Economic Update (Labor Day Edition)

[Lloyd Segal]

Economic Update
(Labor Day Edition)

This crazy bizarre year will undoubtedly be remembered as one of the most challenging times of our lives. A worldwide pandemic, social distancing, facemasks, a recession, historic unemployment, evictions, foreclosures, record-setting heat, power blackouts, Black Lives Matter, and a level of social unrest perhaps never seen before, have all changed the way we live and treat each other. And, as we come to the end of this tumultuous year, we’re preparing for perhaps the most contentious presidential election of the century. I know every four years we decree that the election is the most consequential election in our history, but I seriously think this one really is! Only our real estate market seems to be unaffected (or is it oblivious), as new forecasts project there may be more homes purchased this year than last year. With this in mind, let wash our hands, put on our facemasks, social distance, and celebrate Labor Day by exploring the latest economic data…

Employment. Good news people! Non-farm payrolls increased by 1.37 million in August and the unemployment rate tumbled to 8.4% as the U.S. economy continued to climb its way out of this pandemic. The unemployment rate was by far the lowest since the coronavirus shutdown in March, according to Labor Department. Government hiring helped boost the total, with the growth of 344,000 workers accounting for a quarter of the monthly gain. Most of that hiring came from Census workers, whose rolls increased by 328,000. Despite worries of a revenue crunch among at the municipal level, local government employment rose by 95,000. Those on temporary layoff also declined, falling by one-third to 6.2 million and well off the high of 18.1 million in April. However, permanent job losses also jumped, rising by 534,000 to 3.4 million. Laid-off workers who returned to jobs also fell by 263,000 to 2.1 million. The Labor Department’s household survey indicated employment growth of 3.8 million and a decrease of 2.8 million on the unemployment rolls. That left employment down 11.5 million from pre-pandemic levels. Other big job gains came from retail, which added 249,000 positions, while professional and business services rose by 197,000 and leisure and hospitality, the hardest-hit sector during the pandemic, saw a gain of 174,000, most coming in bars and restaurants. Education and health services also showed strong gains, at 147,000, while transportation rose by 78,000 due to a big gain in warehousing and storage jobs. Financial activities increased by 36,000 while manufacturing increased by 29,000 and wholesale trade was up by 14,000. The unemployment rate for Black people fell 1.6 percentage points to 13% while the rate for Asians declined to 10.7% and the Hispanic level slid 2.4 percentage points to 10.5%. Still, it is unacceptable as a society that these sectors should have higher unemployment rates than the national rate! The report comes amid a raft of mostly positive economic signals, with retail sales, real estate and manufacturing showing sharp rebounds off their coronavirus lows. Still, economists worry that absent another round of stimulus from Congress, the boosts in activity could be short-lived.

Initial jobless claims. Sure, the media pays attention to the unemployment rate, but if you really want to know what is going to happen to our economy, focus on the initial job claims. As such, new applications for unemployment benefits fell sharply last week to a fresh pandemic low. But, unfortunately, the entire decline stemmed from a major change in how the data is reported instead of more people finding jobs. The Bureau of Labor Statistics said last month it would alter its adjustment process to make the report more accurate. The new method began with last week’s report. And last week’s initial jobless claims fell by 130,000 to a seasonally adjusted 881,000. In other he labor market showed no progress last week (absent the change in methodology). These figures reflect applications filed the traditional way through state unemployment offices. It was the fifth straight week in which unadjusted claims have been below 1 million. By any measure, though, jobless claims are still exceedingly high. They ran in the low 200,000s and stood near a half-century low shortly before the coronavirus epidemic broke out. New jobless claims rose the most in California (40,000), with smaller increases in Texas and Louisiana. Notably they fell in Florida and Georgia, states that suffered a big increase in coronavirus cases earlier in the summer. Adding in self-employed workers who filed under a separate federal program, actual or unadjusted new claims totaled 1.59 million last week. That marks a sizable increase from 1.43 million the prior week, not good news. Altogether, the number of people getting benefits through eight state and federal programs rose to an unadjusted 29.2 million as of Aug. 15 from 27 million in the prior week.


LA County Jobs Data. The snapshot of L.A.’s economy in July (latest month reporting) is a mix of good news and bad news. First, the good news. According to the Employment Development Department, Los Angeles County’s unemployment rate fell nearly 2 percentage points in July to 17.5% (from 19.4% in June). That’s the most significant drop in unemployment since the Covid-19 pandemic hit our county in March. Data shows the number of L.A. County residents who reported that they were working rose by 74,000 in July, topping 4 million for the first time in three months. And the number of residents who said they were unemployed in July fell by 95,000 to 863,000. That figure had been near 1 million in May. Now the bad news. The EDD survey took place during the second week of July, just as the city and state re-imposed shutdowns on bars, indoor dining, and indoor personal grooming services amid a surge in coronavirus cases. That means those shutdowns were not yet reflected in the July sample. Since the survey was taken during the week of July 12, the situation in L.A. County has deteriorated. More layoffs have occurred, especially at small- and medium-sized businesses. As a result, the August numbers (which won’t be reported by EDD until the end of September) are likely to be worse than July. For economists, it’s a sign that the recovery from the spring shutdown may be over, with the payroll job count in L.A. County still down 425,000 from a year ago. L.A. County’s economy continues to be harder hit than much of the rest of the nation. The 17.5% unemployment rate for July was well above the 13.3% statewide level and 10.2% national rate. But why? Part of this is due to the fact that our county is still a coronavirus hot spot. But it’s also due to the unique mix of industries that, until this year, had been one of our great economic strengths. Roughly 46% of the jobs in LA County are in high-risk industries.

