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Posts from the ‘General, Economic and Political’ Category

30
Nov

Supply-Chain Chaos

The network, supply chain, that products and parts moved from the factories to distributors and resellers to the consumer have been under pressure since the pandemic began. This situation has gotten worse in the latter months of 2021at the same time demand for goods increased as the holiday season approached.1

 California ports receive about 40% of U.S. imports. Operating 24/7 was enough to solve the problem. Workers were not able to keep up with the flow of container ships arriving from overseas. In mid-November, there was a record backlog of vessels waiting offshore for more than two weeks to unload their cargo.2 Other U.S. ports are also congested, and severe shortages of truck drivers and warehouse workers have further slowed the distribution of goods. The availability of contains is another factor slowing the flow of merchandise. These bottlenecks held up finished merchandise, as well as the inputs and raw materials needed to manufacture products domestically.

Compounding supply-chain issues have been increasing freight and labor costs, delaying shipments, and leaving consumers with higher prices and fewer options since the spring of 2021. As the seasons changed, logjams remained and time was running out, raising fears that U.S. retailers would not have sufficient inventories of goods to meet consumer demand during the holidays.

The good news is that many businesses responded nimbly to challenging conditions, and some consumers have been innovative, too. Here’s a glimpse into how these kinks in the supply chain might affect your holiday shopping in 2021.

Are Retailers Ready?
Many of the nation’s largest retailers anticipated problems and went to great lengths to ensure that shelves would be well stocked with a robust variety of goods in time for the holiday shopping season. In many cases, this required paying much higher freight costs to charter their own smaller ships or cargo planes so they could bypass clogged ports and make up for production delays.3

These costly measures are usually not an option for smaller retailers, which could put them at a disadvantage. In a November survey, 48% of small businesses reported that supply-chain disruptions are having a significant negative impact on their holiday sales.4

Expecting enthusiastic consumer demand, the National Retail Federation (NRF) forecast record holiday spending of 8.5% to 10.5% above 2020 levels. But retailers have also warned consumers that sporadic product shortages and shipping delays would continue and perhaps worsen later in the season.5

Poised to Spend
U.S. retail sales rose 1.7% in October, a surprisingly strong showing and the third monthly increase in a row.6 The potential for a more limited selection of some types of products has been widely reported, and it seems that consumers are paying attention. According to an annual NRF survey, a record share of consumers (49%) started their holiday shopping before November, and 36% did so to avoid missing the chance to buy key holiday items.7

U.S. households have extra money to spend this year after amassing about $2 trillion in excess savings during the pandemic. This was largely due to historic levels of economic relief provided by the federal government, along with fewer spending opportunities due to lockdowns.8 The recent rise in consumer spending bodes well for retailers and economic growth, but heavy demand also weighs on the supply chain and pushes up prices.

A Season of Inflation
Unfortunately, escalating prices for holiday gifts and basic needs could prompt the loudest “bah humbug” of the 2021 holiday season. With businesses paying more for the raw materials, packaging, labor, transportation, and fuel needed to produce and distribute products, a portion of the additional costs are being passed on to consumers. Some sellers have added additional price increases.

Measured by the Consumer Price Index (CPI), prices across the U.S. economy increased 6.2% during the 12 months ending in October 2021 — the highest inflation rate in nearly 31 years. Grocery prices (food at home) rose 5.4% year over year, while prices for the category that includes meats, poultry, fish, and eggs spiked 11.9%.9

Energy prices overall have climbed 30% since October 2020, and the natural gas that keeps many homes warm and cozy increased 28.1% year over year. Gasoline prices rose nearly 50% over the prior 12 months, slamming the budgets of households who plan to drive to family gatherings over the holidays.10

Because supply-and-demand shocks have driven these sharp price increases, some economists still believe they are temporary and that inflation will moderate in 2022 as supply constraints ease.11 Of course, even short bursts of inflation can be especially painful for consumers with lower incomes and little or no savings, and no one knows for certain how long prices might stay elevated. The impact of price increases and the many factors that impact the economy are beyond the scope of this discussion.

Shop Early or Be Flexible
On top of being more expensive, some in-demand products could be hard to find, and transportation bottlenecks aren’t the only issue impacting supplies. A global shortage of semiconductors, or computer chips, is limiting the production of all kinds of electronic devices, including cars, home appliances, laptops, smartphones, TVs, and gaming consoles. The availability of some brands of sportswear, shoes, and accessories could be affected by a COVID outbreak that shut down factories in Vietnam. Other reported shortages include jewelry, some popular toys and books, frozen turkeys, cardboard boxes needed for shipping, and Christmas trees, both real and artificial.12

If you need certain items for entertaining or have family members with specific gifts on their wish lists, it could be risky to wait until the last minute to buy them. Otherwise, shopping locally, being open to alternatives, and giving cash or gift cards to be spent later might end up being your best options.

Projections are based on current conditions, are subject to change, and may not happen.

1) Consumer Reports, October 20, 2021

2) Bloomberg, November 13, 2021

3) The Wall Street Journal, October 10, 2021

4) National Federation of Independent Business, November 3, 2021

5, 7) National Retail Federation, November 16, 2021

6) U.S. Census Bureau, 2021

8) Bloomberg, November 16, 2021

9-10) U.S. Bureau of Labor Statistics, 2021

11) Moody’s Analytics, November 18, 2021

12) CBS News, November 18, 2021

 

3
Nov

Budget and Debt Ceiling Vagueness

On September 30, 2021, Congress averted a potential federal government shutdown by passing a last-minute bill to fund government operations through December 3, 2021.1 Two weeks later, another measure raised the debt ceiling by just enough to sustain federal borrowing until about the same date.2 Although these bills provided temporary relief, they did not resolve the fundamental issues, and Congress will have to act again by December 3.

