Economic Update (August 17-21, 2020)

[Lloyd Segal]

                                                  Economic Update
                                           (Monday, August 17, 2020)

The pandemic has reinforced and exacerbated many of the inequities in our society across categories of race, class and age. With Los Angeles in particular, where community organizations were already straining to serve residents before COVID-19 swept through the city, the situation has become even more challenging. According to the most recent state data, 7.5 million people in California have filed for unemployment since early March. That doesn’t even include those who are still desperately trying to file claims in eh overwhelmed EDD system, or those who are ineligible for unemployment benefits, like undocumented workers (who comprise over 10% of the restaurant industry's workforce). And while the state has expanded unemployment benefits for recipients, people are now increasingly relying on food assistance to get them through this severe economic downturn. At the same time, many Angelenos, like you, are wondering, “How can I help?” One way is by supporting our local food system and the ways we feed those in need. Unfortunately, the pandemic has made it more difficult for these groups to coordinate volunteers, collect food, and distribute it safely. The sheer amount of need in this time of crisis is staggering. But there are opportunities for people to have a real impact. If you want to contribute, or volunteer, or know of someone in need of food, clothing, shelter and/or assistance, please refer them to one of the very best organizations, the Los Angeles Food Bank.

Retail Sales. Retail sales climbed 1.2% in July,but don’t get too excited because sales actually tapered off since the economy reopened and could soften further in the months ahead (in the absence of another major federal-relief package). Retailers have been on a roller-coaster ride since the pandemic began, sinking in March and April and recovering rapidly in the following two months as the economy reopened. But the mild increase in sales in July might be an ominous sign of what lays ahead. The resurgence of coronavirus cases this summer sapped our economy of momentum, delayed the return of workers to their jobs, and in some cases spurred more layoffs. At the same time, the $600 federal unemployment benefits expired at the end of July and Washington is deadlocked over another major aid package. The added uncertainty and potential loss of income for millions of Americans still out of work could undercut retail sales and make it harder for our economy to recover from the deepest recession in modern American history. Specifically, sales surged 23% at stores such as Best Buy that sell electronics and appliances, marking the third straight strong gain in a row. It’s a good sign for our economy when consumers are buying discretionary items like computers or new refrigerators. In another positive sign, spending at bars and restaurants nationally climbed 5% despite renewed restrictions in some states, like California, on indoor dining (after the jump in confirmed infections of the coronavirus). Sales also rose at clothing stores, pharmacies, groceries and gas stations. More interesting, internet-store receipts rose a meager 0.7% after declining in June. Internet shopping had soared during the pandemic. So it is possible that flat sales in the past two months is a sign that people are venturing outdoors again and buying more products at bricks-and-mortar stores. Yet overall retail sales could slow further in the next few months if the coronavirus keeps spreading. A slower recovery, in turn, could force companies to cut jobs and put even more stress on our fragile economy.

Consumer Price Index. The Consumer Price Index rose 0.6% in July for the second month in a row, after declining from March through May (during the height of the crisis). Within the CPI, the cost of many goods and services such as gas, automobiles, clothing and airfare rose in July in a rebound from pandemic lows. And inflation is still barely visible in the wake of a coronavirus-induced recession that sapped demand throughout our economy. Looking under the hood, higher gas prices accounted for about one-quarter of the increase in consumer inflation in July. The cost of oil has recovered from multiyear lows earlier in 2020, though prices are still relatively low. Prices for rent, medical care, new and used vehicles, auto insurance, passenger fares, apparel, wireless phones, and Internet service also rose. However, companies lack the power to raise prices any further because far fewer people are flying, going out to eat, booking hotel rooms, or buying clothes for the office, among other things. The cost of food and recreation were among the few categories to show declines in prices. Food prices fell 0.4% after three large increases in a row. As you recall, the government pumped trillions of dollars’ worth of aid into our economy, but only because demand was on the verge of collapsing. Inflation has been famously described as “too much money chasing too few goods.” But right now forget about inflation because there’s simply not enough demand for goods and services to stoke a sustained increase in prices.

