As expected, US retail sales plunged in March as lockdown protocols and virus containment efforts shuttered businesses across the country and forced Americans to say indoors.
The decline was 8.7%, a record plunge that exceeded estimates. Consensus was looking for an 8% drop. The range was comical. The most pessimistic guess was -24%, while some lonely optimist projected an unchanged print.
“Due to recent events surrounding COVID-19, many businesses are operating on a limited capacity or have ceased operations completely”, the government said. “The Census Bureau has monitored response and data quality and determined estimates in this release meet publication standards”.
As you can see, that forced folks to recalibrate their y-axis. Nothing of this magnitude was witnessed during the GFC.
On the bright side, retail sales less autos came in better than expected, dropping “just” 4.5%. The estimate there was for a 5% plunge.
The control group – which excludes food services, automobile dealers, building materials and gasoline stations – was up 1.7% in March. So, you know, if you just strip out everything that was affected by COVID-19, sales rose! Sarcasm aside, you can thank grocery stores and general merchandise purchases for that – in other words, you can thank people stocking up for the apocalypse.
Meanwhile, Empire manufacturing fell off a cliff. To be clear, expectations were for a large decline (to -35 from -21.5 last month), but the drop was much worse than that.
The general business index (i.e., the headline gauge) dove to -78.2 in April, exceeding the worst estimate by 18 points (the range was -60 to -24) and basically doubling the worst print from the financial crisis.
Remember, the March print was already really, really bad, and served as a harbinger of what was to befall the economy going forward. And yet, the April survey still managed to leave everyone aghast.
The new orders index plunged to an unthinkable -66.3, down from -9.3 in March. Work hours fell to -61.6 from -10.6. The index for the number of employees fell fifty-four points to -55.3, with nearly 60% of respondents indicating lower employment levels.
The New York Fed didn’t mince words. Here’s some color from the release:
Manufacturing firms in New York State reported that business activity declined dramatically in early April. The general business conditions index fell fifty-seven points to -78.2, its largest point drop to its lowest level on record. By way of comparison, the lowest level this indicator had reached prior to April was -34.3 during the Great Recession. Seven percent reported that conditions improved over the month, while 85 percent reported that conditions had worsened. The new orders index fell fifty-seven points to -66.3, and the shipments index dropped sixty-six points to -68.1, indicating a sharp decline in both orders and shipments.
As far as the outlook goes, it’s not favorable – by any stretch.
“Firms anticipate only a small improvement in business conditions over the next six months”, the release reads.
I’d be willing to bet that is an assessment shared across almost all regions.
I would not want to own a Class B or Class C strip center right now. Most likely, if you look at the underlying value – with more vacancy, significant future costs to repurpose any vacated space, declining rents and higher real estate taxes- the cash flows are declining and presumably the values are declining too. Although, it is possible that required IRR’s will continue to fall.
If the strip mall owners already leveraged up the property- that very well might mean the value is less than the outstanding mortgage balance. The banks might be hiring in their “REO” ( Real Estate Owned) departments.
Also, if you look at the huge drop in homebuilder confidence, resulting from future tougher lending standards, namely 20% down, and home buyers being nervous about such a big commitment due to uncertainty regarding their future paycheck – there will be a lot of highly paid people working in the home building industry who will not have any work to do, not just the construction workers. Brokers (say good bye to that sweet 6% commission), architects, attorneys & advertisers. Local government entities will be way down on transfer tax payments, as well.
I am firmly in the camp of “not in a rush to get back into the US equity markets”. Even if I miss the bottom, I want to know what I am investing in. I might limit my upside, but I will also greatly reduce my chances of experiencing my “worst case” downside scenario.
I’m in that camp with you.