COVID-19 Economic Update: “No Question” US Is in a Recession
March numbers paint a grim picture of the economy and economists now look at the depth of it and what a recovery could look like
April 13, 2020
March data paints a grim picture that caused several industry economists to declare the U.S. is in a recession. “We are in recession, full-stop, no question about it,” says Richard Branch, chief economist at Dodge Data & Analytics. “Now we need to figure out the depth of the recession and what a potential recovery looks like.” He noted that the usual data sources have yet to capture the full extent of the economy’s stoppage.
“I can quite confidently say February 2020 will be the official start of the recession,” Ali Wolf, chief economist of Meyers Research, said in an economic update webinar on April 8. She also revised her earlier prediction to a longer 16-18 month recovery, using February as the starting point for future recession analysis. “The bad numbers are just beginning,” she warns.
Window and Door Demand
In an April 10 webinar hosted by the Window & Door Manufacturers Association, Todd Tomalak, principal – building products, John Burns Real Estate Consulting, said housing will be hit “quite hard,” but predicts remodeling will hold up better than new construction.
He expects housing demand in 2020 will be the lowest its ever been and that March housing data will fool many into thinking the housing market will be okay. Tomalak warns, “It will not be okay.” He says builders have very few finished homes to sell, which should delay price reductions, and says incentives can be a better gauge of price weakness than overall price sold, because incentives eat into the net sum. Most builders have also stopped land acquisitions: “Expect any business tied to new construction to slow down significantly because there’s no pipeline.”
Tomalak describes 2020 as “incredibly positive” up until now and that windows and doors as a product category saw some of the fastest growth in orders. The pandemic, however, has altered the year's trajectory. Even so, Tomalak projects windows and doors are poised to be positive relative to the rest of housing and says the category will recover sooner than repair and remodeling as a whole.
He explains that when people are inside their homes and financially squeezed, they gravitate toward projects that can help save in home energy costs, such as windows and doors. Severe swings in temperature also precede increased window purchase incidence rates. Conversely, cabinetry and other cosmetic remodels get more business during booms.
Remodeling: Postponements Versus Delays
According to a John Burns Real Estate Consulting survey, as of April 1, 57 percent of respondents still planned to pursue a remodel, 29 percent postponed and about 14 percent canceled. The question, says Tomalak, is how many of those postponed projects will turn into cancelations, which can be dependent on the type of consumer.
Those who work in fields directly affected by COVID-19 shutdown, such as retail and hospitality, account for about 12 percent of window and door spending, Tomalak calculates. That demographic likely will cancel remodeling projects, whereas postponements versus cancelations will vary for homeowners who are more indirectly affected. The duration of the recession is critical to whether projects are postponed or canceled, emphasizes Tomalak.
The supply chain also could have some bumps. On a scale of 1 to 10, windows and doors rank about a 6 in supply chain complexity, says Tomalak. (For comparison, flour mills are a 1 and surgical implements are a 9.9.) Challenges in other parts of the supply chain will affect windows and doors because the category relies so heavily on others for its need. “It’s difficult to lock down the economy and still have all the inputs you need,” says Tomalak.
Dodge Data & Analytics has been “consistently dour” on the single-family outlook, says Branch, largely due to lack of availability for entry-level buyers and housing affordability. Dodge also includes multifamily in its residential outlooks. He reports the first quarter, however, was “outstanding” in the residential space and the best quarter since 2007.
The current situation prompted Branch to predict home sales will crash in the second quarter by up to 50 percent compared to the first quarter, bringing back “levels we saw during the Great Recession in 2007-2009.” He also predicts the spring and summer selling seasons for single-family homes is gone and that weakness could continue into Q3. “Economic damages to households will take time to repair and heal,” says Branch, who expects to see residential construction regain strength in 2021.
