Zillow Market Pulse: March 27, 2020

March 27, 2020

Consumer sentiment fell the most in one month since the height of the Great Recession. Oil prices continued to tumble, shuttering some U.S. wells and adding still more layoffs to the growing national total. And the just-passed U.S. stimulus package now presents some logistical challenges.

• Consumer sentiment reading fell to its lowest level in more than 3 years

  • The University of Michigan's Consumer Sentiment Index fell to 89.1 in March, down from 101 in February.
  • The 11.9-point drop was the largest one-month decline since October 2008.

• Oil prices continue to plummet, further pressuring U.S. well operators

  • The price of West Texas Intermediate Crude oil – the benchmark oil price on Wall Street – has fallen more than 65% since early January.
  • So far, 9% of the nation's oil rigs have been shut down in the wake of the crisis.

• Government agencies may be ill-equipped to distribute billions of dollars in federal aid

  • The Small business Administration (SBA) – a group now responsible for quickly allocating about $350 billion – approved about 58,000 loans in all of 2019.
  • Estimates suggest some 6 million small businesses nationwide may be in immediate need of assistance.

So what?

Today's overall read on consumer sentiment was in line with most experts' expectations, but that doesn't make the news any easier to digest. The March release offered a stark shift from February, when a strong job market pushed the Michigan index to its second-highest level since 2004; today, the gauge is at its lowest since October 2016. The overall survey of consumer expectations – the forward-looking portion of the release – fell 12.4 points to 79.7 in March, suggesting that consumers' outlook for the economy in the coming months has recently taken a big hit. The decline in consumer sentiment will almost certainly result in a pullback in consumer spending — which accounts for about two-thirds of overall U.S. economic output — in the coming months. But consumers' outlook on the year to come declined only slightly, suggesting that most still anticipate the negative impacts from the coronavirus outbreak to be short-lived.

Meanwhile, oil prices have plummeted in recent weeks in the face of three strong headwinds: Waning consumer demand because of ongoing stay-at-home orders, a glut of supply after some nations neglected to scale back production and a sudden shortage of space in which to store the excess oil. Benchmark oil prices have fallen 65% since early January, with prices of some niche physical oils even turning negative in recent days. The S&P 500 energy index, a broad measure of the energy sector's performance, recently hit a record low and has fallen 85% from its all-time high set in July 2008. Impacts of the price drop are beginning to be felt throughout the industry and in oil-job-dependent communities. U.S. oil companies suspended production at 40 rigs just this week, with more than half of the shutdowns occurring in the Permian Basin in West Texas and New Mexico. Almost one in ten U.S. rigs has now been shut down, at least temporarily, and the news might not get much better in the short-term. U.S. oil field production slid to its lowest level in at least four years, according to a survey from the Federal Reserve Bank of Dallas, and worsening conditions among oilfield services firms are likely. Meanwhile, Rystad Energy, an industry consultant based in Norway, estimates that the industry's slowdown may eliminate 1 million jobs, with the North American shale sector bearing the largest brunt. The U.S. has become the world's largest oil producer in recent years, largely on the back of the shale (fracking) industry.

After some last-minute uncertainty, the $2 trillion U.S. stimulus bill was signed into law on Friday. The bill includes hundreds of billions of dollars allocated to support qualified individuals, families and small businesses. But the passage of the bill now presents some logistical challenges for the parties in charge of actually distributing the capital, and early indications suggest the current system may not yet be up to the challenge. For example, the Small Business Administration (SBA) – a group now responsible for quickly allocating about $350 billion – approved about 58,000 loans in all of 2019. But estimates suggest about 20% (~6 million) of the nation's small business wouldn't survive a month of missed revenue — strongly suggesting the SBA is ill-equipped to tackle the challenge on its own. The Treasury Department has said it will assist in the distribution process, but it's clear that a number of logistical hurdles remain before U.S. households and companies receive some much-needed relief.

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