Economic Update (July 6, 2020)

[Lloyd Segal]

Economic Update
(Monday, July 6, 2020)

The big economic news this week is the second straight employment report which surpassed expectations. Nearly all of the data indicates that the recovery from the partial shutdown of our economy (due to the pandemic) has been faster than anticipated. But with the sudden surge in viral infections and re-closings of businesses we are forced to take a second look this week. Let’s see why…

Covid-19 increasing. I understand the reasons for reopening the economy, but as I've said before, if you don't solve the biology, the economy won't recover. Shockingly, daily infections are increasing everywhere, especially in California. And our very own Los Angeles County now leads the country in Covid-19 infections! Dr. Erin Bromage is a professor at University of Massachusetts – Dartmouth, where he writes and teaches epidemiology and the ecology of infectious diseases. Dr. Bromage explains, in the simplest of terms, that it takes approximately 1000 SARS-CoV2 viral particles to infect a person. That infection comes through: (1) a sneeze (30,000 droplets at 200 MPH), (2) a cough (3,000 droplets at 50 MPH), (3) a breath (50 droplets at low velocity), or (4) a touch (i.e. public restrooms). And whether you get infected depends on: (a) volume, (b) people, (c) airflow, and (4) time. Further, whether you are inside or outside is also relevant during this pandemic. For example, if you’re walking outside (airflow) and pass someone (people) you may get exposed to viral particles (volume), but there is no time (time), so infection is unlikely. Further, the effects of sunlight, heat, and humidity on viral survival all serve to minimize the risks outside. In contrast, indoor facilities, including restaurants, workplaces, offices, choir, indoor sports, birthday parties, prisons, religious ceremonies, funerals, and other large gatherings pose a serious challenge. These are the major sources where infections occur. But what do all of these have in common? In these indoor facilities, you have people, volume, limited airflow, and extended time in an enclosed space. This is why, for example, when you’re shopping at your local supermarket, you have a low risk of infection because you’re not in the market very long. As opposed to that grocery worker who has a very high risk of infection (because of his extended time inside the market). Of course, social distancing helps in all situations. It also goes without saying at this point, wear your facemasks, wash your hands often, and stop touching your damn face! It all minimizes your risk and the risk to others. Please do your part because it helps all of us.

Unemployment Rate. The unemployment rate dropped to 11.1% in June from 13.3% in May. That's still very high by historical standards, but much lower than the peak of 14.7% in April. Even with the June gains, the jobless rate overall stands well above the 3.5% rate in February (do you even remember February?) and remains higher than at any time since the Bureau of Labor Statistics records began in 1948. Keep in mind, 11.1% may not sound like much to our current Administration, but 11.1% means that over 15 million people are out of work in our country, including someone you know. Staggering numbers! A breakdown of the report is even more troubling. Black unemployment was 15.4% compared to 14.5% for Latinos, 13.8% for Asians, and 10.1% for whites. The gap between men and women narrowed to only 1 point. The Bureau also acknowledged that the rate might actually be at least 1% higher because of on-going complications with the survey collection. The labor force (people working or looking for work) increased by 1.7 million in June after a similar gain in May, although it's still down substantially from earlier this year. So the wild ride continues. After plummeting at the fastest pace ever in April, payrolls rose at the fastest pace ever in May and have done so again in June, adding 4.8 million jobs for the month. The labor market has a long road ahead to be fully-healed. The job losses in April were concentrated among lower-paid workers, so average hourly earnings rose because those still working typically made more money. Now, as lower-paid workers are rehired, their pay levels reduce average earnings. As I said last month, the unemployment rate will probably remain at unusually high levels for at least the next few months. Just in time for November elections. A full recovery is still a long way off, but there should be no doubt at this point that the recovery has started. The problem now is that the Labor Department’s numbers were mostly calculated during the first half of June and before the states started shutting down again. So July could be dramatically different.

