While it hasn’t always come out smoothly, the massive amounts of money the federal government has pumped into the U.S. economy due to the pandemic has forestalled an even more severe downturn.
For example, U.S. households pulled down more income in April than they did before the pandemic started, housing markets are in a V-shaped recovery and a majority of small businesses are up and running again, many with the assistance of federal loans.
At the same time, commercial real estate delinquencies are soaring, more white-collar firms are dismissing workers, and state and local government finances are tanking, including a $3.3 billion hole in Colorado’s budget.
And while household incomes are up, many consumers remain unable or unwilling to spend as they did before.
Bankrate estimates that a quarter of U.S. households had no emergency savings, putting them in a bind when the economic downturn started. On the flip side, about four in 10 households report having enough reserves to survive three months with a loss of income, Ali Wolf, chief economist with Meyers Research, said during a webinar on Wednesday.
State unemployment benefits raise the share of households that can stay afloat for three months to 57%. Although sometimes criticized as overly generous, the extra $600 a week in federal unemployment benefits provided under the CARES Act pushes the financial survival rate up to 83%. Add in the extra $1,200 per person in Economic Impact Payments coming from the IRS and the share reaches 85%, Wolf said.
“The legislation passed so far has been enough to keep households whole through the end of July. What are people doing with the money? Many are paying their rent. For the most part, people are saving their money,” said Marc Goldwein, senior policy director with the Committee for A Responsible Budget, in a webinar Tuesday.
With so many businesses closed and people staying at home, consumer spending plunged 13.6% in April, according to the Bureau of Economic Analysis. Despite the heavy job losses that took down private employment compensation by nearly 9%, personal incomes shot up 10.5%, due to government payments.
And in perhaps the biggest surprise, households pocketed $1 out of ever $3 that they earned, which pushed the personal saving rate to a historic high of 33% in April.
“While not true for many individuals, it shows that at the aggregate the stimulus, at least initially, more than offset the aggregate economic loss from the shutdowns for the novel coronavirus,” Contingent Macro Research said in a note in late May.
Normally, savings are good, but they can be too much of a good thing in an economy that relies on consumer spending for 70% of its activity. “Anything consistently above 15% or 20% is a dangerously high level,” Wolf said.
One line of thought is that consumers, expecting that government support will dry up soon, are stockpiling money to protect against a more prolonged downturn. But in doing so, they are prolonging the downturn.
Goldwein, who is normally a deficit hawk, said more federal support will be needed, especially to shore up state and local government budgets, which aren’t allowed to run deficits. Absent that, another wave of public sector layoffs could happen later in the year.
“When this is all done, we will need to figure out the debt issues. It makes sense to borrow when you are in a recession,” he said.
Wolf said it will get more complicated to get the pulse of the labor market in the weeks ahead. To what degree are employees back because an employer has taken out a Payroll Protection Program loan, and will they remain employed when the money runs out? Already, Colorado is seeing several hotels, such as The Brown Palace and The St. Regis Aspen Resort, extend what were supposed to be temporary furloughs beyond six months.
Colorado’s Unemployment Insurance Trust Fund is expected to run dry by early summer, necessitating a loan from the federal government. And while federal unemployment benefits will probably extend beyond July in some form, they are likely to be more targeted and smaller in size.
One positive for the economy is that more small businesses are reopening. A poll with 500 respondents taken at the end of May by the U.S. Chamber of Commerce and MetLife estimates that nearly eight in 10 small businesses are either fully or partially reopened, with 41% in the first camp and 38% in the second.
Even as they move forward, small business owners are losing hope of a fast rebound. In April, half thought it would take six months to a year for things to return to normal. Now 55% think it will take that long, and 6% say things will never get back to where they were.
“Only 55% anticipate rehiring or bringing back all their employees in the next six months. There is a sizable contingent who won’t be able to return to their previous employer,” Neil Bradley, chief policy officer at the chamber, said in a press call Wednesday morning.
A separate poll of more than 88,000 small businesses by Alignable, an online referral network. found that 68% of those surveyed were open, including 40% that were fully open. But those businesses have brought back only 47% of their pre-COVID workforce, in part because fewer than half the customers have returned.
Job cuts are rising among white-collar firms such as Deloitte and Marcus & Millichap, which previously were considered immune from the hit that hotels, restaurants and retailers were taking. As more firms realize that business won’t be back to February levels, they will have to make adjustments, Wolf said.
That will put further pressure on the commercial real estate market. Delinquencies on mortgage-backed securities are running 20% on lodging properties and 10% in retail. An over-leveraged housing market may not tear through the economy like a wrecking ball this time around, but commercial real estate and excessive corporate debt could.
“Commercial real estate needs a healthier labor market,” Wolf said, adding that absent loan restructuring, fears are growing that rising defaults will impact the larger economy.
Housing a bright spot
The CARES Act includes several provisions that protect the housing market, which was at the epicenter of the last recession. Chief among them are forbearance plans on federally-backed mortgages, which allow borrowers to ask for up to a year off from monthly payments. About 8.5% of borrowers have signed up for a plan, although many are still making their payments.
Forbearance plans will reduce distressed sales and foreclosures, which should help stabilize home prices. But they will also mask the true health of the housing market. Wolf said she is starting to track property tax delinquencies after a friend informed her they were filling up pages in Florida newspapers.
The Federal Reserve slashed its federal funds rate and aggressively purchased mortgage-backed securities, pushing mortgage rates to historic lows. That has helped fuel a resurgence in homebuying activity in metro Denver and other cities as restrictions lifted.
“Purchase applications continued their recent ascent, increasing 5 percent last week and 18 percent compared to a year ago. The pent-up demand from homebuyers returning to the market continues to support a recovery from the weekly declines observed earlier this spring,” Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association, said in a report.
And in a perhaps unexpected benefit of stimulus payments, some buyers are using them to purchase a home.
“For people who were looking to buy, this is something that can get them closer to the down payment,” Wolf said.
But that doesn’t mean that real estate will roar back to pre-COVID levels right away. CoreLogic, a real estate research firm, estimates that by the first quarter of 2021, metro Denver home prices will drop 3.5%.
Incomes will be under pressure in the months ahead, and metro Denver is among the markets where home prices have gotten the furthest ahead of income gains, said Selma Hepp, deputy chief economist with CoreLogic. Put another way, metro Denver is an overvalued market.
While modest declines might sting recent buyers who made small down payments, they shouldn’t phase most owners, given that metro Denver has logged some of the largest home price gains since the last recession.
“Given how much equity people have already gained over the last decade, the 3.5% decline won’t have such a significant impact,” Hepp said. But she doesn’t forecast home price appreciation returning to metro Denver until the second half of 2021.
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