The Weekly Briefing - November 2nd, 2020

The Weekly Briefing – November 2nd, 2020:

In This Week’s Brief:

  • GDP Growth Set a Record Pace, but Recovery Only Two-Thirds of the Way There
  • Consumer Spending Notches Fifth Consecutive Month of Gains, but Faces Uncertainty
  • Slowdown in Multifamily Construction Outweighs Pickup in Single-Family Activity

GDP Growth Set a Record Pace, but Recovery Only Two-Thirds of the Way There

The economy expanded at an annualized pace of 33.1% during 3Q20, a record pace of growth but one that was expected after the severe pandemic-induced slowdown this spring. The annualized figure translates into a 7.4% increase over the prior quarter, and the economy has now regained approximately two-thirds of the losses suffered earlier this year.

The pace of the recovery to date has been rapid compared to the rebound from the Global Financial Crisis (GFC), when the economy took four quarters to recoup a similar level of relative losses and another four quarters to surpass the pre-GFC peak. With the easiest gains now behind us and headwinds picking up, the question for the current recovery now shifts to ‘how long until a return to pre-COVID-19 levels of activity?’

For some sectors of the economy, the answer is ‘we are already there.’ For example, seasonally adjusted personal consumption of durable goods, such as motor vehicles, furnishings, and recreational goods and vehicles, stands 6.7% above 4Q19 levels. And spending on nondurable goods is up 4.0% relative to 4Q19, while fixed residential investment has increased 5.1%.

Other sectors of the economy, however, still face a long road to full rebound, providing further evidence of a K-shaped recovery. Personal spending on services remains 7.7% below 4Q19 levels on a seasonally adjusted basis, which is likely due to many services, such as healthcare and food services, require face-to-face contacts that could present a risk of infection. Nonresidential investment, which includes spending on business equipment and structures, came in 4.9% below 4Q19 figures.

Contribution to 3Q20 GDP


Consumer Spending Notches Fifth Consecutive Month of Gains, but Faces Uncertainty

After fueling the strong headline 3Q20 GDP figure noted above, consumer spending improved another 1.4% during September, marking the fifth straight month of increases. Consumer spending nationwide now hovers 2.0% below pre-pandemic levels.

The September figure bodes well for the recovery during 4Q20, but at the same time uncertainties surrounding the coronavirus are likely to continue to hamper consumer activity. According to Opportunity Insights, the rebound in consumer spending has stalled in Midwestern states in recent weeks where new case counts are surging. And consumer spending in states with stricter lockdowns, such as California and New York, continues to lag the U.S. pace of recovery.

Unemployment is also likely to generate additional headwinds moving forward as many households grapple with lost or reduced income. After five consecutive months of gains, nonfarm payrolls still stand 10.7 million jobs lower than before the pandemic. And of these losses, permanent job losses have risen steadily over the past several months to 3.8 million.

In addition, many consumers remain unsure about their financial prospects as well as the broader economic situation. While the University of Michigan consumer sentiment edged up 140 basis points during October to 81.8, the index is still 19.2 percentage points below February levels.

Slowdown in Multifamily Construction Outweighs Pickup in Single-Family Activity

Multifamily construction activity has slackened during the pandemic as apartment developers have demonstrated caution in an uncertain economic environment. Construction starts for structures with five or more units decreased 11.9% YOY during April to September, according to the Census Bureau. Multifamily permits fell even further by 15.3% YOY during the same time period.

With the slowdown, the pace of multifamily construction activity now more closely aligns with its long-run average after an uptick in starts and permits during 2019. Last year’s increase in activity helps explain the 10% YOY increase in multifamily construction underway.

The deceleration in multifamily development has pulled down the pace of overall residential construction, which had never recovered to pre-GFC levels due to supply constraints across the country. Combining single-family and multifamily product, construction starts and permits are down 1.4% YOY and 2.1% YOY since the pandemic started.

If prolonged, the slowdown in multifamily construction could increase already-significant shortages of affordable housing that predate the coronavirus in many major markets nationwide. Class B/C product accounted for 9.2% of multifamily deliveries in 2007 prior to the GFC but represented only 2.1% of new supply during 2019, according to REIS.

Monthly Housing Starts, Seasonally Adjusted Annual Rate (Thousands of Housing Units)

 

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