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Bob’s Journal for 10/22/20

Published on: Oct 22 2020

This Pandemic Recession has Been Different Than any Other

This pandemic recession has been different than any other, and it shows in some anomalies in the data.

The combination of monetary and fiscal stimulus has been unprecedented, especially in the United States. That has caused an unusual response among households.

Income declined dramatically in the first six months of the pandemic. That should be expected because unemployment rose sharply.

Yet, the savings rate also jumped. In fact, the savings rate in the United States rose to unprecedented levels in the last six months. The fiscal stimulus was intended to replace lost incomes, but it was so significant that it often exceeded lost income.

Apparently, a high percentage of household leaders decided to spend only a portion of the stimulus payments and to save the rest.

The result is that after the bottom of the economic downturn, we had the unusual combination of rising retail sales accompanied by high unemployment and a very high savings rate.

More importantly, in the last couple of months, retail sales increased (though only by modest amounts) while household incomes declined.

It appears that households were wise to save a portion of those early fiscal stimulus payments. Most of the fiscal stimulus has expired, at least for a while, yet many households are able to dip into those increased savings to continue paying their regular expenses.

The high savings rate probably is why, though we’ve seen a reduction in growth, the economy hasn’t fallen off a cliff since the stimulus measures expired.

We’ll have to see how long the savings from those early stimulus payments can continue to support economic growth while Congress considers providing additional stimulus and we wait for a vaccine or improved treatments for COVID-19.

Credit Scores Improve During the Recession

Credit scores are another anomaly in this recession.

Normally, credit scores decline during a recession. People lose their jobs and cannot pay their bills.

That’s not the case this time. In fact, the average credit score improved during the recession and hit a record high of 711 in mid-July, according to a report in The Wall Street Journal.

That’s the highest average score since Fair Isaac Corp. began tabulating the data in 2005. The company indicates its preliminary data credit scores have held steady through October. As a comparison, at the low point of the financial crisis, the average credit score was about 686.

One factor in rising credit scores is the payment holidays and late-payment forgiveness policies instituted by many lenders early in the pandemic. This enabled borrowers to keep their credit reports clean even if they failed to make all payments. Debtors also were able to use the cash to pay other expenses and bills while deferring some debt payments.

The fiscal stimulus measures were another factor in improving credit scores. Stimulus checks and enhanced unemployment payments enabled people to stay current on their payments even while unemployed.

But these factors create another level of uncertainty in this economy.

Will debtors be able to continue making payments in the coming months as unemployment remains high, especially if Congress does not enact new stimulus measures? Will debtors also be able to make the payments that they deferred?

Plus, how are lenders to assess credit applicants? People with apparently clean credit records might be several months behind on their debt payments, but the payment holidays mean the delinquencies are not reported and factored into credit scores.

Indeed, credit scores usually are a lagging economic indicator. They hit bottom after the recession ended. That’s likely to be the case again this time.

Cracks in Commercial Real Estate Continue

In the financial crisis, the dog that didn’t bark was commercial real estate. Dire results for commercial real estate that were the subject of widespread forecasts never were realized.

The pandemic appears to be taking a bigger bite out of commercial properties than the financial crisis did.

New York City, the nation’s largest commercial real estate market, is showing signs of serious stress.

There have been many reports of high office vacancy rates, empty retail locations, falling rents and tenants leaving the city or reducing the amount of space they lease.

Another sign of real estate distress is the market for debt backed by hotels and retail locations. Loans for these properties generally are packaged so they can be sold to investors such as pension funds, endowments and mutual funds. The commercial mortgage-backed securities, as they are known, are a big market and trade regularly.

Prices of these commercial mortgage-backed securities, even those backed by prime properties in New York City, have been collapsing, according to The Wall Street Journal. Securities backed by lower-quality properties and those outside prime markets also are tumbling. Many commercial mortgage-backed securities trade at 50 cents to 70 cents on the dollar.

The trading also is volatile. Traders track the spread of the virus and levels of economic activity, changing prices based on the latest trends.

Commercial real estate properties and mortgages backed by them used to be considered safe, blue-chip investments. With the pandemic raising uncertainty, the investments are highly volatile and generally lose value.

The Data

New unemployment claims declined by 55,000 to 787,000 in the latest week. That’s the lowest level since mid-March and better than economists’ expectations.

Continuing claims decreased by 1.02 million to 8.37 million.

Part of the reason for the reduction in continuing claims, however, is people exhausted their regular unemployment benefits. Claims under the Pandemic Unemployment Assistance program increased by 509,828 to 3.3 million. This program pays an additional 13 weeks of unemployment compensation to those who exhausted the initial 26 weeks of compensation.

Economists estimate the economy has recovered about half the jobs lost at the depths of the recession. But the rate of recovery slowed the last couple of months and could slow further or stall.

Retail sales in September increased more than expectations. They jumped 1.9%, compared to expectations of 0.8% and August’s 0.6% increase.

Excluding vehicles and gas, retail sales rose 1.5% in September, compared to expectations of 0.4% and August’s 0.7% increase.

Only one of the 13 spending categories, electronics and appliances, did not increase in September. One sector, clothing, that has been a laggard during the recession rose the most in September by far, 10.96%. Sporting goods was the next best, increasing 5.75% for the month.

Optimism among home builders continues to increase. The Housing Market Index from the National Association of Home Builders (NAHB) climbed to 85 in October from 83 in September. This is another record high for the measure.

Housing starts rose 1.9% in September, which was below expectations. Starts for the previous two months were revised lower than the initial reports. But those negative events were due to weak apartment starts.

Single-family home starts increased 8.5% in September compared to August and 22% over 12 months. These figures support the optimism among home builders.

Existing home sales increased 2.4% in September and are up 10.5% over 12 months. The main constraint on home sales now is a low inventory of homes for sale.

Industrial Production declined 0.6% in September after increasing 0.4% in August. That ended four months of growth.

The manufacturing component declined 0.3% in September after increasing 1.2% in August. Overall, production still is 7.1% lower than it was in February before the pandemic.

Consumer Sentiment, as measured by the University of Michigan, increased a little in October to 81.2 from 80.4 in September. The increase was higher than expected. The expectations component of the index reached its highest level since March.

The Leading Economic Indicators Index from The Conference Board climbed 0.7% in September, and August’s index was revised higher to a 1.4% increase from an original 1.2% advance. The latest number indicates the economy will continue to grow but at a lower rate for the rest of the year.

The Markets

The S&P 500 declined 1.49% for the week ended with Wednesday’s close. The Dow Jones Industrial Average lost 1.07%. The Russell 2000 fell 1.06%. The All-Country World Index (excluding U.S. stocks) decreased 0.65%. Emerging market equities gained 0.72%.

Long-term treasuries declined 2.11% for the week. Investment-grade bonds lost 0.83%. Treasury Inflation-Protected Securities (TIPS) fell 0.35%. High-yield bonds decreased 0.20%.

In the currency arena, the U.S. dollar fell 0.79%.

Energy-based commodities lost 0.45%. Broader-based commodities gained 1.73%, while gold fell 0.79%.

Bob’s News & Updates

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Seriesclick here.

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If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

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