Spending vs. Borrowing

The budget and the debt ceiling are often considered together by Congress, but they are separate fiscal issues. The budget authorizes future spending, while the debt ceiling is a statutory limit on federal borrowing necessary to fund already authorized spending. Thus, increasing the debt ceiling does not increase government spending. But it does allow borrowing to meet increased spending authorized by Congress.

The underlying fact in this relationship between the budget and the debt ceiling is that the U.S. government runs on a deficit and has done so every year since 2002.3 The U.S. Treasury funds the deficit by borrowing through securities such as Treasury notes, bills, and bonds. When the debt ceiling is reached, the Treasury can no longer issue securities that would put the government above the limit.

Twelve Appropriations Bills

The federal fiscal year begins on October 1, and 12 appropriations bills for various government sectors should be passed by that date to fund activities ranging from defense and national park operations to food safety and salaries for federal employees.4 These appropriations for discretionary spending account for about one-third of federal spending, with the other two-thirds, including Social Security and Medicare, prescribed by law.5

Though it would be better for federal agencies to know their operating budgets at the beginning of the fiscal year, the deadline to pass all 12 bills has not been met since FY 1997.6 This year, none of the bills had passed as of late October.7

To delay for further budget negotiations, Congress typically passes a continuing resolution, which extends federal spending to a specific date based on a fixed formula. The September 30 resolution extended spending to December 3 at FY 2021 levels.8 Adding to the stakes of this year’s budget negotiations, spending caps on discretionary spending that were enacted in 2011 expired on September 30, 2021, so FY 2022 budget levels may become the baseline for future spending.9

Raising the Ceiling

A debt limit was first established in 1917 to facilitate government borrowing during World War I. Since then, the limit has been raised or suspended almost 100 times, often with little or no conflict.10 However, in recent years, it has become more contentious. In 2011, negotiations came so close to the edge that Standard & Poor’s downgraded the U.S. government credit rating.11

A two-year suspension expired on August 1 of this year. At that time, the federal debt was about $28.4 trillion, with large recent increases due to the $3 trillion pandemic stimulus passed with bipartisan support in 2020, as well as the 2021 American Rescue Plan and continuing effects of the Tax Cuts and Jobs Act of 2017.12-13 The Treasury funded operations after August 1 by employing certain “extraordinary measures” to maintain cash flow. Treasury Secretary Janet Yellen projected that these measures would be exhausted by October 18.14

The bill signed on October 14 increased the debt ceiling by $480 billion, the amount the Treasury estimated would be necessary to pay government obligations through December 3, again using extraordinary measures. Unlike the budget extension, which is a hard deadline, the debt ceiling date is an estimate, and the Treasury may have a little breathing room.15–16

Potential Consequences

If the budget appropriations bills — or another continuing resolution — are not passed by December 3, the government will be forced to shut down unfunded operations, except for some essential services. This occurred in fiscal years 2013, 2018, and 2019, with shutdowns lasting 16 days, 3 days, and 35 days, respectively.

Although the consequences of a government shutdown would be serious, the economy has bounced back from previous shutdowns. By contrast, a U.S. government default would be unprecedented and could result in unpaid bills, higher interest rates, and a loss of faith in U.S. Treasury securities that would reverberate throughout the global economy. The Federal Reserve has a contingency plan that might mitigate the effects of a short-term default, but Fed Chair Jerome Powell has emphasized that the Fed could not “shield the financial markets, and the economy, and the American people from the consequences of default.”17

Given the stakes, it is unlikely that Congress will allow the government to default, but the road to raising the debt ceiling is unclear. The temporary measure was passed through a bipartisan agreement to suspend the Senate filibuster rule, which effectively requires 60 votes to move most legislation forward. However, this was a one-time exception and may not be available again. Another possibility may be to attach a provision to the education, healthcare, and climate package slated to move through a complex budget reconciliation process that allows a bill to bypass the Senate filibuster. However, the reconciliation process is time-consuming, and it is not clear whether the debt ceiling would meet parliamentary requirements.18

The budget and the debt ceiling are serious issues, but Congress has always found a way to resolve them in the past. It’s generally wise to maintain a long-term investment strategy based on your goals, time frame, and risk tolerance, rather than overreacting to political conflict and any resulting market volatility.

U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost.

Planning is further complicated by the uncertainty as to what changes, if any, will be made relating to income, estate and gift tax provisions and their effective dates. Individual circumstances will differ. Review your situation and planning to determine what if any actions is required. Pay close attention to your current and expected future tax brackets when you consider the timing of deductions and income.

1, 8) The Washington Post, September 30, 2021

2, 16, 18) Barron’s, October 15, 2021

3) U.S. Office of Management and Budget, 2021

4, 7, 9) Committee for a Responsible Federal Budget, June 25, 2021; October 18, 2021

5, 11, 14, 17) The Wall Street Journal, September 28, 2021

6) Peter G. Peterson Foundation, October 1, 2021

10) NPR, September 28, 2021

12, 15) U.S. Treasury, 2021

13) Moody’s Analytics, September 21, 2021

8
Sep

Too Hot to Handle: What’s Ahead for the U.S. Housing Market?

The U.S. housing market, already strong before the pandemic, has heated up to record levels in 2021. The Case-Shiller U.S. National Home Price Index, which measures home prices in 20 major metropolitan areas, reported a 12-month increase of 18.6% in June 2021, the largest year-over-year gain in data going back to 1987.1

The National Association of Realtors (NAR), which provides more current data, reported that the national median price of an existing home was $359,900 in July, down from a record $362,800 in June. Even so, this was the 113th consecutive month of year-over-year price increases. The June to July price relief was due in part to increased supply. Total inventory of new and existing homes increased 7.3% over June but was still down 12.0% from a year ago.2

The July 2021 NAR data suggests that the red-hot market may be cooling slightly, but prices are still extremely high, and industry experts expect them to remain high for the foreseeable future. Here’s a look at some key factors behind the current trend and prospects for future direction.

