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Lloyd Segal
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  • Real Estate Coach
  • Los Angeles, CA
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Economic Update (June 15, 2020)

Lloyd Segal
Pro Member
  • Real Estate Coach
  • Los Angeles, CA
Posted Jun 15 2020, 11:30

Economic Update
(Monday, June 15, 2020)

It’s official: The longest expansion in U.S. history ended in February as the economy fell into a deep recession, according to the National Bureau of Economic Research (“NBER”). Our unprecedented 128-month expansion — the longest dating to 1854 — came to a halt in February. Of course, the announcement comes as no surprise. The coronavirus pandemic struck the U.S hard in March and led to a nationwide lockdown that shuttered most of the economy. The unemployment rate surged to the highest level on record at 14.7% (and likely 16.3%) as more than 45 million workers filed for unemployment benefits. Our economy has fallen into such a deep recession that some forecasters predict a record 40% decline in gross domestic product in the second quarter. A recession is typically defined as two straight quarters of negative GDP. But the NBER has leeway to take into account the depth of a contraction, how quickly it occurs, and how much of the economy is affected. Based on that approach, the group said, the economy entered a recession in March. Nevertheless, with all states reopening again, the economy has already started to recover, as shown below. BLM!

Federal Reserve. The Federal Open Market Committee announced that it doesn’t expect to lift short-term rates through the end of 2022. The central bank’s Committee also said it will keep buying Treasurys and mortgage-backed securities (“MBS”), at least at the current pace, which should be great for keeping mortgage rates low. The central bank has already purchased over $2 trillion of Treasurys and MBS since mid-March. The Fed will buy $20 billion in Treasurys this week and up to $22.5 billion in MBSs to stimulate the economy. In a statement, the Fed said again it would use its “full range of tools” to support the economy:

“The ongoing public health crisis will weigh heavily on economic
activity, employment, and inflation in the near term, and poses
considerable risks to the economic outlook over the medium term.
In light of these developments, the Committee decided to maintain
the target range for the federal funds rate at 0 to 1/4 percent. The
Committee expects to maintain this target range until it is confident
that the economy has weathered recent events and is on track to
achieve its maximum employment and price stability goals.”

The Fed cut its benchmark interest rate, the Fed Funds Rate, to a range of 0-0.25% in mid-March as the economy went into lockdown. As you can see above, in last week’s policy statement, the central bank once again pledged to keep interest rates near zero until the economy “is on track” for a full recovery. The Fed left unchanged its long-range forecasts for GDP, unemployment and PCE inflation. Further, in their statement, the Fed noted that financial conditions have improved, in part because of the Fed’s actions. The Fed also repeated that the coronavirus pandemic poses “a considerable risk” to the economic outlook over the next 18 months or more.

Mortgage Rates. We’re all real estate investors and pre-occupied with interest rates. As such, you’ll be pleased to learn that mortgage rates continue to hover near all-time lows. And the Federal Reserve’s approach to the economic recovery (see previous paragraph) might keep them lower for months and years to come. The 30-year fixed-rate mortgage average is 3.21% this week, up three basis points from a week earlier, according to Freddie Mac. Meanwhile, the 15-year fixed-rate mortgage and the 5-year Treasury-indexed hybrid adjustable rate mortgage are both unchanged from last week at 2.62% and 3.1% respectively. Mortgage rates hit a record low at the end of May, when the 30-year rate dropped to 3.15%. It was the third time that rates hit an all-time low this crazy C-R-A-Z-Y year. The Fed controls short-term interest rates, so the policy won’t directly impact mortgage rates. Instead, mortgage rates roughly track the direction of long-term bond yields, including the 10-year Treasury note. The yield on the 10-year note (0.673%) initially fell in response to the Fed’s announcement. More notably for the mortgage market, Powell also said the Fed will continue buying mortgage-backed securitiesat least at the current pace.” That will continue to pump liquidity into the mortgage market, which lenders will use to continue to offer low rates to attract borrowers. With no end in sight for this Fed policy, it’s likely that mortgage rates are poised to remain low for a while.

