The U.S. Bureau of Economic Analysis said today that the Gross Domestic Product fell 4.8 percent in South Carolina in the first quarter of 2020. In fact, it fell in every state and for the national as a whole, GDP fell 5%.
The largest drop was in New York: 8.2 percent. The smallest drop was in Nebraska: 1.3 percent.
By industry, construction fell by just .8 percent, and real estate and rental and leasing fell by just 1.1 percent. But GDP also showed some interesting results as a result of a pandemic, and large government spending in response:
- Accommodation and food services fell 26.8 percent, the leading contributor to negative GDP in 29 states.
- Arts, entertainment, and recreation fell by 34.7 percent, a contributor to GDP drop in every state.
- Healthcare and social assistance fell 7.8 percent, largely the result of suspension of profitable discretionary procedures.
- Agriculture, forestry, fishing, and hunting increased 15.5 percent, which moderated GDP decreases in 17 states.
The Federal government’s contribution to GDP rose by 2.2 percent, a function of $6 trillion in stimulus spending. But state and local government’s contribution to GDP fell by 4.9 percent.
Our take? High unemployment, coupled with the inherent conflict of social distancing and dining out or attending a ball game is a major factor in a struggling economy. However, with likely home buyers among the least impacted by the rise in unemployment, construction, especially residential construction, and real estate are bright spots. And if you have the time, and the means, why not go fishing?
Last week Dr. Robert Dietz, Chief Economist of the National Association of Home Builders, provided a forecast to remodelers across the country. He stated that the economy has been outperforming his earlier rosy forecasts that housing would lead the economy in the coming months.
“Consistent with the National Association of Home Builders forecast, home building data are showing signs of leading and emerging economic rebound. In fact, high-frequency data suggest gains for most sectors of the economy, even as confirmed virus casts rise in many states.”
Dr. Dietz also said, “I have been chasing up my forecasts.”
We also read the statement in our headline in a Haro Setian’s newsletter. This is what he had to say about our local housing market:
“The number of homes for sale dropped by almost 20% annually this April. This is the lowest April housing inventory of all time.
Inventory was already low before the coronavirus hit. Now, many sellers are either hesitant because of the pandemic, or they simply don’t realize how strong demand currently is.”
Haro’s email went on to say that now is a great time to sell. But it’s also may be a great time to build. The latest quarterly building permit data, for the first quarter of 2020, was recently released by our friends at MarketEdge. This is what they reported*:
- Upstate: (10.1%)
- Greenville County: (9%)
- Spartanburg County: (17%)
- Anderson County: (1%)
- Laurens County: 52%
- Pickens County: (20%)
Anecdotally, our friends in the Greenville County permit office told us they saw a slow down from late March until early April, then a return to normal permit levels.
Could now be a great time to build? Check out this article and this article for a little more context on the economy.
* First quarter 2020 vs. first quarter 2019.
By Dr. Robert Dietz, Chief Economist, National Association of Home Builders
In a surprisingly positive reading for the labor market, recent jobs data from the Bureau of Labor Statistics reported the unemployment rate in May declined to 13.3%. The true unemployment rate is likely closer to 16% due to many who reported being “employed but absent from work” but who were most likely unemployed. However, even with this technical adjustment, the jobless rate came in well below the 20%-plus rate some analysts had forecasted. (NAHB’s forecast called for a 17.8% rate for the second quarter.) This forecasting miss by those predicting a much higher level of unemployment appears to have been based on somewhat unreliable state-level jobless claims data. The unemployment rate for construction workers is currently 15.2%.
Moreover, a job gain of 2.5 million was reported for May; a striking contrast to what many analysts had predicted of a job loss of up to 8 million. Residential construction was among the top sectors in terms of the May turnaround. After posting a job loss of 422,000 in April, home builders and remodelers added 226,000 jobs last month, as housing demand improved. Getting the economy back on track will require additional hiring by employers, as well as a recovery for the labor force participation rate, a measure of people who hold a job or are actively looking for one. After declining 2.5 percentage points in April, the participation rate gained 0.6 points in May, rising to 60.8%.
The reopening of the economy in most states has led to a rapid reversal for the jobs outlook and the prospects for the beginning of a recovery in the third quarter. Housing data indicate the industry will lead the way in such a rebound: For eight consecutive weeks, data from the Mortgage Bankers Association has shown weekly gains for home purchase mortgage applications, a sign of improving housing demand, particularly for the single-family market. In fact, the data from the last week of May and first week of June show applications are running higher on a year-over-year basis. However, risks remain as the recovery could be uneven. For example, recent NAHB analysis identified states with vulnerable labor markets due to exposure of high unemployment business sectors, including tourism and hospitality enterprises.
