Friday, October 9, 2020

Tale of Two Economies: Housing-Related Boom vs Pandemic-Challenged-Services Bust

“E pluribus unum” certainly doesn’t apply to our highly partisan political discourse these days. The phrase is Latin for “Out of many, one.” It is a traditional motto of the US, appearing on the Great Seal. Its inclusion on the seal was approved by an Act of Congress in 1782. Another motto is “Novus ordo seclorum,” which is Latin for "New order of the ages.” That doesn’t seem to apply these days either given our political and social disorder.

Then again, we all seem to be united when it comes to shopping. While the country remains bitterly divided politically, we are united in our drive to thrive. That certainly helps to explain the remarkable economic recovery in recent months from the two-month lockdown recession during March and April.

American consumers almost never disappoint us. I often have observed that when Americans are happy, they spend money and when they are depressed, they spend even more money—because shopping releases dopamine in our brains, which makes us feel good. Obviously, the Great Virus Crisis (GVC) is writing a new chapter in the history of consumer behavior. I’m not a virologist, but one widespread side effect of the virus is evident: Most consumers have been suffering from cabin fever, which can be depressing, and weren’t able to seek relief through shopping during the lockdown recession.

In our May 21 Morning Briefing, we predicted that “US consumers will open their wallets and spend once some semblance of normalcy returns.” So far, so good. As the lockdown restrictions were gradually lifted during May, consumers rushed to spend lots of the cash they had saved up during the lockdown.

Housing-related spending has been especially strong, as consumers have decided it’s time to remodel their cabins if they are going to spend more time working, learning, and entertaining at home. They’ve also rushed to buy more new and existing cabins in suburban and rural areas in a broad-based wave of de-urbanization triggered by the pandemic. In addition, the pandemic may have convinced many Millennials (who are currently 24 to 39 years old) that now is the time to buy a house rather than to rent an apartment. The Fed is contributing to the resulting housing-related boom by keeping mortgage rates at record-low levels.

All these developments were confirmed on October 1, when the Bureau of Economic Analysis (BEA) released the August personal income report. The next day, the employment report for September released by the Bureau of Labor Statistics (BLS) suggested that consumers continued to gain purchasing power from their participation in the labor market—i.e., working—which should more than offset the decline in purchasing power provided by the government with pandemic-support benefits.

If Washington provides another round of such support anytime soon, that will unleash even more dopamine, adding to the economic “V is for Victory” victory over the pandemic’s economic impact. Consider the following:

(1) Consumer-led V-shaped recovery. The October 2 update of the Atlanta Fed’s GDPNow model showed that Q3’s real GDP is tracking at a record jump of 34.6% (at a seasonally adjusted annual rate, or saar) following the record 31.4% drop during Q2. That’s certainly a V-shaped recovery so far.

Leading the way up during Q3 is a 36.8% projected rebound in real consumer spending, following the 33.2% drop during Q2. Consumers contributed 24.0 percentage points to the freefall in real GDP during Q2, when lockdown restrictions held them back (Fig. 1). They are likely to contribute more to the Q3 upswing. By the way, spending on consumer services was hit hardest by the lockdown during Q2, as evidenced by the -22.0ppt contribution of this component to the drop in real GDP!

In current dollars, personal consumption expenditures has rebounded 18.6% from April through August (Fig. 2). It is only 3.4% below its record high during January. Interestingly, consumer spending on goods is up 24.0% over this period to a new record high. Spending on services is up 16.1% since April but still 7.4% below its record high during February. During August, consumer spending totaled $14.4 trillion (saar) with services at $9.5 trillion and goods at $4.8 trillion.

(2) A pile of savings to spend. How can it be that consumer spending has rebounded so strongly when millions of workers remain unemployed? During the lockdown recession, personal saving soared from $1.4 trillion (saar) during February to an all-time record of $6.4 trillion in April (Fig. 3) . It was back down to $2.4 trillion during August.

