the fourth. 

Also, after a lengthy stretch of strong growth, real per capita disposable income moved down slightly during the last three months of 2019. Real per capita disposable income – which is personal income minus personal current taxes, adjusted for population and inflation – is important to watch because this measures the dollars that individuals have for investing, saving and consuming.

• China. China’s troubles continue to mount regarding the outbreak of the coronavirus, with deaths now reportedly topping 200 and those sick nearing 10,000 (as of early afternoon EST on Friday, January 31). 

• Europe. The Wall Street Journal noted on January 31 that growth slowed notably in the eurozone, with growth the slowest since 2013. Also, it was reported that economists aren’t expecting a pick-up in eurozone growth in 2020.

• Politics. Political risk and uncertainty promise to mount as a volatile U.S. presidential race, along with House and Senate contests, roll along during 2020.

So, economic concerns cut across the U.S., Europe and China, which are the major markets for Disney.

Against these concerns, it also must be noted that the only portion of the economy’s investment numbers showing consistent, strong growth has been in intellectual property products, that is, investment in software, research and development, and entertainment, literary, and artistic originals. That’s obviously a big area for Disney. 

And all indicators regarding Disney itself continue to point to investment growth in parks, cruise ships, streaming content, movies, and so on. Of course, though, short-term economic changes affect immediate investment and operational decisions, but Disney is a company poised to stay focused on long-term investments, opportunities and profitability.

Ray Keating is the editor, publisher and economist for DisneyBizJournal.com, and author of The Disney Planner 2020: The TO DO List Solution and the Pastor Stephen Grant novels. He can be contacted at  raykeating@keatingreports.com.

Disney Theme Park Attendance and the Economy

by Ray Keating

Analysis

DisneyBizJournal.com

August 12, 2019

Since the Walt Disney Company reported its latest quarterly earnings last week, there’s been a great deal of speculation as to the reason behind a drop in attendance – widely reported to be a 3 percent decline – at Disney’s domestic theme parks. Most of the possibilities being tossed around likely played a part. But another possible factor – which has not garnered any attention but at least warrants some degree of consideration – is the economy. Specifically, has the recent slowdown in economic growth played a part?

In its third quarter earnings report, Disney explained:

The decrease in operating income at our domestic parks and resorts was due to higher costs and lower volume, partially offset by increased average per capita guest spending. Higher costs were driven by labor and other cost inflation and expenses associated with Star Wars: Galaxy’s Edge, which opened at Disneyland Resort on May 31. The decrease in volume was due to lower attendance, partially offset by higher occupied room nights. Guest spending growth was primarily due to higher average ticket prices and increased food, beverage and merchandise spending.

The basic message here is that there was a decline in park attendance in the third quarter, but spending on average was up among those in attendance. That’s not necessarily a bad thing from Disney’s perspective in terms of increasing revenues while providing an improved experience for the guests in attendance. However, that only goes so far. 

Among the explanations for the attendance drop being noted are Disney managing attendance given the opening of Star Wars: Galaxy’s Edge in Disneyland; guests deferring visits until Galaxy’s Edge opens in Walt Disney World late this month; guests being scared off by the assumption of large crowds tied to Galaxy’s Edge; and guests deferring their visits until Galaxy’s Edge Rise of the Resistance joins Millennium Falcon: Smugglers Run in Walt Disney World on December 5, 2019 and in Disneyland in January 17, 2020. Plus, there’s been a good number of articles and podcasts talking about Disney pushing the prices for theme park admissions too high.

Again, any and all of these factors could be at work. But what about the economy? Obviously, an economic slowdown or recession does not bode well for theme park attendance or Disney’s overall business.

It must be noted that while the current economic recovery/expansion has been lengthy (the recession officially ended in mid-2009), the average rate of growth has substantially under-performed the historical norm. For example, the economy normally grows at 3.3 percent annually in real terms (4.3 percent during recovery/expansion periods), but it has expanded at only 2.3 percent during this recovery/expansion. More recently, from mid-2015 to mid-2017, growth slowed (averaging only 1.8 percent), and it subsequently picked up over the next five quarters (average growth of 3.1 percent) from mid-2017 through the third quarter 2018. 

But growth slowed in two of the last three quarters. Growth in the fourth quarter 2018 was only 1.1 percent, followed by a solid 3.1 percent in first quarter 2019, and then slowing to 2.1 percent in the second quarter 2019.

The first question is: Are we trending lower, or were two of the last three quarters mere breathers in terms of economic growth? Given that anti-growth, protectionist trade policies have taken a chunk out of U.S. economic growth (see my analysis here) recently, and there’s little reason to expect President Trump to reverse course and point trade policy in a more pro-growth direction, this stands out as the biggest threat to economic growth moving forward. For good measure, political uncertainty will increasingly come into play as the 2020 election gets closer.

The second question is: Given that the labor market remains relatively strong, how much have consumers taken notice of any slowdown and potential problems developing? Consumers tend to be followers, that is, they take their cues from what business is doing. That is, if business is investing, expanding and hiring, then consumers tend to be happy and spending. In the second quarter of 2019, the two biggest drags on the economy were declines in private investment and in trade. If those developments persist, recession becomes increasingly likely. 

But there are a lot of “ifs” in play here – more than typical – and the economy could go in either direction – up or down.

So, with one quarter showing a drop in Disney theme park attendance, we’re left to speculate and watch for further developments. In terms of what we’re watching, though, the state of the economy shouldn’t be ignored.

Ray Keating is the editor, publisher and economist for DisneyBizJournal.com, and author of the Pastor Stephen Grant novels. He can be contacted at  raykeating@keatingreports.com.

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