Zillow Market Pulse: July 27, 2020

July 27, 2020

Another survey emerged revealing how comfort in certain social activities during the pandemic differs across political lines. Rapid growth in the Federal Reserve's balance sheet has slowed of late, due to limited demand for specific programs. And spending on capital goods rose strongly in June, but the recent surge in case volumes threatens that rally.

Survey offers specific examples of how coronavirus outlook differs across party lines

• Those who identify as Republican are far more confident in boarding an airplane, dining indoors at a restaurant and other activities than Democrats are, according to a New York Times/SurveyMonkey survey.
• The discrepancy will complicate efforts to create a coordinated response to the virus.

Growth of the Federal Reserve's balance sheet has slowed

• The Fed's balance sheet ballooned in the spring, rising by 67% from February to June.
• Demand for programs aimed at local governments and the private sector has fallen short of expectations.

The manufacturing sector was gathering momentum as of June

• Orders for non-defense, non-aircraft capital goods rose 3.2% in June from May, the strongest monthly improvement in almost two years.
• The metric – generally viewed as a proxy for business activity – was just 2.3% below last June's levels.

 So what?

A report from the New York Times and SurveyMonkey shows that differing views on the coronavirus pandemic across party lines go far beyond whether or not to wear a mask or reopen schools. Of the people who responded to the survey that identify as Republican, 73% said they would feel safe eating at an indoor restaurant. Just 21% of people who identify as Democrats felt that way. More than half of surveyed Republicans (55%) stated that they'd be comfortable taking in a movie in the theater, while only 10% of Democrats expressed the same confidence. Similar differences were revealed around many other topics the survey covered, and the survey also shed light on differing views between genders, age groups and races. The divide on what's deemed appropriate social behavior will complicate the curtailment of the virus and subsequently lengthen the time it takes the national economy to fully recover.

In the immediate wake of the pandemic and subsequent swift economic fallout, the Federal Reserve took unprecedented measures aimed at calming financial markets and allowing money to continue to move through the economy with relative ease. These measures, which involved injecting significant amounts of capital into the economy, generally achieved their immediate goal: Financial stress eased in the mid-Spring as investors saw that the central bank had their back. The measures also caused the Fed's balance sheet to balloon in the spring, rising to about $7 trillion in June, up from $4.2 trillion in February. Since then, however, the pace of the Fed's asset buying has slowed, in part because demand for programs that offer direct support to the private sector, including small businesses, and local governments has begun to wane. The programs offering relief to these groups allow for up to $3 trillion in borrowing. As of writing, the Fed has only extended $104 billion. In fairness to the Fed, the central bank has very little prior experience offering relief directly to these groups. But the limited participation by some groups at a time when local governments and small businesses are struggling so mightily with their finances is telling. That said, should the recovery continue to stall or even reverse downward, participation in these programs might tick up. We will learn more about the Fed's view on these programs' successes later this week at the culmination of the July FOMC meeting. 

In the latest sign that the U.S. economy was on its way back in the late spring, before the resurgence in coronavirus case volumes, purchases of U.S.-made capital goods rose in June from May at its strongest pace in nearly two years. The metric is often viewed as a proxy for business spending, and the monthly improvement brought spending on capital goods (omitting defense products and aircrafts) back 3.2% below their pre-pandemic benchmark. While that is good news for the economy, many believe that the recent increases in COVID-19 case volumes will prevent these improvements from continuing, so the celebration may be short-lived. In addition to weighing on consumer and business sentiment, increased case volumes and the pausing of some states' plans to reopen will weigh on demand and introduce disruptions in supply chains. Next month's report will be a good read on how the outlook for manufacturing and other so-called heavy sectors has changed as a result of the virus's resurgence.

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