Low Supply, Surprise Demand

The housing supply has been low for more than a decade. The housing crash devastated the construction industry, and a variety of factors, including labor shortages, tariffs, limited land, and restrictive permit processes, have kept the supply of new homes below historical averages, placing more pressure on existing homes to meet demand.3

The pandemic exacerbated labor problems and led to supply-chain issues and high costs for raw materials that held back construction, while demand exploded despite the economic downturn. With the shift to remote work and remote education, many people with solid jobs looked for more space, and low interest rates made higher prices more affordable.4

At the same time, homeowners who might have seen high prices as an opportunity to sell were hesitant to do so because of economic uncertainty and the high cost of moving to another home. Refinancing at low rates offered an appealing alternative and kept homeowners in place. Government mortgage forbearance programs have helped families from losing their homes but also kept homes that might have otherwise foreclosed off the market.5

Health concerns also played a part. The pandemic made it less appealing to have strangers entering a home for an open house. And older people who might have moved into assisted living or other senior facilities were more likely to stay in their homes.6

Taken together, these factors produced a perfect storm of low supply and high demand that drove already high prices to dizzying levels and created desperation among buyers.  All-cash sales accounted for 23% of transactions in July, up from 16% in July 2020. The average home stayed on the market for just 17 days, down from 22 days last year. Almost 90% of homes sold in less than a month.7

Freezing Out First-Time Buyers

Recent inventory gains have been primarily in more expensive houses, and there continues to be a critical shortage of affordable homes. First-time buyers accounted for just 30% of purchases in July 2021, down from 34% the previous year.8 A common formula for home affordability is to multiply income by three — i.e., a couple who earns $100,000 might qualify to buy a $300,000 house. A study of 50 cities found that home prices in Q2 2021 were, on average, 5.5 times the local median income of first-time buyers, putting most homes out of reach.9

The lack of affordable housing for first-time buyers also helps to drive rents higher. People with higher incomes who might be buying homes are willing and able to pay higher rents. Rents on newly signed leases in July were 17% higher than what the previous tenant paid, the highest jump on record. After dropping while many young people lived with parents during the pandemic, occupancy of rental units hit a record high of 96.9%.10

Is This a Bubble?

From 2006 to 2012, the housing market plummeted 60%, taking the broader U.S. economy with it.11 Mortgage requirements were made much stricter after the housing crash, and homeowners today are more likely to afford their homes and to have more equity from larger down payments. The housing market has always been cyclical, so it’s likely that prices will turn downward at some point in the future, but less likely that prices will collapse the way they did during the Great Recession.12

What’s Next?

Prices are so high that some buyers are backing off, but demand remains strong and will outstrip housing supply for the foreseeable future. Some near-term relief might come if high prices inspire more homeowners to sell, and if the end of government programs puts more foreclosed homes on the market. There are more single-family homes under construction than at any time since 2007, but it will take months or years for those homes to increase the housing supply.13

The housing market tends to be seasonal, with demand dying down in the fall and the winter. That didn’t happen last year, because pent-up demand was so strong that it pushed through the seasons. With the supply/demand tension easing, the seasonal slowdown may be more significant this year.14 The Federal Home Loan Mortgage Corporation (Freddie Mac) projects that home prices will grow by 12.1% in 2021, lower than the current pace, and drop further to 5.3% growth in 2022.15

Location, Location

Although national trends reflect broad economic forces, the housing market is fundamentally local. The West is the most expensive region, with a median price of $508,300 for an existing home, followed by the Northeast ($411,200), the South ($305,200), and the Midwest ($275,300).16 Within regions, there are dramatic price differences among states, cities, and towns. The trend to remote work, which helped drive prices upward, may help moderate prices in the long term by allowing workers to live in more affordable areas.

1) S&P Dow Jones Indices, August 31, 2021

2, 7, 8, 16) National Association of Realtors, August 23, 2021

3, 4, 6) The New York Times, May 14, 2021

5) NBC News, July 6, 2021

9)  The New York Times, August 12, 2021

10) Bloomberg Businessweek, August 18, 2021

11) NPR, August 17, 2021

12) The Wall Street Journal, March 15, 2021

13) Bloomberg, August 19, 2021

14) CNN Business, August 23, 2021

15)  Freddie Mac, July 2021

21
Jul

New Global Tax Accord Takes Shape

After more than four years of international negotiations taking place mostly behind the scenes, 132 countries — representing more than 90% of worldwide gross domestic product (GDP) and including the Group of 20 (G20) large economies — recently agreed to a new plan to reform international tax laws in an effort to “ensure that multinational enterprises pay a fair share of tax wherever they operate.”1

The negotiations, overseen by the Paris-based Organisation for Economic Co-operation and Development (OECD), represent the most significant attempt in over a century to overhaul the global tax system and bring international tax policy into the modern digital age. The accord has the potential to reshape global commerce.2

What is the crux of the new global tax agreement?

The global agreement has two main pillars. The first would require large, multinational enterprises (including digital companies) to pay taxes in countries where their goods or services are sold and where they earn profits, even if they have no physical presence there. This provision is aimed primarily at large U.S. tech companies that sell their goods and services abroad, and is intended to supercede attempted regulation by other countries that are already in the process of trying to collect taxes on these companies.3

The second pillar, proposed by the United States, calls for a 15% global minimum corporate tax rate in an effort to prevent multinational companies from shopping for a country or jurisdiction with the lowest tax rates, a phenomenon U.S. Treasury Secretary Janet Yellen described as a “race to the bottom.”4

President Biden added: “With a global minimum tax in place, multinational corporations will no longer be able to pit countries against one another in a bid to push tax rates down and protect their profits at the expense of public revenue.”5

The OECD estimated that raising the global minimum corporate tax rate to 15% would generate an estimated $150 billion in additional global tax revenues each year. It stated that the  “package will provide much-needed support to governments needing to raise necessary revenues to repair their budgets and their balance sheets while investing in essential public services, infrastructure and the measures necessary to help optimise the strength and the quality of the post-COVID recovery.”6

What countries are on board?

