Economy Report: Phases and Stages

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A key indicator of consumer confidence slipped in December as the coronavirus pandemic raged on in the United States amid the initial rollout of vaccines to combat the virus. The Conference Board reported that its Consumer Confidence Index fell to 88.6 from a revised 92.9 in November, dropping to its lowest reading since August.

“Consumers’ assessment of current conditions deteriorated sharply in December, as the resurgence of Covid-19 remains a drag on confidence,” Lynn Franco, senior director of economic indicators at The Conference Board, stated in a press release. “As a result, consumers’ vacation intentions, which had notably improved in October, have retreated. On the flip side, as consumers continue to hunker down at home, intentions to purchase appliances have risen. Overall, it appears that growth has weakened further in Q4, and consumers do not foresee the economy gaining any significant momentum in early 2021.”

A separate measure of consumer confidence was higher than its November reading but lower than it was in mid-December. The University of Michigan reported that its Consumer Sentiment Index fell to 80.7 at the end of December from 81.7 earlier in the month, but the year-closing reading was up from 76.9 at the end of November.

“The Sentiment Index slipped in late December, although it remained higher than last month despite the ongoing surge in Covid infections and deaths,” David Curtin, chief economist of the university’s Surveys of Consumers, stated in a press release. “The improvement was due to a large and rapid partisan shift, with Democrats becoming much more positive and Republicans much more negative. The largest change was in long-term business prospects, as twice as many Democrats as three months ago expected a continuous expansion over the next five years — 54 percent, up from 27 percent — while that same favorable expectation was nearly cut in half among Republicans — 32 percent, down from 60 percent.”

Curtin said that since the pandemic began, a “huge divide has grown across households in how they assess their own personal finances: The finances of those that continue to be employed and working at home have remained positive, while those who have lost jobs and incomes have been quite negative.

“While the rollout of the vaccine has been greeted as the beginning of the end, the end of the pandemic is still on the distant horizon in terms of a return to normalcy for consumer behavior, even among the most favored households,” Curtin added. “Precautionary motives will continue to shape both economic and personal behavior.”

Frederick Leidecker, operations manager of JMP Marine USA, the Miami-based American arm of South Korean company JMP Corp., says economic health depends on the industry. In the United States, people are buying and fixing boats. JMP, which manufactures replacement propulsion and generator engine-cooling pumps and flexible impellers, has seen sales rise by 25 percent during the pandemic.

Leidecker says JMP Marine sells through distributors. Rather than follow traditional economic indicators, he says, “the indicators I mainly get are from our distributors,” and they have been positive. For this year, Leidecker says the price of fuel is likely to affect JMP’s sales. “If it stays low, people will continue to go out on their boats, so that’s a great indicator right there.”

There are also reasons for concern. The U.S. Department of Commerce reported that consumer spending fell 0.4 percent in November, with the decline blamed on the pandemic. Personal income also fell in November, declining 1.1 percent after a 0.3 percent drop the previous month.

Inflation remained weak. The 12-month increase in the Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred inflation barometer, fell to 1.1 percent in November from 1.2 percent in October. The core PCE index, which strips out volatile food and energy prices, remained at 1.4 percent on an annual basis.

The Conference Board’s Leading Economic Index rose 0.6 percent in November, to 109.1, after an 0.8 percent increase in October and an 0.7 percent increase in September. The index attempts to predict future economic activity.

“The U.S. LEI continued rising in November, but its pace of improvement has been decelerating in recent months, suggesting a significant moderation in growth as the U.S. economy heads into 2021,” Ataman Ozyildirim, senior director of economic research at The Conference Board, stated in a press release. “Initial claims for unemployment insurance, new orders for manufacturing, residential construction permits and stock prices made the largest positive contributions to the LEI. However, falling average working hours in manufacturing and consumers’ worsening outlook underscore the downside risks to growth from a second wave of Covid-19 and high unemployment.”

The mood among the nation’s small businesses darkened in November. The National Federation of Independent Business reported that its Small Business Optimism Index declined 2.6 points, to 101.4, but remained above the 47-year historical average of 98.

“Small-business owners are still facing major uncertainties, including the Covid-19 crisis … which is shaping how they’re viewing future business conditions,” NFIB chief economist Bill Dunkelberg stated in a press release. “The recovery will remain uneven as long as we see state and local mandates that target business conditions and disproportionately affect small businesses.”

Confidence among home builders slipped in December. The National Association of Home Builders reported that its NAHB/Wells Fargo Housing Market Index fell 4 points, to 86, after three successive months of record highs. “Housing demand is strong entering 2021; however, the coming year will see housing affordability challenges, as inventory remains low and construction costs are rising,” NAHB chairman Chuck Fowke stated in a press release. “Policymakers should take note to avoid increasing regulatory costs associated with land development and residential construction.”

NAHB chief economist Robert Dietz added: “Builder confidence fell back from historic levels in December, as housing remains a bright spot for a recovering economy. The issues that have limited housing supply in recent years, including land and material availability and a persistent skilled labor shortage, will continue to place upward pressure on construction costs. As the economy improves with the deployment of a Covid-19 vaccine, interest rates will increase in 2021, further challenging housing affordability in the face of strong demand for single-family homes.”

The HMI index that gauges current sales conditions dropped 4 points in December, to 92; the component that measures sales expectations in the next six months fell 4 points, to 85; and the barometer that charts the traffic of prospective buyers also decreased 4 points, to 73. Any number above 50 indicates that more builders see conditions as good, rather than poor.

The Commerce Department reported that sales of new single-family homes fell 11 percent, to 841,000, in November at a seasonally adjusted annual rate, down from a downwardly revised pace of 945,000 in October. Although mortgage rates remained historically low, the rising cost of new homes was seen as a factor in the decline.

“While buyers continue to favor larger homes with bigger backyards and better quality of life, steeply rising prices are driving a wedge between their preferences and their wallets,” George Ratiu, senior economist at Realtor.com, told MarketWatch.

Sales were also lower in the home resale market. The National Association of Realtors reported that existing-home sales fell 2.5 percent from October to a seasonally adjusted annual rate of 6.69 million in November. However, sales were up year over year by 25.8 percent. They totaled 5.32 million in November 2019. The November 2020 decline followed five successive months of increases.

“Home sales in November took a marginal step back, but sales for all of 2020 are already on pace to surpass last year’s levels,” Lawrence Yun, NAR chief economist, stated in a press release. “Given the Covid-19 pandemic, it’s amazing that the housing sector is outperforming expectations.”

Yun said job recoveries stalled in recent months, and rapidly growing coronavirus cases and stricter lockdowns hurt consumer confidence. “Circumstances are far from being back to the prepandemic normal,” he said. “However, the latest stimulus package and with the vaccine distribution underway, and a very strong demand for home ownership still prevalent, robust growth is forthcoming for 2021.”

The NAR reported that the median existing-home price in November was $310,800, up 14.6 percent from the same month in 2019. Prices increased in every region of the country. The price increase marks 105 consecutive months of year-over-year gains.

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