The economy's
uncertain path forward

Strong economic growth paired with a worsening pandemic and lack of fiscal stimulus makes for quite the conundrum

October 28, 2020
>> Quick takes:
  • Strong economic growth in the third quarter expected
  • But the pandemic is already worsening
  • Fiscal stimulus unlikely before the election
  • Housing market remains a bright spot
  • Multi-housing in expensive cities already deteriorating

Just last week we wondered if we had entered a “Boys of Summer” economy, where things had shifted, but we had not yet fully realized it. This week presents another chance to test that idea. We will get our first look at third quarter GDP growth. We expect GDP to register a quarterly record, likely in excess of 30% on an annualized basis. That would roughly mirror (in percent change) the contraction in GDP growth from the second quarter. If so, that would still leave GDP about 4% below the level from the end of 2019. Through the third quarter, the economy objectively snapped back faster than many had anticipated, which we have already observed across several metrics.

The pressing issue remains not where the economy has been, but where it is currently going. We continue to believe that the economy entered a recovery during the summer and now heads on a growth trajectory. But exact path forward remains uncertain because of key downside risks. And unfortunately, those downside risks increasingly look more troublesome.  The pandemic itself presents the first key risk. Daily case levels in the U.S. have once again reached record-high levels as many had feared would occur when cold weather returned to the Northern Hemisphere. While difficult to determine exactly where case levels are heading, the path appears upward. Higher case levels increase the probability that governments once again start locking down and shutting down parts of the economy. While we do not expect a return to the draconian measures that were implemented in the spring, we note that several countries in Europe have begun re-initiating some stern measures to slow the resurgent outbreak. Yet even more modest measures could produce headwinds for the U.S. economy if some businesses must operate at limited capacity, restraining aggregate supply. Beyond government edicts, consumers could revert to their behavior from earlier this year when they opted out of many economic activities because of fear of falling ill. Much like with lockdowns, we do not expect behavior to mirror exactly what occurred earlier this year, but consumers continue to refrain from many economic activities. Cold weather will almost certainly start limiting outdoor activities such as dining. Throw in additional consumer restraint born of resurgent fear, and the combination of those factors could drag on aggregate demand.

The second risk, that fiscal stimulus does not get passed in a timely manner, is also increasing. As of this writing it appears incredibly improbable (though technically not impossible) that a package could get passed before the election next week. But time is running seriously short. After the election, depending upon the outcome, a lame-duck Congress or an emboldened Congress could have little desire to pass a fiscal stimulus package. It seems reasonable that a package could not get passed, assuming one even does, until sometime in the first quarter of 2021. The economy could suffer considerable, potentially permanent, damage by then. While we assiduously avoid taking normative positions on economic policy, we acknowledge the potential for severe disruption to the recovery because of the impairment to both the demand side and the supply side of the economy. The economy will not fully recover until we have moved past the pandemic. Fiscal stimulus alone cannot accomplish that. But it can help to fill the void left by consumers and businesses that will continue to restrain their consumption and investment activity.

Housing remains the bright spot

The housing sector remains the brightest silver lining amidst some dark storms clouds in the economy. Housing starts and building permits increased in September, with both single-family starts and permits reaching levels unseen in roughly 13 years, before the global financial crisis. Existing home sales (on an annualized basis) increased 9.5% in September, rising to its highest level since May 2006. Consequently, inventory for sale continues to hover near record lows. In August, monthly supply of houses in the U.S. (essentially how long the inventory for sale would last at the current sales rate, assuming with no new additions to inventory)  reached just 3.4 months, a record stretching back to the early 1960s. Housing inventory did not reach such scant levels even in the housing bubble during the 2000s. Although inventory increased slightly in September to 3.6 months, the lack of supply, coupled with strong demand, continues to push housing prices upward. While incredibly low mortgage rates are playing a role, the housing market appears driven by a significant number of households switching from renting to home ownership, particularly those moving from very expensive cities such as New York and San Francisco to their suburbs or to other, less-expensive cities. 

Record-low housing inventory

|  What else we are watching this week  |

A busy week of data will provide more clues as to whether the Boys of Summer have truly gone. New home sales should decline slightly but remain up for the quarter, another sign of the housing market’s strength. Jobless claims should remain at an elevated level, above 700,000. Both consumer confidence and sentiment should continue down the path to recovery, though gains could be harder to come by with fiscal stimulus already expired and the labor market recovery slowing. With fiscal stimulus gone and unemployment benefits expiring, personal income likely fell in September, though we still expect a small gain in personal spending.

|  What it means for CRE  |

For commercial real estate, increasing headwinds present risk to all property types, but multi-housing in expensive cities is suffering the most. Some residents are fleeing during the ongoing crisis. During the third quarter rents fell the steepest in markets such as New York, San Francisco, and San Jose which were among the strongest markets not long ago. Although the vacancy rates have only increased marginally in those markets, the significant declines in asking rents demonstrate the acute deterioration in demand.

|  Thought of the week  |

According to the NRF, Halloween spending should total roughly $8 billion this year, down 8% from 2019.