All the G20 economies, representing over 75% of global trade, have endorsed the deal. They include the United States, Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and most countries of the European Union.7 In all, 132 countries are in favor.

However, several countries with low corporate tax rates that currently operate as tax havens have not agreed to the deal, including Ireland, several Caribbean countries, Hungary, Estonia, Kenya, Nigeria, Peru, and Sri Lanka.8 These smaller nations are attempting to secure a better deal to enable them to compete with larger countries and make up for the potential loss of any tax advantage. The refusal of Ireland, Hungary, and Estonia to sign on to a global corporate tax rate is a potential roadblock because of the European Union’s requirement for unanimity on tax issues. 9

Undoubtedly, there is a significant amount of work to be done to bring “holdout” nations on board. The Biden administration has pushed Congress to approve a new tax rule that would punish companies that operate in the United States but  have headquarters in those holdout countries by significantly increasing their tax liabilities. The  president has also pushed Congress to increase the minimum tax on revenue earned by U.S.  companies outside the United States in an effort to help fund the $4 trillion infrastructure and economic agenda he hopes to pass this year.10

Has the new global tax agreement been enacted yet?

No. There are still significant, complex technical and policy details that need to be worked out, including how the plan will be executed and which U.S. multinational companies will be subject to the new rules on digital tax.

In addition, the plan needs to be approved by Congress and the national legislatures of participating countries. In the United States, each pillar of the plan could be considered separately. According to Treasury Secretary Yellen, the provision for a 15% global minimum corporate tax rate could be included in a budget bill headed to Congress later in 2021, while the provision on digital taxation of multinational companies might be ready for Congress in the spring of 2022. A further wrinkle is that if the digital tax provision is considered an international treaty, it will require two-thirds approval in the Senate.11

In any event, the global tax accord is due to be finalized by G20 leaders at their next meeting in Rome in October 2021, with G20 finance ministers anticipating global implementation in 2023.12

1, 3, 6) OECD.org, 2021

2, 4-5, 8, 10) The New York Times, July 8, 2021

7) G20.org, 2021

9, 11-12) Bloomberg, July 11, 2021

2
Jun

Shortages and Bottlenecks Expose Weak Links in U.S. Supply Chains

U.S. consumers won’t soon forget the troubling shortages of personal protective equipment during the early days of the pandemic, or when the first stay-at-home orders spurred panic buying and stress-inducing shortages of toilet paper, cleaning products, and food.

Now, as the economy reopens fully and all at once, consumers are again experiencing a wide array of shortages. Businesses are having trouble hiring workers as well as acquiring sufficient supplies of raw materials and key components needed for manufacturing.

Businesses that shut down or cut back when the economy was closed could not ramp up quickly enough to meet a flood of demand in the spring of 2021. The speedy rollout of widespread COVID-19 vaccinations unleashed this pent-up demand faster than expected, catching many businesses off-guard. At the same time, the flow of goods ordered from overseas was slowed by shipping bottlenecks.

Some of these supply disruptions were triggered or worsened by extraordinary calamities, and panic buying by consumers and businesses intensified the more serious shortages.

Here’s a look at some of the events that have stressed corporate supply chains and impacted the economy — regionally, nationally, and globally — in the first half of 2021.

Gas crisis

In mid-May, a ransomware attack led to the multi-day shutdown of a 5,500-mile pipeline responsible for supplying 45% of the fuel on the East Coast. Existing stockpiles might have held up, but news of the outage caused a run on gasoline, and states of emergency were declared by the governors of North Carolina, Georgia, Virginia, and Florida. The average price of a gallon of gasoline spiked to a six-and-a-half-year high, but increases were larger in states that rely heavily on the pipeline.1-2

Trade disrupted

Longer delivery times caused shortages of some raw materials and many types of consumer goods purchased from overseas. Congestion in the busiest West Coast ports left dozens of huge container ships from all over the world anchored off the California coast, waiting to unload. These log jams peaked in February 2021, when imports surged. Now that port workers can be vaccinated, operators are aiming to clear the backlog by the summer.3  In March, a six-day blockage of the Suez Canal by a grounded cargo ship caused massive disruption in international trade. Globally, container ship capacity is stretched and demand is high, so costs could remain elevated for some time.4

Texas freeze

In mid-February, a brutal winter storm knocked out the power grid in Texas, shut down numerous chemical plants, and froze the production of plastics used for packaging and materials needed to make many goods, including auto parts, computers, PVC piping, and paint. This resulted in global shortages, production delays, and higher costs for manufacturers and homebuilders, which will likely be passed on to buyers.5

The same storm closed major chicken-processing plants. Large losses of chicks and eggs, on top of COVID-19–related staffing problems, caused a nationwide chicken shortage and price hikes for restaurants.6

Lumber and housing

When the pandemic hit, many U.S. lumber mills were closed, and the expectation was that housing demand would falter. However, after a brief pause, demand for homes and home remodeling took off, surprising builders and domestic lumber producers. The price of lumber was already rising due to tariffs, but it has skyrocketed more than 300% since April 2020 and caused the price of a new single-family home to increase by nearly $36,000.7

Chips and cars

A global shortage of semiconductors, or computer chips, is limiting the production of all kinds of goods, including home appliances, cars, PCs, gaming systems, servers, and 5G equipment. The effects of the chip shortage are far-reaching but most evident in the market for new and used cars. Auto makers have been forced to cut production of more than 1.2 million vehicles in North America. Dealer inventories are strained, and new and used car prices are causing sticker shock.8-9

The U.S. Senate is debating a bipartisan bill that would invest $100 billion in research, commercialization, and training programs to boost critical technologies, including the domestic production of semiconductors.10

Labor concerns

Some employers report having difficulty finding workers who are willing to take lower-paying jobs, and staffing issues are a contributing factor in the shortages. Some workers may be reluctant to accept jobs because the enhanced unemployment benefits provide more income than they would normally earn through work. For others, opportunities to participate in the workforce are more limited due to lack of child care or skill gaps. To attract much-needed workers, some large employers in the retail and restaurant industries have raised entry-level wages. At least 22 states plan to end the $300 federal benefit by this summer in a bid to spur more people to seek jobs.11

Hard lessons

Since the pandemic began, businesses have had to make difficult decisions amidst great uncertainty. Some supply constraints could ease in the coming months, but other problems, like the chip shortage, could take longer to resolve. Recent events also serve as a reminder that critical energy-control systems and infrastructure are vulnerable to cyberattacks and weather events, and that the damage can ripple throughout the economy when energy providers are knocked offline.

