COVID-19: Research Update VI


Will McIntosh, Ph.D
Global Head of Research

John Kirk, CAIA, CCIM
Senior Director, Research

Mark Fitzgerald, CFA, CAIA
Executive Director, Research

Karen Martinus
Senior Associate, Research

Chenchao Zang
Senior Associate, Research

Jane Zheng
Associate, Research

May 18th, 2020

Here are our thoughts on the economy and financial markets as we reflect on the pandemic and its fallout:

What did we learn from the April employment report?

April marked the first calendar month of shelter-in-place restriction, and the data is now starting to reveal the full impact of COVID-19 on the U.S. economy. Total nonfarm payroll employment fell by 20.5 million in April, the most significant decline on record, and twice the cumulative jobs lost during the Global Financial Crisis (GFC). The unemployment rate rose from 4.4% in March to 14.7% in April. Goldman Sachs, who previously projected the unemployment rate would peak at 15% this year, now expects it will reach 25% – equalling the level achieved during the Great Depression. Notably, jobless claims remain high as nearly 3.0 million occurred in the week ending May 9th, though they have declined six consecutive weeks since peaking at almost 6.9 million in March.

Were there any critical insights from the retail sales data?

The market has widely anticipated a severe economic decline during the second quarter, but the results are still eyepopping.  Retail purchases were down a crippling 21.6% on a year-over-year basis, the most significant drop since the Commerce Department started tracking this data back in 1992. One bit of positive news is that grocery sales were up over 13% annually, while nonstore retail sales surged nearly 22% from last year, as consumers continued to adopt e-commerce. The decline in retail sales was mostly broad-based, but some industries were hit harder than others. Please see the attached exhibit for a more detailed breakdown of the most impacted sectors.

Have there been any signs of psychological shifts in consumer behavior?

After the recession ended in 2009, the personal saving rate rose steadily for about three years before consumers reverted to regular spending habits – a similar shift has been observed recently. The personal savings rate hit 13.1% in March, from 7.7% in January, as those who still have a job have become more cautious regarding their spending habits. Bank deposits ballooned by $1.7 trillion in March and April, according to the Federal Reserve Board. If the current pace holds through the second quarter, consumers could have over $3.2 trillion of dry powder on hand. To put this in perspective, Congress has enacted around $2.9 trillion in fiscal stimulus programs so far during the health crisis. In theory, the enormous amount of consumer spending power available should help jump-start the economy once the virus is contained, and consumers resume normal spending behavior. However, the nature of this economic crisis, being driven by a pandemic, makes it difficult to know how much of this shift away from spending to savings will be a temporary or permanent change.

Should policy officials provide more stimulus?

As noted earlier, Congress has enacted approximately  $2.9 trillion in fiscal stimulus – around 14% GDP – to support various aspects of the economy that have been impacted by the Coronavirus.  Still, it seems that even more will be required. Much of the stimulus went to stabilize households, businesses, and health-care providers. Yet, state and local governments seem to be in dire need of additional support. According to a recent Brookings report, a one percentage point increase in the unemployment rate corresponds with around a $45 billion deterioration in state budgets. In April alone, the unemployment rate jumped ten percentage points (an estimated $450 billion shortfall for state budgets nationally), and employment conditions are forecast to further weaken in the coming months. Fed Chair Powell has urged Congress to enact more stimulus, warning that the recovery could stretch to the end of 2021. However, additional stimulus proposals have been met with Congressional gridlock thus far. While the initial fiscal policy response was swift and robust, it appears that the political appetite for more stimulus spending may be waning, which could pose a significant risk to an eventual recovery.

What does the high-frequency data reveal about the economy now that states have begun to reopen?

