Congress and Fed
Will the CARES Act and new measures enacted by the Fed last week get the U.S. economy back on stronger footing? And how will they impact CRE—reeling from the coronavirus on both the occupier and investor sides?
Unemployment claims demonstrate abrupt halt to economic activity
Weekly initial unemployment claims leapt to a record high of roughly 3.3 million. That figure reflects the sudden and dramatic halt to economic activity with millions of people losing their jobs in such a concentrated time period. That differs from typical recessions which have more dispersed job losses. For example, during the Great Recession, weekly claims peaked at 665,000 but total jobless claims during that time period totaled roughly 37.1 million. We expect elevated claims to continue due to ongoing job losses, expanded eligibility for unemployment benefits, and the fact that many states’ systems became overwhelmed by the large volume of claims, leaving some states unable to process all of them.
Drop in final consumer sentiment for March belies massive decline in consumer mood
The final reading from the University of Michigan consumer sentiment index for March declined notably versus the level from February. Yet, it still underestimates the decline in consumer mood because roughly two-thirds of the surveys were conducted in early March before the widespread issuance of lockdown orders and cancellation of many events. Daily estimates of consumer spending, such as those from Morning Consult Economic Intelligence, show more dramatic declines in consumer spirits.
CARES Act will support consumers, businesses, and governments
Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act late last week. It will aid low-income and middle-income consumers in the form of direct payments and expanded eligibility for unemployment benefits. It will help businesses with roughly $1 trillion of loans, loan guarantees, and bailout funds. It will also support governments at the local, state, and federal levels.
CARES Act will provide support in the short term and medium term
The CARES Act will provide immediate support to consumers and businesses. But the act should also support the economy’s eventual recovery. Roughly 99% of U.S. firms are small businesses and many could fail during the downturn. If so, that could reduce the number of employers relative to the number of people seeking employment once the crisis abates. That mismatch would slow any economic rebound. The CARES Act should help employers stay in business and shorten the transition period from downturn to recovery. The $2.2 trillion overall package is already more than double the size of the cumulative fiscal stimulus deployed during the Great Recession between 2008 and 2010. And this likely will not be the last of the legislation to help cushion and ultimately revive the economy.
Fed expands its toolbox to support the economy and financial markets
The Federal Reserve continued to expand its toolbox to combat the crisis. The Fed broadened previously used measures such as quantitative easing (QE) and announced a slate of new measures. Among the most relevant to commercial real estate (CRE), The New York Federal Reserve announced that it would begin purchasing securities backed by commercial mortgages for the first time. Initially the securities would primarily be backed by multifamily mortgages, but the program might expand to include mortgages backed by other commercial property types.