Economic Update (Monday, May 10, 2021)

[Lloyd Segal]

Economic Update
(Monday, May 10, 2021)

Are you making love less? I thought so. Apparently you’re not alone. According to the National Center for Health Statistics, the number of babies born in the U.S. dropped by 4% in 2020 compared with the previous year. In fact, the general fertility rate was a disastrous 55.8 births per 1,000 women ages 15 to 44, reaching yet another record low. What is happening? You would have thought that the birthrate would have increased during a pandemic as everyone stayed home (and looked for “creative” things to do), right? But the reverse happened! Was it an issue of performance anxiety? By the way, this is the sixth consecutive year that the number of births has declined after an increase in 2014 (down an average of 2% per year), and the lowest number of births since 1979. The U.S. total fertility rate (which estimates how many babies a hypothetical group of 1,000 women would have during their life based on data from a given year), remains far "below replacement" – meaning there wouldn't be enough babies born for a generation to replace the people who died during the same period. The rate has generally been below replacement since 1971. The statistical replacement rate is 2,100 births per 1,000 women. But in 2019, it was just over 1,700 births. And in 2020, the total fertility rate fell to just 1,637.5 births per 1,000 women. Bottom line: we need MORE lovemaking. Do I have your support on this? If I do, let’s wash our hands, put on our face masks, social distance (unless you’re making love), get vaccinated, and let’s dance…

Friday’s Employment Report is Disappointing. The U.S. created only 266,000 new jobs in April on a seasonally adjusted basis even as our economy gained strength, suggesting companies might be struggling to fill open jobs even with millions of people still unemployed. The official unemployment rate, meanwhile, notched-up to 6.1% from 6%, the U.S. Labor Department reports. Yet this first increase in 13 months stems from more people entering the labor force in search of jobs — a good sign for our economy.  The small increase in new jobs belies mounting evidence that companies are eager to hire more workers in response to soaring demand for goods and services. Job openings have surged, for instance, and a survey of small businesses showed that 60% tried to hire people in April. The momentum in our economy is unlikely to fade anytime soon, either. Rising vaccinations and falling coronavirus cases have allowed states to lift business rules and encouraged Americans to resume normal activities. We are going out to eat again, traveling, and taking our first vacation in more than a year. At the same time, the government is pumping trillions of dollars of stimulus into the economy in a bid to restore growth as quickly as possible. So-called leisure and hospitality businesses — hotels, restaurants, theaters, amusement parks — added the most new jobs in April. These companies were hit the hardest during the pandemic and are now benefiting the most from a more open economy. Americans are itching to get out after being most stuck at home for the past year (but without sufficient love-making). But limited job options for adults, especially women, because they are still taking care of young children or older relatives. And they might not be able to return to work full time until day care centers, schools and nursing homes fully reopen. These issues likely contributed to the relatively small increase in hiring. But don’t be discouraged. The U.S. is still set up for a summer of strong economic growth, especially if the coronavirus is mostly squelched.

Unemployment Benefits Are Not Creating A Worker Shortage. As our economy bounces back from the COVID-induced downturn, some employers complain they’re having a hard time finding workers, blaming overly generous unemployment benefits. But that’s a simplistic interpretation of a more nuanced predicament. Economists say generous unemployment benefits are NOT the cause. After all, workers understand that unemployment benefits do not last forever (the federal benefits will expire in the fall). Further, a series of academic studies confirmed that extra benefits aren’t stopping people from going back to work. After all, if demand for workers were exceeding supply, the price of labor would be shooting up. But as Federal Reserve Chairman Jerome Powell said last week, overall wage growth increased. In reality, there are several more fundamental factors at play here. First, the normal hiring networks that employers previously relied on were blown up by the pandemic. Yes, some employers who received forgivable government loans were able to keep their workers on the payroll, but most firms simply let them go during lockdown. A year later many of those workers have taken other jobs, moved on, or even died. Second, employers may be reluctant to pay the “market clearing wage” ― the pay necessary to attract workers to available work, especially at a time when many jobs have become more difficult and stressful due to the pandemic. For example, restaurant (where owners are objecting the most), notoriously don’t pay very much, with median wages around $11 for servers in 2020, compared to more than $20 across all occupations. Third, don’t underestimate workers who are still wary of virus exposure, or are running into other obstacles to returning to work. In other words, there’s still a plague going on (scaring away workers from returning to work). Finally, one obvious factor would be schools aren’t fully opened as yet. So there are people (overwhelmingly mother) who are still at home taking care of their children that would like to be back in the workforce, but can’t. In summary, with fewer people in the workforce, worker safety concerns, the need for caregivers to remain at home, and much greater competition with other industries for workers are keeping workers away.

