A "Boys of Summer"
Retail sales were up as consumers started spending but there’s a chance we didn’t appreciate it while it was happening
>> Quick takes:
- September retail sales surprised on the upside
- But are other data already signaling a downshift?
- Inflation and consumer sentiment slowly recovering
- Housing market remains a bright spot
- CRE set to take guidance from the economy
We continue to believe that the economy is on the road to recovery, but which road remains to be seen.
Data released last week had a “Boys of Summer” feel to it, as if something has already ended and maybe we just have not fully appreciated it yet. As summer wrapped up in September, retail spending surprised on the upside. Consumers splurged on new cars, clothing, sporting goods and dining out, potentially taking advantage of outdoor activities while the weather remained cooperative across much of the country. They accomplished this via spending more of their income and reducing their savings rate, which spiked during the crisis. But as we have reiterated numerous times, the risk remains that the economy broadly (and households more narrowly) begins to struggle without the support of fiscal stimulus.
Other data from last week seems to support this concern. Industrial production contracted in September, presenting an early hard data point that shows the withdrawal of fiscal stimulus and the slowing in the economy are not random and independent. News from the labor market also supports this view. Weekly unemployment claims for the week ended October 10 showed a small increase. But the magnitude matters less than the trend. The number of initial claims began declining in early April, but clearly stalled. Since late August, initial claims have remained within a very narrow band from 845,000 to 898,000, levels that would set records and create serious cause for alarm during any other period. Moreover, even though continued claims drifted lower, some of that decline stems from people exhausting their benefits and becoming ineligible for additional unemployment insurance. We continue to believe that the economy is on the road to recovery, but which road remains to be seen.
Weekly claims remain elevated
Inflation still recovering
Inflation data reflects an ongoing recovery in aggregate demand. Both the headline and core consumer price index (CPI) readings for September both increased slightly, roughly in line with expectations. Future increases should remain challenged while the economy mounts a slow recovery. Meanwhile the producer price index (PPI) for September outperformed expectations with the year-over-year growth rate returning to growth territory after a noteworthy decline in the price level for a good part of the year, particularly in April. Disruptions to the supply chain will wrestle with tepid demand, helping to keep prices subdued. The import price index increased slightly in September, its weakest gain since April. Import prices moved up only slightly, largely due to energy costs. Year-over-year, the change in the index remains negative and muted global demand should limit upward pressure, even as prices continue to slowly increase.
Consumers are gradually feeling more optimistic as the economy moves past its most dire stages, but ongoing issues with the labor market and the expiration of fiscal stimulus has caused the sentiment index to remain well below levels from before the pandemic.
Consumer sentiment also building back up
Consumer sentiment also continued to recover, increasing slightly during October. Consumer sentiment has followed a trajectory roughly similar to that of inflation: improvement over time, but with acceleration returning very slowly. Consumers are gradually feeling more optimistic as the economy moves past its most dire stages, but ongoing issues with the labor market and the expiration of fiscal stimulus has caused the sentiment index to remain well below levels from before the pandemic.
| What it means for CRE |
For commercial real estate (CRE), the path of the economy remains of paramount importance. While we expect economic growth to slow after a snapback third quarter, the magnitude of the slowdown remains uncertain. We continue to believe that continued fiscal stimulus would support the economic recovery and limit the downside risk. But the longer the delay, the greater the risk of permanent damage via business failures and job losses that will make the trajectory far more treacherous for the economy and CRE.
| What we are watching this week |
Housing takes center stage this week. Housing starts and building permits for September should both increase, but we expect gains to come from the single-family sector while enthusiasm for multifamily development continues to wane during the pandemic. Existing home sales for August look set to increase with demand for for-sale housing continuing to increase as many seek larger dwellings and social distance from others.
| Thought of the week |
On a year-over-year basis, seasonally adjusted beer, wine, and alcohol sales increased by roughly 22% in August, down slightly from the record high of 23% in May. The previous record high was roughly 11%.