Funky Unemployment Rate. Nobody believes the unemployment rate in the U.S. fell to 13.3% in May (or that it reflects the true state of the labor market), not even the government bean-counters who came up with the number! So what is the real jobless rate? Well, no one knows for sure, given the unprecedented scale of economic destruction caused by the coronavius pandemic, but economists guess it’s closer to 20%. The decline in the jobless rate delighted the Trump White House but confounded economists. Economists predicted the jobless rate would surge to 19% or higher. What happened? Government and private-sector economists offer a handful of explanations. For starters, the Bureau of Labor Statistics said the unemployment rate likely would have been three points higher (16.3%) had all the households surveyed answered the government’s monthly questionnaire correctly. What may have also contributed to a drop in the official unemployment rate is the government’s huge rescue package for small businesses (“Paycheck Protection Program”) that gives them forgivable loans if they keep paying workers regardless of whether they are actually working. The way the program is structured, millions of people who work at small businesses “would have been paid even if they didn’t work, meaning the BLS would have counted them employed.” Another factor that’s suppressing the unemployment rate is a big decline in the number of people who say they are part of the labor force — the so-called “participation rate.” Nearly 6 million people have simply stopped looking for work with so few jobs available during the pandemic, the May employment report showed. Add it all up and most economists think the jobless rate is closer to 20%. A broader and more reliable measure of unemployment, known as the U6 rate, stood at 21.2% in May. It includes people who can only find part-time work and those who’ve gotten too discouraged to look for work in the past month.

Weekly Jobless Claims. Some 1.54 million Americans applied for state unemployment insurance in early June (and more than 700,000 sought compensation though an emergency federal program), reflecting a tenth consecutive weekly decline in job losses from the coronavirus, but a still-worrisome number of layoffs, according to the Labor Department. New applications for benefits have dwindled since peaking at almost 7 million in late March, but they are still extremely high. (Before the pandemic paralyzed the U.S. economy in March, new claims were running in the low 200,000s and sat near a 50-year low.) In a good sign that more workers are returning to their jobs, the number of people actually collecting traditional jobless benefits fell slightly last week. The Big Picture is that more than 47 million new jobless claims have been filed since the crisis took root three months ago, an unfathomable number that shows just how much devastation COVID-19 has caused to millions of Americans and the U.S. economy. The huge number of new claims, however, also overstates the damage. Millions of people have been returning to work as the economy reopens and there’s likely been a lot of duplicative claims during the crisis owing to massive technology snafus at overwhelmed state employment offices. Still, the unemployment rate sits at a modern record high. Many people are likely to find they don’t have a job to return to in the coming months, especially in businesses that rely on dense clusters of customers such as travel, entertainment and dining out. In other words, the worst in the labor market appears to be over, but it is still in terrible condition from the viral recession.

Consumer Price Index. The Consumer Price Index (“CPI”) declined only 0.1% in May, according to the Bureau of Labor Statistics, following back-to-back months of large declines. Gasoline prices (-3.5%), motor vehicle insurance (-8.9%) and apparel (-2.3%) lead the decline in the CPI, and were key contributors to April's decline as well. And as you’ve noticed in your local Ralph’s, food prices rose 0.7% in May, as costs for meats, poultry, fish, and eggs continue to feel the impact from the shutdown of plants that were hotspots amid the COVID outbreak. The Beef Index alone surged 10.8% in May, the largest increase for that index since recording began back in 1947! Strip out the (largely offsetting) impacts from the typically volatile food and energy sectors, and "core" prices still declined 0.1% in May. This is the third consecutive month of decline in core prices, something we have never seen in the CPI's records (dating back to 1957). Businesses continue to operate under reduced capacity, which looks likely to continue for the next few months. However, we expect prices to move back toward positive monthly readings in the months ahead, and ultimately rise towards the 2% - 3% annual inflation pace (that was in effect before the Coronavirus wreaked havoc on our economy). Even with the declines over the last three months, consumer prices are still up 0.1% in the past year, though that is a marked slowdown versus the upward trend in inflation prior to the Coronavirus. The Good News: The economic recovery has begun, and the data over the coming months will show us exactly how quickly the return to "normal" will be taking place.

