E3: Economic Update - 08/25/20


In his latest economic report, Mr. Andrew Duguay, Prevedere’s Chief Economist, discusses how unpaid state-level contributions to federal unemployment benefits across most of the United States have created record-low consumer sentiment. Consumers who have suffered through delayed and significantly lowered unemployment payments remain uncertain about the future.

Mr. Duguay also delves into somewhat contradictory housing market data. In response to COVID-19, home buying trends, such as buying second homes and moving to more rural areas, are rising at staggering rates. This positive growth juxtaposed with a significant segment of the population now struggling to pay mortgages is causing concerns that a housing bust may be on the horizon.

What does the amalgam of the latest data mean for economic recovery? Find out in Prevedere’s latest report.


Host Nicole Flynn is joined by Mr. Andrew Duguay, Prevedere Chief Economist. In this episode, Mr. Duguay discusses delayed unemployment benefits, a complex housing market, and how they intertwine to impact recovery over the next several quarters.

About Andrew Duguay

Mr. Duguay is a Chief Economist for Prevedere, a predictive analytics company that helps provides business leaders a real-time insight into their company’s future performance. Prior to his role at Prevedere, Andrew was a Senior Economist at ITR Economics. Andrew’s commentary and expertise have been featured in NPR, Reuters, and other publications. Andrew has an MBA and a degree in Economics. He has received a Certificate in Professional Forecasting from the Institute for Business Forecasting and Certificates in Economic Measurement, Applied Econometrics, and Time-Series Analysis and Forecasting from the National Association for Business Economics.

Lean more about Andrew Duguay

>> Welcome, and thank you for listening in on our latest economic outlook report focusing on the recovery of the US economy. Today we’ll be focusing on the impact from delayed unemployment benefits and the complex housing market signals. Leading today’s economic update is Prevedere’s Chief Economist, Andrew Duguay. Andrew, we’re looking forward to your insights, and as usual thank you for joining us.

>> Thank you, Nicole. August we kinda knew all along would be an interesting month, we talked about the summer of shock. And one of the main features of that shock that we had been anticipating nervously was that unemployment benefits would expire at the end of July. And if we did not have a plan to at least wean the US economy off of all the stimulus that had been given out to date, that we could be looking at some market dynamics that are much different in the second half of the year than in the first half of the year.

So what ended up happening was unemployment benefits did expire, and this has left many Americans in a bit of quandary, where they are still unemployed, have not found a job, and their income is changing rapidly and with a lot of uncertainty. So we know that there was some Band-Aid measures put out by the President through executive order to continue some of the federal stimulus and unemployment benefits to the tune of $300 week contribution, with the state contributing $100 a week.

However, the rollout of that has actually been pretty choppy, and so here we are looking at an update here, August 25th, and we only have two states that are actually confirming full payouts according to the plan of the extension of benefits. This means that unless you live in those two states and you’re unemployed, you’ve likely seen a large reduction in your unemployment payouts.

Which could start to really significantly change spending in many ways, spending not only on retail goods, but also the mortgage and housing and rental markets, which we’re going to talk about here in a bit. So this is gonna start to feel more like a recession than many of the indicators we’ve been monitoring over the past few months.

There’s been a lot of surprises to the upside from some of the leading indicator signals, however, the asterisk was that we’ve seen unprecedented levels of stimulus. Well, that stimulus is gone, we have yet to see a new full blown package pass. And so what we’re left with is the feelings of, hey, this is what it’s like when unemployment’s above 10% and we’re losing a million jobs a week.

So this is the state that the US economy is in, obviously coronavirus has a lot to do with this, and the cases are still really high. They are coming down on a national level, but they’re still at very elevated levels. And so as we look towards the coming weeks a lot still hinges on the stimulus that was promised and did not come to fruition.

And what we’re left with is a hodgepodge of states working on approving this this federal government unemployment benefits, but have not gotten there yet. Fortunately most have promised that they will get retroactive with it, and cover some of the weeks that have been lost here, dating back to the end of July.

But even though states such as Texas that are confirming payouts, those payouts not everybody is even being accepted for the full amount of the payout. So it’s quite some interesting state by state dynamics here. And we’ve had other states that are saying, hey, we’re not even going to participate in this, because of the contribution that the states would have to kick in and their worries about balancing their budgets.

