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Economic & Housing Weekly Note

Resilience of the Economy and Consumers Tested by the Coronavirus

March 13, 2020

Key Takeaways:

Note: Economic data released this week largely focused on February, prior to the recent escalation in the coronavirus pandemic.

  • The National Federation of Independent Business (NFIB) Small Business Optimism Index edged up 0.2 points in February to the highest level in three months. The share of firms expecting the economy to improve jumped 8 percentage points to 22 percent, the highest share since November 2018.
  • The Consumer Price Index (CPI) rose 2.3 percent in February from a year ago, decelerating two-tenths from January’s pace. The deceleration was largely driven by energy prices, which grew only 2.8 percent year over year in February versus 6.2 percent in January. Core CPI (excluding food and energy prices) grew 2.4 percent annually, accelerating one-tenth from January and tying the fastest pace of growth seen over this expansion.
  • U.S. households’ and nonprofit organizations’ net worth—the value of assets minus liabilities—rose $3.1 trillion in the fourth quarter, the second largest monthly gain ever recorded, according to the Federal Reserve. Owners’ equity in real estate rose slightly but continued to move sideways for the third straight quarter. Owners' equity as a percentage of household real estate value has fallen since Q1 2019, ending the year at 63.8 percent, the lowest level in a year.
  • The University of Michigan Consumer Sentiment Index posted the largest decline since last August in its preliminary March reading, falling to the lowest reading since October. The indices for current economic conditions and consumer expectations both pulled back, falling to the lowest readings in four and five months, respectively. The accompanying press release stated that “additional declines in confidence are still likely to occur as the spread of the [corona]virus continues to accelerate.”
Forecast Impact

Data released this week showed that before the recent escalation in the COVID-19 (coronavirus) pandemic, the U.S. economy had remained resilient, supported by strong business and consumer sentiment. Household and nonprofit organization net worth rose sharply in the fourth quarter as equity markets continued to climb to record highs. Business optimism remained elevated, with more firms reporting a favorable outlook for the economy. We believe these positive developments are likely to reverse in March, as evidenced by preliminary consumer sentiment data from March. Suspensions of schools, sports seasons, travel, and other entertainment, along with continued volatility and losses in equity markets, are likely to erode consumer sentiment further in the coming months. The potential declines in consumer sentiment suggest that our expectations for consumer spending in the first half of 2020 may need to be lowered further. We expect that recent declines in energy prices due to a coronavirus-related drop in oil demand from China, along with the beginning of a price war between Russia and Saudi Arabia, will also add to the uncertainty businesses currently face, potentially weighing further on business investment.

Business Confidence Was Healthy in February, Though The Coronavirus Remains a Risk


Coronavirus Concerns Weigh on Consumer Sentiment

Details on Key Takeaways and Other Releases

  • The NFIB Small Business Optimism Index rose 0.2 points in February to 104.5. The share of firms planning on making capital outlays fell 2 percentage points to 26.0 percent, the lowest level since June 2019, while the share of firms planning on increasing employment rose 2 percentage points to 21.0 percent. The net percent of businesses planning on raising worker compensation fell 5 percentage points to 19.0 percent, the largest monthly decline since January 2016.
  • The University of Michigan Consumer Sentiment Index fell 5.1 points to 95.9 in the preliminary March reading. The index of current economic conditions pulled back, falling 2.3 points to 112.5. The forward-looking consumer expectations index fell sharply, falling 6.8 points to 85.3. Consumer expectations of the inflation rate over the next five years was unchanged at 2.3 percent.
  • Headline CPI ticked up 0.1 percent in February but was weighed down by a 2.0-percent decline in energy prices. Core CPI rose 0.2 percent in February.
  • U.S. household and nonprofit organization net worth rose $3.1 trillion to $118.4 trillion in the fourth quarter, according to the Federal Reserve. Owners’ equity in real estate rose $51.2 billion to $18.7 trillion, while owners' equity in real estate as a percentage of household real estate value fell approximately one-tenth to 63.8 percent. This represented the first back-to-back declines in the real estate equity ratio since 2012. Single-family mortgage debt outstanding rose by $88.2 billion to $11.2 trillion, the highest level since Q3 2008. Holdings of corporate equities and mutual fund shares rose at the fastest year-over-year pace since Q4 2013 and Q3 2012, respectively.

Economic and Strategic Research Group
March 13, 2020

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.