Stressed Out Los Angeles. Folks, the world is becoming more urban. Opportunities created by established and emerging industries, the exposure to diverse cultures, and cultural attractions like museums and art galleries all contribute to the growth of cities. Plus greater density puts residents closer to restaurants, theater, clubs, banks, and grocery stores. But increased density combined with poor planning leads to traffic congestion and air and noise pollution, making city living difficult. Plus, this expansion creates challenges such as housing, transportation, infrastructure, education, and health care, putting greater stress on urban dwellers. As a result, some of the most desirable cities have long commutes, pricey monthly transportation, and steep housing affordability costs, requiring workers to work longer hours (or even longer commutes) to afford to live in these cities. 24/7 Tempo has compiled a list of the world’s 25 most stressed-out cities. Where is Los Angeles on the list? I’m sure you’re already thinking LA is number one. Actually, we’re only number six. Here’s how they describe LA:

“6. Los Angeles, United States (4.0 million). Los Angeles’ famous traffic is a major reason for America’s second-most populous city ranking on this list. The average one-way commute time is 61 minutes, the fourth longest of any of the 560-plus cities reviewed for the list. L.A. also scores badly among the cities in other traffic categories, including an index of CO2 emissions. Another source of stress in LA is the cost of housing, which is nine times higher than the city’s median household income, the sixth highest of any city reviewed for the list.”

So who is world’s most stressed out city? Hong Kong, of course! With a population of 7.5 million people, Hong Kong ranks as the most stressed-out city in the world because the cost of housing is 20 times higher than the city’s median household income. Further, China has been exerting pressure on Hong Kong, curtailing press freedoms and hindering the rights of people to gather in public areas. This has led to demonstrations that have turned violent, and these events have hurt the economy, which tumbled into recession. In other words, Hong Kong is really stressed out!

California's New Eviction Law. OK landlords, here it is. You may not like it, but here it is. The law designed to stop a wave of evictions was signed by Gov. Gavin Newsom last week. The new law protects tenants from being evicted for failing to pay rent between March and August of this year. Tenants now need to sign paperwork declaring they haven't been able to pay rent due to COVID-19. Going forward, tenants will need to pay 25% of their monthly rent. If tenants pay that 25%, the remaining balance (75%) will convert to civil debt and may not be used as grounds for an eviction. By Feb. 1, 2021, tenants will need to resume paying their full monthly rent to avoid eviction. The bill, AB 3088, was a compromise measure, scaled down from earlier proposals to keep tenants in their homes while compensating landlords for their losses. Under the new law, courts won't process eviction cases based on non-payment of rent until Oct. 5. However, other types of evictions can now move forward, and sheriff's departments could soon be locking out your tenants. The bill was backed by the California Apartment Association, but opposed by tenant groups like the statewide Tenants Together (who say it doesn't go far enough). For tenants, the bill's complicated, legalistic provisions could prove difficult to employ when they receive an eviction notice. Without action from lawmakers, eviction proceedings would have resumed in courthouses across California this week. But just days prior to the bill’s passage, UCLA and USC researchers published a report estimating that nearly 100,000 households in Los Angeles County are threatened with eviction. Another 40,000 households are already in eviction proceedings, the researchers said, which probably scared the bejesus out of legislators.


Hollywood Hills Fixer. How about a fixer upper in the Hollywood Hills, owned by KISS rocker Gene Simmons? Simmons is hoping you’ll buy his scenic canyon retreat for its listing price of $2.2 million. It’ll cap a seven-year stay for the musician, who used the house to “Rock n Roll All Nite.” He paid $1.45 million for the home in 2013 from the royalties KISS probably received from you buying their albums. Perched at the top of a gated road in Laurel Canyon, the private hideaway takes in sweeping city views from three levels of decks, as well as a tiered backyard with a dining area down below. The home once boasted a Midcentury style, but a remodel introduced a more KISSABLE feel. Wide-plank floors, gallery white walls and pocketing glass doors fill the sunny, scenic open floor plan. Four bedrooms and two bathrooms complete the interior, including a master suite with polished concrete floors and a wooden alcove perfect for applying make-up. The house was “Made for Lovin You.” A native of Israel, Simmons, 70, co-founded KISS in the early 1970s and serves as the band’s bassist and lead vocalist. Known for their over-the-top makeup and costumes, the New York group has released 20 studio albums and is one of the bestselling bands ever, with more than 75 million records sold. Lisa Young and Kennon Earl of Compass hold the listing. 