So we’re left with a nation that’s very vulnerable right now, and this vulnerability certainly has reflected in the economic indicators in a couple ways. And so the first one being is that consumer sentiment in August by most measures has sunk again. And so looking at whether it’s Prosper Analytics measure of consumer sentiment or the US Conference Board’s, when we saw strong rebounds in retail sales, usually that’s bolstered by strong rebounds in consumer sentiments.

But what we’ve seen in August is that consumer sentiment not only did not jump, but it’s actually gotten worse. And so we can expect some of this negative pressure to start playing itself out on the retail sales numbers, I think in the coming weeks. And we’ll start to see more as more data comes out in August, but I suspect we’re gonna start to see some of the early signals that the retail sales rebound is not necessarily gonna be as v-shaped as it looks now.

It’s gonna start that w, where it went up, but it might go back down again. And so I think we’re seeing vulnerability on a number of levels. I think none more than in the housing market, where the majority of Americans who have mortgage or rent payments to make basically operate on a month to month.

If they lost their full income, could they sustain more than a month’s worth of payments? Most of them the answer is no, according to several surveys, and we’ll talk about that. And so obviously the shift in unemployment benefits, a lot of this money was going towards paying the utilities, and the rent, and the basic consumer goods, and is gonna be sorely missed.

At the same time what you have in the housing market is a very positive dynamic going on now. People are fleeing cities, people are looking for houses in the suburbs, and all this has translated into what I’ll call empirically a v-shaped recovery in housing. So yes, things ground to a halt in April, like everything did, some states and cities even stopped construction altogether.

And so you saw housing starts and building permits, as permitting offices were closed, all dip just like we saw retail sales dip. But what we’ve seen in the housing market is that people have strongly demanded housing. And this could mean a second home in a rural area or moving out to the suburbs for whatever reasons, relating to the pandemic or not.

And a lot of people after working from home want more home space to work in, we’re starting to see that housing is really taking off, so new home sales, 13 year high. A recent survey from the National Association of Home Builders, combined with Wells Fargo they have this housing market index, which tracks here in this chart very well to housing starts, it’s actually at a record high right now.

This would suggest that housing starts, which has started its recovery, would fully see that recovery happen, and we’re gonna get back to housing starts in tune with prerecession levels or greater, due to the demand. So home builders have never been more confident or excited about the pent up demand for new homes, home sales are at multi-year highs.

This is elevating home prices, which is normally good for homeowners, increasing the value. And if we just do a quick real time data look from our sources at Google, we see that people are searching for things like either home improvement, which would suggest remodeling expenditures, up 50% year over year.

And then just simply searching for home sales, well, that’s up 30% year over year. Some very, very strong numbers out of the housing market, this should excite home builders. However, we need to think about this combined with the fact that there’s another sub segment, large sub segment of the US that’s struggling with lost jobs and struggling to make ends meet, particularly with the housing payments.

And while the housing boom, I think, is more immediate, because people immediately want homes right now, the housing bust signals are ones that are probably gonna play out slowly over time. So I think we could be talking a very different picture, and very different story about 12 months from now, if some of these things come to fruition.

So what are what are the negative factors? Well, for one is part of the government programs was to allow mortgage owners to essentially delay their payments due to COVID. Saying, hey, you can voluntarily put your mortgage into forbearance, not make payments, it won’t count against you, and you can make those payments later.

Doesn’t mean those payments go away, does not mean that they’re forgiven. However, it does mean that you’re essentially putting yourself into delinquency with the acknowledgement that nobody is gonna foreclose on your house as long as you start to make those payments eventually. A lot of people have taken the government up on this offer and have moved into that forbearance.

And what we’ve seen is mortgage delinquency rates have increased, and they’re up to over 8% right now, which, if you look historically, compares to housing crisis type levels. Now we put that asterisk there, because we know that a lot of this is voluntary, but you wouldn’t necessarily not pay your mortgage if everything was okay.

There’s really not a lot of incentive to not pay your mortgage, if you just have to pay it back a few months later. So part of the signal is actually a little worrying to me, the fact that 1 in every 12 mortgages right now in America is past due.

So we don’t wanna have comparables to the housing crisis when you look at this. Now, one thing we know about the housing crisis, it was a very slow play, right? We saw housing prices peaking around 2006, 2007. You didn’t really see the bulk of foreclosures enter the market until 2009, 10, or even 11, as the process to actually foreclose on a home takes a very long time.

