The United States has recorded 126 months marking the longest economic expansion in history, breaking the record of 120 months of economic expansion from march 1991 to march 2001. Nonetheless, this cycle has been weaker in comparison with other expansions in history. The cumulative total of quarterly GDP growth figures amounts 25%, lower than the previous economic expansions.
With the excitement coming along with this growth in the economy, the job growth has been relatively slower than during other postwar recoveries. Now, there is a high possibility that this economic expansion will come to a speedy end amid the unprecedented effects of the COVID-19 according to the latest commentary from the Fannie Mae Economic and Strategic Research (ESR) Group.
With the stay-at-home orders forcing the consumers to stay at home, many businesses are shutting down, and the households are forced to contemplate the huge financial burdens growing each day, the Group projects a back-to-back quarter of negative real GDP growth in the first half of 2020.
The updated ESR’s forecasts predict a historically large contraction in the Q2 2020 of approximately 25 percent annualized amid the sizeable decline in unemployment, consumer expenditure, business spending, and investment. It’s not all gloomy; the full-year 2020 output is expected to contract to 3.1 percent, the Group anticipates a growth rebound of 4.8 percent in 2021. While this calls for a reason to be hopeful, the forecasts remain heavily skewed to the downside due to the uncertainty brought about by the virus and virus-related shutdowns, ultimately determining the likely contraction’s severity.
The worst scenario is one where consumer spending and business investment recover at a slower pace. For instance, the longer the shutdowns continue, the higher the risk that cash-constrained firms will close permanently, which skews chances for a quick rebound. On the upside, however, (a less likely scenario) there could be a more rapid recovery from the first half of the recession. In this case, while the first and second quarters would record declines, the virus would be mitigated more rapidly.
Under such circumstances, the consumers would quickly emerge from the social distancing, increasing their consumption and allowing for a more stable resurgence in economic growth supported by the monetary and fiscal policies. This would more fully make up for the first two-quarters of declines. If this is the case, the output in 2020 will fall by 1-2 percent, with a healthy rebound expected in 2021.
Housing Started Strong but Will Slow Down in Coming Months
Despite having a relatively strong start, housing is expected to slow significantly in the coming months. The ESR Group expects there to be a decline in mortgage originations due to the decline in applications, falling new single-family for sale home listings, and waning consumer confidence. Right now, it is clear that buyers are holding off their purchase and selling homes in light of the major uncertainties brought about by the effects of the virus and the outlook of the economy.
Therefore, going forward, there will be a sharp decline in the total homes sales, and the housing starts in Q2 2020 and all of 2020. However, the low-interest-rate environment will continue to support the refinance activity this year; the ESR Group projects to account for 56 percent of the total mortgage origination volume.
“Amid job losses and employment stability concerns, we expect the housing market to also experience a downside shock,” Duncan continued. “In our view, the negative shock will apply to both the home purchase and rental markets. On the demand side, early indications are that the purchasing benefit of lower interest rates is being offset by the downturn in employment. On the supply side, the number of listings is falling, as those with homes to offer may either be hesitant to allow strangers to tour their home or worry that the lack of demand is placing downward pressure on the sales price they might otherwise receive. On net, the expected effect is about a 15 percent decline in home sales in 2020, translating into a decline in purchase originations from $1.28 trillion in 2019 to $1.11 trillion in 2020. On the flip side, compared to 2019, refinances are expected to pick up in 2020 by approximately $400 billion to $1.41 trillion.”
ESR projects that the existing home sales will fall 34 percent to an annualized rate of 3.76 million units in Q2 2020 which is a similar sales pace to the lowest levels experienced in the Great Recession. There is a high chance that the monthly sales will decline to an even lower annualized pace, partly evidenced by the decline in the HPSI. However, the April sales are expected to be bolstered by the contract signing from March or even February transactions. Despite a stronger projection for strong sales in the final quarter of the year, 2020 existing home sales are projected to fall 15 percent from 2019.
The ESR house price forecast has been revised downward from 4.6 percent to 0.4 percent Y-O-Y. The slowdown in the housing activities will likely correspond with weaker home price appreciation; as such, the decline in house prices will be sustained on a national basis. While this economic downturn is short-run in nature, there are other forces at play which ultimately affect the price softness.
Even before the current downturn hit, a lack of housing supply was pressurizing the prices. Secondly, the nature of the current sales slowdown is two-fold. While the demand is declining, economic confidence is also falling, and people are avoiding open houses due to social distancing. On the other hand, there is a negative supply response as potential sellers do not want to list their homes out of worry of infection; also, there is the notion that there are fewer buyers in the market.
Job Losses Expected to Skyrocket
Due to the government-enforced business closures and the social distancing rules, this has led to a meaningful decline in activity for many industries, including retail, dining and travel. Besides, the decline in demand, as well as the conflict between Saudi Arabia and Russia over the production levels, have led to a dramatic reduction in oil prices which has pushed the U.S. oil producers to intense pressure.
The march employment report shows the first unprecedented wave of unemployment stemming from the effects of the virus. The nonfarm payroll employment fell by 701,000 in March, which is the largest decline since March 2009. Unemployment rates jumped to 4.4 percent, which is the largest one-month increase in over 40 years. This shows the nature of this economic contraction. The ESR predicts employment losses to reach record levels in the second quarter of 2020, reaching a peak decline in April.
Data from the Department of Labor shows that in just three weeks ending April 4, the initial unemployment insurance claims had risen to about 15 million people. It is expected that many of these workers may drop out of the labor forces as the lack of job prospects and a continued pressure to practice social distancing leads them to stop searching for new employment. Supposing that they drop out as expected, this would result in them being categorized as “discouraged workers” and removed from the count of individuals in the labor force. To paint the full picture, the potential for a decline in the labor force shows the technical level of unemployment moving forward may not fully encompass the full magnitude of the lost jobs and the hours worked. ESR projects that the unemployment rate will average nearly 12 percent in Q2 2020, but as the pandemic eases and shutdowns abate, the rate will end the year around 7 percent.
“The historically rapid decline in economic activity, the accompanying employment loss, and our limited, though improving, understanding of COVID-19 make this a particularly challenging forecast environment,” said Doug Duncan, Senior Vice President and Chief Economist, Fannie Mae. “Our baseline forecast of a 3.1 percent contraction in real GDP in 2020 acknowledges the economic downdraft and, considering the unprecedented monetary and fiscal policy responses, suggests a solid-but-incomplete recovery exiting 2020. The variability around this forecast is wide and is dependent on the incidence, severity, and duration of the virus, as well as the response of the public and policymakers to new information. In the background and contributing to the economic stress is the drop-off in demand and the negotiations over supply constraints in the oil industry.”
For a more detailed economic outlook, visit the Economic & Strategic Research site at Fanniemae.com. Here, you will find the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary.
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