Furthermore, we expect the economic crisis associated with the virus to accelerate existing geographic trends of home construction activity. The NAHB Home Building Geography Index (HBGI) found that in the first quarter, single-family construction expanded at a faster pace in small metros, small towns and rural areas than in larger metro areas. A similar pattern has been in place for apartment construction, with multifamily market share for less-dense markets having risen since the start of 2019. The impact of the virus, with people telecommuting more and seeking lower-density neighborhoods, will accelerate these existing trends.
Challenges remain ahead for housing, but as the labor market improves, so too has the outlook for the housing market. And while a decline in listings of existing homes is holding back the resale market, home builders have benefitted in the short-run due to the corresponding decline in competition. However, on the whole, historically low interest rates and a more rapid than expected improvement in the labor market should set the stage for a V-shaped recovery for housing, which in turn will provide support for the overall economy as a rebound takes shape in the second half of the year.
By: Joseph Von Nessen, Ph.D.
April 13, 2020
For many South Carolinians, the last few weeks have brought with them a level of uncertainty not seen in a long time. As the COVID-19 pandemic has spread across the United States and social distancing has become the new normal, many sectors of our economy have either been severely disrupted or completely stopped. Many workers have been laid off from their jobs and many more face the possibility of being laid off in the weeks ahead. And the stock market, which was at an all-time high just a few weeks ago, has seen a substantial contraction and is now highly volatile. Given this whirlwind of change, how can we begin to evaluate the state of our economy and the prospects for South Carolina’s recovery in the months ahead?
It is important to first recognize that this current economic shock is very different from those we have typically seen before. Most economic contractions are caused by fundamental problems in specific areas of the economy that lead to steady declines in economic activity that can last for many months or even years. By contrast, right now we are experiencing an intentional pause on an otherwise strong economy as part of a proactive effort to mitigate the spread of COVID-19. In this way, our current situation is more akin to a temporary statewide shutdown in response to a major winter storm than it is to a typical economic contraction. This is one reason why unemployment has been spiking so quickly. This also implies that if the pandemic abates in a relatively short period of time, we could see our economy recover faster than we might otherwise expect.
At this point, of course, we do not know how long the pandemic will last nor how long the guidelines on social distancing will remain in effect. We do know, however, that there are at least two likely paths to economic recovery for South Carolina in the months ahead after the pandemic is mitigated.
If the COVID-19 pandemic abates before the summer begins, South Carolina’s economy would likely follow what economists call a V-shaped recovery pattern – that is – a steep drop followed by a steep rise. In many sectors, a pent-up demand is already being created for the goods and services not currently being purchased. Once we begin to move back towards normal social interactions, there is likely to be a surge in consumer demand that will offset some of the losses we are currently experiencing. This could set the stage for a relatively fast recovery during the second half of the year. The federal stimulus, which includes direct payments to South Carolina households and cash-flow assistance to businesses, will also help to preserve consumer spending and minimize business losses in the meantime.
If, however, the pandemic extends into the summer months, many of South Carolina’s businesses that are temporarily closed right now would be increasingly likely to go bankrupt. This could lead to a second wave of layoffs as well as to disruptions in financial markets that would set the stage for further economic decline in the second half of 2020 and a much slower recovery period that could extend into 2021. Economists call this second path a U-shaped recovery pattern – that is – a steep drop followed by a slower rise. In the weeks ahead, it will be important to be on the lookout for any significant increase in the rate of bankruptcies among businesses, as this could indicate that a U-shaped recovery path is becoming more likely.
One other critical factor for South Carolina’s economic recovery will be the revival of consumer confidence. Even after social distancing guidelines are relaxed and businesses are reopened, consumer spending will not likely return to pre-pandemic levels if individuals are still uncomfortable going out in public. Health officials will be able to help to minimize this “hangover effect” as widespread screenings and effective treatments are put in place.
All industries are being affected by the COVID-19 pandemic and the housing industry is no exception. The single biggest predictor of housing demand is job growth, and the recent layoffs suggest that South Carolina has lost about six months of job growth in just the last three weeks alone. That’s the bad news. The good news is that a majority of these layoffs have been reported as temporary, suggesting that these workers will be hired back once the pandemic is over. Further, the long-run outlook for South Carolina’s economy remains strong. Over the past decade, South Carolina has consistently experienced both job growth rates and population growth rates that have been higher than the national average. In addition, the competitive advantages that South Carolina maintains – including strong natural amenities, a low cost of living, and a business-friendly environment – continue to make South Carolina an attractive choice for both companies and individuals. While we do not know how long this pandemic will last, we do know that South Carolina is well positioned for the years ahead.
