Economic Update (August 10-14, 2020)

[Lloyd Segal]

Economic Update
(Monday, August 10, 2020)

The resurgence in coronavirus cases is sidetracking an economic recovery that gained steam in May and early June, slowed in July, and now indicates a rocky path ahead. The U.S. simply can’t return to normal while the coronavirus is still a serious threat and millions of people can’t go back to work. Worse, the longer the health crisis goes on the more likely that the temporary job losses become permanent job losses and the longer it will take for the U.S. to recover. With that in mind, wash your hands, put on your face masks (yes you!), and let’s get in the weeds…

Employment Growth. The U.S. economy added 1.76 million new jobs in July (just one-third of the 4.79 million gain in June), reflecting a sharp slowdown in hiring after a resurgence in coronavirus cases halted the return of many workers to their jobs. Apparently, the torrid pace of employment growth in late spring gave way in July to a sharp slowdown in hiring, underscoring the fragile nature of our recovery with the coronavirus still running rampant in many states. Restaurants and retailers added the most jobs in July, but at a slower pace compared to the prior two months. Restaurants rehired 502,000 workers and retailers raised employment by 258,000. Restaurants and retailers have been at the epicenter of the pandemic. The smaller increase in job creation took place against the backdrop of a surge in coronavirus cases in a number of states, including California, Texas and Florida. But the mild improvement in hiring was really weaker than it appears. The government’s questionable process of seasonal adjustments showed an exaggerated increase in school employment. Specifically, many school workers such as bus drivers and cafeteria workers who would normally be laid off in July were sent home after schools closed early in March. The government’s process of seasonal adjustments made it look like hiring rose simply because those layoffs did not take place in July as usual. In addition, the federal government also hired more Census workers. So, if we strip out government employment, private-sector jobs rose only 1.46 million last month.

Unemployment Rate. Another piece of relatively good news is that the official U.S. unemployment rate fell for the third month in a row to 10.2% from 11.1% (and 19.2% in Los Angeles County). That 10.2% is still very high by historical standards, but much lower than the peak of 14.7% in April. However, part of the improvement in the unemployment rate was because the U-3 labor force (people working or looking for work) declined 62,000, following large gains in May and June. Although the official jobless rate fell again, it’s quite likely the true level of unemployment is higher. Why? Because a more accurate measure of unemployment known as the U-6 rate suggests the “real” unemployment rate was really 16.5% in July (a bit lower from 18% in June). The U-6 rate includes millions of workers who can only find part-time jobs and those who have become too discouraged to look for jobs. Bottom Line: the U.S. shed more than 22 million jobs during the height of the pandemic. So far it’s only restored about 9.3 million jobs, leaving more than half of the Americans who lost their jobs still unemployed. That means that approximately 14 million Americans are still unemployed! Let that sink in…

$600 is Crucial to Our Economy. Over the weekend, President Trump issued several Executive Orders, one of which renewed the supplemental unemployment benefits at $400 per week. But the legality of his Executive Orders will likely be challenged in Court, so those $400 payments are in doubt. Accordingly, Congress still need to put partisan bickering aside and reach a legislative compromise as soon as possible. For those of you still skeptical about the necessity of the $600 weekly benefits, forget for just a moment all the unemployed workers no longer receiving those weekly checks. Forget for just a moment how desperate they are to continue receiving those extra funds. Forget them! Focus instead on our economy. Ordinarily when people lose their job, they stop spending money. But something unusual happened this spring-summer when millions of people were suddenly thrown out of work by the coronavirus pandemic. A University of Chicago study found that at first, their spending did go down, just as you would anticipate. But then spending magically rebounded -- once people started receiving those unemployment benefits (which the federal government had boosted by $600 per week). Jobless people who received those benefits wound up spending MORE on the whole than they had before the pandemic. In other words, as crucial as the $600 weekly benefits are to unemployed workers, those $600 payments are just as crucial, if not more so, to sustain our economy during this pandemic. Consumer spending is a key driver of the broader U.S. economy. That should be a crucial consideration as Congress attempts once more to compromise on a new coronavirus relief package. Unless lawmakers agree to replace that extra $600 a week aggregate consumer spending in the U.S. will collapse — a far steeper decline than our country experienced during the Great Recession more than a decade ago. In other words, without those supplements, we could experience another recession over and above our already struggling economy (on top of a deadly pandemic). Economist call that a “triple whammy.” Of course, jobless benefits aren't the only factor behind the surprising improvement in household spending. There were also those $1,200 relief payments, which acted like an extra tax refund. Still, the extra $600 weekly unemployment benefits have been an important aid for people and resulted in continued spending. And that continued spending may be exactly what our economy needs right now to avoid tumbling into an even deeper recession.