Judge Vacates CDC Eviction Moratorium. Last week a federal judge ruled that the Centers for Disease Control and Prevention (“CDC”) overstepped its authority when it issued a nationwide eviction moratorium. The moratorium (implemented under the Trump administration and extended to June 30 under President Biden), aims to protect the millions of Americans unable to pay rent amid the economic downturn triggered by the COVID-19 pandemic. As of March, 15% of adult renters have yet to catch up on payments, according to the Center on Budget and Policy Priorities. But it also created a backlog of rent owed to landlords, with estimates in the tens of billions. Landlords have repeatedly challenged the CDC order, saying it creates an undue financial burden. But Federal courts have issued conflicting rulings. In Wednesday’s decision, U.S. District Court Judge Dabney Friedrich, a Trump appointee, ruled that the CDC moratorium must be vacated. But landlords, don’t get too excited. The Department of Justice received a stay on the judge’s decision until an appeal has been decided by a higher court. So the Judge’s ruling does not take effect as yet. Regardless, many states and local governments have enacted their own eviction bans. For example, the judge’s ruling does not affect moratoriums in Los Angeles or California. In January, Governor Newsom extended until June 30 evictions protections for tenants affected by the pandemic. A similar Los Angeles rule gives tenants within city limits extra time to pay the rent they owe. Nevertheless, landlord groups welcomed the judge’s decision. The fundamental problem is there was no targeted help for mom-and-pop property owners who provide much of America’s affordable housing. For these landlords, mortgage, maintenance and tax bills have been piling up, putting them in danger of losing their property or being forced to sell to wealthier investors (hunting for distressed deals). Some property owners have argued that eviction bans leave them saddled with tenants who were delinquent even before the pandemic.

Buyers Squeezed in Bidding Frenzy as Prices Vault Up. In Lake Arrowhead’s 92352 ZIP code, sales of homes increased 117% last month from the year before, the biggest sales jumps in California, according to DQ News/CoreLogic. Prices rose almost 52% from the year before. So if you own a cabin in Lake Arrowhead congratulations! Within Southern California, fierce completion over a limited supply of homes fueled strong sales and drove prices to record highs during this year’s busy spring homebuying season, all but erasing the memory of the market’s coronavirus crash a year ago. The median price of a Southern California home — or the price at the midpoint of all sales — climbed 14.5% to a record $630,000 in March. It was the region’s seventh record median in the past 13 months. Los Angeles, Orange, Riverside, San Bernardino, Ventura and San Diego counties also posted record-high prices in March. In L.A. County, prices jumped $110,000, or 17.2%, from March 2020 to last month’s median of $750,000. Sales, meanwhile, rocketed to 24,885 transactions, up 32.2% from March 2020 to the second-highest level in almost three years — and the most for a March in 15 years. Much of today’s demand stems from the pandemic-induced desire for more indoor and outdoor space as well as millennials’ accelerated timeline for buying their first or larger home in a suburban location. Low mortgage rates also boosted a home shopper’s buying power. At the same time, the number of homes for sale remains at the lowest level in years. About one in five Southern California homes sold in 2020 was bought by an investor looking mainly for rental properties, and the pace of investment buying probably remains about the same this year. Unlike other parts of the nation (where institutional buyers like pension funds dominate) most of the investor competition in Southern California comes from smaller, mom and pop ventures because of the region’s high home prices. The number of investor purchases ranged from 18% in Orange County to 21% in Los Angeles and 23% in the Inland Empire (exceeding the share of investor sales during the speculative bubble years of 2005-08).

Flippers Selling to Owner-Occupants: While the broad outlines of the current inventory shortage are generally understood (i.e. there’s more demand for housing than there is supply), a number of lesser-understood factors are also making the situation more extreme. One of those factors, according to economists, is investors. In other words, landlords, flippers, startups and other entities come in and outcompete retail buyers for houses. However, a March survey of more than 200 rehab-and-resell investors from Auction.com found that rehabbing and flipping to owner-occupants was the primary investing strategy for the majority of respondents. The report additionally reveals that the vast majority of investment buyers (78 percent), purchased properties within driving distance of their own homes. Moreover, 87 percent purchased five or fewer properties in 2020 — which was up from 76 percent in 2019. Only 3 percent of survey respondents purchased more than 10 properties. The implication from these numbers is that despite a massive influx of venture capital in recent years (as well as the rise of professional iBuying startups such as Opendoor), a significant amount of investment is still taking place at the local, mom-and-pop level. Which, of course, is good news for all of us.