In April 2021, inflation shot up 4.2% over the previous year, the highest rate since 2008. Mismatches between supply and demand are pushing up consumer prices, which is one reason many economists believe the spring rise in inflation will be mostly “transitory.”12 Regardless, prices rarely fall once they have risen, which means even short-lived bursts of inflation can be painful for consumers.

The longer-term path of inflation is still unclear and could depend on economic policy decisions yet to be made. Moreover, the nation’s economic prospects will largely be determined by how U.S. businesses react to the challenges they are facing, and whether corporate leaders can reshape their strategies and invest in ways that strengthen their supply chains for the future.

1-2, 12) The Wall Street Journal, May 13, 2021

3) Bloomberg, May 16, 2021

4) Bloomberg, May 3, 2021

5) The Wall Street Journal, March 17, 2021

6) Associated Press, April 25, 2021

7) CNBC.com, April 30, 2021

8-9) The Wall Street Journal, April 19 and May 13, 2021

10) Reuters, May 17, 2021

11) The Wall Street Journal, May 20, 2021

25
May

Crisis Averted? Financial Help for Struggling Renters and Landlords

By one estimate, U.S. landlords were owed about $57 billion in unpaid back rent at the beginning of 2021. The average household that fell behind owed about four months of rent, or $5,600. Altogether, more than 10 million U.S. families were facing the possibility of eviction.1

Many landlords, including those who depend on rent payments for retirement income, have experienced financial difficulties in lockstep with their heavily impacted tenants. Although multi-family apartment complexes are often owned by large corporations, about 90% of single-family rentals are owned by small investors who are facing the risk of mortgage default, bankruptcy, or forced property sales.2

Fortunately, the March 2021 federal stimulus bill added almost $22 billion in housing assistance to the $25 billion previously allocated by Congress.3 In many cases, payments are being sent directly to landlords through new or existing local programs on behalf of renters who meet certain eligibility requirements.

Program parameters

Under the Emergency Rental Assistance Program (ERAP), the U.S. Treasury has distributed grants to states, cities, and counties with populations greater than 200,000 to be used for back-due rent and utility bills accrued after March 13, 2020. Eligibility is limited to households that earn less than 80% of the area’s median income, as defined by the Department of Housing and Urban Development.

Applicants must document their incomes, prove they qualified for unemployment benefits or suffered financial hardship due to COVID-19 that impacted their ability to pay rent, and submit unpaid bills or notices that demonstrate they are at risk of becoming homeless.

What can landlords do?

Tenants and landlords generally apply for the funds together, but the application process and guidelines differ from program to program. In some states, landlords may be asked to forgive a percentage of the rental arrears in exchange for larger rent payments.

If you are a landlord, you might reach out to tenants who are behind on rent and encourage them to explore any potential opportunities for financial assistance. Check the websites of your state and local housing agencies to find the status and requirements of various housing programs and how to apply. Of course, many higher-earning households won’t be eligible for help, and in areas with lots of lower-income renters, local programs could run dry quickly.

Evicting tenants can be a painful and expensive process. If you have tenants who fell behind but are trying to catch up, it may be advantageous to work out a payment program instead to help keep them in place.

1) Moody’s Analytics, 2021

2) RealtyTrac, 2021

3) The Wall Street Journal, March 11, 2021

5
May

Rising Inflation: Where Will It Go from Here?

In March 2021, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.6%, the largest one-month increase since August 2012. Over the previous 12 months, the increase was 2.6%, the highest year-over-year inflation rate since August 2018. (By contrast, inflation in 2020 was just 1.4%.). 1

The annual increase in CPI-U — often called headline inflation — was due in part to the fact that the index dropped in March 2020, the beginning of the U.S. economic shutdown in the face of the COVID-19 pandemic. Thus, the current 12-month comparison is to an unusual low point in prices. The index dropped even further in April 2020, and this “base effect” will continue to skew annual data through June. 2

The monthly March increase, which followed a substantial 0.4% increase in February, is more indicative of the current situation. Economists expect inflation numbers to rise for some time. The question is whether they represent a temporary anomaly or the beginning of a more worrisome inflationary trend. 3

Measuring Prices

In considering the prospects for inflation, it’s important to understand some of the measures that economists use.