Mortgage Rates. The 30-year fixed-rate mortgage dipped to a record low of 2.88% last week, dropping 11 basis points from the week prior, Freddie Mac reports. It was the eighth time this year the benchmark mortgage rate slipped to a record low. (In comparison, these loans had an average rate of 3.6% a year ago.) The 15-year fixed-rate mortgage dropped seven basis points to an average of 2.44%, while the 5-year Treasury-indexed adjustable-rate mortgage fell by only four basis points to 2.9%. Because mortgage rates are long term rates, they have historically moved roughly in line with the direction of the 10-year Treasury. The yield on the 10-year Treasury note also flirted with record lows last week, dropping to 55%. Historically low mortgage rates are spiking demand for real estate, as buyers rush to lock-in low monthly payments. However, buyers are facing obstacles to their desire to buy a home. In particular, buyers are confronting an incredibly low inventory of homes for sales, which is leading to a frenzied environment of multiple bids, price escalation clauses and inspection waivers. And while mortgage rates are historically low, lenders have escalated standards to qualify for a loan given the risks posed by the pandemic and the tumultuous economy. The challenge now for borrowers is to prove income during a pandemic. Formerly lenders requested tax returns from last year. Now lenders require your banks statements for the last two months to prove you’re still working. At this pace, tighter lending standards and low inventory of available homes will squeeze housing activity and will inevitably lead to a slowdown in sales in the second half of this year.

Mortgage Delinquencies. Mortgage balances continued to rise during the second quarter to $9.78 trillion, according to a national report by the New York Fed. Delinquency rates on mortgages ticked down though, with 1.08% of mortgage debt classified as “serious delinquency” (90 days or more delinquent) in the second quarter compared to 1.17% in the first quarter. (Delinquency rates on student loans, auto loans, and credit card debt also declined quarter-over-quarter.) The Fed attributes the lower delinquency rates to the increase of forbearances. In addition, the CARES Act federally-mandated foreclosure moratoriums on government-backed mortgages have also prevented those who have been unable to meet payments from losing their homes. But that protection will expire at the end of August. So the lower rates in the report may be masking the title wave of foreclosures that could come if the moratorium is lifted before households have financially recovered. Protections afforded to American consumers through the CARES Act have prevented large-scale delinquencies from appearing on credit reports and avoiding a record number of foreclosures. But Congress is stalled in negotiations for a stimulus package with further fiscal support, so we’ll have to wait and see how Congress responds, if at all.

Lending Update. Last week the Federal Reserve released its “July 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices” which addressed changes in the standards, terms, and demand for bank loans to households and businesses (and investors) over the past three months (second quarter of 2020.) Regarding loans to businesses, respondents to the July survey indicated that their banks tightened standards across all three major commercial real estate ("CRE") loan categories—(1) construction and land development loans, (2) non-farm nonresidential loans, and (3) multi-residential loans. At the same time, as further security for their loans, major banks increased the use of interest rate floors, collateralization requirements, loan covenants, premiums charged on riskier loans, and loan spreads over the bank's cost of funds. Meanwhile, major banks reported weaker demand for all three CRE loan categories during this period. With respect to residential lending to households, major banks dramatically tightened standards for all loan categories, especially subprime mortgage loans. Regarding demand, major banks reported overwhelming demand for residential mortgages. Demand was reportedly weaker only for home equity lines of credit (HELOCs). Regarding lending criteria, banks reported that their lending standards increased at the tightest level since 2005. HELOCs was the one loan category whose level was most consistently reported as being the tightest, with major banks reporting that standards are currently at the extreme end of the range. Additionally, major banks also reported relatively tight standards for jumbo residential loans.

Construction spending. Construction spending fell for fourth straight month in June. Specifically, outlays for construction projects fell 0.7% in June at a seasonally adjusted annual rate of $1.36 trillion, the Commerce Department reports. Residential construction fell 1.5% in June, while spending on public construction projects fell 0.7%. This is the fourth straight monthly decline. Economists had secretly prayed for a 1.3% increase. So, unfortunately, spending is going in the wrong direction. Spending in May was revised to a 1.7%, a fall from the prior estimate of a 2.1% drop. Despite these declines, construction spending has held up relatively well during the pandemic, with spending up 0.1% on a year-on-year basis.

House Party Crackdown. Residents of ritzy hillside neighborhoods say “Party Houses” are proliferating during the pandemic.Just last week amassive home in the Hollywood Hills was the site of a large party that ended in gunfire and the death of a 35-year-old woman. For years now, residents of L.A.'s ritzy hillside neighborhoods have objected to so-called "party houses." They're usually rental or Airbnb spots that become makeshift nightclubs and host hundreds of people. "The proliferation of party houses has become out of control, especially now during the pandemic because of bars being closed," said Anastasia Mann, president of the Hollywood Hills West Neighborhood Council. In response, Councilman David Ryu introduced a motion that aims to crack down on rowdy parties in Los Angeles. Apparently there is a party house ordinance already on the books, passed in 2018, that imposes thousands of dollars in fines for violations. And an existing L.A. County order prohibits gatherings during the pandemic applies to the City of L.A. as well. But members of neighborhood councils in areas that regularly see wild parties say many wealthy party organizers and homeowners are undeterred by fines. So this weekend Mayor Garcetti ordered the Department of Water and Power to turn-off utilities at any party house if the City receives complaints. That may work? BTW, if you own that party house up the street (you know who you are) please turn off the music at midnight…or invite me over.

