Economic Update
(Monday, February 22, 2021)

The minutes from the Federal Open Market Committee’s Jan. 26-27 meeting, released last week (after their customary three-week delay), show that members of the Committee are committed to using the full range of tools to support our economy. Federal Reserve officials, citing the uncertain course of the pandemic and a late-year economic slowdown, said they expect to keep short-term interest rates near zero and maintain $120 billion in monthly bond purchases until they conclude employment and inflation achieve their objectives. The Committee aims to allow inflation to run moderately above 2% for some time so that inflation averages 2% overall, according to their minutes. The minutes also disclosed that most members expect that the stimulus late last year, the likelihood of additional fiscal support in March, and continued progress in vaccinations will lead to a sizable boost in economic activity. Fortunately for investors, yields on the 10-year Treasury note, at 1.291%, remained steady after the minutes were released. So with vaccinations increasing and a second round of stimulus nearing, let’s wash our hands, put on our face masks (yes, you!), social distance, and get down into the weeds…

Retail Sales Higher in January. Consumers flocked to spend their stimulus checks in January, sending retail sales for the month up 5.3%, a good start to 2021, according to the U.S. Census Bureau. Excluding autos, sales rose 5.9%, also far ahead of the 1% estimate in a display of unexpected strength from consumers. A month after Congress approved a $900 billion additional stimulus package on top of the $2.2 trillion approved earlier in 2020 to counteract the Covid-19 impact, shoppers were armed with $600 checks they used to buy a variety of goods (that they probably really didn’t need). The jump in consumer spending came at a time when expectations for growth in the early part of 2021 were muted as our economy continues to shake off the pandemic-induced slowdown. Spending gains were broad-based, with every major category showing increases. Electronics and appliances saw the biggest increase, up 14.7% for the month, while furniture and home furnishing stores were up 12%, and online spending at non-store retailers jumped 11%. Even food and drinking places, which suffered the worst during the pandemic, saw a 6.9% rise. However, bars continued to see damage, with sales down 16.6%. Clothing and accessories were also off 11.1% while electronics and appliances saw a 3.5% decline. While most economists see the year is off to a slow start, they nevertheless expect the pace to pick up later in the year as vaccination efforts spread and the Covid-19 albatross fades.

Housing Starts Decline. Following four straight gains (and a December reading that marked a fourteen-year high), housing starts took a breather in January, coming in 6.0% below the December mark and down 2.3% from a year ago. All of the decline in starts in January was due to a slowdown in single-family housing starts, while multi-family units increased. Worse, given the hard winter freeze currently enveloping much of our country (our prayers are with you Houston!), look for a further decline in housing starts when we get the February data a month from now. However, as we look towards the spring, anticipate a return to the upward trend in housing starts, led by single-family homes. Why the confidence? Just look at housing permits to build single-family homes. They are up 29.9% from a year ago and the highest since 2006! This is important because each single-family unit adds much more to economic activity than each multi-family unit. Accordingly, look for both overall and single-family starts to post even higher numbers in 2021. My positive outlook is reinforced by yesterday's NAHB index, a gauge of homebuilder sentiment, which rose to 84 in February from 83 in January, remaining within throwing distance of its record high of 90. These signs all suggest housing will provide a substantive tailwind to our economic recovery in the foreseeable future.

Existing Home Sales Rise in January. U.S. existing home sales inched up 0.6% to a seasonally-adjusted annual rate of 6.69 million, the National Association of Realtors reports. Compared with a year ago, home sales are up a staggering 23.7%. Economists polled by The Wall Street Journal had forecast that existing home sales would fall to a median rate of 6.66 million. So what happened? Low inventory happened! In fact, low inventory continues to bedevil the sector. The inventory of homes for sale fell to a record low 1.04 million units by the end of January. That’s a 25.7% decline year-over-year! The market has only a 1.9-month supply of homes for sales. (A 6-month supply is considered a sign of a balanced market.) “Home sales continue to ascend in the first month of the year, as buyers quickly snatched up virtually every new listing coming on the market. Sales easily could have been 20% higher if there had been more inventory and more choices," said Lawrence Yun, NAR's hopelessly optimistic chief economist. Economists think that low mortgage rates will continue to boost housing demand in the coming months. The market is also fueled by Buyers looking for more room and more remote locations in the wake of the pandemic. Meanwhile, the national median existing-home price rose to $303,900 in January, up 14.1% from a year ago. In Los Angeles, the median price is just under $700,000.00.