FAA Reports "Off the Charts" Spike in Unruly Passengers on Flights. If you were thinking it was finally time to catch a flight somewhere (anywhere), maybe think again. I say this because the Federal Aviation Administration is warning air travelers about what it describes as a dramatic increase in dangerous behavior aboard passenger airplanes. In a typical year, the FAA sees 100 to 150 formal cases of bad passenger behavior. But since the start of this year, the agency reports, the number of reported cases has jumped to 1,300! An even more remarkable number since the number of passengers remains below pre-pandemic levels. The behavior in question includes passengers refusing to wear masks, drinking excessively and engaging in physical or verbal assault (including what the agency describes as political intimidation and harassment of lawmakers). In Fort Lauderdale, Florida, for example, a fistfight broke out amid a dispute over mask-wearing. In Washington, D.C., a passenger was escorted off a flight after arguing with flight attendants over the mask rule. In recent days, Alaska Airlines banned an Alaska state senator for refusing to comply with mask requirements. In another case, a flight bound for Los Angeles was diverted to Denver and forced to make an emergency landing after a passenger allegedly tried to open an emergency exit. Sara Nelson, president of the Association of Flight Attendants union, said airline employees have reported a wide range of troubling incidents. “What we have seen on our planes is flight attendants being physically assaulted, pushed, choked,” Nelson said. “We had a passenger urinate. We had a passenger spit into the mouth of a child on board,” adding that the physical and verbal abuse that flight attendants have allegedly experienced this year has been “off the charts” compared to the last 20 years. The FAA is now taking a “zero-tolerance” approach to poor behavior: Unruly passengers face potential criminal charges, fines up to $35,000 or lifetime bans on certain airlines, and no more peanuts. So much for the friendly skies.

Tiny-House Village. Like so many of the parks in Los Angeles County’s San Fernando Valley, Alexandria Park is little more than a sliver of grassy land along a concrete-lipped embankment of a freeway onramp. Today, though, local officials are pointing to it with pride, as 103 tiny homes to be used as transitional housing for local homeless residents opened in the park. At a press conference last Thursday, where Alexandria Park was called the “biggest tiny-home village in the state,” city leaders milled about this mini-neighborhood, which has been laid out with the precision of a suburban subdivision, with a dozen or so homes painted in neon yellow, hot pink, and red diagonal stripes to create a disarmingly charming effect. It is the second such site in L.A.; another tiny-house village opened in February two miles to the southeast, and a third is under construction near Echo Park Lake, with several more to come. But unlike the other tiny-home villages, which are located in parking lots, the Alexandria village has retained its parklike attributes, including large mature shade trees. L.A. city councilmember Paul Krekorian said this project would serve as a citywide model for turning a public space that had been a “significant problem” into housing solutions. The village manages to strike a visual note somewhere between a summer camp and those temporary field offices that crop up for years at major construction sites, with modular buildings and portable trailers providing accessible shared bathrooms, showers, and laundry facilities; the all-important dog run (pets are welcome and will receive their own suite of services); and common spaces for meetings with caseworkers and meals (three per day are provided). But the tiny homes themselves were the one element the architects couldn’t spec: The eight-by-eight-foot shelter made by a Washington-based company named Pallet was preselected for them by city contractors. The buildings are made from insulated plastic and feature four windows and a pitched roof, a heater, an AC, lights, outlets, and two fold-down beds (although current COVID restrictions will keep them single-occupancy unless couples or family units want to share).

Pitcher Hope Trautwein Throws A Perfect Game. I don’t normally write about our “National Pastime” in these Economic Updates. But let me “catch” you up on the latest news. It’s a rare feat in baseball or softball to pitch a "perfect game." That happens when no opponent reaches base — not by a hit, or a fielding error, or a walk. But pitcher Hope Trautwein of the University of North Texas made history last Sunday by pitching a game more than perfect against the University of Arkansas. What she did was amazing! Through all seven innings, she struck out every single one of the 21 batters she faced! The NCAA said Trautwein, who hails from Pflugerville, Texas, is the first pitcher in NCAA Division I history to strikeout every single batter in a seven-inning perfect game. Every batter! It's also the first perfect game in the history of the North Texas team. Trautwein said her "poor team just had to watch me throw over and over and over again every inning. So it might have been boring for them. But I guess they were excited in the end." The perfect game was just another to add to Trautwein's long record of accomplishments. She's pitched two no-hitters before, in 2018 and 2019. And Sunday was the third time she's struck out 21 batters in a single game, her team noted. As for what to call the feat — the coach has an idea. "I mean Hope did it, so maybe we call it a Hope-a-Dope." Congratulations Hope! Hey Dodgers, are you listening?

This Week. Looking ahead, investors will continue watching global Covid case counts and increasing vaccine distribution. Beyond that, the Bureau of Labor Statistics will report the Consumer Price Index (CPI) on Wednesday (5/12). CPI is a widely followed monthly inflation report that looks at the price change for goods and services. Producers Price Index will be released by the same BLS on Thursday (5/13). Retail Sales will be released on Friday (5/14) by the Census Bureau. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of growth.

Weekly Change:
10-year Treasuries: Fell 0.07 bps
Dow Jones Aver: Rose 800 points
NASDAQ: Fell 100 points

Calendar:
Wednesday, 5/12: Consumer Price Index
Thursday, 5/13: Producers Price Index
Friday, 5/14: Retail Sales


For further information, comments, and questions;

Lloyd Segal
President