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
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
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
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
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
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
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
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
The Jobs Recovery: More Work to Be Done
In April 2020, the U.S. economy lost an astonishing 20.8 million jobs, by far the largest loss recorded in a single month dating back to 1939. To put this in perspective, the second largest monthly job loss was about 2 million in September 1945, when defense industries reduced production at the end of World War II.1
The April unemployment rate spiked to 14.7%, the highest official rate on record (though unemployment has been estimated as high as 25% during the Great Depression). Just two months earlier, it was 3.5%, a 50-year low.2-3
As these numbers indicate, the impact of the COVID-19 recession on U.S. employment is unprecedented. As we approach the end of a very difficult year, this might be a good time to look at the state of the jobs recovery so far and consider its future prospects.
Measuring unemployment
The headline unemployment rate for October was 6.9%, a 1% improvement over September and less than half the rate in April. The rate is moving in the right direction but has a long way to go, and the headline rate — officially called U-3 — is not always the best indication of the state of employment. The U-3 rate only measures those who are unemployed and have actively looked for work during the previous four weeks.4
The broadest measure, U-6, includes discouraged and other “marginally attached” workers — those who are not currently looking for a job but are available to work and have looked in the last 12 months — and part-time workers who want and are available for full-time work. By this measure, the unemployment rate in October was 12.1%, suggesting that almost one out of eight Americans who want to work full-time cannot do so.5
Among the positive news in the October report was that almost 750,000 people age 20 and older — including 480,000 women — joined the labor force (meaning they are either employed or actively looking for work). This came after 1.1 million left in September — about 80% of them women — suggesting they may have dropped out to care for children attending school remotely or because they lacked child care. Women are also more likely to work in jobs that have been especially hard-hit by the pandemic. Since February, almost 2.2 million women have left the labor force compared with just 1.4 million men.6-7
Diminishing job gains
Prior to March 2020, the U.S. economy added jobs for 113 consecutive months dating back to October 2010. With the beginning of lockdowns in March, followed by the April collapse, more than 22 million jobs were lost over a two-month period.8
About 12 million jobs returned over the next six months, but that leaves the economy down 10 million jobs, and growth has slowed substantially since almost 5 million jobs were added in June during the first wave of reopenings. September and October saw gains of 672,000 and 638,000, respectively — great months during a healthy economy, but not nearly enough to catch up.9 If job creation continues at that pace, it would take about 15 months to get back to pre-pandemic levels, and that may be optimistic. In the October Economic Forecasting Survey of The Wall Street Journal, more than 40% of economists projected that payrolls would not return to pre-pandemic levels until 2023, and about 10% thought it would take even longer.10
An uneven recession
Different industries respond differently during any recession, but the pandemic has created big disparities that have led to large-scale layoffs. The leisure and hospitality industry has been hit the hardest, with total payrolls still down 20% from a year ago, despite more than 4.8 million employees returning to work over the last six months. By contrast, payrolls in the financial industry are down just 0.9%. Manufacturing is down 4.5%, and professional/business services is down 4.9%. Driven by demand for housing, the construction industry added 84,000 jobs in October and is down just 2.6% over October 2019.11
The retail industry added more than 100,000 jobs in October and is down only 3.0% from a year ago, aided by the strength of building supply stores, warehouse stores, and food and beverage stores, which have added almost 300,000 employees over the past year. Even with many locations reopening, employment in clothing stores is still down almost 25%, while sporting goods and hobby stores are down 16%. Online retailers, which have flourished during the pandemic, added 54,000 employees over the last six months, but payrolls are flat over a year ago.12 In 2019, retailers hired more than a half million temporary employees during the winter holiday season, but with so many brick-and-mortar stores struggling, the holidays may not provide as much of a boost this year.13
Imagining the future
In the near term, the employment picture will depend in large part on controlling the coronavirus. The spike in cases going into the winter cold and flu season suggests that the return-to-work process may slow down. Recent news regarding a vaccine is encouraging, and some high-risk groups might be inoculated by the end of the year. However, a vaccine may not be widely available until spring 2021.14
While an effective vaccine could be a game changer, it will not instantly open businesses or return all employees to the same jobs they had before the pandemic. For example, the shift to online retailing, which requires fewer employees, will likely continue. On the other hand, pent-up demand for travel and dining in restaurants could lead to a surge in hiring. A recent survey of frequent travelers found that 99% are eager to travel again, and 70% plan to take a vacation in 2021.15
In the best case, the pandemic might inspire changes that will strengthen the American workforce. In October, more than 21% of U.S. workers were still working remotely due to COVID-19, and many companies are making remote work a permanent option — a paradigm shift that may open new jobs for workers living outside of urban centers.16 The combination of remote work, remote learning, cheap technology, and low interest rates might offer opportunities to rethink broad business, employment, and education models. In the long term, the jobs recovery could depend on innovation as much as a vaccine.