And the government can even get involved and stall a lot of those actions. And so what we could be seeing is that, hey, the market’s gonna be really tight right now and probably for the next couple of quarters. If the second part of America that is struggling to pay their mortgage and have lost their jobs, and they lost their boosted unemployment benefits.

We’re not gonna see the negative ramifications from that on the housing market itself probably till mid next year at the earliest. So what we’re gonna see is probably a continued tight market and a lot of building that’s gonna go along with it. And then maybe next year at this time, we could be in a very interesting situation, where you don’t wanna be the last builder to build, because this could signal a bit of a construction boom with all this demand right now.

But a year from now we could be in a very different market dynamic, where prices are elevated, right now lumbar prices are at near record highs. And so costs are up, and we’ve already seen housing prices themselves are appreciating at about three times rate of inflation. But we’re also seeing that the cost to build a new house is also elevated.

So what we could be left with is a year from now a lot more foreclosures that have kind of kicked off starting now, due to the recessionary conditions a lot of Americans are facing. Plus an elevated inventory of expensive homes that were built today to try to meet today’s demand.

So this has all the shapes to be a very cyclical market over the next several years, with the the boom and bust cycle, and so it’s just something that we need to watch out too. I think there’s a lot of statistics right now that we’re kind of cautiously watching, and so I put some of these up here on the screen.

One of these I already mentioned is that about 80% of renters and 90% of homeowners can only afford to make payments one month without any income. So you think about the fact that jobless claims last week went up above a million again, means that a lot of people are losing their jobs, the unemployment benefits are not as beneficial anymore.

And you have a lot of very vulnerable people with rent and mortgage obligations. To look at it a different way, we don’t wanna be scaremongers, and so looking at multiple different sources. We look at sources like the NMHC, and you see that the number of renters paying, and this is actually off of a survey of rental payments in the millions, and so that’s actually pretty good statistical data.

Shows that as of this week in August, 90% of renters are paying some contribution towards their rent. This is lower than last year, where 92.1% of renters were paying some portion of their rent. However, just keep in mind that it’s still in the 90s, so the majority of people are paying their rent, but the numbers are weaker than they were last year.

And so this is part of the challenge that we’re seeing here with the volatile unemployment benefits, the weak economy, high unemployment. It’s an interesting mix combined with the fact that with COVID everybody wants to shelter in place, working from home, and there’s just naturally more demand for housing.

At the same time there’s a lot of people with housing that are at risk of losing it. So interesting dynamics there in the housing market. I think we’re moving through a boom cycle that’s probably gonna be followed by a bust cycle about 12 months from now or so.

We will continue to keep tabs on this by trying to watch the various indicators. I’ll just say there’s a lot of data we can look at, I think it’s always important to not fit the last recession into this recession, every recession has different causes and effects. So it is interesting that when we are talking about the housing market, we don’t wanna get caught in saying that this is gonna turn into another housing crisis like 2008 to 2010.

This is obviously caused by a lot of different reasons. And if we do get another level of stimulus passed, that is aggressive and tops up people’s incomes and allows them to continue to pay, we might not be worried as much about this. So there’s a lot of things still to be determined on the housing side, but we will continue to monitor this as it goes along, as well as what happens with unemployment benefits.

But for now I think the overall message that we’re talking about for the economy is that there was a lot of positive numbers in July, particularly on the retail spent sector. A lot of the early signals out of August suggest that we are going to see a rocky road ahead, and that we do not expect a v-shaped recovery throughout most industries.

That we’re gonna start to see more recession type feelings out of consumers, their confidence, their spending levels, they’re hesitancy to spend. A lot of that that might have been delayed with the initial aggressive stimulus is now setting into the reality that we can’t have this aggressive stimulus forever or at least that seems to be the situation now.

And so there’s gonna be economic consequences to this pandemic, and we’re gonna start to be facing more of those economic realities today than we might have been facing just even a couple months ago or a couple weeks ago.

>> Wow, thank you Andrew, great insights, and on what’s really a complex breakdown of unemployment benefits and housing, particularly those year over year numbers, so we’ll continue to watch.

That concludes this economic update. If you have any questions for Andrew, please feel free to contact us at the information on screen or N, F as in Frank, lynn@prevedere.com. Stay tuned for follow up presentations, thank you.

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