The Monday Morning Quarterback
A quick analysis of important economic data released over the last week
Before we get into last week’s numbers. I want to go over some random thoughts.
The first has to do with the increase in new cases of COVID-19 around the world but especially in Greater Phoenix. As we have discussed before, the pattern seems clear. Infections start increasing. This leads to parts of the economy being closed. This leads to a decline in new cases. This leads to parts of the economy reopening. This leads to people, especially younger adults, normalizing their behavior without taking the necessary precautions. This leads to a higher rate of infections. And the cycle continues. What is going on now will be the third time around the bases. This cycle will continue until sufficient action is taken when the economy starts to reopen to prevent cases from re-escalating.
The state and the Greater Phoenix area had been doing extremely well in controlling the situation since the July/August spike. This is in large part due to the Arizona government’s good work after the spike in cases over the summer. Yet, the reclosure of the parts of the economy that might occur due to this new spike would hurt us all. Some people will die. The medical system will be taxed and regular care will suffer. More people will be unemployed. It hurts business confidence and the desire to rehire. Also, more small and medium size businesses will close for good each time the cycle occurs. Every cycle also extends the timing of a recovery in the economy.
It is a dangerous situation all around. Sufficient protocols have to be put in place to prevent this from happening. We are all tired of the situation. It’s been a long and frustrating haul for all of us. But, we have no choice. COVID-19 is not going away any time soon. Indeed, we are at best probably only in the 5th inning or so. A vaccine, when one is approved, is only part of the answer. It will not be 100% effective. Not by a long shot. And 100% of American will not agree to be vaccinated. Again, not by a long shot. And this is not only because of the almost impossible logistics for a rapid deployment of a vaccine for everyone. A good part of the population will not want the vaccine. At least not for a long time. Yes. Therapeutics are improving rapidly. But that helps people after someone gets sick, not before. And more reliable and cheap testing is also just around the corner. But it’s not here yet. Also, my personal opinion is that deaths matter more than cases. But even deaths are slowly rising now. So, no matter how tired and disgusted you may be with the current situation, it’s time to suck it up and play by the rules.
Second, based on what both political parties are saying, a follow up to the CARES Act will be most likely a post-election phenomenon. Even if the congress gets off its collective over-politicized butt, no compromise is likely to be implemented until at least four months after the original August 1st expiration. This leaves a lot of people out in the cold for far too long. The delay is all over pork. Because of this, the average American who is out of a job due to the government-imposed shutdown of the economy has been forgotten by many of the more arrogant and well fed in Washington. When congress does get its act together, many will be helped. But, for many, the hiatus will have been too long.
The final random thought has to do with the holiday season that will soon be upon us. It is likely to be a lackluster season. Many will remain reluctant to go to the mall or join the crowds that will be shopping. Those who were left behind by congress will continue to be under pressure and won’t spend much. Yet, it will be a good season for internet retailers. Order early because the supply chain will be under pressure and the probability of getting most things delivered on time for Christmas looks low. Plan ahead.
As for last week’s national data, initial claims for unemployment insurance got worse. But it was probably due to a technical issue. Consumer sentiment was slightly more positive. Industrial production weakened modestly. Retail sales exceeded expectations despite the fact that, in total, the retail sales recovery is nearly complete. And consumer prices remain under control.
In Arizona, employment improved in September and now stands only 3.1% below year earlier levels. Greater Phoenix was down 2.9% while Greater Tucson was down 4.0%. This compares to a decline of 6.4% nationally. The unemployment rate increased but this was mainly due to growth in the labor force as many started looking for jobs again. August retail sales were up strongly. The Greater Phoenix office market remains under pressure as net absorptions were negative for the second quarter in a row. The industrial market in Great Phoenix continued to do well.
Initial claims jumped this week. But it could be due to technical reasons related to California’s decision to halt processing of new filings for a couple of weeks. Overall, the U.S. labor market continues to recover from the COVID induced recession.
Slowing employment growth, the resurgence in COVID-19 infections, and the absence of additional federal relief payments prompted consumers to become more concerned about the current economic situation. These concerns were largely offset by continued gains in economic prospects for the year ahead. Overall, the University of Michigan Consumer Sentiment index rose to 81.2 in October compared to 80.4 in September and 95.5 a year ago.
Industrial production fell 0.6% in September. It was the first decline in the last five months. The initial bounce to industrial production after states reopened their economies has faded and the September numbers are in line with the recent moderation. Industrial production remains down 7.3% from a year ago.
Retail sales growth exceeded expectations despite the fact that in total the retail recovery is nearly complete. Retail sales in September were up 1.9% in September from August and are up 5.4% from a year ago.
The CPI rose by 0.2% in September. This was in line with expectations. Food prices were unchanged while energy prices rose 0.8% for the month. Excluding food and energy, prices rose 0.2% as well. Over the last year, overall prices are up 1.4%. Excluding food and energy, prices were up 1.7% for the same period.
Initial claims for unemployment insurance in the state increased over 10,000 for the first time in a month. They now stand 155% above a year ago and signal a modest slowing of labor markets.
On a seasonally adjusted basis, the unemployment rate in the state increased to 6.7% in September from 5.9% in August. Nationally, unemployment fell to 7.9%. A significant part of the state’s increased level was due to a 4.4% rise in the labor force as many who were previously not looking for work reentered labor markets.
Arizona nonfarm employment was up for the month but was down 90,700 jobs or 3.1% from a year ago. For the first nine months of the year, employment in the state was down 2.2% from the similar 2019 period. The majority of the losses from a year ago were in leisure and hospitality (down 56,000), and professional and business services (down 24,300).
In Greater Phoenix, employment was down 63,500 jobs or 2.9% compared to September 2019 and was down 1.8% for the first nine months of the year compared to the similar 2019 period.
Greater Tucson lost 15,800 jobs or 4.0% compared to September 2019 and was down 2.7% for the first nine months of the year.
The Greater Phoenix office market enjoyed its highest average lease rate on record with an average rental rate of $27.95. At the same time, new absorptions were negative for the second quarter in a row in the third quarter. They fell by 578,939 square feet in the third quarter according to CBRE. This compares to a loss of 486,488 square feet in the second quarter. This is the first time since 2009 that absorptions declined for two quarters in a row.
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