Producer Price Index. Like the CPI, the Producer Price Index (“PPI”) also rose 0.6% in July. Energy prices rose 5.3% while food prices declined 0.5%. In the past year, prices for goods are down 2.0%, while prices for services have risen 0.3%. The jump in July was the second largest monthly rise in nearly eight years! Rising costs virtually across the board resulted in a more substantial 0.6% increase. On the services side, margins led the way, with final demand trade services (margins to wholesalers and retailers) rising 0.8%, and final demand services less trade, transportation, and warehousing (think hospitals, financial services, and lodging) increasing 0.4%. On the goods side, the typically volatile food and energy categories continue to live up to their reputations, with energy prices up 5.3% - a third consecutive month of 4%+ increases. On the other hand, food prices declined 0.5% because of the lower costs for meat. Disruptions related to COVID-19 continue to muddy the data, with excess volatility in no short supply. Meanwhile, businesses operating at limited capacity will remain a headwind to increased economic activity. The result will eventually be too much money chasing too few goods (and services), meaning higher – but not hyper – inflation. The data is already starting to shift higher, tracking the emergence of our economy from what was a severe – but short – recession. But, as you can see, we still have a long way to go to get back to where we were at the start of 2020.

U.S. Bankruptcies. Bankruptcies (Chapter 7 & 11) are in route to a 10-year high with 424 companies filing as of August 9. This includes both public and private companies with public debt. The coronavirus has hit consumer companies hard, with more than 150 filing for bankruptcy, including Men's Wearhouse's parent, department store Lord & Taylor, and work-wear retailer Brooks Brothers. After all, who needs to wear a suit and tie (or pants, for that matter) if you’re working from home? Nearly 100 bankruptcies are in the energy and industrials sector. For example, oil-and-gas producer Chesapeake Energy Corp. and small-engine maker Briggs & Stratton are among the 35 companies that have filed with more than $1 billion in liabilities. No doubt this will be a very busy year at the United Stated Bankruptcy Courts.

Mortgage Rates. Mortgage rates moved higher this week, rising in recent days at the fastest pace in months. According to Freddie Mac, the most popular 30-Year fixed rate increased to 2.88% (but still below the 3.00% benchmark), the 15-Year fixed rate increased to 2.44%, and the 5/1 adjustable rate increased to 2.9%. These strong increases ended a 6-week stretch in which rates trended consistently downward, a trajectory that reflects the pessimism brought upon by a surge in coronavirus cases and uncertain availability of Federal fiscal relief. Remember, mortgage rates rise in response to encouraging economic and pandemic news, and last week we had plenty of it. Stronger than expected inflation figures over the past couple days, along with some encouraging developments regarding a COVID-19 vaccine fueled the increase – although doubts about Congress’s ability to agree on a new coronavirus relief bill appeared to hinder some of the upward motion. Mortgage rates are still historically low, But the recent increases are certainly a wakeup call for many investors. Where rates go from here is difficult to predict, but if key economic data – such as Friday’s retail sales data (see Retail Sales story above) – continue to impress, along with a stimulus deal in Washington, then more upward movement in rates could be on the way.


Working from Home. As real estate investors, we need to pay close attention to the preferences and shifting priorities of buyers. With more and more companies figuring out how to efficiently and effectively enable their employees to work remotely (and for longer than most of us initially expected), homeowners throughout the country are re-evaluating their needs. New priorities are on the table for many Americans as we ride the wave of the current health crisis and consider evolving homeownership needs. Working remotely is definitely changing how Americans spend their time at home, and also how they use their available square footage. Homeowners aren’t just looking for a room for a home office, either. The desire to have a home gym, an updated kitchen, and more space in general – indoor and outdoor – are all key factors motivating buyers to change their home search parameters. Through these challenging times, families have found their home becoming their office, their children’s classroom, their workout facility, and their family’s safe haven. This has quickly shifted what “home” truly means to many American families. More than ever, having a place to focus on professional productivity while many competing priorities (and distractions!) are knocking on their door is challenging homeowners to get creative, use space wisely, and ultimately find a place where all of these essential needs can realistically be met. In many cases, a new home is the best option. Making a move into a larger home may be exactly what buyers need to set their families up for optimal long-term success. As a result, make sure your deals include all of these amenities and considerations.