Latest Vaccine News. Moderna Inc. said it has finalized the Phase 3 study protocol for its COVID-19 vaccine candidate. Although its Phase 2 trial, which began dosing patients less than two weeks ago, has not been completed. Moderna had previously said it expects the experimental vaccine to move into Phase 3 trials in July if it is successful in the mid-stage study. But I guess they couldn’t wait any longer given the current pandemic. The plans for the Phase 3 trial include a randomized, placebo-controlled study with about 30,000 participants in the U.S. The primary endpoint will test whether a 100-microgram dose of the vaccine prevents symptomatic COVID-19 disease. The secondary endpoints will evaluate if the vaccine candidate can prevent severe forms of COVID-19 and infection from the virus at all. Moderna is ahead of the pack of drug companies and biotechs attempting to develop a COVID-19 vaccine in record time. Moderna’s July trial is expected to be followed in August by a vaccine that is being co-developed by Oxford University and U.K. drug maker AstraZeneca. In September, Johnson & Johnson will launch a trial involving its vaccine candidate. Currently, there are over 100 different vaccine trials going on around the world.

The Homeless Population. If you’ve driven under a freeway overpass recently, you already know the homeless population in Los Angeles is out of control. Well, the Los Angeles Homeless Services Authority made it official on Friday. Their annual report estimates the county’s homeless population at 66,433, up nearly 13% from the prior year, the second consecutive double-digit increase. The estimate for the city was 41,290, up almost 14% and only slightly less than last year’s increase of 16%. In other words, despite hundreds of millions of dollars spent to curb homelessness, the number of people without a home in Los Angeles grew last year for the fifth time in the last six years. And that was before the pandemic! The double-digit increases reported in both the city and county only reflected the status as of January. It doesn’t take into account the almost 600,000 people that, since January, and even just since May, have lost their jobs due to COVID-19. Specifically, the homeless population continues to be about two-thirds male. The racial dynamics of homelessness also continue to be stark. Black residents account for 8% of the population in Los Angeles County, but 34% of those who are homeless. That structural racism means that Black men and women are four times more likely to experience homelessness. There was little growth in the population of homeless veterans, but both seniors and people aged 18 to 24 increased by 20% from the prior year. One worrisome sign was the increase of family homelessness, which saw a jump of nearly 46% from 8,800 to 12,800 family members living without a home. The lack of a living wage and high rents magnify other challenges that families experiencing homelessness face. Overall, these dismal numbers highlight the continuing incapacity of our region’s expanding homeless services institutions to get their arms around interwoven crises of affordable housing, income inequality, and mental health, that are playing out on our streets.

Starbucks. OK, you can return to Starbucks! Starbucks Corporation has announced that although it expects losses in the fiscal third-quarter, it has seen sales improvements around the world as cities open up, and is forecasting a full-year profit. Sales are expected to fall as a result of the COVID-19 pandemic from 6.2 billion last year to $3.2 billion this year, which is still a lot of caffeine. In the U.S., 91% of stores were open by the end of May, though many were limited to takeaway orders and had reduced hours. Same-store sales were down 32% the last week of May, also showing continued improvement, after dropping 63% in April. Sales have overwhelmingly come through the drive-through window and mobile-order-and-pay function, the company said. As you’ve probably noticed, all tables and chairs have been removed from stores, so there is no in-store socializing anymore. Starbucks still expects to open 300 new stores in the U.S. in fiscal 2020, down from 600 originally. Starbucks will also include a new store format designed for “on-the-go” urban markets. They’ll be located near traditional stores that include seating, to reduce crowding. These new “Starbucks PickUp” locations have been tested in New York City and Toronto and are designed for mobile orders. Before the coronavirus pandemic, about 80% of transactions at U.S. company-owned stores were takeaway anyway, so this new format should be successful. I can’t fully espresso my excitement!

Retail Tenants. Marred by tepid consumer interest, countywide protests, curfews and looting, the retail reopening in Los Angeles after the Covid-19 shutdown has had a rough start to say the least. But local merchants and industry experts are hopeful that recent difficulties are mostly behind them. Understandably, it’s incredibly scary for retailers and restaurants out there. There’s a lot of anxiety as to whether customers are going to come back and whether they’re going to spend like they used to. My personal belief is that as a society globally, and especially in America, we’re very resilient, and we have thankfully, a very short memory (in a good way). I believe customers will absolutely come back, and that mall traffic, street traffic and shopping centers traffic will eventually resume at a normal pace. But I don’t know if that’s six months from now, 18 months from now, or two years from now. Nevertheless, for many merchants already facing lost revenue due to the pandemic and the impact of civil unrest, paying the rent poses a major challenge. Landlords are offering temporary reprieves, with the full amount to be repaid by August. But with unemployment rates hovering near 20% in LA County and little to no tourism traffic, I am worried it will be difficult for tenants to meet that deadline. This summer they’re just trying to keep the businesses afloat. Normally, Los Angeles gets 50 million tourists a year, mostly in the summer. That’s a major part of their business. It’s unbelievable how much revenue tourists bring to our city in the summer and those tourists are only now slowly returning. So this summer will be a challenge. For the most part, I see a lot of negotiations going on. It’s not always exactly what either party wants, but they are trying to come up with solutions that are beneficial to both sides. In some cases, landlords are very resistant. And then I’ve seen other ownership groups that have what I feel is the right mentality, which is a very partnership-oriented mentality towards retail tenants to get through these difficult times. Bottom Line: Landlords and tenants must work together as our economy slowly recovers.

