Written by: Samira Fatehyar
This will be the first of many blog posts regarding economic and real estate data coming out, especially in these uncertain times. I will be trying my best to release one every two weeks. I have been asked many times over the last 2 months, what type of data I am looking at and how I knew a recession was coming. I wanted to take the time in my first post to highlight what exactly I have been monitoring over the last year to lead me to believe a recession was imminent. Did I know Covid-19 was coming? No, but our economy was already weakened, which leads me to believe our eventual economic recovery will be long. The purpose of this blog is to share many of the tools my education brought me along with several of my inferences on what it all means.
We were told we were in the longest economic recovery ever recorded in the US. 11 years of economic expansion. Any macroeconomic 101 course would teach you that our economy is cyclical and that with every boom there is a bust, or at the very least a recession, even if it lasts a short time. So what’s going on right now?
What lead us to this point?
PMI
Signs of the coming economic decline were all around us. But a lot of us chose to ignore them. May 2019 we saw a sharp decline in the PMI (Purchasing Managers Index), as seen in the Graph 1, below. For those of you who are not aware of this, the PMI shows the trends in both the services and manufacturing sectors. It basically summarizes how purchase managers view market conditions. In Graph 1, you can see there was a drop during the Summer of 2019 that was then found to start increasing again by the Fall. By November 2019 though, it looked like we hit a slight peak, in comparison to what we had seen in the years prior. This is especially important to note because the market had already started slowing prior to the Covid-19 pandemic. Of course, the pandemic exacerbated conditions, but we will get into that later. The trend shown in this graph is important because late 2018 and early 2019 saw a decline. What were these purchase managers seeing? They knew that a recession was on the horizon.
Graph 1
Purchase Mangers Index from April 2015 to April 2020. https://tradingeconomics.com/united-states/manufacturing-pmi
Wages Vs. Housing Cost
Another very important factor that showed me that a recession was nearing was the fact that wages were not keeping up with rising housing costs. This not only has exacerbated the coming recession but has also lead to a bigger income inequality gap. The worst part is that the income inequality gap will only increase when this economic downturn is over.
I’ve provided 3 important graphs to illustrate this important point. Graph 2 shows the median usual weekly real earnings for the past 10 years. From Q1 2010 which saw a CPI of 344 to Q1 2020 which saw a CPI of 367, we can see that the increase, although not linear, was about 6.69%. Before I start explaining what this tells us, I’d first like to explain what CPI represents. CPI or Consumer Price Index, takes a weighted average basket of goods and services bought by households and measures the changes in the price levels. This helps represent the purchasing power that consumers have. So, the purchasing power for a basket of goods and services has increased by 6.69% in the last 10 years.
Graph 2
Median Usual Weekly Real Earnings from January 2010 to January 2020 provided by the Federal Reserve Bank of St. Louis. https://fred.stlouisfed.org/series/LES1252881600Q
Now let’s now take a look at the increase in housing costs. Graph 3 shows the S&P/Case-Shiller US National Home Price Index, this index shows the value change in the US residential housing market. It's has been named a barometer by many economists because it shows the health of the US housing market. Taking a look at Graph 3, it was found that from January 2010 to January 2020, there was an increase of 46.21%. So in the same time range as wages, housing costs rose about 7 times more than wages or purchasing power increased. There should be flashing red lights and a loud siren when one reads this information. This is not sustainable in any economy.
Graph 3
S&P/Case-Shiller US National Home Price Index from January 2010 to January 2020, provided by the Federal Reserve Bank of St. Louis. https://fred.stlouisfed.org/series/CSUSHPINSA
To further prove the above point, I went and pulled Graph 4, below, which shows the Median Sale Prices of Houses sold in the US. This showed approximately a 48% increase from the same time period, January 2010 to January 2020. This is not sustainable. Yet, prices keep increasing.
Graph 4
Median Sales Price of House Sold in the US from January 2010 to January 2020, provided by the Federal Reserve Bank of St. Louis. https://fred.stlouisfed.org/series/MSPUS
An economy cannot run when its people cannot keep up with the ever increasing cost of housing. Purchasing power heavily varies from state to state as well. For example, a California dollar has more purchasing power in Nevada than a Nevada dollar has in California. But looking at this from a micro level, we see even with a California dollar in metropolitan areas in California, it doesn’t go very far, especially in terms of housing. Looking at the Reno market, I’ve heard of people constantly complaining about the ever increasing cost of rent. What happens when people of a society cannot even afford a roof over their heads? We need to make sure wages and housing costs rise at a much more steady pace, together.
The Impacts of Covid-19
Covid-19 has acted as an exogenous catalyst to our current economic situation. Unfortunately, our lawmakers as well as the Federal Reserve have been treating it as the only way they know, through enacting a stimulus and printing money, as if it were a housing bubble causing this. Now, don’t get me wrong, the stimulus is needed for those who have lost their jobs and are affected financially because of the pandemic. But the way they are reacting to this is setting a dangerous precedent that moral hazard is acceptable. What do I mean by this? The US Federal Reserve just last week bought low-rated bonds as well as exchange traded funds of junk bonds. Why is the US’s central bank doing this? This will only encourage higher financial risk taking by many firms and moral hazard, as previously mentioned.
What’s to come next? I don’t have a crystal ball. Will small businesses permanently close due to this sudden lockdown? Yes, the question now is how many will. I think we have a very long road to recovery. With a record number of unemployed, we need to remember that those will not magically go back to work when all of this is over; it won’t work like a light switch. In my next blog post, I will discuss the unemployment numbers in much more depth.
A positive aspect I can take from all of this? We are undergoing a complete redesign in terms of our working ability. The remote lifestyle, that many in the Millennial generation dream about, is becoming more apparent. The insane traditional workday of 9am-5pm, is just not sustainable in these times. People can be much more productive on their own time, which not only makes companies efficient but also more profitable in the long run. Now, I know not all businesses can do this, but a lot of them are rethinking the traditional workday, and that, that is a win in my book.
Related Articles
Interested in what I’m reading these days? I’ve listed out many articles I have found interesting recently. Apologies if any have paywalls.
https://www.bloomberg.com/news/articles/2020-04-15/u-s-retail-sales-plunged-by-record-8-7-in-march-amid-pandemic
https://www.bloomberg.com/graphics/2020-sba-paycheck-protection-program/?srnd=premium
https://www.bloomberg.com/news/articles/2020-04-17/fight-over-rent-payments-gets-ugly-with-wave-of-defaults-looming
https://www.ft.com/content/52a46bcf-f238-43cd-82dd-c48c3c1883e3