Merry Christmas Everyone. I trust and hope your Christmas this year is a blessed one. Please stay safe and enjoy the time with family either in person or virtually. I also want to wish all of you a Happy and Safe New Year. 2021 has to be better than 2020. I will be taking a break next week so the next update will be on January 4, 2021. That being said, this is a longer update with a lot of information for the year end.
I had mentioned in earlier updates there were some signs that December was going to be soft in terms of economic activity. The early numbers for December are showing a slowing of economic activity. The Philadelphia Manufacturing Report showed a drop from 26.3 all the way down to 11.1 in activity. The Kansas Fed report also showed a drop from 20 last month to 12 this month. The Empire State Manufacturing report was down from 6.3 in November to 4.9 in December.
The Manufacturing Production reports for November reflected the start of the softening. Overall production across all sectors dipped from .9% in October to .4% in November. Manufacturing singularly dipped from .9% to .4% in November. In spite of the slowing, industrial capacity remained at 73%. The overall level of industrial capacity usage was at 77.1% in January of 2020. The COVID Pandemic dropped that to a low of 64% in April. The level has clawed back to the current 73% level but is well below where we would like it to be. At 81% capacity inefficiencies arise requiring new equipment. The recent surge in equipment purchases by business has been related to a lack of available, trained workers. So there is quite a bit of runway left before business needs to turn up the volume on new equipment
Retail Sales are also falling in December. The Redbook month over month report fell by 2.2% after falling by 2.4% in November. The Redbook report covers same store sales volume period to period. The report for December indicates just how bad traffic is in the retail bricks and mortar sector. In visiting malls myself in the past two weeks the experience was downright depressing. Many stores were dark while others limited the number of visitors or required you to wait outside the entrance for someone to escort you in. I would estimate based on personal observation the traffic was down 90% from past visits.
The Retail Sales report released on Wednesday showed a drop of 1.1% for November, well beneath even the worst expectations. When you removed auto related sales the number was less bad, .9%. That means for November auto sales made the number worse. The issue here is that the torrid pace of auto and truck sales earlier in the year were fueled by record breaking incentives and financing terms that were unsustainable. Many automakers were offering seven years or even longer terms for financing to keep payments affordable. That sucked the pipeline dry. Anyone who was considering a purchase this year likely did it already. It will be a long lonely winter in the auto show rooms.
The housing starts for November were better than expected, even after a massive jump between September and October. New permits in November were off the charts indicating that the construction will continue. Taking a deep dive into the numbers tells an important tale. Single family starts and new permits were a very low part of the overall numbers. Builders are finding it difficult to locate affordable land on which to construct new single family housing. The prices on most detached units is providing sticker shock for buyers who are having to settle for condos and townhouses. That was where the majority of the numbers came from. While there were new rental multifamily construction showing, these are likely not needed in the market at this time.
Investment multifamily real estate is on the brink of a major shift. Delinquent rent is now at 18%, a level not seen since 2007. Across the nation the states with eviction moratoriums are seeing them expire or judicial cases ruling them unconstitutional. The courts are indicating they are a form of a “taking” from the owners. This is where the government “takes” income or value from someone without compensating them. In these cases the government is allowing tenants to live without paying the owners and not covering the rent for the tenants. A number of states have not enforced the moratorium and allowed evictions to continue. As the eviction hiatus expires, the nation will see a dramatic rise in homelessness which will stress state and local reserves to deal with. The loss of 18% or more of their income will drop many investment real estate loans into a default setting. This will create a significant stress on many banks who will also see the same stress on their commercial real estate portfolio. Banks need to immediately set their loan loss reserves higher to be able to survive the next year. Waiting for 2021 when income will likely fall will be too late as bank earnings will likely be lower.
Based on everything mentioned above you might expect consumer debt to be rising. Well, consumer debt is rising but not for the reasons you think. During 2020 personal debt levels have risen from $14.15 Trillion to $14.35 Trillion. The key areas where the increase is coming from is mortgage debt, auto debt and student debt. Mortgage debt levels are up due to the rise in housing prices along with the overall demand for housing. We are finally seeing the Millennials purchasing houses and settling down. The increase in auto debt was explained above. Student debt is increasing, but at a lower growth rate this year as many are deferring schooling until covid passes and the students will actually get the education they are paying for.
Credit card debt has decreased in 2020 by just over $100 Billion which one would consider a surprise. Those with credit card debt are seeing it for the cancer it is on their budgets and shedding it rapidly. The restrictions placed by COVID closings is also helping on the spending front. More eating in as well as limited ability to shop til you drop have curtailed new spending.
Lastly, gas prices are rising not due to demand or supply issues, but the impact of the weak dollar. Oil is traded in dollars so when the dollar weakens, overseas producers demand a higher price. Even though the US is importing less oil, the market spreads the increase. This is not sustainable and should pass by mid-January.
Have a great Christmas and a Happy New Year.