Zillow Market Pulse: July 31, 2020

The Pulse team will be off Monday, August 3. We look forward to resuming our usual publication schedule on Wednesday, August 5.

July 31, 2020

The U.S. economy tanked in the second quarter of 2020 — news that was widely expected. Consumer spending rose in June, but the recent virus spread appears to be eroding consumer sentiment. And jobless claims remain elevated as crucial support programs expire without an extension.

Unsurprisingly, the U.S. economy plummeted in 2020's second quarter

• Real GDP fell 9.5% in Q2 from Q1, or the equivalent of a 32.9% fall at an annualized rate
• Economic activity greatly improved in the latter half of the quarter, but the recent increase in COVID-19 case counts threatens to slow this momentum

The virus spread and fiscal uncertainty damped consumers' outlook

• The University of Michigan Index of Consumer Sentiment fell 5.6 points in July from June
• This decline means the index is basically flat from April

Jobless claims remain high as key programs expire

• Two million more workers filed for unemployment benefits last week
• Despite plenty of discussion, the program offering enhanced unemployment benefits expires today without a clear path forward

So what?

Most knew it was coming, but that didn't make the release any easier to stomach. The U.S. economy contracted in Q2 2020 at an annualized rate of 32.9% – the steepest decline in nearly 75 years – and 9.5% from the previous quarter. The remarkable drop in the nation's most comprehensive economic indicator essentially erased almost five years of accumulated economic growth. The declines were suffered across a broad array of industries and sectors, including those that are normally quite stable, even amid economic turmoil. Health care spending – a sector that expanded in every quarter of the Great Recession – accounted for 9.5 points of the annualized decline. But the fact is that the economy was always going to contract severely in Q2, as the nation shut down in an effort to corral the coronavirus spread before starting to slowly reopen, planning for a sharp rebound in activity into Q3. It appears this process is playing out in some countries. Germany, for example, saw their GDP fall by an even larger amount in Q2, but also saw their COVID-19 case volumes fall sharply (and remain down) and their economy begin to recover as a result. But in the U.S., where case volumes continue to rise and states struggle to reopen, a similar path is not a foregone conclusion.

The recent degradation in the economic outlook due to increased case volumes is evident in measures of consumer sentiment and spending. July's final reading of the University of Michigan's Index of Consumer Sentiment showed that consumer confidence fell in July, dropping to just above May's levels and only slightly above the recent low levels set in April. The forward-looking Expectations Index followed a similar pattern, sliding back to May's levels, itself a six-year low. According to the Bureau of Economic Analysis, consumer spending rose 5.6% in June, the second straight monthly increase, but overall consumer spending levels are still 6.6% below pre-pandemic heights. What's more, evidence is mounting that a substantial portion of the partial rebound in spending has been due to government support, which is about to expire and, so far, has no extension planned. So, much like the nation as a whole, while the strong monthly increase in consumer spending is suggestive of a recovering economy, the absence of more planned relief and the continuous spread of the virus threaten this improved consumer behavior.

Another element of this dampening outlook is the enduring strife being felt in the labor market. Another 2 million claims for jobless benefits were filed last week, making it the 19th straight month in which more than a million claims for jobless benefits were filed. Prior to the pandemic, the all-time record for claims filed in one week was 695,000. The still-elevated levels come as the program offering enhanced unemployment benefits (in the form of an additional $600 a week) comes to an end. Options regarding a temporary extension of the program and a more comprehensive new relief bill had been discussed in Washington over the last few weeks, but ultimately a deal could not be struck before the program officially expired today. Many studies have shown that the program was and remained instrumental at buoying consumer spending and household balance sheets as the economy reeled from the pandemic. A report today showed that unemployment insurance helped disposable personal income rise by 5.4% from June to February, even as income gained from wages and salary fell by 4.1% over the same period. Increasingly, it appears that the economic recovery has stalled and that the path of the recovery depends in large part on our ability to contain the virus. Indeed, Federal Reserve Chair Jerome Powell emphasized this statement in the July Federal Open Market Committee meeting, which took place this week. Not extending the enhanced unemployment benefits program and other key benefits has the potential to greatly impact the lives of millions, posing further challenges for the nation's recovery.

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