CPI-U measures the price of a fixed market basket of goods and services. As such, it is a good measure of prices consumers pay if they buy the same items over time, but it does not reflect changes in consumer behavior and can be unduly influenced by extreme increases in specific categories. Nearly half of the March increase was due to gasoline prices, which rose 9.1% during the month, in part because of production interruptions caused by severe winter storms in Texas.4 Core CPI, which strips out volatile food and energy prices, rose 0.3% in March and just 1.6% year over year. 5

In setting economic policy, the Federal Reserve prefers a different inflation measure called the Personal Consumption Expenditures (PCE) Price Index, which is even broader than the CPI and adjusts for changes in consumer behavior — i.e., when consumers shift to purchase a different item because the preferred item is too expensive. More specifically, the Fed looks at core PCE, which rose 0.4% in March and 1.8% for the previous 12 months, slightly higher than core CPI but still lower than the Fed’s target of 2% for healthy economic growth. 6

A Hot Economy

Based on the core numbers, inflation is not yet running high, but there are clear inflationary pressures on the U.S. economy. Loose monetary policies by the central bank and trillions of dollars in government stimulus could create excess money supply as the economy reopens. Pent-up consumer demand for goods and services is likely to rise quickly, fueled by stimulus payments and healthy savings accounts built by those who worked through the pandemic with little opportunity to spend their earnings. Businesses that shut down or cut back when the economy was closed may not be able to ramp up quickly enough to meet demand. Supply-chain disruptions and higher costs for raw materials, transportation, and labor have already led some businesses to raise prices. 7

According to the April Wall Street Journal Economic Forecasting Survey, gross domestic product (GDP) is expected to increase at an annualized rate of 8.4% in the second quarter of 2021 and by 6.4% for the year — a torrid annual growth rate that would be the highest since 1984. As with the base effect for inflation, it’s important to keep in mind that this follows a 3.5% GDP decline in 2020. Even so, the expectation is for a hot economy through the end of the year, followed by solid 3.2% growth in 2022 before slowing down to 2.4% in 2023. 8-9

Three Scenarios

Will the economy get too hot to handle? Though all economists expect inflation numbers to rise in the near term, there are three different views on the potential long-term effects.

The most sanguine perspective, held by many economic policymakers including Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen, is that the impact will be short-lived and due primarily to the base effect with little or no long-term consequences. 10 Inflation has been abnormally low since the Great Recession, consistently lagging the Fed’s 2% target. In August 2020, the Federal Open Market Committee (FOMC) announced that it would allow inflation to run moderately above 2% for some time in order to create a 2% average over the longer term. Given this policy, the FOMC is unlikely to raise interest rates unless core PCE inflation runs well above 2% for an extended period. 11 The mid-March FOMC projection sees core PCE inflation at just 2.2% by the end of 2021, and the benchmark federal funds rate remaining at 0.0% to 0.25% through the end of 2023. 12

The second view believes that inflation may last longer, with potentially wider consequences, but that any effects will be temporary and reversible. The third perspective is that inflation could become a more extended problem that may be difficult to control. Both camps project that the base effects will be amplified by “demand-pull” inflation, where demand exceeds supply and pushes prices upward. The more extreme view believes this might lead to a “cost-push” effect and inflationary feedback loop where businesses, faced with less competition and higher costs, would raise prices preemptively, and workers would demand higher wages in response. 13

Maintaining Perspective

Although it’s too early to tell whether current inflation numbers will lead to a longer-term shift, you can expect higher prices for some items as the economy reopens. Consumers don’t like higher prices, but it’s important to keep these increases in perspective. Gasoline, jet fuel, and other petroleum prices are rising after being deeply depressed during the pandemic. Airline ticket prices are increasing but remain below their pre-pandemic level. Used cars and trucks are more expensive than before the pandemic, but clothing is still cheaper. 14 Food is up 3.5% over the last 12 months, a significant increase but not extreme for prices that tend to be volatile. 15

For now, it may be helpful to remember that “headline inflation” does not always represent the larger economy. And with interest rates near zero, the Federal Reserve has plenty of room to make any necessary adjustments to monetary policy.

Projections are based on current conditions, are subject to change, and may not come to pass.

1, 5, 15) U.S. Bureau of Labor Statistics, 2021

2-4, 7) The Wall Street Journal, April 13, 2021

6, 9) U.S. Bureau of Economic Analysis, 2021

8) The Wall Street Journal Economic Forecasting Survey, April 2021

10, 13) Bloomberg, March 29, 2021

11) The Wall Street Journal, April 14, 2021

12) Federal Reserve, 2021

14) The New York Times, April 13, 2021

7
Apr

High-Frequency Indicators: Where to Look for Signs of Recovery

Since the pandemic began, disruptions in business activity have varied greatly from region to region, and often from one week to the next, according to the severity of local COVID-19 outbreaks. Unfortunately, many of the official government statistics used to gauge the health of the U.S. economy are backward looking and somewhat delayed.

Changes in the nation’s gross domestic product (GDP) indicate the rate at which the economy is growing or shrinking, but the first GDP estimate is not published by the Bureau of Economic Analysis until about one month after each quarter ends. GDP increased at a 4.3% rate in the fourth quarter of 2020 but posted the worst annual decline (-3.5%) since 1946. 1.

Rapid changes in virus conditions — for better or worse — can make many of the monthly reports that gauge employment, consumer spending, and production seem outdated and irrelevant by the time they are released. Consequently, economists and investors have been focusing on more timely data sources to monitor the economic impact of the pandemic throughout the nation. This information is reported every week, and in some cases every day, by government agencies or private companies with access to key business insights.

Here are some of the high-frequency indicators that may be helpful in evaluating the progress of the economic recovery.

Employment picture

A weekly report from the Department of Labor includes the number of new claims for unemployment insurance benefits under state programs filed by workers who recently lost their jobs, as well as the number of continuing claims filed by those who remain unemployed. This provides an early look at whether the labor market is improving or worsening on a state-by-state and national basis. For the week ending March 20, 2021, first-time claims for unemployment benefits fell to 684,000, the lowest level since before economic lockdowns began in mid-March of 2020. 2.

