Despite Government Attempts to Boost Liquidity, Consumer Credit Continues to Contract, Stalling Recovery

Recent consumer credit data suggests that the economic recovery will be far slower than after previous recessions. Despite a moderating pace of job losses and heightened government spending, consumers remain cautious and are increasingly choosing to pare down debt rather than overextend themselves. Consumer credit balances fell by a greater-than-expected $12 billion in August, a 5.8 percent annualized drop, following a $19 billion decline in July. Lenders remain reluctant to extend credit, while consumers are increasingly cautious of taking on new debt due to uncertainty in the employment market.

The impact of tighter credit conditions and changing consumer behavior is most evident in revolving debt, which is comprised primarily of credit cards; revolving debt fell at an annualized rate of 12.3 percent in August. The recent decline was the second steepest monthly drop since the onset of the recession and signals that a consumer-led recovery will take some time to gain traction. The drop-off in revolving credit was surprising, however, given that personal consumption accelerated in August, which should support the use of credit.

Non-revolving credit, which is used to finance automobiles, home improvements and education, fell by $2.1 billion in August, a 1.6 percent annualized drop. The “Cash for Clunkers” program increased vehicle sales, offsetting some of the contraction associated with modest consumer demand. Non-revolving credit was expected to rise in September as more auto loans began to show up on credit balances, but the increase will likely be temporary, as consumers are putting off large purchases due to persistent concerns surrounding the weak employment market.

A growing propensity to save will have a dramatic impact on the speed and degree of the recovery, as consumption accounts for roughly 70 percent of gross domestic product. After peaking at 5.9 percent in May, the savings rate eased to 3 percent of disposable income in August, although that figure is much higher than in recent years.

The decreased use and availability of credit cards continue to hinder retail property fundamentals and lead to concerns heading into the holiday season. According to preliminary third quarter estimates, retail vacancy spiked 150 basis points year to date to 9.9 percent on negative net absorption of approximately 67 million square feet. Thus far in 2009, nearly 8,300 store closures have been announced, compared with 6,900 closures all of last year.

Merchants have trimmed inventories as a way to reduce costs and weather the recession. As a result, tenant demand for industrial space has slowed, pushing up vacancy 170 basis points year over year to 12.1 percent on negative net absorption of 88 million square feet.

Headwinds Blow in September; 263,000 Jobs Cut

The economy continues to face significant headwinds, as 263,000 jobs were cut in September, and the unemployment rate rose 10 basis points to 9.8 percent, indicating that the effects of the recession continue to linger. The worst of the job cuts may be over, though, as 768,000 positions were shed in the third quarter, compared with the elimination of about 2.1 million workers in the first quarter of this year.

The severity of the recession has been extreme, as more than 7.2 million positions have been lost to date. Despite the moderation in job reductions, significant hiring is not expected to resume until well into 2010. In a recent survey, 13 percent of chief executive officers expect to add workers in the next six months, an improvement from the second quarter, when only 6 percent intended to hire. Nonetheless, this will not offset the 40 percent who expect to cut additional workers. The survey confirms that most CEOs remain cautious, pointing to slow employment growth ahead.

The unemployment rate is forecast to climb to 10 percent by year end. Notably, the number of individuals unemployed for 27 weeks or longer increased from 2 million one year ago to more than 5.4 million in September. Individuals unemployed for 27 weeks or more account for 36 percent of all unemployed, the highest percentage in the past 29 years. The inability of the unemployed to find jobs will diminish the strength of a recovery by suppressing spending and the creation of new households. In addition, the average hours worked fell to 33 hours last month; employers will likely increase the hours of existing workers before resuming hiring.

In the apartment sector, nationwide vacancy rose 90 basis points to 7.6 percent in the first half of this year and is projected to hit 8 percent in the third quarter. The unemployment rate in the prime renter age cohorts remains high, which will suppress rental demand in the months ahead. The unemployment rate for individuals ages 20 to 24 is elevated at 14.9 percent. Among individuals ages 25 to 34, the unemployment rate has increased to 10.6 percent.

Weak employment continues to weigh on the office sector, where vacancy is projected to exceed 16 percent in the third quarter, compared with 14.5 percent at year-end 2008. Last month, 18,000 office-using jobs were eliminated, the lowest monthly total this year. As leases renew in the months ahead, however, the full effects of the loss of 1.2 million office-using jobs year to date will materialize.

Hotel employment is one of the few sectors that has expanded this year. Although hotel employment is down year over year, about 30,000 jobs have been added in 2009 as a result of new hotels opening. Additions to hotel supply, plus a sharp decline in room revenue, have resulted in an 18.3 percent drop in revenue per available room, or RevPAR, so far this year, creating a strain on the operations of many properties. Opportunities to invest in distressed properties are expected to increase in the near term.

Home Sales Data Disappoints; Recovery Likely Choppy

• The collapse of the housing market was one of the primary drivers of the recession, and the sector’s rebound will be an essential step toward an economic recovery. Recent home sales trends show that the market is improving slowly, but fundamentals remain weak and unlikely to spark a recovery in the near term. Year over year, the median prices for existing and new homes are down 12.5 percent and 11.6 percent, respectively.

• Sales of existing homes lagged expectations in August, falling 2.7 percent. New-home sales rose for the fifth straight month, ticking up 0.7 percent, but current levels are still down 3.4 percent year over year. Demand is expected to remain weak in the fourth quarter due to the expiration of the government’s first-time homebuyer subsidy and the troubled labor market. Soft demand will likely keep prices in their current ranges, limiting new building and construction employment into 2010.
• Inventory levels are contracting but still have a ways to go before reaching traditional equilibrium points of approximately four months to six months of stock. The inventory of new homes has fallen from 12.4 months in January to 7.3 months of supply in August. After peaking at 11 months of inventory last November, the current stock of existing homes is now 8.5 months, although not all foreclosed homes are counted in inventory, skewing this figure.
• While the first-time homebuyer credit has driven some renters to homeownership, the increase in foreclosures has sparked demand for single-family home rentals to a greater degree than apartments. Year over year through the second quarter, the single-family vacancy rate declined 30 basis points to 10.1 percent, while the apartment vacancy rate increased 150 basis points to 7.6 percent. The significant availability of shadow rental stock will continue to apply downward pressure on apartment rents and drive concessions higher.
• Home price declines have pushed down household wealth 12 percent from one year ago. Consumers have reined in spending as a result, causing a drag on retail property conditions. Specifically, retail vacancy is up 110 basis points year to date on negative net absorption of 50 million square feet.