1-2, 4-6, 8-9, 11-12, 16) U.S. Bureau of Labor Statistics, 2020
3) The Wall Street Journal, May 8, 2020
7) Associated Press, November 8, 2020
10) The Wall Street Journal Economic Forecasting Survey, October 2020
13) National Retail Federation, 2020
14) MarketWatch, November 13, 2020
15) Travel Leaders Group, October 16, 2020
The Shape of Economic Recovery
On June 8, 2020, the National Bureau of Economic Research (NBER), which has official responsibility for determining U.S. business cycles, announced that February 2020 marked the end of an expansion that began in 2009 and the beginning of a recession.(1) This was no great surprise considering widespread business closures due to the coronavirus pandemic and the resulting spike in unemployment, but it was an unusually quick official announcement.
The NBER defines a recession as “a decline in economic activity that lasts more than a few months,” so it typically takes from six months to a year to determine when a recession started. In this case, the NBER’s Business Cycle Dating Committee concluded that “the unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy,” warrants the designation of a recession, “even if it turns out to be briefer than earlier contractions.”(2)
Another common definition of a recession is two or more quarters of negative growth in gross domestic product (GDP), and it’s clear that the current situation will meet that test. The U.S. economy shrank at an annual rate of 5% in the first quarter of 2020 — a significant but deceptively small decline, because the economy was strong during the first part of the quarter. (3)
The first official estimate for the second quarter will not be available until July 30, but the Federal Reserve Bank of Atlanta keeps a running estimate that is updated based on incoming economic data. As of July 9, the Atlanta Fed estimated that GDP would drop at a 35.5% annual rate in the second quarter.(4) By comparison, the largest quarterly drop since World War II was 10% in the first quarter of 1958, followed by 8.4% in the fourth quarter of 2008.(5)
Most economists believe that GDP will turn upward in the third quarter as businesses continue to open.(6) But with the extreme decline in business activity during the first half of 2020, it will take sustained growth to return the economy to its pre-recession level. In its June economic projections, the Federal Reserve Open Market Committee projected a 6.5% annual drop in GDP for 2020, followed by 5.0% growth in 2021 and 3.5% growth in 2022.(7) The simple math of these projections suggests the economy may not return to its 2019 level until 2022.
By the letters
Economists traditionally view economic recessions and recoveries as having a shape, named after the letter it resembles.
V-shaped — a rapid fall followed by a quick rebound to previous levels. The 1990-91 recession, which lasted only eight months and was followed by strong economic growth, was V-shaped. This type of recovery would require control of COVID-19 through testing and treatment, a quick ramp-up of business activity, and a return to pre-recession spending habits by consumers. (8-9)
U-shaped — an extended recession before the economy returns to previous levels. The Great Recession, which lasted 18 months followed by a slow recovery, was U-shaped. If COVID-19 takes longer to control and the economy does not bounce back as expected in the third quarter, the current recession could be prolonged. (10-11)
W-shaped — a “double-dip” recession in which a quick recovery begins but drops back sharply before beginning again. The U.S. economy experienced a W-shaped recession in 1980-82, when a second oil crisis and high inflation triggered a brief recession, followed by a quick recovery and another recession sparked by overly aggressive anti-inflation policies by the Federal Reserve. This type of recession could occur if a second wave of COVID-19 forces businesses to shut down again later in the year, just as the economy is recovering. (12-13)
L-shaped — a steep drop followed by a long period of high unemployment and low economic output. The Great Depression, which lasted 43 months with four straight years of negative GDP growth, was L-shaped. This is unlikely in the current environment, considering the strength of the U.S. economy before COVID-19 and the unprecedented economic support from the Federal Reserve. (14-15)
A swoosh
In the July Economic Forecasting Survey by The Wall Street Journal, which polls more than 60 U.S. economists each month, 13.0% of respondents thought the recovery would be V-shaped, 11.1% expected it to be W-shaped, 5.5% indicated it would be U-shaped, and none thought it would be L-shaped.(16)
The vast majority — 70.4% — believed the recovery would take a “Nike swoosh” shape, which suggests a sharp drop followed by a long, slow recovery.(17) This view factors in the possibility that businesses may be slow to rehire, and consumers could be slow to resume pre-recession spending patterns. It also considers that some businesses may be impacted longer than others. Airlines do not expect to return to pre-COVID passenger activity until 2022, and movie theaters, beauty salons, sporting events, and other high-contact businesses may struggle until a vaccine is developed. (18)
Adding to the prognosis for a slow recovery is the fact that the rest of the world is also fighting the pandemic, including many countries where growth was already more sluggish than in the United States. And if the virus resurges in the fall or early 2021, the recovery may turn jagged with significant setbacks along the way. (19)
While the consensus suggests that the duration of the actual recession may be brief, it is much too early to know the true shape of the recovery. However, the economy will recover, as it has in even more challenging situations. All these projections indicate that a key factor in determining the shape of recovery will be control of COVID-19. Beyond that, the underlying question is whether the virus has fundamentally changed the U.S. and global economies.
(1-2), (8), (10), (12), (14) National Bureau of Economic Research, June 2020
(3), (5), (15) U.S. Bureau of Economic Analysis, June 2020
(4) Federal Reserve Bank of Atlanta, July 9, 2020
(6), (16-17) The Wall Street Journal Economic Forecasting Survey, July 2020
(7) Federal Reserve, June 10, 2020
(9), (11), (13) Forbes Advisor, June 8, 2020
(18-19) The Wall Street Journal, May 11, 2020
