Are We There Yet?

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If timing is everything, the June employment report is a lot less encouraging than it appeared to be. 

The numbers were greeted initially with a combination of surprise and relief.  Employers added 4.8 million jobs for the month and the unemployment rate declined from May’s 13.3 percent to 11.1 percent, suggesting, on its face, that the economy was beginning to recover from the pandemic’s devastating effects.  But closer inspection suggests the celebration is probably premature.

The survey on which the Department of Labor report was based was completed in the middle of the month, before the virus resurfaced with a vengeance in states that had been leading the march to reopen their economies.  As a result, those states and several others either slowed their reopening plans or reversed direction entirely.  The June employment report doesn’t reflect those developments or their likely negative impact on future employment reports. 

Add Salt

The numbers should be taken “with a whole stockpile of salt,” Diane Swonk, chief economist for Grant Thornton, told the Wall Street Journal. “It’s all backwards-looking because of what we’ve experienced since then. Fear is its own tax,” Swonk added, “and the pullback was pretty dramatic.”

“The virus drives the economics,” Betsey Stevenson, who served on the Council of Economic Advisers during the Obama administration, agreed.  If virus infections continue to rise, as appears to be the case, she said, “we’re not going to have people going back to work….We’re going to see more people staying home.”

The “stockpile of salt” Swonk recommended as seasoning for the employment number applies equally to recent improvements in consumer confidence, also recorded before states began to backtrack in the face of rising virus infections. A more recent household survey conducted by the U.S. Census Bureau found that the number of households expecting to lose income over the next month increased after declining in the two previous weekly surveys.

Little Traction

Even before infections began to soar, there were indications that the nascent economic recovery did not have much traction: 

  • Another 1.43 million Americans applied for jobless benefits the last week in June, leaving nearly 20 million unemployed workers still receiving unemployment insurance.
  • Zip Recruiter, an online employment bulletin board, reported a 7 percent decline in job openings in June, reversing a 15 percent increase in May.
  • Notwithstanding the employment gains recorded for May and June, the economy has recovered only three of every 10 jobs lost thus far – a large gap that won’t be closed easily or quickly under the most optimistic forecasts for economic growth.

Economists, who had been predicting a V-shaped recovery --  a steep decline followed by an equally speedy recovery – are now talking about a recovery shaped more like a reverse square root – a steep plunge followed by an anemic recovery that would leave the economy near recession levels for an extended period. 

Hope for Housing

Housing industry executives think the housing outlook is more upbeat and some recent indicators support that view. Pending home sales, which have been trending steadily downward for months, soared in June, pushing this National Association of Realtors (NAR) index up by 44.3 percent over the May reading, and producing the largest month-over -month increase since the NAR created this index in 2001. 

The June rebound followed pandemic-induced plunges of 20.8 percent in March and 21.8 percent in April that drove the index nearly 70 percent lower than it was a year-ago. 

 “This has been a spectacular recovery for contract signings, [reflecting] the resiliency of American consumers and their evergreen desire for homeownership,” Lawrence Yun, the NAR”s chief economist, said in a press statement.  “This bounce back also speaks to how the housing sector could lead the way for a broader economic recovery,” he added.

Existing home sales haven’t yet turned that corner, however.  They declined by 9.7 percent in May – better than the stomach-churning 17.8 percent plunge in April, although still the lowest level of home sales in nearly a decade. 

Low Point?

But the May rebound has convinced Yun that we have reached “the cyclical low point” in home sales – a confident view fueled in part by a 6.2 percent n increase in the inventory of homes available for sale in June.  The gain reversed several consecutive monthly declines, but still left  inventories nearly 20 percent below their year-ago level, keeping upward pressure on prices and limiting choices for prospective buyers.   

New home sales, although a smaller segment of the market than existing homes, continue to outperform them.  Sales increased for the second consecutive month in May, with an annualized rate of 623,000 units that was 16.6 percent above the April pace and almost 13 percent higher than the year-ago level. 

That generally upbeat report was leavened somewhat, however, by a significant downward adjustment in April’s initial sales estimate, bringing that month’s annualized total down from 623.000 to 580,000 units. Still, the stronger than expected performance encouraged industry analysts, who noted evidence of strong and increasing homebuyer demand. 

The question is whether this demand will prove sustainable and the answer will depend on the success of efforts to tame the virus and prevent its continued spread.

The NAR’s Yun predicts that the housing market’s recovery “will be V-shaped,” even though the economic recovery as a whole may not be.  Other analysts suggest that the housing market’s fate will be tied more closely to the economic recovery, the prospects for which remain cloudy, at best.

Federal Reserve Chairman Jerome Powell acknowledged that point in a recent speech.  “The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus,” he said, adding: “A full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities.” 

The recent negative results of efforts to reopen many state economies suggest that we aren’t there yet.