Weekly Jobless Claims. New applications for traditional jobless benefits continued a slow and steady descent in late June, moving in the right direction but at a slow pace. It shows the labor market is still struggling to recover after the biggest wave of layoffs in American history. Initial jobless claims, a rough gauge of layoffs, dipped to 1.43 million in the seven days ended June 27 down from 1.48 million the prior week, the Labor Department reports. An additional 839,563 people applied for benefits last week through a temporary federal-relief program. New jobless claims have been receding gradually as Americans return to work and the economy reopens. Yet millions still haven’t been able to go back to their old jobs and some have few prospects of ever doing so, especially in industries such as travel and tourism. More than 50 million new claims have been filed since mid-March. (Before the crisis the states processed fewer than 225,000 claims a week.) The number of people receiving traditional jobless benefits, meanwhile, rose 59,000 in the week ended June 20 to 19.29 million. These are known as “continuing claims.” This is the first increase after three straight weekly declines, and could be a sign that progress in the labor market is stalling. What comes next is less easy to determine, especially after a fresh outbreak of coronavirus cases in Texas, Florida and California, that were among to first to relax restrictions. This report confirms that while activity may have bounced back in the first phase of the recovery, the employment rebound has been lagging.

Pending Home Sales. The index of pending home sales soared 44.3% in May (compared with April), the National Association of Realtors reports. The monthly increase was the largest ever in its history! Yes, the largest in history! This is a spectacular recovery for contract signings, and demonstrates the resiliency of American consumers and their desire for homeownership. The index measures real-estate transactions for previously-owned homes where a contract was signed but the sale had not yet closed (i.e. pending in escrow). Compared with a year ago, contract signings are still down 5.1% (a sign of how steep the declines in March and April). Every region saw a monthly increase in pending home sales, led by the West (up 56%). The rebound in pending sales means that there likely won’t be a repeat of May’s significant downturn in existing-home sales for the coming months. It appears that home buyers are eager to re-enter the housing market. As such, the typically busy spring home-buying seasons appears to have been delayed for most buyers rather than foregone outright. Still, buyers will face trouble finding homes to buy. Why? Because sellers are still reluctant to list their homes indicating their concerns with the coronavirus and the economy. For buyers, it means they can expect more competition and higher prices for the limited properties that are available. But overall good news for investor-sellers.

Mortgage Rates. Could average mortgage rates drop below the 3% mark? If the recent trend continues, that’s a distinct possibility. The 30-year fixed-rate mortgage averages 3.07% this week, down six basis points from last week, Freddie Mac reports. In comparison, these loans had an average rate of 3.75% a year ago. The 15-year fixed-rate mortgage dropped three basis points to an average of 2.56%, while the 5-year Treasury-indexed hybrid adjustable-rate mortgage fell by eight basis points to 3%. The previous record low for the benchmark 30-year mortgage was set just two weeks ago at 3.13%. Mortgage rates have dropped to historic lows multiple times this year as the coronavirus pandemic has caused turmoil in the economy. The decline in rates come as investors reacted to the surge in COVID cases and the Federal Reserve’s concerned outlook for economic recovery. The drop comes even though there were some positive indicators about the state of the economy, including the rise in pending home sales and consumer confidence. Mortgage rates continue to slowly drift downward with a distinct possibility that the average 30-year fixed-rate mortgage could dip below 3 percent later this year. The trajectory of rates will of course depend on the direction the recovery from the pandemic takes. Many states across the country have seen a surge in COVID-19 cases recently. Further, lenders have raised their underwriting standards in the face of the economic downturn, which could limit how much of a stimulation interest rates will have on the housing market.

