The government released a slew of economic data ahead of the Christmas holiday. The data provide a look at how the surge in COVID cases in November started to impact everything from consumer spending to business investment. High frequency data revealed that the economy slowed during the last weeks of November but not as much as we saw in the spring.
There are several reasons for this: We have become more conservative in our containment measures, keeping more of the economy open than we did initially despite a much larger and broader surge in cases; the losses are coming from a lower base, especially when it comes to employment; and, consumers are reacting much less dramatically to the threat of contagion.
Positive developments in terms of access to an effective vaccine have made us less risk-averse, which is sadly upping the pace of contagion. This, coupled with concern that the virus has mutated, has prompted more aggressive mitigation efforts abroad and in some states, effectively making this data backward looking and more positive than we will see for the months of December and January.
Personal consumption expenditures dropped 0.4% in November, adjusting for inflation. That marks the first drop in overall spending since April. A drop in spending on goods was only partially offset by another increase in spending on health care. Data for October was revised down significantly. This now suggests the consumer struggled more than previously thought as we entered the fourth quarter.
Dentists’ and doctors’ offices have reported an uptick in cancelations but the pullback is nothing compared to what we saw last spring. Spending at hospitals has held up better, but the surge in cases has meant that beds for elective surgeries requiring an overnight stay are starting to be rationed. Caring for COVID patients is much more taxing for hospitals and staff (understatement) than caring for non-COVID patients.
Personal disposable incomes plummeted 1.3% in November, after the drop in October was revised to be somewhat smaller than initially reported. The weakness in incomes was driven by a drop in the support provided by Payroll Protection Plan (PPP) loans and subsidies to the farm sector. We also saw an uptick in the number of people who lost their extensions to unemployment insurance (UI) during the month. These losses underscore how important it was to pass an aid bill earlier this fall.
The saving rate fell to 12.9% in November, the lowest we have seen since before the crisis. This reflects the drawdown in saving we saw when households rolled off of the support programs provided in the CARES Act and underscores the need for the new aid bill. The president has yet to sign the relief bill. Every day we wait is another delay in when households actually receive funds. His demands for larger stimulus checks is not expected to be met given the pushback from his own party on the size of the bill. Households will have to wait until January to feel any gains associated with the aid bill. Airlines started to recall furloughed workers in the hours after Congress voted on the new aid bill. Those workers will return to work in January, as long as the president signs the bill before year-end.
Wages and salaries continued to recover in November but at a slower pace than earlier in the year. Employment slowed fairly dramatically in November.
The personal consumption expenditures (PCE) deflator, which more accurately measures inflation than the CPI, was essentially unchanged in November. The core PCE, which excludes food and energy and is a good predictor of future inflation, also flatlined during the month. Both indices rose only 1.1% and 1.4% from a year ago, respectively. That marks a slowdown in the overall index from the pace in October. Both indices remain well below the Federal Reserve’s 2% target on PCE inflation. Those worried that the current crisis could stoke inflation because of the unprecedented response by fiscal and monetary policy have been consistently wrong.
Consumer spending is poised for a more modest increase than previously expected on the basis of this data for the fourth quarter. Stimulus checks and expansions to unemployment insurance (UI) benefits will blunt the blow to incomes in the first quarter. Spending on necessities, such as food, could get a boost from expansions to UI. Stimulus checks are expected to be saved until the economy can reopen more fully later in the year.
Housing Remains Resilient
New home sales fell 11% to a seasonally adjusted annual rate of 841,000, but were still up 21% from a year ago. Monthly declines were broad-based, with all regions posting declines in sales. The Midwest saw double-digits declines on monthly and annual bases as the virus surged in the weeks leading up to and including the Thanksgiving holiday.
Existing home sales fell 2.5% in November to a seasonally adjusted annual rate of 6.7 million after climbing for five months in a row. Compared to a year ago, sales were 26% higher. Sales in the West were unchanged on the month; all other regions recorded declines in sales. The supply of existing homes for sale at the end of the month totaled 1.28 million, just over two months’ supply and a new record low. More homes have been listed on the market than at this time last year but the demand remains strong enough for homes to be snapped up quickly.
Prices rose a startling 15% from a year ago for existing homes. Mortgage applications for purchase have softened as we approached the holidays while the average loan balance set a record high of $376,800 in mid-December. There is more housing supply at the higher end of the market where those who have cash are buying.
