Weekly Economic Update June 1, 2020

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Welcome to June.  As we start the last month of the second quarter the hope is that the economy begins to open so we all get a running start at the third quarter.

A sign that certain areas might be reflecting the green shoots of recovery was new home sales in April.  New home sales were up .6% over March.  Part of this was the drop in mortgage rates, another is the continued shortage of existing houses being listed on the market.  You could also pin the cause on the reluctance of many to allow access to their dwellings for open houses over the fear of the covid virus being introduced and left by a prospective buyer.  Let’s see if May holds the same up tick.

The Baker Hughes Oil rig count is in free fall.  In the US the number has fallen from 622 in late March to 237 as of May 22.  Many rig owners are shutting down the rigs and walking away.  There is no market for the product and no place to economically store what is coming out of the ground.  Beyond tank farms across the US that are at storage capacity, virtually every tanker in the world is now anchored some place, full of crude oil waiting to be refined.  The refineries are out of space for storage also.  The rig shut downs have allowed the crude oil levels to decline slightly which has turned into a further increase in gasoline supplies.  While the price of gas rose before the Memorial Day holiday, the lack of any travel over the weekend did little to decrease the supply of gas.  Expect prices to remain low for the time being.

Commercial real estate troubles are growing.  Delinquencies on corporate bonds backed by commercial real estate rose to 2.29% in May.  This is an early warning sign to banks that are concentrated on commercial real estate, especially investor real estate.  Boston Properties announced that they did receive 97% of all rents from office tenants.  That is a good sign.  The bad news was that they experienced a nearly 30% delinquency rate on their retail tenants.  Beyond retail, hotels and restaurants, have been hard hit.  With travel at a standstill, many hotels are hovering at under 10% occupancy rate.  Sorry, but under no business model does 10% come close to break even or provide an ability to keep current on any debt load.  Many banks have built a sizable concentration within their credit portfolios of investment real estate over the past few years.  Those properties that are either hospitality or retail centered are in real trouble. The issues for banks later this year will climb dramatically as borrower’s reserves, if any, are drained.  Before the end of this second quarter we have to expect banks to significantly boost their loan loss reserve.  The coming way of troubled credits is expected to exceed 2008 levels.  There will be some banks where their viability will be in question before the end of the year.

The activity this past week in Minneapolis and later in St. Paul has been devastating.  I grew up in South Minneapolis and was heartbroken to see many landmarks torched, now gone forever.  This was not random violence.  The activity was coordinated and planned to overwhelm the business owners as well as stay a step ahead of law enforcement.  If the authorities do not quickly figure out how to respond and stop an outbreak, I fear this model of looting will quickly spread to other regions and cities.  This was not a local, small scale riot run amok.  Without the protection of law enforcement our community businesses will not survive.  When roughly the same behavior occurred in 1967 in Minneapolis along Plymouth Ave the merchants did not return.  This left the city residents without needed services such as core staples like grocery stores, clothing, pharmacies, banks and other services locally.  The merchants that were struck along the five mile section of Lake Street and the three miles of University Ave may never return.  This will leave our cities much less vibrant, cause another flight to the suburbs leaving the inner cities to lower income levels, education levels and a more depressed quality of life. Sadly a rotting core only spreads outward eventually

Have a good week, let’s hope we have reached the bottom between the Covid and the violence.



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