The Weekly Briefing - August 17th, 2020

The Weekly Briefing – August 17th, 2020

In This Week’s Brief:

  • Retail Sales Bounce Back to Pre-COVID-19 Levels
  • Prospects of High- and Low-Income Households Diverging
  • States and Municipalities Projecting Wider Budget Shortfalls
  • Fewer Homeowners Are Newly Behind on Mortgage Payments

Retail Sales Bounce Back to Pre-COVID-19 Levels

Overall U.S. retail spending registered increases for a third consecutive month in July and has now surpassed figures from earlier this year before the coronavirus outbreak. Consumer spending at stores, restaurants, and online grew 1.2% during July compared to the month prior, led by a 22.9% jump in spending at electronics and appliance stores. Spending in the electronics and appliance category has been elevated since April, which is likely fueled by the need for equipment to support remote work, remote schooling, and now students returning to school. The headline figure obscures the fact, however, that the recovery in retail spending has been uneven, and many sectors continue to see spending well below pre-pandemic levels. Retail sales at gasoline stations, clothing stores, and restaurants are each still down YOY by -15.6%, -20.9%, and -18.9% respectively, despite month-over-month increases of at least 5.0% during July. A closer review at the retail spending data also underscores how the pandemic and business restrictions have rearranged American shopping habits. Online sales are up 24.7% YOY and now represent 15.7% of all retail spending compared to 12.9% a year ago, a trend that is likely to continue driving demand for retail/online fulfillment commercial real estate. Looking ahead, now that spending on consumer has goods has improved, the next phase of the economic recovery will require consumers shifting back to spending on services. Consumer outlays on services make up a much larger share of the economy but have not bounced back as quickly. Overall consumer spending on both goods and services has hovered between 5.0% to 8.0% below pre-pandemic levels since early July, according to the Opportunity Insights Economic Tracker.

Prospects of High- and Low-Income Households Diverging

As the recovery starting to take hold and the U.S. economy added 9.3 million jobs from May to July, high-income households have captured a disproportionately large share of employment gains. Data provided by Opportunity Insights indicates employment of high-wage individuals ($60,000+) has effectively returned to pre-pandemic levels, but low-wage employment (<$27,000) has recovered only a little more than half of the jobs lost during the early days of the pandemic. Much of the dichotomy owes to the lopsided impact of the coronavirus across different sectors of the economy. Jobs requiring more frequent face-to-face interaction, such as those in retail, hospitality, and food services, have faced the greatest disruption and tend to offer lower wages. In contrast, higher-income occupations in finance, information, and professional services are more easily conducted remotely and less vulnerable to social distancing restrictions. High-income household finances have also received a boost from the rising stock market as the S&P 500 nears the record high it reached in February of this year. Meanwhile, homeowners have benefited from rising home values during the pandemic that have been fueled by record-low mortgage interest rates.

Percentage Change in Employment by Wage Band Since January 2020

States and Municipalities Projecting Wider Budget Shortfalls

State and local government efforts to balance budgets by enacting spending reductions are likely to weigh on the economic recovery and could lead to cutbacks in basic services. A Moody’s Analytics report released earlier this summer estimates state and municipal fiscal difficulties could cost the U.S. more than three percentage points of GDP and as many as four million jobs without additional federal aid. State and local governments account for more than one in eight jobs nationwide. Declining property, income, and sales tax receipts have undercut public coffers at state and local levels. As shown in the chart below, many state budget agencies project tax revenue declines of 10% to 20% during the current fiscal year, which for most states will run through June 2021. At the local level, the National League of Cities surveyed 485 city finance officers and found 87% expect worsening budget situations this fiscal year with an average anticipated revenue decline of 13%. Additional federal support would provide an important boost to state and local government finances that could stave off workforce and service reductions. After allocating $150 billion to state and local governments in an earlier relief package, Congress had not come to terms on the next round of funding before breaking for the annual August recess.

States with the Largest Projected Fiscal Year 2021 General Fund Tax Revenue Declines

Fewer Homeowners Are Newly Behind on Mortgage Payments

In a sign that the wave of new single-family mortgage delinquencies may be slowing, the 30-day delinquency rate edged downward during the second quarter even as the overall delinquency rate surged, according to the Mortgage Bankers Association. A seasonally adjusted 2.3% of outstanding loans are now 30 days delinquent, down 33 basis points from the prior quarter. Government relief has undoubtedly played a pivotal role in keeping borrowers current on their mortgages. The overall delinquency rate, however, jumped nearly four percentage points during the second quarter to 8.2% of outstanding loans, the highest level in several years. FHA-backed mortgages fueled the surge, increasing nearly six percentage points to a delinquency rate of 15.7%. Loans backed by the VA also climbed, with delinquency reaching 8.1% of outstanding loans. States with large tourism industries count among those with the largest increases in delinquency rates. New Jersey, Nevada, New York, Florida, and Hawaii each saw the overall delinquency rate increase by at least five percentage points during the second quarter of 2020.

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