The ASA Staffing Index from the American Staffing Association tracks weekly changes in temporary and contract employment. Many employers rely on temporary help before hiring additional permanent employees, so staffing agency trends tend to lead nonfarm employment by three to six months. As of March 8-14, 2021, there were 11.2% more staffing jobs than there were one year earlier. 3

Consumer behavior

The proprietary Johnson Redbook Index captures consumer spending trends based on weekly data from a representative sample of thousands of large general merchandise and apparel retailers. In an encouraging sign, this key index improved 9.4% year-over-year on March 23, 2021. 4

The reservation app OpenTable has been monitoring the impact of COVID-19 on the hard-hit restaurant industry, providing data that doubles as an indicator of the “openness” of local economies around the world. Daily data shows changes in the number of people dining at restaurants compared with the same day of the same week in 2019. As of March 28, 2021, the weekly average number of U.S. seated diners was still down 29% from 2019, but had bounced back considerably from the last week in February, when the average was 40% below 2019. 5

Mobility and travel

Other technology companies rolled out tools designed to help public health officials and policymakers around the world monitor day-to-day mobility trends with data collected from smartphone apps. Google’s Community Mobility Reports show changes in visits to places like grocery stores, retail shops, and parks. Apple’s Mobility Trends Reports show changes in routing requests (since January 2019) for walking, driving, and public transportation trips, the latter of which have been slower to recover.6

The number of people who pass through U.S. airport checkpoints is posted daily by the Transportation Security Administration. On March 21, 2021, a spring-break surge caused the number of air travelers to rise above 1.5 million for the first time in about a year. Still, this total was far below the 2.2 million air travelers on the same Sunday in 2019. 7

The hotel occupancy rate (released weekly by STR) is another good indicator of the willingness of consumers and businesses to spend money on travel. U.S. hotel occupancy hit 58.9% in the week ending March 20, 2021, the highest level in a year. More importantly, the industry had recovered nearly 85% of comparable 2019 occupancy. 8

Real-time tracker

In May 2020, Harvard-based nonprofit Opportunity Insights, in partnership with several private-sector providers of high-frequency data, launched a real-time Economic Tracker as a free public service. Interactive charts show day-to-day changes in U.S. debit- and credit-card spending, small-business revenue, employment, online job postings, and time spent outside the home. In addition to nationwide statistics, disparities in progress can be broken down by income and industry, as well as by state or metro area.

Fed indexes

The Weekly Economic Index (WEI), which is published by the Federal Reserve Bank of New York, signals the state of the U.S. economy based on 10 different indicators of consumer behavior, the labor market, and production that are available daily or weekly. The WEI is scaled to the four-quarter GDP growth rate, which means the weekly result is the economic growth that could be expected if current activity continued for a year. For the week ending March 20, 2021, the WEI jumped to 4.14% from -0.33% the previous week. 9

In addition, the Federal Reserve Bank of Atlanta keeps a running estimate of GDP changes — GDPNow — that is updated based on a model that incorporates incoming economic data. On March 26, 2021, the growth estimate for the first quarter of 2021 was 4.7%. 10

These estimates are based on current conditions, are subject to change, and may not come to pass. Neither is an official forecast of the Federal Reserve. When investing, it’s generally wise to maintain a long-term approach based on your personal goals, time frame, and risk tolerance, rather than react too quickly to shifting economic dynamics

1) U.S. Bureau of Economic Analysis, 2021

2) U.S. Department of Labor, 2021

3) American Staffing Association, 2021

4) Investing.com, 2021

5) OpenTable, 2021

6) Apple Mobility Trends, 2021

7) Transportation Security Administration, 2021

8) STR, 2021

9-10) Federal Reserve, 2021

11
Mar

National Consumer Protection Week: Beware of Pandemic Scams

This past year, scam artists have taken advantage of people’s concerns over the coronavirus pandemic to defraud them of money. According to the Federal Trade Commission (FTC), consumers reported losing more than $3.3 billion to fraud in 2020, up from $1.8 billion in 2019. (1)

This week is National Consumer Protection Week, the perfect time to take steps to protect yourself from the increase in fraud, identity theft and other scams. Here are some of the latest ones to watch out for.

Unemployment benefit scams

According to the U.S. Department of Labor, there has been a surge in identity theft related to unemployment insurance claims. In fact, over $5 billion in potentially fraudulent unemployment claims were paid between March and October of 2020.  (2)

Typically, these types of scams involve a fraudster trying to use your personal information to claim unemployment benefits. If you receive an unexpected prepaid card for unemployment benefits, see an unexpected deposit from your state in your bank account, or receive a Form 1099-G for 2020 unemployment compensation that you did not apply for, report it to your state unemployment insurance office as soon as possible.

Economic impact payment scams

Scammers have come up with a number of schemes related to the economic impact payments sent to taxpayers by the federal government. It is important to note that at this time, all first and second economic impact payments have already been sent out. A third economic impact payment may be sent out to taxpayers in March.

The IRS is warning taxpayers to be aware of scammers who:

  • Use words such as  “stimulus check” or “stimulus payment” instead of the official term, “economic impact payment”
  • Ask you to “sign up” for your economic impact payment check
  • Contact you by phone, email, text or social media for  verification of personal and/or banking information to receive or speed up your economic impact payment

In most cases, the IRS will deposit economic impact payments directly into accounts that taxpayers previously provided on their tax returns. If the IRS does not have a taxpayer’s direct-deposit information, a check or prepaid debit card will be mailed to the taxpayer’s address on file with the IRS. For more information visit irs.gov.

Fraudulent products and vaccine scams

This past year, the Federal Trade Commission has warned about scam artists attempting to sell fraudulent products that claim to treat, prevent or diagnose COVID-19.

With the arrival of new COVID-19 vaccines, the FTC is warning consumers to also be wary of possible vaccine scams. The FTC is urging consumers to contact their state or local health department in order to find out how, when and where to get a COVID-19 vaccine. In addition, the FTC warned consumers to avoid scammers who:

  • Offer to put your name on a vaccine list or get early access to a vaccine for a fee
  • Call, text or email you about the vaccine and ask for financial information

Protecting yourself from scams

Fortunately,  there are some things you can do to protect yourself from scams, including those related to the coronavirus pandemic:

  • Don’t click on suspicious or unfamiliar links in emails, text messages or instant messaging services — visit government websites directly for important information.
  • Don’t answer a phone call if you don’t recognize the phone number — instead, let it go to voicemail and check later to verify the caller.
  • Keep device and security software up to date, maintain strong passwords and use multi-factor authentication.
  • Never share personal or financial information via email, text message or over the phone.
  • If you see a scam, be sure to report it to the FTC at ftc.gov, the Treasury Inspector General for Tax Administration (TIGTA) at tigta.gov and your local police department.

