Employment Situation Remains Dire

The latest data on employment claims simply confirms what has been well documented in the news media: that the employment situation in the U.S. is dismal. Last week, an additional 6.61 million people filed for unemployment benefits, a figure only slightly lower than the 6.8 million who applied the week before.

This brings to 16.8 million the number of people who have filed for unemployment benefits over the last three weeks. Anecdotal evidence suggests that many filers are having difficulties going through the process due to the increased load on state unemployment offices. These offices typically  manage around 200,000 applications a week, but suddenly, their volume increased 30-fold.

Prior to the lockdown in mid-March, the total number of people employed had reached a record of almost 152 million. Now, the number of claims is resulting in a virtual unemployment rate of over 11%, which is a sharp jump from the 3.5% rate just two months ago. This is much, much worse than either the peak rate during the 2007-09 recession a decade ago, when unemployment peaked at 9.9%, or even the 1980-82 recession, when unemployment soared to  10.8%.

Consumer Expectations Markers Lag Reality

Most of the surveys on consumer confidence or expectations currently available still reflect opinions collected before the effective national lockdown. Thus, survey results do not capture the full impact of the current situation with consumers’ opinions.

A survey by the New York Fed is typical. Results show a deterioration of consumers’ expectations, but the magnitude is modest for the most part. For instance, consumers assessed that the probability of losing their job over the next year at one in five (around 18%), up from 14% maintained over the preceding two years. This, of course, does not reflect the nearly 17 million persons mentioned above who have already applied for unemployment benefits.

But their assessment of a higher unemployment in the future is closer to the current reality. Consumers feel that the probability that unemployment will be higher over the next year at 51%, up sharply from the 36% they had estimated just in February.

Also, prior to last month, consumers in general expected home prices to rise about 3% over the following year. In fact, as the chart below clearly shows, home price expectations had been remarkably stable between 2015 and February of this year, ranging slightly above 3%.

But consumers’ opinion changed drastically in March, when they slashed expected home price appreciation to half of what they previously thought.

Consumer Prices Drop

Consumer prices fell in March by 0.4% — not surprising, given that many shops were closed the last two weeks of the month. This is the first time that prices have fallen in two years and, unlike that previous experience when prices fell due mostly to a drop in energy prices, this time the decline was felt across many product categories.

A substantial 5.8% drop in energy prices is the major cause, although other categories also saw a  contraction in prices. In Transportation Services, e.g. airline travel, inflation was down 1.9%, NewVehicle prices fell by 0.4%, Furniture goods fell by 1.1% and Flooring products dropped also 0.4%.

Annually, Prices Still Rose

But compared to last year, consumer prices were 1.5% higher than what they were in March 2019. But this increase is one percentage point lower than the annual inflation rate seen over the previous three months, when price increases were 2.3% to 2.5% higher than a year before.

Note in the chart below that the so-called “Core Inflation” is still running at over 2%, higher than the overall inflation rate of 1.5%. This is because core inflation is calculated excluding two items from the equation: energy and food. These two items tend to be highly volatile from month to month and may distort the underlying inflation trend.

Medical Care is typically the leading category with the highest price increases. For the 12 months ended in March, this category had risen by 4.7%. This is followed by Financial Services, which had a 4% increase.

As is often the case, many categories reflect falling prices. Leading them is Gasoline, not shown in the chart, where prices declined by 10.2% in March. Further declines are to be expected in the months ahead, since oil prices fell by 43% in March alone. The latest declines in oil prices were driven mainly by the lack of agreement between two of the largest oil producers, Russia and China, on restricting their supply of oil to the world.

Foreign Trade Situation Improves

Before the coronavirus pandemic hit the world, the U.S. trading position with the rest of the world had been improving gradually over the last few months. This had been achieved mainly by threat of imposing tariffs, followed by actually setting up tariffs on a number of countries, which resulted in a reduction of U.S. imports

The chart below shows that while total imports have turned down over the last year-and-a-half, exports have remained relatively stable. Therefore the balance — the red line showing exports minus imports — has been rising (i.e., becoming less negative.)

Globally, the U.S. balance of trade in goods, i.e. excluding services, has improved from roughly $80 billion in late 2018 to $46.3 billion in February of this year; this is the difference between our total imports minus exports of goods from all countries.

This was achieved by improving the position with China from over $40 billion in late 2018 to February’s $16 billion.

Mortgage Rates Unchanged

Last week, mortgage rates varied little. The 30-year fixed rate remained unchanged at 3.33%, although the 15-year fixed rate fell by a minimal five basis points to 2.77%.

Given the current economic situation, where the biggest concern among potential home buyers is whether they will be able to meet their mortgage payment commitments, a small fluctuation in rates isn’t going to boost the housing or remodeling markets in general.

Manuel Gutierrez, Consulting Economist to NKBA

Explanation of NKBA’s Economic Indicators Dashboard

The dashboard displays the latest value of each economic indicator with a colored triangle that highlights visually the recent trend for each of the drivers. “Green” is a positive signal, indicating that the latest value is improving; “Yellow,” as it’s commonly understood, denotes caution because the variable may be changing direction; “Red” indicates that the variable in question is declining, both in its current value and in relation to the recent past.

Note that all the data, except for “mortgage rate” and “appliance-store sales” are seasonally adjusted and are represented at annual rates.

Remodeling Expenditures. This is the amount of money spent on home improvement projects during the month in question. It covers all work done for privately owned homes (excludes rentals, etc.). The data are in billions of dollars and are issued monthly by the U.S. Department of Commerce.

Single-Family Starts.  This is the number of single-family houses for which construction was started in the given month. The data are in thousands of houses and are issued monthly by the U.S. Department of Commerce.

Existing-Home Sales. These data are issued monthly by the National Association of Realtors and capture the number of existing homes that were sold in the previous month.

High-End Home Sales. This series are sales of new homes priced at $500,000 and higher. The data are released quarterly by the U.S. Department of Commerce and are not seasonally adjusted. Thus, a valid comparison is made to the same quarter of prior year.

Mortgage Rate. We have chosen the rate on 30-year conventional loans that is issued by the Federal Home Loan Mortgage Corporation (known popularly as Freddie Mac.) Although there are a large number of mortgage instruments available to consumers, this one is still the most commonly used.

Employees in Residential Remodeling. This indicator denotes the number of individuals employed in construction firms that do mostly residential remodeling work.

Building-Materials Sales. These data, released monthly by the Department of Commerce, capture total sales of building materials, regardless of whether consumers or contractors purchased them. However, we should caution that the data also includes sales to projects other than residential houses.

Appliance-Store Sales. This driver captures the monthly sales of stores that sell mostly household appliances; the data are stated at an annual rate. We should not confuse this driver with total appliance sales, since they are sold by other types of stores such as home centers.

We hope you find this dashboard useful as a general guide to the state of our industry. Please contact us at Feedback@nkba.org if you would like to see further detail.