Rent collections in December, as tracked by the National Multifamily Housing Council, declined slightly to 89.8% as of December 20; rent collections have been slowing since October and are now down 3.4% compared to a year ago. [The tracker only measures rents paid for large, professionally managed apartment buildings; mom and pop landlords have been disproportionately hurt by the pandemic.]
According to the National Council of State Housing Agencies, total rent due will amount to between $25.2 billion to $34.3 billion by January 2021. Due to eviction moratoriums, many renters have been able to pause or reduce rent payments; that has hurt landlords who do not get to pause or reduce their mortgage or tax payments. Unlike the mortgage forbearance programs available to homeowners, renters could be liable for all of the rent missed in one lump payment including late fees - impossible for many who still cannot afford even one month of rent.
The newest federal aid bill passed by Congress this week includes $25 billion in rental assistance and extends eviction moratoriums to January 31. The funding will be provided to state and local governments, which will distribute to renters or landlords. Some states already have the infrastructure to take requests through relief organizations (New York and California); other states (such as Alabama or Missouri) will have to set up from scratch, which will delay the distribution of funds. Renters will be eligible for up to 15 months’ assistance for rent and utilities. Evictions are still expected to rise, given the gap between what is owed and what the government is providing.
Durable Goods Orders Slow
Durable goods orders rose 0.9% in November after being revised up slightly for the month of October, when orders increased by 1.8%. Orders excluding the volatile transportation sector rose a moderate 0.4% during the month. Nondefense aircraft orders lost ground after finally increasing last month. Defense spending continued to post gains.
Core durable goods, which strip out defense and aircraft orders and more closely track investment decisions by businesses, rose 0.4% in November. Data for the quarter are still well into the black for business investment. The drivers of overall gains in business investment remain computers and information technology. This reflects the shift to working from home and the accelerant that COVID is playing in pushing firms to adopt more digital platforms.
The shift to digitization goes well beyond retail, representing a fundamental shift in the way business is done. The pandemic has forced companies to adopt cost-cutting technologies more rapidly, which means larger disruptions to employment even as the economy reopens more fully when we reach herd immunity.
We also saw another increase in spending on new machinery. Last month, this was concentrated in construction machinery, which is picking up in response to the housing market. Some factories have also begun to retool and upgrade their equipment, although gains vary a lot by sector.
Core shipments rose 0.4% during the month, after surging 2.6% the previous month. That suggests business investment will remain robust in the fourth quarter. This will help to offset the weakness we are seeing in consumers spending. There is some risk that exports could slow as we come to the close of the year, given the more aggressive lockdowns we are seeing in Europe. The good news is that manufacturers have shown that they are better at containing the spread of the virus than much of the service sector, and they have gotten more of a pass on shutdowns this winter than we saw in the spring.
Unemployment Claims Move Higher
Initial unemployment claims for the week ending December 19 fell to 803,000 after seasonal adjustment, but were revised up during the previous week. The four-week moving average on initial unemployment claims has moved up 4,000 to 818,250. The data suggest that employment could be flat to negative in December as PPP loans dried up and many stores and restaurants were forced to close for good. Some of the surge in the first half of December reflected a catch-up in claims that were delayed over the Thanksgiving holiday. Initial unemployment claims remain close to four times the pace we saw a year ago.
The special pandemic unemployment insurance claims also fell during the week but that was after spiking during the first two weeks of December. Many people who ran out of extensions to their unemployment insurance because of how long they have been unemployed, applied for the special pandemic unemployment insurance.
The new aid bill will allow people $300 per week in supplements to both regular and special pandemic unemployment benefits through at least March 14. Those who have applied for benefits prior to March 14 will get an additional $300 per week for four more weeks. This is half the $600 per week we saw in the CARES Act but a vast improvement over basic unemployment benefits.
The economy is slowing in response to the surge in COVID cases. The risk is that we slow further in response to another uptick in cases following the Christmas holiday. The aid bill passed by Congress should help to blunt losses as we move into January. The challenge now is to get the bill signed and cash into people’s pockets. Too many will get nothing until after the Christmas and New Year’s holidays. Donate to your local food bank. The pain is still compounding for too many.
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Na Tasha Lowe
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