German Real Estate Update. Have you been wondering about real estate in Europe during the pandemic? I thought so. Well, my buddy in Munich has the latest updates from Germany. According to financier Clemens Martin, housing prices have risen sharply during the coronavirus pandemic, causing the dream of home ownership increasingly more difficult. The average price of a single-family residence in Germany is $365,000, while in the greater Munich area (the “Five Lakes County”) its $1,368,000. In contrast, the average price of a condo in Germany is $198,000, while in the Five Lakes County its $544,000. With this in mind, it is interesting to note that house prices are climbing much faster than condominium prices during the pandemic. In the second quarter (April to June), condominiums were on average 1.3% more expensive than at the beginning of the year. Compared to the second quarter of 2019, the increase was 5.9%. But during this time, the increase in condos was surprisingly surpassed by the price increases for single- and two-family houses (what we call “duplexes”). These increased by 2.9% compared to the previous quarter and by as much as 9% year-over-year! This is unusual in that prices of condos in Germany have almost always risen significantly more than houses over the past ten years – until now. This is shown by the most recent residential index of the research company F+B (which measures price developments in the German real estate market) published in SPIEGEL, the major German newspaper. “The sharp rise in the price of single-family homes is due in part to increased demand from families looking for more open space, gardens, and the appeal of working from home,” says Clemens. “Similarly, employers seem to appreciate the idea of employees working at home because it saves money and time.” The other element of German home ownership is that they tend to buy for life. Unlike Americans, Germans do not continuously upgrade. Vielen Dank!


Los Angeles Airports. Passenger traffic at the four airports serving Los Angeles County plunged 58% during the first half of 2020, their worst six-month performance in history as Covid-19 slammed the air travel industry! For the six months ending in June at Los Angeles International, Long Beach, Ontario, and Hollywood Burbank Airport, a total of 21 million passengers went through terminal gates, down from 49.9 million for the same period last year. That’s the steepest drop in the history of these commercial airports, and substantially bigger than the declines that followed the Sept. 11, 2001 terrorist attacks. This year’s drop would have been even worse had it not been for robust passenger traffic in January and February. After that, we skidded off the runway. April was the worst month as our economy and the air travel industry were in nearly full lockdown mode. LAX, of course, is still the driver of the region’s air traffic with the overwhelming majority of passengers. For the first six months of 2020, passenger counts at LAX were down 58.9% from the same period last year, to a total of 17.7 million. However, LAX passenger traffic was still down 87.1% compared to June 2019. As a point of reference, passenger volume in June 2020 was similar to the average month in 1965, so the numbers are staggeringly low in comparison to recent years.


Malibu Fixer-Upper. Are you looking for a fixer-upper in Malibu? If yes, Alex Rodriguez and Jennifer Lopez have a deal for you. Yes, that Alex Rodriguez and Jennifer Lopez. As Lopez describes the house, “a little fixer-upper next to the water.” The couple bought the property last year from “Entourage” actor Jeremy Piven for $6.6 million. The three-story house sits on the sand and has five bedrooms, 4.5 bathrooms and more than 4,400 square feet of living space. Balconies and patio space on each level create additional living space outdoors, looking out at the Pacific Ocean. Rodriguez and Lopez had begun renovating the home, but then had other priorities, before listing it for sale. Realtor Carl Gambino of Compass has listed the fixer-upper for sale at $7.99 million. So call him, not me! Lopez, 51, as you may know, has appeared in 34 films including “Selena.” As a singer, she has sold roughly 80 million albums worldwide. Rodriguez, 45, was a 14-time All-Star in 22 seasons in the Major Leagues. He won a World Series title with the Yankees in 2009. The couple are part of a group of investors that made a bid to purchase the New York Mets. The group, which includes former NFL linebacker Brian Urlacher, former NFL running back DeMarco Murray and NFL tight end Travis Kelce, has reportedly submitted a bid of $1.7 billion to purchase the baseball franchise.