Consumer spending clearly was boosted by the jump in the government social benefits component of personal income from $3.2 trillion (saar) during February to a record $6.6 trillion during April (Fig. 4).

However, government social benefits was down to $4.1 trillion during August. That’s still well above the $3.2 trillion during February. The same pattern is evident in personal saving. So there is still enough “potential” fiscal stimulus left over to provide “kinetic” energy to consumer spending over the next few months, in our opinion.

(3) Earned income rebounding. But don’t we need another round of fiscal stimulus to keep the consumer recovery going until a vaccine is available? Not if wages and salaries continue to rebound along with employment. The former is up 7.6% since April through August, while the latter is up 6.5% from April through September (Fig. 5).

Our Earned Income Proxy (EIP) is highly correlated with wages and salaries in the private sector (as reported in the BEA personal income release). The EIP is up 10% from April through September (Fig. 6). The EIP is based on the monthly BLS payroll data. It is simply aggregate hours worked by all workers—which is up 12.1% from April through September—multiplied by average hourly earnings. Aggregate hours worked reflects payroll employment—which is up 8.8% from April through September—multiplied by the average length of the workweek. This augurs well for the ongoing V-shaped recovery in both consumers’ purchasing power and their spending.

(4) Housing-related spending leading the way. The latest personal income release confirms my view that a housing-related spending boom is underway as a result of de-urbanization and record-low mortgage rates. Spending on furniture & furnishings and household appliances soared 38.9% from April through August to new record highs since June of this year (Fig. 7).

Construction spending on new homes and on home improvements is included in the residential investment component of GDP rather than in personal consumption. The recent jumps in new and existing home sales suggest that both categories of residential construction should be rising to new cyclical highs soon and could be on their way to record highs in coming months (Fig. 8). Together, they totaled $589.4 billion (saar) during August, 13.1% below the record high during February 2006.

Altogether, housing-related consumer and construction spending totaled a record-high $906.4 billion (saar) during August, surpassing the previous record high during February 2006 by 1.3% (Fig. 9).

(5) Spending on autos also strong. Undoubtedly, the pandemic also has boosted the demand for autos along with the demand for houses by people moving out of cities to the suburbs and rural areas. Sure enough, current-dollar spending on new motor vehicles jumped 50.6% from April through August to the highest pace since July 2005 (Fig. 10). Spending on used cars is up 94.5% since April.

(6) Services are on the mend too. As noted above, the services economy also has been recovering, but has a ways to go to regain all that was lost during the lockdown recession. That’s because several important services-providing industries remain challenged by various voluntary and enforced social distancing restrictions.

Initially, the pandemic caused spending on health care services to plunge 34.7% from February through April (Fig. 11). Hospitals suspended elective procedures in anticipation of a huge influx of Covid patients. Since April through August, this category is up 43.5%, which is only 6.4% from its record high during February.

Also taking a big hit from the lockdowns was spending on food services, including restaurants. This category plunged 47.5% from February through April but rebounded 69.4% through August (Fig. 12). It is still 11.2% below its record high during January. It is likely to struggle to climb higher in coming months as winter weather forces restaurants to halt outdoor dining and do the best they can with significant capacity limits on indoor dining.

Among the services-providing industries, the most challenged have been the following (showing the percentage changes from February through April and from April through August, as well as the percentage below the February pace): Air Transportation (-93%, 888%, -36%), Hotels & Motels (-83, 176, -54), Gambling (-80, 320, -18), Amusement Parks, Campgrounds, & Related Recreation (-90, 240, -67), and Admissions to Specified Spectator Amusements (-97, 423, -82) (Fig. 13 and Fig. 14).

(7) Bottom line. Although the recovery from May through September has been V-shaped, there are plenty of challenges ahead. The pace of the recovery is bound to slow in 2021, and there could be setbacks. However, so far, the recovery has been impressive.

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