Mortgage Rates Soar to Highest Level in Months. Mortgage rates lurched to the highest level since mid-November this week — a worrying sign for investors navigating a market defined by fast-rising house prices and low inventory. The 30-year fixed-rate mortgage averaged 2.81% for the week ending Feb. 18, up eight basis points from the week prior, Freddie Mac reports. The increase comes after three weeks where the 30-year mortgage rate stayed at 2.73%. The 15-year fixed-rate mortgage rose two basis points to an average of 2.21%, while the 5-year Treasury-indexed hybrid adjustable-rate mortgage dipped two basis points to 2.77%. The rise in mortgage rates was probably inevitable because mortgage rates had not risen in tandem with Treasury yields. Historically, mortgage rates have tracked the direction of long-term bond yields, specifically the 10-year Treasury (currently 1.291%). But throughout the pandemic that relationship has weakened somewhat — with mortgage rates falling to record lows well above the levels bond yields fell to. That gap has given mortgage lenders some latitude when it comes to adjusting interest rates. But this week, lenders followed suit. Nonetheless, mortgage rates remain very low by historic standards. This shift in the market’s outlook seems to suggest that the days of all-time low rates may be a thing of the past. However, as rates do rise, “affordability” is going to become an issue for some buyers. Already, a decline in the number of mortgage applications suggests that some Americans have been priced out of the market, as a record-low supply of homes for sale has pushed prices higher.

What the Pandemic Has Really Done to Our Economy. A new report issued by the Los Angeles County Economic Development Corporation delves into the job losses, industry contractions, and economic hardships that have hit our county during the pandemic. The report also attempts to lay out policy recommendations that might help create a recovery that is both good for business and mindful of improving equity. The report, titled “Pathways for Economic Resiliency,” is full of bleak statistics that will lull you to sleep within minutes. It finds that, as of late 2020, overall employment in the county was down 9.8 percent compared to the same point in 2019 (and that 9.8 percent was not distributed evenly across the population). Individuals filing for unemployment were more likely to be people of color, women, and those without college degrees. These people have borne the brunt of the economic pain of this pandemic. Between February and November of last year, LAEDC reports 20,000 more people in Los Angeles County became homeless. Even in 2021, with commerce reopening, our county is projected to have 354,000 fewer “living wage jobs” than before the pandemic, and will need to add a total of 738,672 jobs at that wage level for everyone in the county’s eligible workforce to be able to earn a sustainable living. The study also lays out the industries that were hardest hit by job losses in 2020: hospitality (125,900 jobs lost); arts, entertainment, and recreation (37,300 jobs lost); motion picture and sound recording (36,500 jobs lost); non-essential retail (23,400 jobs lost); and personal care and laundry services (20,400 jobs lost). Businesses, particularly small businesses, have struggled as well. The report finds that 62 percent of businesses in our county say they have less than two months of operating cash on hand, and already 15,000 local businesses have permanently closed due to the pandemic.

Consumer Sentiment Sags to Six-Month Low. Pessimism about financial security, especially among middle- and lower-income Americans, grew in early February and fewer expect our economy to show much improvement by the summer, a new survey shows. The first of two readings of consumer sentiment this month fell 3.5 points to 76.2 in early February and touched a six-month low, according to an index produced by the University of Michigan. The index registered 79 in January. In other words, the attitude of Americans right now about their own personal finances and the broader economy was basically negative. The so-called “Index of Current Conditions” edged down to 86.2 from 86.7 in January. Hopes for a stronger economy later in the year also dimmed. A forward-looking gauge on what consumers expect six months from now sank to 69.8 from 74 last month. That’s also the weakest reading in six months. The biggest decline in optimism occurred among households with incomes below $75,000 a year. Fewer than a quarter of families in the bottom third of incomes said their financial situation has improved. A brief lapse in extended federal unemployment benefits and fresh layoffs at restaurants and other businesses toward the end of 2020 added more financial stress on working Americans. By contrast, more than half of the households in the top third of incomes said their finances have actually improved, likely reflecting large gains in the U.S. stock market and their real estate holdings. Most upper-income Americans are also able to work from home and have not suffered as many job losses. Nevertheless, the overall consumer sentiment index is still 25 points below its pre-crisis peak.

Housing Crisis Made The Pandemic Worse. The vast majority of L.A. renters are spending too much on housing — and the region’s affordability crisis provided opportunities for the COVID-19 pandemic to spin out of control. That's according to the researchers behind a new survey published last week that measures how much Angelenos spent on housing and other essential needs last year. "High rates of housing insecurity make L.A. more vulnerable to the impact of the pandemic on public health," said USC sociologist Kyla Thomas, director of the USC Dornsife-Union Bank LABarometer survey. The survey collected responses from 1,326 L.A. County residents during the fall of 2020, finding that nearly two-thirds (65%) of renters could be considered "cost-burdened," meaning they spend more than 30% of their income on rent alone. More than 40% of L.A. residents live in overcrowded homes. That means that when low-income workers who interact with the public get sick, they're often bringing the virus back into their homes where it has ample opportunity to spread. These problems affect some L.A. residents more than others. Latinos are most likely to be rent-burdened (70%) and to live in overcrowded housing (55%). Rent burden is also high for Black residents (67%). And while Asians have the lowest rate of rent burden among all ethnic groups included in the survey, they also face high rates of over-crowding (40%). The survey reveals widespread housing instability across L.A., with one-in-three Angelenos saying they worried about losing their homes last year. Researchers say crushing housing costs have forced L.A. residents to cut back on other necessary expenses. For example, the survey found that one-in-three Angelenos postponed medical care because it cost too much, and 11% worried about not having enough food to eat.