U.S. house prices rose in February, up 0.7 percent from the previous month, according to the Federal Housing Finance Agency (FHFA) House Price Index (HPI). House prices rose 5.7 percent from February 2019 to February 2020. The previously reported 0.3 percent increase for January 2020 was revised upward to 0.5 percent.
For the nine census divisions, seasonally adjusted monthly house price changes from January 2020 to February 2020 were all positive, ranging from 0.3 percent in the West South Central division to +1.2 percent in the Middle Atlantic division. The 12-month changes were all positive, ranging from +4.2 percent in the West South Central division to +8.1 percent in the Mountain division.
Monthly index values and appreciation rate estimates for recent periods are provided in the tables and graphs on the following pages. Downloadable data and HPI release dates for all of 2020 are available here: https://www.fhfa.gov/HPI.
By Tom Barkin, President, Federal Reserve Bank of Richmond
The downturn will be deep, but recovery will follow.
This pandemic is new for all of us, creating unprecedented uncertainty. First and foremost, families are asking how best to protect their health and safety. But Americans are also asking about the health of the economy. How deep will this downturn be? How long will it last? How fast will we recover?
The answer to the first question is now clear: it will be deep. The service sector is 70 percent of the US economy and broad swaths of it are shut down, including travel, non-food in-store retail, restaurants, sports and entertainment. Last week’s initial unemployment claims exceeded 6 million, nearly doubling the previous week’s 3.3 million. The previous high had been 695,000 in 1982.
The duration is of course not fully knowable, but — absent a remission or treatment of the virus — it is hard to imagine social distancing moderating until there is a significant slowdown in new cases. While testing is expanding, it is far from universal. Most experts project widespread availability is at least a month away. As testing rolls out, the number of confirmed cases will inevitably expand. It’s hard to imagine calling the country back to work until the numbers have started to drop, which could be May or even later. This of course will be painful for tens of millions, and the recent fiscal package is intended to mute the impact of this elongated outage on businesses and employees, as are the Fed’s recent moves to stabilize markets and lower interest rates.
Which gets us to the third and most important question for our economy: the pace of recovery.
The good news is that one can have confidence people will be able to go back to work. Chinese companies have brought manufacturing back. Essential US businesses such as grocery stores, logistics companies, hospitals and public safety have operated successfully throughout this crisis. Each has used a now proven set of protocols, including appropriate distancing, sneeze guards, gloves and masks, testing upon entrance, funding sick employees to go home and deep cleaning where required. Companies that follow those protocols should now know they can operate, not with zero illness but with the ability to assure employees they are safe. That of course assumes we address the current shortages in necessary personal protective equipment.
The challenge will be bringing consumers back. Consumer spending is two-thirds of GDP. Our confidence in our ability to interact with others while staying healthy has been badly shaken. Hopefully doctors will quickly develop a treatment or vaccine. Absent that, businesses will have to find a way to convince consumers to shop, or eat out, to travel, or go to a concert or a game.
Unmanaged, this will happen very slowly. In China, retail traffic six weeks after stores reopened is reported to be only about half of where it was previously.
After 9/11, the rollout of the TSA was critical to restoring confidence in the air traffic system. It was messy, to be sure, but the existence of tougher screening, more agents, heightened vigilance and the like made a real difference in convincing people like me that it was safe to fly again.
Is there a way to, similarly, provide customers more reassurance? There are some obvious steps businesses can take, such as enhancing online access, self-checkout, drive through or delivery options. Perhaps governments can publicize “safe protocols.” But more will likely be needed.
Grocery stores are innovating here. In many, someone meets you in a mask and swipes down your shopping cart, sending a signal that safety is their priority. The aisles aren’t crowded. The cashiers have sneeze guards. The floors are taped to demonstrate appropriate social distancing in line. Seniors have a special time window to shop.
Other service businesses will need to redesign their models to signal that their experience is safe as well. Could restaurants offer explicit deep cleaning protocols for their tables, less server contact or less dense seating to allay health concerns when eating out? Should airlines fly with middle seats empty and boarding/deplaning protocols that preserve social distance? Should personal services pivot to an at-home delivery model? Is there a screening protocol for anyone who enters a hotel or a restaurant or a bar? Many of these changes could increase costs and prices, but they could also reassure the public enough to bring business back to life.
With rates at zero and fiscal support at historic scale, there is significant financial stimulus to help bring the economy back. But that will only meet its full potential when customers are ready to spend. Businesses and governments will need to innovate to make them comfortable doing so.
As part of the nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working with the Board of Governors to support a healthy economy and to foster economic stability and strength. It connects with community and business leaders across the Fifth Federal Reserve District — including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia — to monitor economic conditions, address issues facing communities, and share this information with monetary and financial policymakers. It also works with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through the nation’s payments system.