Statistics from Meyers Research show 94 percent of builders kept base prices flat week-over-week. But, 42 percent increased incentives while 41 percent reported increased cancelations. March listings are down 15.7 percent year-over-year, but the final two weeks of the month—when COVID-19 hit the U.S.—reflect a 34 percent year-over-year drop.
Tim Sullivan, senior managing principal at Meyers Research, draws what he called “very strong” correlations between unemployment and housing starts. When housing starts go down, unemployment goes up. “Watch the unemployment rate in your market to get a sense of a pivot point,” he says.
The Labor Market
The unemployment picture is worse than many economists projected. In a three-week timeframe, initial jobless claims tallied 16.8 million, which Wolf describes as “depression-like” levels. Construction accounted for 29,000 of a reported 701,000 of net job loss in March and manufacturing accounted for 18,000. Wolf contrasts this number to the Great Recession, when it took 10 months of net job losses to reach that 700,000 figure.
In general, concern is mounting among construction professionals. The construction workforce, which Branch describes as “already hobbled by lack of skill and available labor,” will be hit not only in the field, but also in office roles and supporting industries. About 67 percent of those surveyed that are experiencing COVID-19-related delays cite onsite worker availability as the most prevalent reason.
A positive unprecedented statistic lies with temporary layoffs, which account for 25 percent of the unemployed. “The share of furloughed employees is important because it helps with the restart,” she explains.
Branch predicts a good portion of people who lose jobs in the first half of the year will get re-hired in the second half, but that “it takes a lot to restart a service-based economy. It'll be a bit of a slog to get economy back up and unemployment rate back down.”
Three phases of legislation are intended to make a dramatic impact on the economy: the Coronavirus Preparedness and Response Supplemental Appropriations Act; the Families First Coronavirus Response Act; and the Coronavirus Aid, Relief and Economic Security Act. Branch expects a phase four stimulus program geared toward relief for individuals and businesses that fell through the gaps in phase three and that also includes strong support for infrastructure spending. He doesn't anticipate seeing this next phase until late Q3 or Q4.
Wolf discussed the value of the $350 billion in aid money as part of the CARES Act that’s allotted for small businesses with 500 or fewer employees. To qualify, an employer must agree not to reduce head count, not to cut wages, and to spend 75 percent of the received funds on payroll costs in the first eight weeks. If all conditions are met, the debt is forgiven. “[The money] is given to businesses to ensure they can weather the next two months,” explains Wolf. She also said Steve Mnuchin, secretary of the Treasury, announced on Twitter he’s looking to secure an additional $250 billion to add to this program.
In addition, the Fed continued its aggressive efforts by announcing on April 9 that it would release another $2.3 trillion into the economy. Branch describes this as an “unprecedented and extremely aggressive action by the Fed.” The Fed also bought $600 billion of loans through the Main Street Lending program, mainly for companies under 10,000 employees and with revenues under $12.5 billion. It also will provide $500 billion for loans for states and municipalities.
Restarting the Economy
The economic restart won’t be without its hiccups. Wolf anticipates fear will loom when people will feel safe enough to go out; uncertainly about if COVID-19 could return in the winter; and consumers will have insecurities around employment. Macro considerations include the global economy, debt burden, how individual sectors recovery and the long-term impact on supply chains.
She quoted Henry Paulson, former U.S. Secretary of the Treasury, that "fear is the enemy." To come out successfully, she said, individuals need to focus on their real work so they aren’t playing “catch up” when the new world emerges. Wolf also stressed that it’s vital to focus on the future.
“The world has changed in such a radical and quick fashion,” says Sullivan. This pandemic could influence how homes are designed and built in the future. As people remain home, he says, they could realize they want larger spaces, but affordability is still a concern. Manufactured or factory-built housing could be an answer, he predicts. Homes could also be built using more flexible spaces and some might turn to materials with bacteria- and virus-reducing qualities, such as copper, or hand-free hardware. This is a time to adapt, improvise and overcome, says Sullivan.