Surge in COVID-19 Cases Poses Threat to Business and Consumer Sentiment
- The National Federation of Independent Business (NFIB) Small Business Optimism Index was unchanged in October, remaining at 104.0, just below the level seen in February. On net, the share of firms planning on increasing employment fell 5 percentage points to 18 percent, the first decrease since April. The net share of firms expecting the economy to improve also fell 5 percentage points to 27 percent, but the share of firms expecting real sales to be higher rose 3 percentage points to 11 percent.
- The University of Michigan Consumer Sentiment Index fell 4.8 points to 77.0 in the preliminary November reading. The current economic conditions component was essentially unchanged, while consumer expectations fell 7.9 points to 71.3, the largest decline since April. According to the press release, “[t]he outcome of the presidential election as well as the resurgence in COVID infections and deaths were responsible for the early November decline.”
- The Consumer Price Index (CPI) rose 1.2 percent from a year ago in October, a deceleration of two-tenths from the prior month. Headline CPI is being held down by energy prices, which fell on an annual basis for the eighth straight month. Core CPI (which excludes food and energy prices) rose 1.6 percent from a year ago, a deceleration of one-tenth from September.
- The Federal Reserve Board Senior Loan Officer Opinion Survey in the three months ending in October showed that a “moderate net share of banks tightened lending standards for most [residential] mortgage loan categories.” Specifically, jumbo mortgages and home equity lines of credit (HELOCs) experienced significant tightening in standards. Despite tighter standards, a “major net share” of banks reported stronger demand for residential mortgages, especially GSE-eligible loans. The only loan categories to see weaker demand were subprime loans and HELOCs.
- The Mortgage Bankers Association National Delinquency Survey (which counts loans in forbearance as delinquent) for Q3 2020 showed that for all mortgages, delinquencies fell six-tenths to 7.7 percent. However, this was after spiking to 8.2 percent in Q2, the highest delinquency rate in nine years. The serious delinquency rate (90 or more days past due and mortgages in foreclosure) rose 0.9 percentage points to 5.2 percent, the highest level since the end of 2013. Serious delinquencies on Federal Housing Agency mortgages jumped 2.8 percentage points to 10.8 percent, the highest level on record.
Both the decline in firms planning on increasing employment in October and the decline in consumer sentiment in November suggest to us that the “low-hanging” fruit of the recovery may not be enough to continue to return the economy to its pre-pandemic levels. Given that the decline in consumer sentiment was partially attributed to the increase in COVID-19 infections and deaths, we expect that consumer sentiment will likely decline further over the month, assuming daily new COVID infections remain at or exceed current record highs. Currently, various localities are implementing new policies to try to combat the spread of the virus, with some states considering re-implementing stay-at-home orders/advisories or dictating the closure of bars and/or restaurants. Such closures could harm businesses’ bottom lines and are likely to erode both business and consumer sentiment, particularly if they are prolonged. In housing, while credit standards continued to tighten for the three months ending in October, demand for most mortgage loans remained strong, which supports our expectation of continued strength in this sector in the near term.
Economic and Strategic Research Group
November 13, 2020
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