Treasure Chest Found. A decade-long search for an infamous treasure hidden deep in the Rocky Mountains that led to multiple people’s deaths is finally over! Thank God! Forrest Fenn, an eccentric New Mexican art dealer, revealed on Sunday that his famed treasure was found and confirmed by NBC News. The treasure, placed in a 13th-century Romanesque bronze chest, was hidden in 2009 with an estimated $2 million of gold, jewelry and gems. Tucked “somewhere in the mountains north of Santa Fe,” the bounty was either in New Mexico, Colorado, Wyoming or Montana. “It was under a canopy of stars in the lush, forested vegetation of the Rocky Mountains and had not moved from the spot where I hid it more than 10 years ago,” Fenn wrote. The art dealer left searchers nine clues in his memoir to help them find the treasure and said the hunt was meant to “get people outside and explore nature.” But the hints weren’t enough to keep many of them safe. In the decade between its hiding and discovery, four people died in their search. So much for exploring nature! In fact, in 2017, New Mexico urged people to stop looking for the treasure after someone died in the search. And another searcher died as recently as March of this year. Hey, by the way, if you’re the lucky person that found the treasure (and you’re reading this Economic Update), please give me a call. I have an incredible deal in Downey you’re going to love…

Monday Morning Quarterback. The recession that started in March was the sharpest downturn since the Great Depression. As it turns out, it may also be the shortest. Last week's employment report should leave little doubt that the US economy has already hit bottom and is starting to recover. Nonfarm payrolls rose 2.5 million, and the unemployment rate dropped to 13.3% (or 16.3% depending on who you ask). This doesn't mean our economy is fully recovered, or even close; a full recovery is going to take years. But look for more positive numbers from here on out, including this week's reports on retail sales, industrial production, and housing starts. Some analysts have been saying that the unique nature of the economic downturn has made the unemployment rate unreliable, because, for example, PPP loans have allowed furloughed workers to be paid, even though they aren't working. So technically, they are unemployed. Counting these workers as unemployed would have put the jobless rate at 16.3% in May (versus the official report of 13.3%). Another piece of evidence supporting a recovery is that tax receipts look better. Every day the Treasury Department releases figures on various categories of tax receipts. In the past five workdays, the Treasury collected $56.8 billion individual income. So thank you for finally paying your taxes (you know who you are). And payroll taxes withheld from paychecks was up 11.8%. A month ago, in early May, these receipts were up 7.1%. This acceleration also signals the economy has turned a corner. Likewise, corporate profits will be down substantially in the second quarter, but should recover strongly in the several quarters thereafter. Meanwhile, the money supply is growing rapidly, and the Federal Reserve is prepared to keep monetary policy loose for the foreseeable future. The US has gone through tremendous turmoil so far this year, with a response to COVID-19 that included unprecedented widespread government-mandated economic shutdowns, followed by a combination of legitimate protests, riots, and looting. No one knows for sure what the second half will bring, much less 2021 and beyond. But, as in the past, those who have faith in our future will be rewarded.


This week
. Looking ahead, investors will continue to watch for news about medical advances, vaccines, government stimulus programs, street demonstrations, and the reopening of our economy. Beyond that, Retail Sales will be released tomorrow, Tuesday (6/16). Since consumer spending accounts for about 70% of all economic activity in the U.S., the retail sales data is a key indicator of financial conditions. Housing Starts will come out this Wednesday (6/17), and new jobless claims this Thursday (6/18)..

Calendar:

Tuesday:

6/16

Retail Sales

Wednesday:

6/17

Housing Starts

Thursday:

6/18

Jobless Claims

Weekly Change:

10yr Treasury: fell 0.20

Dow: fell 1,500 points

NASDAQ: fell 200 points