Master Bedrooms. When was the last time you slept in a master bedroom?A growing number of real-estate professionals have stopped using the phrase “master bedroom” amid a broader societal rethink of the language we use in our industry. Real estate investors could soon be calling this room the “owner’s suite” or “primary bedroom” instead of master bedroom. To many, the phrase “master bedroom” is associated with slavery and evokes imagery of violence against people of color. Another definition of the word “master” is the male head of household, which is considered sexists to many people. In the aftermath of the Black Lives Matter protests this summer, there is a reckoning about product names and even the etymology of the language used in many industries, including ours. The real-estate industry has finally come to a decision that took years in the making to stop using the word “master.” But the movement to abandon “master bedroom” is not a new one. Behind the scenes, some major players in the real-estate industry have been skipping the term for years. Home builders, in particular, have already stopped using the terminology and chose to standardize “owner’s suite” across its markets. Internally, the National Association of Home Builders has altered its survey language to use the phrase “primary bedroom.” Even HGTV is committed to change and wants to use words that are more descriptive and inclusive — like “primary or main bedroom” instead of master bedroom. But besides the etymology, there’s a real opportunity for improvement far beyond the simple terms we use in our industry. There are much larger issues that need to be addressed — from redlining and steering, wealth inequality, access to down payment funds, and diversity in our industry — that would drive lasting change and move us towards equality. For example, if there’s an Indian Home Loan Guarantee Program designed to boost homeownership among Native Americans, why isn’t there, at the very least, an African American Home Loan Guarantee Program?

Volunteering for COVID-19 Vaccine Trials? If you’re interested in participating in COVID-19 clinical trials, here’s what you need to know. Volunteers are being solicited by the National Institute of Allergy and Infectious Diseases. They are recruiting volunteers for clinical trials of vaccines being developed by AstraZeneca, Novavax, Moderna, and Johnson & Johnson. Each company needs over 30,000 volunteers for its trials (and more vaccine developers could be added if their products also advance to late-stage clinical trials). Because of the sheer number of participants needed, anyone who’s interested should volunteer. But vaccine developers are particularly interested in recruiting clinical trial participants who are considered to be most vulnerable to COVID-19. People with pre-existing conditions are a priority population, as are adults over age 65. African Americans, Native Americans, and Latinos also have a high chance of being admitted to a vaccine trial. So do people most likely to contract the disease because they work at health care facilities or in open workspaces (such as meatpacking plants). Before signing up, though, you need to understand what being in a COVID-19 vaccine trial entails. First and foremost, the vaccine involves injecting bits of genetic material from the virus to prompt your body to launch an immune response — emerging technology that hasn’t been widely deployed before. Second, don’t assume you’ll be able to throw away your mask and stop social distancing after you get the shot. These trials will be placebo-controlled. That means every participant will have a 50-50 chance of getting a placebo shot rather than an actual vaccine. In fact, vaccine developers are counting on some trial participants actually getting sick with COVID-19. All participants will be warned that they could get the coronavirus. Of course, they’re not exposing you to COVID-19 or giving it to you, but they do have to find people who have a higher risk of getting it. That’s how the companies will be able to compare infection rates among people who received the vaccine and those who don’t. Also, there could be side effects, including sore arm, low fever, fatigue, and muscle aches — typical side effects for all vaccines. Finally, if the monitoring board looks at the interim data and determines the vaccine is NOT effectively preventing the disease, it will end the trial. As of late July, more than 154,000 people had already volunteered to participate in the COVID-19 vaccine trials. If you still want to volunteer visit Corona Prevention Network. 

This Week. Looking ahead, investors will continue watching for news about medical advances, vaccine developments, government stimulus programs, Fed monetary policy changes, and the re-opening of our economy. Beyond that, the Consumer Price Index (CPI) will come out this Wednesday (8/12). CPI is a widely followed monthly inflation report that looks at the price change for goods and services. Retail Sales will be released on Friday (8/14). Since consumer spending accounts for about 70% of all economic activity in the US, the retail sales data is a key indicator of growth.

Calendar:
Wednesday, 8/12: CPI
Thursday, 8/13: Import Prices
Friday, 8/14: Retail Sales

Weekly Change:
10-year Treasury: Fell 0.01%
Dow: Rose 800 points
NASDAQ: Fell 300 points