Home Price Appreciation. Home-price appreciation maintained a steady pace in April, despite the spread of the coronavirus across the U.S., according to the CoreLogic Case-Shiller 20-City Price Index. The Index posted a 4% year-over-year gain in April, up from 3.9% the previous month. Because of the two-month lag in the data, this was the first report that accounted for the full effects of the coronavirus pandemic on the housing market. Phoenix continued to lead the country with an 8.8% annual price gain in April. Seattle was next, with a 7.3% gain, followed by Minneapolis, where home prices rose 6.4% over the past year. This is, so far, the only directly visible impact of COVID-19 on the Case-Shiller Indices. The price trend that was in place pre-pandemic seems so far to be undisturbed, at least at the national level. The coronavirus pandemic hasn’t put downward pressure on home prices, yet. As further support, the Federal Housing Finance Agency released its monthly home price index, which similarly showed prices increasing on a monthly and yearly basis in April nationwide. But whether this trend will continue depends largely on the trajectory of the pandemic. Until now, home-buying demand has remained high relative to a limited supply of homes available for sale. As states began reopening in May, home sales rebounded across much of the country. But many of the states that reopened early are now seeing sharp upticks in the number of people testing positive for COVID-19. As a result, states have had to reverse some of their reopening plans to slow the spread of the virus, and it’s not clear yet what effect that will have on consumer confidence or the real estate market. In the interim, housing is benefiting from low mortgage rates, stronger demand for larger square footage (as more and more people work from home), and a desire to move away from crowded cities to the suburbs to avoid exposure to the coronavirus.

Commercial Update. The commercial real estate market hasn’t stopped since stay-at-home orders were enacted in Los Angeles in mid-March. But it has slowed dramatically! While there have been some sizable sales during this period, most of those were already in the works prior to the pandemic. In May, $332 million of retail, office, industrial and apartment properties sold in Los Angeles County, according to NKF data. Of course, that’s a fraction compared to the $1.66 billion in sales in May, 2019. But there were some big deals. For example, Patrick Soon-Shiong, owner of the LA Times and one of the richest men in L.A., purchased the St. Vincent Medical Center and adjacent buildings for $135 million. The biggest multifamily sales during the coronavirus lockdown were a leasehold interest in the 438-unit One Santa Fe downtown and a recapitalization of a leasehold interest in the 449-unit Wilshire Vermont in Koreatown. Further, iconic properties like The Forum (in Inglewood) sold in the midst of stay-at-home orders for $400 million. We’re going to see the Westside remain a hotbed of activity down to El Segundo, where there’s a lot of tech and aerospace activity. Experts say that industrial properties remain the most in-demand product type in the market. Many companies are looking at keeping larger amounts of inventory on hand and some businesses will likely bring manufacturing back to the United States, all benefiting industrial real estate. Since March, roughly 18 million square feet of industrial real estate sold in L.A. County. That’s up from 15 million square feet during the same period in 2019. The other property types doing well is medical office buildings. Several medical buildings have sold since Covid-19 arrived. Overall commercial sales are expected to gradually rebound later this year.

Gold Futures. Gold futures settled above $1,800 an ounce on Tuesday, the first time since 2011. Why, you may be asking, is this important to real estate investors? Because! Because prices for gold continue to increase when there is uncertainty over a recovery in our economy. Gold is considered a “haven metal.” In other words, when people are uncertain about our future, they seek security by investing in gold. Gold is ending the quarter 12.8% higher and trading up by more than 18% for the first half of the year. So what does that tell you? It tells you that with a potent combination of ongoing global monetary stimulus and COVID-19 uncertainty, there is catalyst in the market for the price of gold to continue increasing as our economy struggles to regain its footing.

