Hello “Normal” economy and farewell (to the idea of A) “Boom”
In many parts of the country, more masks! Reopening of businesses. And it seems the impact of the latest stimulus checks (helicopter money) has quickly faded away.
Despite the IRS continuing to send billions more in stimulus funds as it processes 2020 tax returns, April retail sales fell -0.7% M / M. Market expectations were for an increase of + 1.0%. In the retail world, this is a huge mistake. Worse yet, the “base” figure used in the GDP calculations fell -1.5% for April, the first month of Q2, which does not bode well for GDP growth. This likely means that the high single-digit forecast and some double-digit forecast for Q2 GDP growth will soon fall back to earth.
The University of Michigan consumer sentiment survey also cast cold water on the “boom” mentality. The overall survey fell from 88.3 in April to 82.8 in May. The drop in sentiment affected all walks of life and all age groups. It is concerning that auto buying plans fell to 102 from 118, the lowest level since October 2008. But the biggest drop in sentiment has occurred in home buying plans which collapsed to 95 in May from 114 in April and 127 in March. The May reading was on lowest in 38 years!!!
As anyone who reads or watches the news knows, house prices have skyrocketed. The graph (through February) shows 12% year-on-year growth. The latest data, however, has accelerated and the M / M price hikes are at a pace closer to 15% annualized.
Supply chain problems, caused by the pandemic, have put building materials in a shortage, and labor also appears to be in short supply (brakes on unemployment benefits?). These caused price spikes to rise. In addition, in the existing living space, the single-family unit is now all the rage as Work from Home (WFH) has focused on this form of housing. In some markets, listings for existing homes for sale last less than a day, and bidding wars result in prices paid higher than the asking price and the original appraisal.
The good news is that supply chains are slackening. As noted in our previous blogs, the Canadian lumber industry has shifted into high gear. We believe that much of the price frenzy was caused by speculative fervor in the commodity pits rather than actual supply / demand. Nonetheless, speculation has a great influence on the prices of commodities, such as lumber. We have recently seen speculative retreats (Bitcoin!) And commodities have not been excluded. The graph below shows the wild ride the price of lumber has undergone in the CME’s commodity pits this year.
On May 6, the price of lumber (per thousand board feet) reached $ 1,687. As of 2:32 p.m. EDT on May 19, the price was $ 1,327, down 21% in two weeks. Note that it was below $ 750 in January, so the price is still very high, but falling. (Note: Continuing volatility, wood on the CME closed at $ 1,390 on Thursday, May 20.)
Besides the price of wood starting to come back to earth, other housing data suggests that the housing frenzy may have peaked:
- As mentioned above, the home buying intentions sub-index in the recent University of Michigan survey hit a 38-year low in May;
- Existing home sales have fallen in four of the past five months: December: -2.6%; Jan: -0.3%; February: -2.8%; March: -10.6%; Apr .: + 1.9% (all M / M data changes);
- Mortgage purchase requests fell 4.1% the week of May 14;
- Housing starts fell -9.5% in April and single-family starts fell -13.4% (the third decline in the past four months);
- Building permits for single-family homes also fell -3.8% in April. Some attribute this data to “shortages”, but if so, why have multi-family housing starts (+ 0.8%) and permits (+ 8.9%) increased?
Housing is now and always has been a major contributor to the economy. Thus, moderation / weakness will have a major impact on economic growth and inflation.
Initial Unemployment Claims (CI) continue to decline, dropping to + 455K the week ended May 15 (unadjusted – NSA) from + 492K (revised from 487K) the previous week, a decline of around -33K compared to the + 487K number on the market just before release. We note the continuation of the downward trend. Keep in mind that CIs are an approximation of layoffs, and + 455K still represents a number we would only expect in a severe recession.
In the Special Pandemic Unemployment Assistance Programs (PUA), the CIs have increased from + 104K to + 95K. The people participating in these programs are small business owners, and the number of new filings here is an approximation of small business closings. The addition of the two IC numbers gives + 550,000 new applicants (graph). The pre-pandemic “normal” was + 200K, so the main excitement here is that the ICs continue to drop.
As we have said in previous blogs, our biggest concern remains the level of Continuous Unemployment (CC) claims (those who receive benefits for more than a week). These stood at 16.0 million the week of May 1, down about -900K from the previous week. Almost all of the decline occurred in PUA programs, which we interpret to mean that small businesses have reopened with those business owners returning to work and losing their unemployment role. However, the numbers of states do not change as quickly. Those in state office are former employees of an employer who has contributed to the state unemployment system. This stubbornness tells us that the deterrent of the federal supplemental payment of $ 300 / week is still in play. As of this writing, 20 states are now considering suspending this federal supplement.
We expect PUA claims to continue to decline as the economy reopens. State claims will also drop, but the steepness of that downward trend through most of the summer will depend on how states take action on the current federal supplemental payment. While we believe the return to the full employment economy is still a long way off (companies have learned to get along with fewer employees), by the end of the third quarter, we expect the current market dislocation (labor shortages) to be largely resolved.
We continue to see discussions of ‘non-transient’ (i.e. ‘systemic’) inflation in the business media, especially as the CPI and PPI indices for April showed increases. disproportionate prices on a Y / Y basis. In our view, a large part of these increases were due to base effects. Economist David Rosenberg observed that while the base period of the CPI and PPI for April was two years ago instead of last year (thus eliminating price drops at the start of the pandemic ), the annual rate headline and core inflation is 2.2% – not that scary. Therefore, it is logical to conclude that most of the disproportionate results of the CPI and PPI were due to “base effects”.
All of the significant increases in the post-war period have been accompanied by rapid growth in consumer borrowing and rapid expansion of bank lending to businesses. None of these problems are happening today. The graph shows that consumers have paid off their debts during the pandemic. And, the New York Fed told us that a third of the value of the last batch of stimulus checks has gone or will go towards reducing consumer debt.
The following graph shows the peak of initial borrowing during the first months of foreclosure (in many cases, companies have borrowed the full amount of their bank lines of credit for fear that these lines will be drawn by banks as they do. were in 2008). Since then, outstanding bank loans have declined and today are not much different from what they were in mid-March 2020. Without general credit expansion, “systemic” inflation does not occur. simply not.
Over the past few months, we have repeatedly asked in this blog what the pandemic has done to change the very slow growing / low inflation economy we had in the decade leading up to COVID-19. Once the schools reopen, the helicopter money stops and the jobless brakes disappear (20 states are canceling the $ 300 / week federal grant), we see no fundamental change. A slow growing, low inflation economy will return.
(Joshua Barone contributed to this blog)