Kissing 2020 goodbye
Can vaccine distribution and a potential fiscal stimulus counteract rising unemployment claims?
>> Quick takes:
- Unemployment claims clearly signal trouble
- Supported by inflation and sentiment data
- Vaccination coming for people and the economy
- Fiscal stimulus still on the table
- CRE capital markets could bounce back sooner than expected
With our last weekly Economic Insights of 2020, we close the book on an unprecedented and tumultuous year while we look forward to 2021. Unfortunately, 2020 is ending with a loss of momentum. After snapping back in the summer and into the third quarter, the economic recovery has slowed. And it risks stalling out before the economy moves past the cataclysm that crippled it in 2020.
Still in the tunnel
The loss of momentum shows clearly in the weekly unemployment claims data. Weekly initial unemployment claims leapt by 137,000 to 853,000, the highest level since the middle of September. Additionally, continued unemployment claims, which have generally declined since May, also increased slightly. While too soon to signal a trend, rising continued claims reinforce the view that the recovery has slowed.
Initial weekly unemployment claims worrying
Consumption-related data also shows evidence of cooling in the economy. The headline consumer price index (CPI) for November held steady on a year-over-year basis while core CPI ticked up slightly year over year in November. Meanwhile, the headline producer price index (PPI) for November increased slightly but also remains subdued on a year-over-year basis. Taken together, the inflation data serves as another warning sign. And consumer sentiment for December, though up slightly, remains subdued and likely entangled in post-election feelings (from both Democrats and Republicans) that do not fully reflect economic reality.
While it will take some time to impact the economy, vaccination provides the best path to better times because the pandemic is the recession.
Seeing the light
Yet 2020 also ends with hope for 2021. First and foremost, vaccination distribution and administration began this week. While it will take some time to impact the economy, vaccination provides the best path to better times because the pandemic is the recession. As people get vaccinated, they will feel more confident engaging the economy. But those vaccinations will also slowly begin to bring the pandemic under control, which, all else equal, enables the non-vaccinated to go out and more safely participate in economic activities. Coupled with the return of warmer weather in the spring and the light at the end of a long, dark tunnel is becoming brighter.
With momentum stalling and cold, inclement weather returning while vaccination is beginning, the main unresolved issue becomes how quickly we can escape the dark tunnel. That largely depends on how much of a boost the economy receives from fiscal support. We remain steadfast in our apolitical view that the economy will not fully self-correct until the pandemic ends, or at least comes under control. That seems unlikely to occur until mid-2021 at the earliest. Consequently, our escape velocity remains uncertain but would benefit from one more round of government spending. We feel like we are getting a bit of whiplash on this issue, but as of this writing it appears as if a modest stimulus package remains within reach. Though smaller than previously mooted spending packages, it would nonetheless provide vital support during the critical first quarter of 2021 and help us accelerate out of the tunnel.
| What we are watching this week |
Retail sales on a core and headline basis for November could signal a worrying decline. Even accounting for more volatile components like auto sales and gasoline sales, the trend marks an unambiguous deceleration from the summer and even fall. Initial unemployment claims should change little, reflecting the more challenging economic environment of recent weeks. And housing starts and building permits for November should also hold steady, demonstrating the continued strength in housing even this far into 2020.
| What it means for CRE |
For commercial real estate (CRE), the path forward remains nuanced and differences could become exacerbated by how quickly economic recovery unfolds. Normal divergences during economic recoveries – by property type, property quality, and by geography – could get amplified during this cycle. While we expect property market fundamentals to lag the business cycle, as they always do, we have already observed heartening signs of stabilization in the transactions market. In a break from the past, the transaction market responded much more quickly this cycle than previous cycles. The tentative signs of stabilization provide hope that we could see increased volume and even pricing in 2021, potentially running ahead of the recovery space market fundamentals. Depending upon how that unfolds, that could also provide an interesting break from history.
| Thought of the week |
As of this writing, the S&P 500 index increased by roughly 13% in 2020, despite the massive economic downturn.
Note: Economic Insights will return in January 2021. Happy holidays!