“I would say it may be that further support for commercial real estate will require further action from Congress. … My sense is that more fiscal support is likely needed. Of course, the details of that are for Congress, not for the Fed. … In these cases, direct fiscal support may be needed.”-Federal Reserve Chairman Jerome Powell, Sept.16, 2021
The Federal Reserve is obsessed with Congress. Don’t believe us? Press conference transcripts are usually around 30 pages — and the transcript of this week’s press conference features nearly one mention of Congress per page! That trend has been on the rise during quarantine.
The committee essentially removed itself from the stimulus conversation at last week’s meeting, putting the onus squarely on Congress. The Fed released its “Statement of Economic Projections” that included forecasts showing zero rate hikes projected through 2023. The Fed is on fully automated emergency setting, with no plans to tighten (or even think about tightening). That seems to be about as far towards additional stimulus as the majority is willing to go.It’s hard to read the ever-shifting winds on the likelihood for additional stimulus from Congress, but even the prospect of nothing coming from the fiscal authorities is worrisome. A nuanced look at last week’s retail sales report shows why.
Sales hit $538 billion in August, now up 2.5% year over year and 2.3% year to date. That is truly astounding given the sheer magnitude of job losses and over 30 million in claims for some kind of unemployment assistance every week. No doubt this rebound in retail sales is the result of household income support measures enacted in the Coronavirus Aid, Relief, and Economic Security Act.
A deeper dive into the numbers shows a slowing recovery in the hardest-hit sectors. Restaurants and bars, most notably, remain in an $11 billion hole since the lockdown began. After $10 billion gains in each of May and June, we’ve only seen $2 billion advances in July and August. On the other hand, shifts to delivery of goods (via Amazon, mostly), at-home eating and home-office work have boosted nonstore retailers, grocery stores and building-garden materials spending.
But those surges in spending haven’t resulted in many new jobs — the yellow dots above — especially in comparison to the millions of restaurant and retail workers still unemployed. Firms likely realize these bursts in pandemic-related spending are temporary, and won’t require additional hiring. Meanwhile, temporary job losses in restaurants and retail are increasingly becoming permanent. According to an update by the service review site Yelp this past week, 100,000 businesses have now permanently closed since March 1. As you can see in the chart below, store closures in the early days of the lockdown were dominated by temporary ones. That all changed over the summer.
We’ve been tracking data from the reservation site OpenTable on restaurant activity with a regularity that borders on religious, and for good reason. It’s a great proxy for COVID-impacted sector performance in general, and we’ve seen that it responds directly to our ability to keep the virus under control. There is some hope that we’re nearing a turning point in the restaurant industry, and for retail in general, where traffic is able to increase without that leading to subsequent spikes in new cases. Below we track OpenTable restaurant activity against the COVID positive test rate across the country. The data is somewhat noisy around the recent holiday and the wildfires in the West, but restaurant traffic has undoubtedly increased over the last month or so as the spread of the virus subsides.
This has largely been possible through increased outdoor seating, in combination with masked diner requirements and strict indoor eating limitations. The problem is, these gains have happened during a period where outdoor seating is pleasant. Will the same be possible as cold weather approaches?Let’s look at another fun set of data! To measure indoor demand throughout the year, we can look at heating degree days (degree of weather across the country below 65 degrees Fahrenheit, meaning days you would want the heat to be on) and cooling degree days (meanings days you would want the air conditioning on). The chart below combines the two, on a population-weighted basis, and essentially measures the unpleasantness of being outside at any point in a typical calendar year.
Essentially, conditions are as good as can be for outdoor eating in September, only rivaled by May. It’s perhaps not a coincidence that the U.S. saw a spike in Southern cases this July, as eating outdoors became unbearable in many regions. Already in the North we’re seeing major cities begin to panic. New York is clearly worried about it, while Chicago actually held a public contest for best outdoor dining solutions. Boston has extended its outdoor dining allowances, but likely needs more direct aid.
Can struggling restaurants make it through the winter without widespread indoor dining? A report by the National Association of Restaurants revealed 40% of restaurateurs believe it is unlikely they can last another six months without additional fiscal support.To circle back to Powell’s comments, the COVID recession is creating some extraordinary imbalances that are not appropriately managed by broad lending assistance, which is the Fed’s mandated limitation. A relief bill to help some of these uniquely damaged industries seems like a no-brainer, lest we want to guarantee permanent closures and long-term unemployed keep increasing.The longer this lasts, and the slower the recovery becomes, the greater the risk that a more traditional recession forms and permanent job losses rise. Evidence of this is starting to bubble up. Initial job losses were concentrated in low-income industries, while higher-paying jobs were largely shielded. However, recent data from the job listing site Indeed shows posts for high-wage jobs are down 24% compared to normal, while posts for low-wage positions are only down 13%. While restaurants (and everyone in 2020, honestly) have gotten creative, that only goes so far.
The Week Ahead …There’s little data of high consequence this week, so congressional discussions around additional stimulus remain the most important thing we’re tracking most closely. Politico’s Morning Money reports “Democrats and Republicans appeared even further from a coronavirus relief deal,”and Goldman Sachs similarly tempered expectations of additional stimulus. Should jobless claims remain elevated, and, perhaps more importantly, stock indexes continue to fall as we enter the fourth quarter, the calls for stimulus will likely grow louder.Tuesday has the potential to be a big day in Washington, D.C. Powell and Treasury Secretary Steven Mnuchin are scheduled to testify in front of the House Financial Services Committee on pandemic response measures, before doing the same in front of the House Committee on Oversight and Reform’s subcommittee on the coronavirus crisis on Wednesday and then the Senate Committee on Banking, Housing, and Urban Affairs on Thursday. In addition, on Tuesday, the Joint Economic Committee holds a hearing on “The Economic Impact of America’s Failure to Contain the Coronavirus,” led by Democratic Virginia Rep. Don Beyer. What a title! We expect emotions will run high.By Robert Calhoun and Matt PowersCoStar AnalyticsSeptember 21, 2020 | 9:46 AM