Economic Update – Week of August 2, 2020

I hope all you are staying safe as we continue to venture into uncharted territory with the coronavirus.  The best any of us can do is adapt to the current conditions and look for ways to improve ourselves for what life looks like post coronavirus.  Make sure you continue to practice hygiene and wear face masks so we can get through this sooner rather than later.

  • Pending home sales – Sales are rising mainly because of historically low mortgage rates
  • GDP (Gross Domestic Product) – Fell a historic ~33% last quarter because of closure due to the coronavirus.
  • Case & Shiller – Constraints in the housing market are causing a strong demand in the short term.  People are also preferring suburbs over city living because of the coronavirus
  • Consumer Confidence – Despite rising to 96 it’s still well below the historic high of 132 from February. 

Pending home sales.  Pending home sales continued to rebound across the country in June as Americans continue to buy homes despite the pandemicThe index of pending home sales rose 16.6% in June as compared with May.  The increase comes after pending home sales experienced the largest monthly rise on record last month.  Compared with a year ago, contract signings are up 6.3%, a sign of how sharply the market has rebounded from its coronavirus-related low.  Consumers are taking advantage of record-low mortgage rates resulting from the Federal Reserve’s maximum liquidity monetary policy.  The index measures real-estate transactions where a contract was signed for previously-owned homes but the sale has not yet closed.  The rebound in pending home sales suggests that the real-estate market is thriving in spite of the continued rise in COVID-19 cases across the country.  Two main factors are driving the surge in home-buying activity. First, many buyers appear to be entering the market looking to make up for lost time.  As such, the rise in sales is a reflection of the delays caused by the coronavirus outbreak.  Second, historically low mortgage rates have created a sense of urgency among Americans looking to purchase a home and lock-in those low rates.  The pandemic is still causing a shortage of homes available for sale as some sellers continue to stay on the sidelines rather than list their properties for fear of exposing their homes (and themselves) to infection.  This supply limitation will inherently limit how many deals close in the months ahead.

Gross Domestic Product.  The U.S. economy just suffered its worst quarter (April–June) in our nation’s history, with GDP falling a historic 32.9%.   This pandemic is worse than the Great Depression, the Great Recession, or any of the more than three dozen economic slumps over the past two centuries, which never caused such a sharp decline over such a shockingly short period of time.  The Commerce Department report highlights how deep and dark the hole is that our economy cratered into this summer.  Sharp contractions in personal consumption, exports, inventories, investment, and spending by state and local governments, converged to bring down GDP, which is the combined tally of all goods and services produced by our economy during the quarter.  Personal consumption, which historically accounts for about two-thirds of all activity in the U.S., subtracted 25% from the Q2 total, with services accounting for nearly all that drop.  Spending also slid in health care and goods (such as clothing and footwear).  

Real GDP % Change From Preceding Quarter

Case-Shiller Index.  Home-price appreciation maintained a steady pace in May amid the pandemic, according to the Case-Shiller 20-city Price Index.  The index posted a 3.7% year-over-year gain in May, down from 3.9% the previous month. Phoenix continues to lead the country with a 9% annual price gain in May, followed once again by Seattle with a 6.8% increase.  Tampa, Fla., came in third, with a 6% uptick.  But a look at the individual cities in the 20-city index shows that home-price growth could be slowing.  Home prices have remained mostly insulated from the pressures of the coronavirus pandemic thus far.  

Falling mortgage rates have boosted the demand for homes among buyers, as the record-low interest rate environment has made purchasing properties more affordable for many people.  At the same time, though, the supply of homes for sale nationwide remains severely constrained.  Many home sellers have stayed on the sidelines and held off from listing their properties because of infection fears related to the coronavirus.  But even before the pandemic, the country’s housing inventory was falling well short of demand.  The gap between the demand for homes and the country’s inventory has pushed prices higher.  And that gap explains why home prices continue to rise even if the job market takes another hit from the pandemic.  There are some signs though that prices could end up falling.  The house price index released last week by the Federal Housing Finance Agency indicated that home-prices nationally fell 0.3% on a monthly basis between April and May, despite a 4.9% annual gain.

Consumer Confidence.  Consumer confidence swooned in July amid a rash of new coronavirus cases in many states.  The index of consumer confidence fell to 92.6 this month from a revised 98.3 in June, the Conference Board reports.  The level of confidence is still above its pandemic low of 85.7, but it’s likely to be a long time before it returns to its pre-crisis peak.  For example, the index stood near a 20-year high at 132.6 in February before the pandemic struck.  This index signals a rocky economic recovery in the months ahead.  It suggests that the recovery has shifted into a lower gear, as consumers become more cautious about the outlook as virus cases continue to escalate.  Consumers have grown less optimistic about the short-term outlook for our economy and remain subdued about their financial prospects.  Such uncertainty about the short-term future does not bode well for our recovery, nor for consumer spending.  Thankfully, massive federal aid and other measures to prop-up our economy have helped stave off worse financial straits for millions of Americans already struggling to survive.  More than 30 million people are receiving unemployment benefits.  And hopes for a quick economic recovery from the coronavirus have been dashed by an explosion in new cases in Texas, California, Florida and other hotspots.  Our economy will likely continue suffering regular ups and downs until the virus is brought under control or a vaccine is discovered. 

Weekly Jobless Claims.  The number of Americans who filed new claims for unemployment benefits last week totaled 1.434 million, the Labor Department reports as the pandemic continues to ravage our economy.  It was the 19th straight week in which initial claims totaled at least 1 million.  But more disappointing is the fact that it is the second consecutive week in which initial claims rose after declining for 15 straight weeks.  “Continuing Claims” — which are composed of those receiving unemployment benefits for at least two straight weeks — rose by 867,000 to 17.018 million for the week ending July 18. (Data on continuing claims is delayed by one week.)  Thus, the level of weekly claims remains shockingly elevated and the rise in continuing claims definitely reflects the re-closings over the past few weeks that we’ve seen in some states where the virus has flared-up. 

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