Home Sales During an Election Year? Investors always ask me whether home sales decline during a Presidential election year. Here now is the official answer. BTIG, a research and analysis company, looked at new home sales from 1963 through 2019 in their report titled “.” They noted that in non-presidential years, there is a -9.8% decrease in November sales compared to October sales. This is the normal seasonality of the market, with a slowdown in activity that’s usually seen in fall and winter. However, they also revealed that in presidential election years, the typical drop increases to -15%. The report explains why: “This may indicate that potential homebuyers may become more cautious in the face of national election uncertainty. This caution is temporary though, and ultimately results in deferred sales, as the economy, jobs, interest rates and consumer confidence all have far more meaningful roles in the home purchase decision than a Presidential election result in the months that follow. History suggests that the slowdown is largely concentrated in the month of November. In fact, the year after a presidential election is typically the best of the four-year cycle. This suggests that demand for new housing is not lost because of election uncertainty, rather it gets pushed out to the following year. Will it matter who is elected? Not in the overall number of home sales. Consumer confidence plays a far more significant role in a family’s desire to buy a home than politics. How may consumer confidence impact the housing market post-election? The BTIG report say: “A change in administration might benefit blue county housing dynamics. The re-election of President Trump could continue to propel red county out-performance.” Again, overall sales should not be impacted in a significant way. Bottom Line: If mortgage rates remain near all-time lows, the economy continues to recover, and unemployment continues to decrease, the real estate market should remain strong up to and past the election.

Restaurant Rents Drop over 20%. As an ex-restauranteur, I’m terribly concerned about the restaurant industry, which is in the middle of a massive reset. In the last decade, commercial landlords were shifting their floorspace away from traditional retail (stores that sold tangible goods) into service - and experiential - retail, including fitness studios, beauty salons, and particularly food-related businesses like restaurants. This explosion of the restaurant industry allowed landlords to steadily increase rents each year. But also during the decade, the headwinds came [for restaurant operators] in the form of increased labor costs, food costs, and other expenses. For restaurants, rent typically hovers around 6 percent of revenue, with food costs at about 30 percent, and labor another 30-35 percent of overall sales. By the start of 2020, restaurant operators were already squeezed to their limits. So after years of an ever-expanding market, the COVID-19 pandemic has triggered a severe correction to the industry nationwide. When cities began issuing stay-at-home orders in mid-March, bars and restaurants were left with little to no business beyond meager takeout sales, yet often faced rents that remained fixed at high pre-pandemic levels. The situation became untenable for scores of restaurants and led to a wave of closures hitting every tier of the industry — from smaller mom and pops to corporate chains like the Cheesecake Factory. Now, with a sea of new vacancies, a standstill in new leases, and remaining businesses operating at a fraction of their previous revenues, restaurants are being forced to adapt to a new landscape, and landlords are facing a reckoning of their own. Some restaurants were able to strike a deal with their landlord on rent abatement, but others were left scrambling to find the money to pay — radically cutting staff and food costs in a desperate effort to reorganize costs. But the closures keep coming, and will continue coming as long as the indoor dining ban is in place. This growing wave of vacancies is the chief anxiety heard from landlords, especially smaller, independent ones. These landlords own these properties and they have mortgage payments they’re still paying. So a drop in rent prices has been unavoidable. Some as high as 20%! But it’s anyone’s guess how the industry rebounds after the pandemic. There will no doubt be permanent effects on our dining habits. However, there are certain elements of hospitality (human interaction, spontaneity) that delivery apps like Grubhub and Postmates can never replace. Likely indoor dining will return more intensely as life returns to normal. And when that day comes, and it will come, trust me, it will still take time for the real estate market to fully recover. What is clear though is that going into the pandemic the Los Angeles restaurant market was oversaturated with too many restaurants and this pandemic has sped up a massive reset.

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 reopening the economy. Beyond that, it will be a light week for economic data. The Consumer Price Index (CPI) will come out on Friday. CPI is a widely followed monthly inflation report that looks at the price change for goods and services. The next European Central Bank meeting will take place on Thursday. Mortgage markets will be closed on Monday in observance of Labor Day.

LA County Real Estate Numbers (August):

New Listings: 8,399 (up 16%)
Total houses sold: 6,291 (down 4%)
Median Sales Price: $700,000 (up 8%)
Median days on market: 42 (down 9%)
Inventory: 2.4 months (down 23%)
Median price per sq. ft: $451 (up 5%)

Calendar:
Thursday, 9/10: ECB Meeting
Thursday, 9/10: Producers Price Index
Friday, 9/11: Consumers Price Index

Weekly Change:
10-year Treasuries: fell 0.05
Dow Jones Average: fell 800 points
NASDAQ: fell 700 points