As most states began easing restrictions over the last few weeks, higher frequency data indicators are beginning to reveal a picture of the post-pandemic recovery, as highlighted in the following:

  • Auto Travel: Apple’s mapping data indicate that driving activity is around 75% of normal levels, up from 50% a month ago. The increased traffic has been a critical driver in the rapid rebound in gas prices in recent weeks.
  • Air Travel: Air travel is still down 91% from last year’s levels even while air passenger numbers have nearly doubled in recent weeks.
  • Box Office Receipts: Movie theatre sales have remained near zero. The industry has not only been hampered by a weaker consumer spending outlook but also several blockbuster releases have been delayed due to the virus outbreak.
  • Restaurants: In-person dining was down 95% as of May 13 from the same day a year ago, according to OpenTable. This weak performance is underscored by the 49% year-over-year decline in the Food Service & Drinking sector in April (see attached exhibit). The National Restaurant Association estimates that 25% of U.S. restaurants may go out of business after losing more than $80 billion in sales during March and April.

Indeed, the preliminary data suggests that while people are leaving their homes more often, discretionary consumer spending remains anemic.  Last week’s same-store sales were down by 7.5% compared to the previous year, consistent with the sluggish output recorded while lockdown restrictions were still in place, according to Redbook. Therefore, even as more restrictions are eased, it appears that consumer demand is not likely to recover fully until the virus is contained.

Are there any signs that a second wave of the virus is imminent?

While it is too soon to know if a second wave is on the horizon, history may provide a clue as to what we might expect going forward.  The 1918 Spanish flu pandemic came in three waves, with each one being more severe than the last.  The flu pandemics in 1957 and 1968 had multiple outbreaks as well. More recently, the 2009 H1N1 (or swine flu) started in April and reemerged in the fall season.  However, SARS in 2003 did not have a significant second wave. Ultimately, while we cannot predict the path this pandemic will take, it is reasonable to expect that if a second wave occurs, it will be less damaging than the initial outbreak, as improvements in treatment and testing should allow for better containment. 

Notable Real Estate Updates

  • Price Discovery: The road to price discovery in the commercial real estate sector is slowing beginning to reveal itself.  The Green Street Commercial Property Price Index declined by 9.4% in April. Prices of every property type included in the index were adjusted lower for the month, ranging from 5% for Industrial, Healthcare, and Self-Storage to 20% for the Mall sector. Overall, the index is down 10.4% from its peak reached at the end of last year, which is consistent with anecdotal evidence that indicates some deals that were in the works before the pandemic eventually retraded 5-10% lower than the initial price. More will be revealed regarding price discovery as transaction volume recovers in the coming months.  Comparably, this index declined 37% during the GFC.
  • Multifamily: U.S. apartment retention hit a new record high in April, as renters were incapable or reluctant to relocate due to the Coronavirus. Approximately 58% of apartment renters elected to renew in the same unit, according to RealPage.  The unprecedented increase in renewal failed to deliver a windfall for apartment owners, as rent revenues increased by just 2.73% year-over-year in April, the slowest pace since 2011. The weak rent growth reflects the gravity, and uniqueness, of the situation. Generally, landlords opted not to hike rents during the crisis, and most tenants overwhelmingly chose to renew their lease and shelter-in-place in the same unit.
  • Hotel: The U.S. hotel industry is hoping that the worst of the crisis has passed from an occupancy level standpoint. Hotel occupancy in the U.S. topped 30% for the week ending May 9th, according to the latest report from STR. This week marks the fourth consecutive period of higher occupancy, signaling that people are gradually venturing out now that restrictions have been lifted. The 30% occupancy level marks an improvement of more than nine percentage points since occupancy bottomed in the week of April 5-11. The industry as a whole will continue to lag until the virus is contained, and airline travel picks up. In the meantime, markets in regions with more relaxed social distancing measures will see a faster recovery than others.


The effects of the pandemic continue to mount even as some states lift restrictions, allowing businesses to reopen gradually. The data seems to indicate that consumption will initially rebound at a slow pace, and the economic recovery will be uneven, with some industries and regions of the country bouncing back faster than others. While there remains the hope of a V-shaped recovery once COVID-19 is contained, the economy will likely operate well below pre-pandemic levels for some time to come.



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