Economic Update – Week of July 19, 2020

In an unexpected turn the coronavirus has seen some of its highest days in the last 30, despite drops in cases in other countries around the world.  Regardless, this wave will likely be less devastating on the stock market and economic woes as the first one

Consumer Price Index. Let’s start with the good news.  After three months of declines, the consumer price index (CPI) rose 0.6% in June, which tied the largest monthly increase since 2009.  Gasoline prices (+12.3%), beef (+4.8%) and physicians services (+0.5%) lead the rise.  Energy also rose 5.1%, which is the first rise in 5 months as as fuel prices offset a decline in the electricity index.  

How Does CPI Work?

Food prices increased 0.6% in May, with rising costs for meats, poultry, fish, and eggs leading a rise across most major food categories.  In addition, prices for hospital care (+0.4%), home furnishings (+0.4%), and airline fares (+2.6%) were key contributors, while heavily COVID impacted industries like autos and recreation continued to have price declines. 

But the Coronavirus and government-mandated shutdowns remain a factor clouding the data.  Businesses continue to operate under restrictions of reduced capacity, which looks likely to continue for the foreseeable future.  We expect prices to continue to rise in the coming months and be closer to the 2-3% annual pace of inflation we saw before the Coronavirus impacted global economies.  While we are still battling the virus, the worst appears to be behind us; especially as governments around the world stay committed to preventing a coronavirus recession.  Other economic indicators also suggest that the economy bottomed out in May, making the COVID recession one of the sharpest recessions on record, but also the shortest.  The worst economic quarter in the post-World War II era is behind us, the economic recovery has begun, and the question now shifts to how quickly we recover.

Retail Sales. Retail sales rose 7.5% in June from May.  Just two months ago, retail sales were down 19.9% from a year ago.  Now, in June, retail sales are up 1.1% from June 2019.  For more perspective: from February (before the COVID shutdowns started) to the bottom in April, retail sales fell 21.7%.  Now, with the increase in June, we are only 0.6% below the February mark.  Ten of thirteen major retail categories had gains in June.  

Non-store retailers was the one group that rose during the shutdown, saw a decrease of 2.4% in June, but is still up 23.5% from a year ago.  Food & beverage sales declined 1.2% in June but are up 12.4% from a year ago.  Retail sales will be important to monitor over the coming months, especially if high unemployment persists without more stimulus or extension of benefits.

Mortgage Rates.  Mortgage rates are now at an all-time low after the average for a 30-year fixed-rate slipped below the psychological threshold of 3.00%.  Interest rates fell to 2.98%.  These rates are the lowest level in almost 50 years of recordkeeping by Freddie Mac for the third straight week (and the seventh time since the coronavirus outbreak began roiling financial markets).  The tumble comes as the Federal Reserve holds its benchmark rate near zero and continues buying mortgage bonds as part of its plan to stimulate the economy.  Lower borrowing costs have drawn a flood of applications for refinancing and new purchase loans.  The dip below 3% could prompt even more Americans to apply for loans.  In May, when the Federal Reserve started buying mortgage securities, analysts predicted that rates could drop below 3%.  Now, there’s speculation that the slide could continue, so get ready for even lower rates!  Despite historic low mortgage rates, risks still abound in the housing market.  With credit standards tightening amid high unemployment and fears that the economic recovery is stalling, some potential buyers won’t qualify for loans or could struggle to find homes in their price range.  That could hamper what has been a relatively strong housing market.  Ultimately, of course, the direction of the virus is going to dictate the course of the housing market and our economy.

Housing Starts. Housing starts increased 17.3% in June to a 1.186 million annual rate.  This was the largest monthly gain since 2016, as the recovery in new construction continues.  Looking at the details of the report shows that the gains were broad-based, with both single-family and multi-unit construction posting healthy increases.  Those measures are now down only 3.9% and 4.1% respectively from year ago levels, demonstrating the remarkable resilience of the housing market in the aftermath of the pandemic.  That said, builders are still dealing with headwinds which have been hampering a sharper rebound.  While home builders have been classified as “essential workers” in most areas of the country, regulations still require fewer people per crew, dragging out project times.  The construction industry also seems to be suffering from an ongoing shortage of workers, with job openings up from pre-pandemic levels while job openings in the broader economy have fallen significantly.  In other words, there are still lots of unfilled construction jobs that, if filled, would promote a sharper rebound in new construction.

Building Permits.  New building permits increased 2.1% in June to a 1.241 million annual rate.  Compared to a year ago, permits for single-family houses are down 1.1%.  Overall, permits rose less than expected in June.  This reading was held back by a 13.4% decline in permits for multi-unit structures.  Meanwhile, permits for single-family homes rose 11.8%.  This divergence looks to be an ongoing trend, as builders respond to a shift in consumer preferences for more space in less dense environments due to the pandemic.  A continued rebound in construction is likely in the months ahead.

Home Builders Confidence Index. The construction industry’s outlook has continued to improve from its recent lows as buyers rush back into the housing market.  The National Association of Home Builders’ monthly confidence index rose 14 points to a reading of 72 in July.  Keep in mind readings above 50 are a sign of improving confidence, and a figure below that threshold would represent a declining outlook.  In April, the index had fallen to its lowest level since June 2012.  April was also the first time since 2014 that the index has dropped below 50, and the index stayed below that threshold in May. Builders’ views on the traffic of prospective buyers moved 15 points higher to a reading of 58.  Expectations of home sales in the next six months improved by a smaller amount, rising only seven points to a reading of 75.  The continued rebound in housing is benefitting home builders — and experts say the rebound is more than just a reflection of pent-up demand.  New home demand is improving in lower density markets, including small metro areas, rural markets and large metro exurbs, as people seek out larger homes and anticipate more flexibility for telework in the years ahead.  But costs remain something of a concern for home builders.  In particular, the cost of lumber has skyrocketed in recent months due to the uptick in demand and a reduction in supply caused by the pandemic.  Not only that, but many builders are seeing rising costs of land, and labor expenses remain a concern.

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