Biden Blue” Comes to the White House. Among the great ceremonial elements of the presidency are the design and furnishing of the White House, a working office building that is also a museum and a home. Although much of the interior of 1600 Pennsylvania Avenue is managed by curators, First Families certainly impart their sensibility in subtle — and sometimes dramatic — ways. All of which leads me to the question, What is the Bidens’ taste, and how will they display it at the White House? We do know that Joe Biden’s personal taste steers toward the conventional. Biden’s a politician who plays by the rules, and that’s probably a good thing here because the White House has lots of rules when it comes to interior design. The building is divided into the Public State Rooms (the ground floor that tour groups see, where dignitaries and heads of state are received and which leads to the Oval Office and the administrative spaces in the East and West Wings), and “the Residence” (comprising the First Family’s private living quarters on the second and third floors). Which brings me back to the Bidens. The White House interiors will change. But so far, the Oval Office is the only room the public has seen in the new administration. And the few changes that have occurred so far are already reinforcing Biden’s promise on the campaign trail: “to be a president who will unify the country.” The Bidens don’t project an image of worldliness like the Kennedys did, Hollywood glamour like the Reagans, or modernity like the Obamas. With this First Family, it’s about rolling up your sleeves and getting to work. After Biden’s inauguration, the White House staff quickly switched out a few of the furnishings in the Oval Office. For example, like most presidents since JFK, Biden is using the Resolute desk, a gift from Queen Victoria to President Rutherford Hayes in 1880. The newly placed bust of Cesar Chavez on a table behind the desk has received the most attention. The gold draperies and beige damask wallpaper are still around. But the most visible differences from his predecessor’s décor is the deep-blue rug. Although Biden’s Oval Office rug wasn’t custom-made for him, its color speaks to his personal taste. It isn’t just any blue — it’s a vibrant, almost inky shade reminiscent of twilight according to Biden’s interior designer, Victoria Hagan, who has nicknamed the shade “Biden Blue.”

Man Joyrides in Real-Life Baywatch Boat. Forget televised freeway chase - we’re now going to watch “ocean chases” on TV. A David Hasselhoff want-a-be stole a moored boat in Santa Monica Bay last week, before brazenly leading police on a high-seas chase into the Pacific Ocean. According to the Los Angeles County Sheriff’s Department (LASD), the thief made off with the lifeguard vessel on January 26 while it was moored in Malibu. Lifeguards, the Coast Guard, and a LASD’s Air 5 helicopter all participated in the slow-speed chase, which took place somewhere out in the Pacific. The boat crews responded offshore to locate some lunatic looking for his 15 minutes of fame, by playing lifeguard and stealing a boat named “Baywatch Malibu” (seriously, that’s its name – you can’t make this stuff up) from its moorings. Where was Pamela Anderson in all of this? A helicopter pilot on the Santa Monica Airport Tower frequency cautioned he was heading out over the water to chase a stolen lifeguard boat. Another pilot noted, “It was humorous to listen to the coordination between Baywatch Del Rey, LASD Air 5 & Marina Del Rey’s boat crews all chasing a stolen boat! The world keeps getting crazier by the day!” The suspect was soon apprehended by members of the LASD Marina del Rey Boat Operations team and the boat was recovered with no major damage. Never a dull moment in LA…

This Week: Looking ahead, investors will continue watching Covid case counts, vaccine distribution, and the size of the government stimulus spending bill. Beyond that, it will be a light week for economic data. Consumer Confidence will be released tomorrow (2/23). Personal Income and the Core PCE price index (the inflation indicator favored by the Fed), will be released on Friday (2/26).

Quote of the Week. “This morning I saw a neighbor talking to her dog. It was obvious she thought the dog understood her. I came into my home and told my cat. We had a good laugh!”

Weekly Change:
10-year Treasuries: Rose 0.15 bps
Dow Jones: Rose 100 points
NASDAQ: Fell 100 points

Tuesday, 2/23: Consumer Confidence
Friday, 2/26: Core PCE
Friday, 2/26: Personal Income