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Columbia Business Monthly

Coronavirus impact is hammering the economy

Mar 26, 2020 04:23PM ● By David Dykes

SC Commerce Secretary Bobby Hitt talks about state response to virus

Economic forecasts have been ratcheted down considerably as governments, businesses and individuals respond to the rapid increase in confirmed COVID-19 cases. 

While developments surrounding the virus are changing rapidly, one thing is abundantly clear:  economic activity has ground to a virtual halt throughout most of the country.

That's the assessment of economists and analysts of the Wells Fargo Securities Economics Group.

"We now expect real GDP to decline at a 14.7 percent annual rate during the second quarter, followed by a 6.3 percent drop in the third quarter," they wrote in a research report. "The resulting five percent pullback in real GDP will rank as the worst in the post-war era and is expected to result in massive layoffs over the next few weeks that will push the unemployment rate up to at least 8.6 percent."

The sudden stop in economic activity that began in mid-March was first apparent in the leisure and hospitality industry, said senior economist Mark Vitner, economist Charlie Dougherty and economic analyst Matthew Honnold.

While some restaurant chains have shifted to pick-up and delivery models, overall business is down 85 percent or more and airlines and hotels have suffered a similar fate, they said.

They noted home sales also have also slowed abruptly, but not by that magnitude. They expect new and existing home sales to post double-digit drops from the prior year in March and April.

"The declines mark a sharp reversal, as home sales had gotten off to a strong start this year, aided by strong job growth, low mortgage rates and mild winter weather," the analysts said.

Sales of new homes through February were running 21 percent ahead of the same pace last year and sales of existing homes were up 7.2 percent year-over-year in February, they said.

They noted the latest mortgage applications data offered an early look as to how the housing market is likely to be impacted.

After hitting an 11-year high just two weeks ago, mortgage applications plummeted 29.4 percent in the week ended March 20. 

"We have reduced our housing forecast to incorporate the effects of the COVID-19 outbreak, which will impact the economy through several channels such as widespread business shutdowns, a surge in layoffs and a host of shelter-in-place orders," the analysts said.

They also believe, however, housing could be a driving force of an economic recovery.

"Policymakers reacted swiftly to the sudden stop in economic activity and heightened volatility in financial markets," the analysts said. "The Fed slashed interest rates, bringing the fed funds rate back near zero, and unleashed a host of targeting lending facilities aimed at restoring order to fixed-income markets."

Congress also appeared nearing agreement on a massive $2 trillion stimulus package, while Fannie Mae and Freddie Mac are implementing policies to head off a rise in mortgage delinquencies and foreclosures, they noted.

"With these policies in place, mortgage rates should probe new lows in coming weeks, which should set the stage for a rebound in home buying later this spring and summer," they said.

Housing starts ramped up late last year, reflecting strong demand from first-time buyers.

The analysts noted starts averaged a whopping 1.61 million-unit pace over the past three months, a 24.7 percent above last year’s total of 1.29 million units.

Further, they expect builders to remain relatively busy over the next few weeks, even as sales weaken.

Home construction is deemed an essential activity in most communities with shelter-in-place orders, and most work can be done in ways that are consistent with Centers for Disease Control and Prevention social-distancing guidelines, the analysts said.

"Prospective buyers, however, will face a little more difficulty shopping for homes while they are sheltering in place, and we suspect builders will not want to get too far ahead of demand–particularly with the unemployment rate spiking," they said.

While buyer traffic will fall off this spring, the year got off to an unusually strong start and there appears to be significant pent-up demand for homes from the rising number of Millennials reaching their late thirties, they said.

For now, though, the COVID-19 outbreak will be a significant shock to the economy, the analysts said.

"We expect eight million jobs to be eliminated over the next few months, with about two-thirds of that drop occurring in the leisure and hospitality and retail sectors," they said. "Hopefully the virus will behave like other cold viruses and flus and diminish as temperatures warm up in the Northern Hemisphere.

"If that occurs, then most of the weakness will be confined to the second and third quarters of the year and the economy should get back on track this summer and fall."

They expect single-family starts to fall 0.9 percent this year, with most of the drop coming over the next few months.

But apartment construction is likely to take a bigger hit.

While most of the growth in the apartment market in the past decade has been in higher-end luxury units, "apartment development had been pivoting toward more affordable units it recent years, targeting the hourly wage earners that are most likely to bear the brunt of the impact from coronavirus-related shutdowns," the analysts said.

"We are looking for multifamily starts to decline 8.2 percent this year to 370,000 units. With the unemployment rate spiking, apartment owners are likely to be focusing on operations rather than new development, and new projects will also likely face greater scrutiny from investors and lenders."

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