More evidence of an
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>> Quick takes:
- More evidence of an imbalanced recovery
- Labor market recovering, while leaving some behind
- Stock market rising, but driven by relatively few companies
- Housing market still strong, even as many face evictions
- For CRE, increasing emphasis on property-level analysis
A few weeks ago, we wrote about the prospect of “K-shaped” economy recovery. Though not literally “K-shaped”, it emphasized that the current economic recovery seems more uneven than previous economic recoveries (which also unfolded unevenly). Since that writing more evidence has emerged that demonstrates both the unevenness of the recovery up to this point and why the current circumstances will likely persist as the economy claws its way back.
The labor market
Last week we saw evidence of imbalance in the labor market. Overall, the market continued to rebound with a net gain of roughly 1.4 million jobs. That brings the total number of jobs recovered from May through August to roughly 10.6 million out of the approximately 22.2 million lost in March and April. Though job gains are slowing, the economy simply cannot mount any recovery without job gains, slow or otherwise. The unemployment rate fell 180 basis points (bps) to 8.4%, down 630 bps from its peak in April. And the number of people on temporary layoff declined, demonstrating that net job gains predominantly represent the recovery of lost jobs and not the creation of wholly new jobs.
Yet the details provide evidence of disparate outcomes amidst the recovery. The number of permanent job losers increased again to roughly 3.4 million. Coupled with the roughly 700,000 people that completed a temporary job brings the total number of people not on temporary layoff to roughly 4.1 million. This comports with the data from initial and continued weekly unemployment claims which remain stubbornly elevated, even almost six months after widespread lockdowns began. Moreover, the data provides further evidence that the funding in the CARES Act did not restrain the labor market’s recovery. The CARES Act expired at the end of July, yet job growth slowed in August while unemployment claims remained elevated. That data largely reflected the limited opportunity for workers to get hired or rehired, not misaligned incentives as some had surmised. This outcome indicates that the longer Congress takes to create the next stimulus package, the wider the rift in fortunes during the uneven economy. And more trouble lurks on the horizon, even as we expect the labor market to continue to slowly heal. As part of the funding provided by the CARES Act, companies had to agree not to lay off workers. But that provision begins expiring over the next month and companies have already begun warning employees of impending layoffs to come. Continued divergent paths lie ahead.
The asset markets
The continued rise in the asset market is also exacerbating the divide between households who are faring well and those who are struggling. Despite a recent pullback, the stock market continues to trend upward, providing those households that invest in publicly traded equities with a stronger asset base and some renewed confidence via the wealth affect to continue increasing their consumption. And the fortunes in the housing market look even more stark. Homeowners continue to benefit from rising prices in the housing market and historically low mortgage rates. The homeownership rate continues to trend upward, as those who can are purchasing homes, reaching 67.9% in the second quarter. That represents the highest rate since the third quarter of 2008, even if issues with the survey are overstating the ownership rate. Yet the fortunes of homeowners are diverging from renters beyond the impacts on their respective balance sheets. Struggling households also often face eviction which leads to many knock-on economic consequences. Although the federal government extended the moratorium against evictions last week, many loopholes exist. If the moratorium does not expire an estimated 30 to 40 million people face potential eviction.
U.S. homeownership rate
What we are watching this week:
A short week after the Labor Day holiday will provide a few key data points. Inflation, measured by both the consumer price index (CPI) and producer price index (PPI) for August should show that price levels in the economy continue to slowly rise as overall economic activity regresses back to something approximating normal. Weekly unemployment claims should change little, remaining elevated and indicative of ongoing struggles in a slowly convalescing labor market.
What it means for CRE
For commercial real estate (CRE), navigating the path ahead will mean incredibly discrete, asset-level analysis, likely even more so than during the pre-pandemic times. Recent history shows that painting with a broad brush often produces sloppy analysis. For example, during the Great Recession many investors completely swore off the retail sector. Yet pockets of strength persisted, generating excellent returns for those who did their homework on individual deals. A similar temptation is emerging during the current crisis. Many are ready to forsake components of the CRE market as varied as office buildings, urban apartments, and discretionary retail. The market still holds tremendous opportunity for those that do their homework and pick their spots, even if the analysis is becoming more challenging.
| Thought of the week |
The proportion of young adults living with their parent(s) recently surged to 52%, the highest level on record, exceeding the level reached during the Great Depression.