This Week’s Economic Update, July 5, 2021

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The ISM Manufacturing Report released on July 1 reflected a manufacturing sector that is holding its own, thank you very much.  The index was at 60.6%. This was slightly below the May report which came in at 61.2, so essentially the same.  Anything over 50 indicates expansion.  Manufacturing continues to expand, indicating a nice pace in the post pandemic era. 

Employment contracted in spite of production increasing.  The issue appears to be stemming from retirements.  Those who were off for a while, or those who are re-assessing their options, are opting out.  Many are looking at working conditions or have reconciled their lifestyle with anticipated income, allowing them to either switch to new industries or make ends meet on part time income. 

Stress within the report is shown in a number of areas.  Suppliers are struggling to provide products on time and for the right price.  Prices continue to climb due to shortages.  These shortages are not necessarily related to domestic issues, but rather international trade.  Asia and East Asia are still struggling with Covid absences leading to plant shutdowns locally.  This leaves orders from the US unfilled.  Eventually they will catch up, the issue is how long.  Until our trading partners reach herd immunity with sufficient, and effective vaccinations, that is not going to occur.  While the Chinese are providing doses of their vaccine, many countries have found the product inferior and not stopping the virus from spreading.

Overall, once the supply chain catches up, the labor market stabilizes and vaccinations are sufficient worldwide, manufacturing is set to expand well above the current level of 60.

The Surfside Condo collapse may forever change the way banks look at condominium lending.  Owner Associations regularly build a reserve to address a roof, siding, window or other normal maintenance issues.  When the costs to repair an item exceed that reserve, a special assessment is approved and everyone pitches in.  While not pleasant, most of the special assessments are well within the budget of the unit owners.  However, when the issue is critical, as it was in the Surfside instance, the whole game is changed.  When owners are looking at an assessment that is more than 20% of the value of the unit, things get testy.  Owners, as well as the lenders financing the units, have to have a plan when a building has structural issues that arise that could actually lead to condemnation, a full loss of any value of the unit. 

This issue is not just related to high end condos in Miami.  Many old apartment houses, some 50 or 60 years old, were converted to condos in the last two decades.  Often the prior owner knew of deficiencies which they did not want to address that may just now become a maintenance nightmare.  Inspections are obviously required, but if the owners do not have the financial resources to pony up the special assessment, what happens?  What about disclosures of the structural condition of the building to new buyers?  All of this has the possibility of tanking condo and townhome values until new assurances are arrived at to protect new buyers.  Any condo that goes on the market now is rather suspect. 

The Federal Reserve has been buying up not only US Treasury Debt over the past 10 years, but they have also been buying up Mortgage Backed Securities Bonds to keep mortgage rates low, keeping the real estate market growing, if not overheating.  Low rates push up not just sales but values. 

The market has been wondering when the Fed would begin tapering its purchases.  This past month we saw the first of the taper begin as the Fed cut back purchases of MBS.  30 year rates just edged up over 3.2%.  Nothing spectacular but enough to push mortgage applications down 6.9%.  While the rate increase is not the only reason for the drop, supply of available housing to purchase is  another factor, it is cooling the refinance market in particular.  We can expect the Fed to continue to taper in this market, working to slow the froth in the real estate transactions. 

The Fed is looking at social engineering in their moves, not just determining economic activity.  The writings from the Minneapolis Fed in particular are looking at how the Federal Reserve can impact affordable housing with its policies.  In the past, the major workings at our central bank have been focused on economic levels under the philosophy that a stable economy will lift all boats.  Sometimes this has worked, sometimes it has not.  Now they are trying to figure out how they can add a thumb to the scale and help out certain sectors of the economy, primarily those that have been left behind economically speaking.  Time will tell whether they can figure this out without disrupting the economy as a whole.

Have a great week



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