ISM Manufacturing Index. Time to discuss the always exciting ISM Manufacturing Index, which rose to 52.6 in June (Levels higher than 50 signal expansion; levels below 50 signal contraction.) The Institute of Supply Management monthly index (comprised of 18 separate indexes) is based upon a national survey of 30,000 purchasing managers in its manufacturing sector. It is considered one of the most reliable barometers of the health of the US economy going forward. So pay close attention. Specifically, the new orders index rose to 56.4 from 31.8 in May, while the production index increased to 57.3 from 33.2. The employment index moved higher to 42.1 from 32.1. The supplier deliveries index declined to 56.9 from 68.0 in May. The prices paid index rose to 51.3 in June from 40.8 in May. The largest monthly increase in more than forty years brought the ISM manufacturing index back into expansion territory in June. Granted, we are rising off a very low bar set during the shelter-in-place orders, but data across indicators continue to show the recession is behind us and the recovery has begun. Manufacturing growth in June was broad-based, with thirteen of eighteen industries reporting expansion while four reported contraction (one reported no change). And the comments from survey respondents were largely positive, peppered with phrases like "orders have picked up," "sales are increasing," and "order books are rebuilding." Some industries, such as transportation equipment, remain depressed, as social distancing measures at factories are slowing a return to normal production. While others, like food, beverage, and tobacco products, have seen a pickup in sales as consumers have shifted their purchasing habits during these unusual times.

Apple Stores. Hope you enjoy shopping online because Apple just announced that it is closing 30 of its retail stores in the U.S. Citing a spike in the coronavirus pandemic, Apple has now closed 77 stores nationwide. The stores affected are in eleven states, including California. "Due to current COVID-19 conditions in some of the communities we serve, we are temporarily closing stores in these areas," an Apple spokesperson said in a statement. "We take this step with an abundance of caution as we closely monitor the situation and we look forward to having our teams and customers back as soon as possible." Apple has 271 stores in the U.S., including 21 stores in L.A. County.

Fauci for President. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases for three decades, one of the leading experts on pandemics in the U.S., and the good neighbor you’ve always wanted, dished out some very harsh words while speaking at the Senate Health, Education, Labor and Pensions Committee in Washington, D.C. Fauci said SARS-CoV-2 will continue to spread unless everyone dramatically changes their game plan. Fauci focused on three main failings by the public and authorities: (1) many states have reopened too quickly, (2) people are not abiding by rules of social distancing and facemasking, and (3) the authorities need to do a better job at contact tracing (where individuals who have been in touch with those who test positive with COVID-19 are contacted and told to stay home). The COVID-19 pandemic has infected 2,534,981 people in the U.S. and claimed the lives of 129,545. Fauci added, “When you have community spread, it’s insidious, because there are so many people in the community who are infected, but asymptomatic. It makes it extremely problematic to do efficient contact tracing, because most of the people who are infected don’t even know they’re infected. So how do you do contact tracing when someone doesn’t have any symptoms?” In states where coronavirus spread is surging, like Arizona, Texas, Florida and California, Fauci said, “20% to 40% of the people who are infected don’t have any symptoms. So the standard, classic paradigm of identification, isolation, contact tracing doesn’t work no matter how good you are, because you don’t know who you’re tracing. The coronavirus pandemic is not even close to being over and the worst is still to come.” Words of encouragement from Dr. Fauci. The pandemic has brought out the best and the worst of humanity.

This Week. Looking ahead, investors will continue to watch for news about medical advances, vaccines, government stimulus programs, Fed monetary actions, new coronavirus outbreaks, and plans for re-opening (and closing) our economy. Beyond that, it will a very light week for economic data. The ISM national services index will be released today (7/06). The Producers Price Index will be released this Friday (7/10).

LA County Round-Up:
Total houses sold: 3,167 (down 52% from last year)
Median days on market: 44 days (down 4% from last year)
Median sales price: $635,000 (up 1% from last year)
Median price per sq. ft: $433 (up 3% from last year)
Sold above listing price: 39% (up 1% from last year)
Inventory supply: 4.4 months (up 47% from last month)

Calendar:
Monday, July 6: ISM Services
Tuesday, July 7: Job Openings
Friday, July 10: Producers Price Index

Weekly Change:
10-year Treasury: rose 0.02
Dow Jones: rose 900 points
NASDAQ: rose 500 points