(1)Federal Trade Commission, February 2021
(2)U.S. Department of Labor, February 2021

17
Dec

How COVID-19 Has Changed Consumer Behavior and the Future of Retail

U.S. retail sales suffered in the spring of 2020 due to safety concerns, government-mandated lockdowns, and economic uncertainty wrought by the coronavirus pandemic. Sales — including purchases at stores, restaurants, and online — plunged from $483.95 billion in March to $412.77 billion in April, a record 16.4% drop.1)

Fortunately, retail sales rebounded sharply after the economy began to reopen in May, matched pre-pandemic levels in June ($529.96 billion), and continued to rise steadily from July through September. But sales softened in October, ticking up just 0.3% to $553.33 billion.2)

The arrival of an effective vaccine could inspire some holiday cheer, though it probably won’t be widely available until next spring.3)  Until then, consumers will likely spend more time at home.

U.S. consumer spending accounts for about two-thirds of all economic activity, so it’s good news that many businesses and consumers have adapted quickly to the new normal created by the pandemic.4) Here’s a look at recent changes in consumer behavior, the state of the retail industry, and what these trends could mean for the broader U.S. economy.

Stay-at-home spending shifts

Some workers with stable incomes have been able to save money they would normally spend on transportation, gym memberships, restaurant meals, and expensive “experiences” such as vacations, concerts, sporting events, and other live shows. On the other hand, many households are spending more on home improvements, household goods, fitness equipment, and other lifestyle purchases that make sheltering in place more tolerable.5)

For example, huge demand for bicycles resulted in surprising shortages.6) And with offices closed and most special events cancelled or postponed, a preference for casual and comfortable clothing has decimated consumer demand for more formal attire like business suits and dresses.7)

A swift expansion of e-commerce was also unleashed. New online habits were created in the first three months of the pandemic, accelerating the adoption of digital technologies that might have taken 10 years to achieve otherwise.8)

When lockdowns and social distancing measures were put in place, many consumers were compelled to shop online and use other digital services (e.g., video chat, virtual doctor visits, and online classes) for the first time. Surveys suggest that a vast majority of new users found online services to be useful and convenient; many said they will continue to use them permanently.9)

But anxious consumers have also been boosting their savings. The personal saving rate — the percentage of disposable income that people don’t spend — hit a record 33.6% in April before falling to 14.1% in August, far above February’s 8.3% rate.10) When consumers prioritize saving, it may help individual households build financial stability and prepare for retirement, but it can also hold back the nation’s economic growth.

Traditional retailers on the ropes

Big-box retailers that sell groceries and other goods in one place and home-improvement stores were deemed “essential” in the spring. Regardless of local virus conditions, these businesses have remained open for a steady flow of customers eager to stock up on food and other necessities. As a result, they have generally been able to book healthy profits.11)

Meanwhile, temporary closures, capacity limits, and a drop-off in overall customer traffic have taken a toll on nonessential retailers that couldn’t offer a convenient online shopping experience with home or curbside delivery. The pandemic may land the blow that knocks out some familiar brick-and-mortar retailers, many of which were already buckling under excessive debt and fierce competition from e-commerce giants.

Retail bankruptcies and store closings are on track for a record year in 2020. By mid-August, 29 U.S. retailers had filed for Chapter 11 protection, including several long-standing department-store chains. More than 10,000 permanent store closings have already been announced in 2020, vacating roughly 130 million square feet of physical retail space.12)

A holiday season like no other

Higher unemployment and wage cuts might have had a more severe impact on consumer spending from March to October were it not for the expanded unemployment benefits and stimulus checks delivered to consumers by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. At the time of this writing, Congress had not passed a follow-up stimulus package, and consumers were facing new challenges going into the holiday season.

More than 11 million U.S. workers were still unemployed in October, before a nationwide surge in virus cases and hospitalizations sparked a new round of business restrictions and closures in mid-November.13-14) CARES Act provisions that offer financial support for affected consumers and small businesses expire by the end of December.

Holiday sales figures are often considered an economic barometer, reflecting consumer confidence and funds for discretionary spending. In 2019, holiday spending in November and December rose 4.1% over 2018, suggesting that economic growth was picking up steam.15) But holiday shoppers were blissfully unaware that a pandemic was on its way.

Black Friday holiday deals are designed to create a frenzy and lure throngs of shoppers into stores. But retailers seemed to agree that a different approach was needed in 2020: Promotions were offered online and earlier; store hours were shortened and capacity was limited; and unlike in past years, most stores stayed closed on Thanksgiving.

The prospects for holiday retail sales in 2020 are murky, but consumers are expected to purchase more gifts online than ever before — and possibly too many for shipments to be delivered on time. To be on the safe side, the National Retail Federation is recommending that consumers get their shopping done early and take advantage of curbside pickup.16

1) The Wall Street Journal, May 15, 2020

2) U.S. Census Bureau, 2020

3) The New York Times, November 17, 2020

4) U.S. Bureau of Economic Analysis, 2020

5) The Wall Street Journal, November 17, 2020

6) The New York Times, June 18, 2020

7) The Wall Street Journal, August 27, 2020

8-9) The Wall Street Journal, November 15, 2020

10) The Wall Street Journal, October 25, 2020

11) The Wall Street Journal, November 18, 2020

12) The Wall Street Journal, September 29, 2020

13) U.S. Bureau of Labor Statistics, 2020

14), 16) Associated Press, November 11 and 17, 2020

15) National Retail Federation, 2020