Taix French Restaurant. In 1870,the Taix Family, descendants of sheepherders and bakers from the “Hautes-Alpes” in southeastern France, immigrated to Los Angeles. They soon opened a hotel, Champ d’Or (“Fields of Gold”), in downtown L.A.’s then French quarter. In 1927, Marius Taix Jr. opened Taix French Restaurant inside his father’s hotel, making it one of Los Angeles oldest restaurants. They served chicken dinners for fifty cents at long “family-style” tables. Diners could choose private booth service for an extra quarter. Taix’s French cooking, unique service, and affordable prices makes it a Los Angeles institution. Taix moved to its present location at the intersection of Sunset and Park Avenue in 1962. Some of Taix’s employees have been with the restaurant for over forty years. Taix has long been a neighborhood favorite for birthdays, weddings, anniversaries, family get-togethers, and a popular gathering spot before and after Dodger games. For generations, Angelenos flocked to Taix for their famous onion soup, mussels, beef bourguignon, and steak frites. But business became harder for Taix in recent years. Accordingly, Taix sold the property in 2019 and is now leasing the building as a tenant. But its new owner, Holland Partner Group, unveiled new project plans that call for the demolition of the Taix building, a horrible blow to LA history and causing indigestion to its loyal customers. Please help us push for a preservation-based project that incorporates the existing building and its eligibility to be listed as a landmark. Visit their website to learn more! Taix is currently open Tuesday-Sunday 5 - 9:45 p.m. for outdoor dining, pick-up and delivery. 


Yes, This Summer Has Been Hotter Than Normal. If this summer feels hotter than normal, that's because it is! Especially this weekend! July was teh 11th hottest month on record for the U.S., according to the National Oceanic and Atmospheric Administration. And you thought it was the coronavirus. Here in California, temperatures have been two degrees hotter than average, making this the 19th warmest start to a summer on record. Drought conditions, particularly in the northern part of the state, have worsened over the past few months, due to high heat following a less than stellar rainy season. In July, we saw heat waves cook SoCal's valleys and deserts with triple-digit scorchers, not to mention this weekend! Death Valley hit 130 degrees on Sunday, one of the hottest days ever recorded on planet Earth. EVER! Hotter temperatures lead to an increase in heat-related deaths, especially among marginalized populations. As you’ve seen this weekend, high temperatures also increase our wildfire risk, in part, because the dry vegetation has dangerously low moisture levels. High heat has been a contributing factor to the above-average number of fires we've already seen across the state this summer, including the Apple Fire still burning in Riverside County, the Lake Fire still burning near Lake Hughes, the Ranch Fire still burning near Azusa, and the Post Fire still burning near Corona. Shall I go on?

Monday Morning Quarterback. After a sharp rebound in our economy in May and June, the economic recovery is now faltering as consumers, workers and businesses remain extremely cautious. The latest jobs data confirms that the recovery is faltering. But economists expect our economy to gradually regain its footing in 2021, with gross domestic product rising 5%. The unemployment rate will probably still be around 10% at the end of this year with a strong jobs recovery next year once the coronavirus is beaten back. The key driver of our economy is what assumptions you make about the path of the virus. If you think about it, it’s less about the number of cases than the level of restrictions in place. The next six to 12 months will likely exhibit the effects of a “prolonged dislocation” in the labor market. In other words, what’s going to drive the recovery is how fast people get their jobs back. The latest data show that most of the job gains since the depths of April have come in the heavily beaten-down food services, accommodations, and retail sectors. But there’s been almost none in sectors that were able to shift white-collar workers to home offices. Growth in manufacturing jobs stalled in July (outside the automotive sector). The labor-force participation rate dipped in July after gains in May and June. And within the employed, a large share remains either part-time (for economic reasons) or employed but not at work. The retail sector is under strain, and more bankruptcies are looming in many sectors of our economy. Regardless of what Washington does, consumption will slow in September and October. Bottom Line: the biggest headwind in the next few months will be a large drop in income, due to the expiration of massive federal relief. Sadly, even if Congress eventually agrees to another round of extended employment benefits (or direct payments), it won’t replace all the lost income support that was the lifeblood to prevent our economy from tanking from March through July.

This Week. Looking ahead, investors will continue watching for news about medical advances, vaccine developments, government stimulus programs, Fed monetary policy changes, and plans for re-opening our economy. Beyond that, it will be a big week for real estate investors with the housing sector in the spotlight. Housing Starts will be released tomorrow (8/18) and Existing Home Sales on Friday (8/21). As real estate investors, we need to closely monitor these two leading economic indicators.