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Victor Calanog of Moody’s Analytics discusses the potential effects of Coronavirus (COVID-19) on US multifamily and commercial real estate, highlighting lease lengths and renewals, susceptible geographic areas and property types, construction delays, and longer-term implications.

For more of Moody’s insights on the impact of the Coronavirus, visit our Coronavirus topic page.

Coronavirus (COVID-19): Looming Threats to US Multifamily and Commercial Real Estate

COVID-19: Global Recession Q&A

Question: What’s the criteria for a country being in recession and labeled as below potential growth?

Answer: We stick with the technical recession definition for countries except for the U.S. A technical recession is two consecutive quarters of declining GDP. For the U.S., a recession, as defined by the National Bureau of Economic Research, is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” The U.S. economy clearly contracted in March and that will extend through the second quarter. To be labeled as below potential growth, trend growth in a country has to be below our estimate of potential.

Question: What are the implications of lower oil prices for the U.S. economy?

Answer: The impact of lower prices on consumer spending is fairly linear, all else being equal. However, the implications for energy-related investment from a drop in global oil prices are not linear; they depend on the break-even price of oil. Therefore, the drop in oil prices could hurt the economy this quarter and next. The Bureau of Economic Analysis uses the American Petroleum Institute’s weighted average of footage drilled along with rotary rig counts from Baker Hughes in its current quarter estimate of private fixed investment in mining exploration, shafts and wells. The good news is that this segment now accounts for around 18% of nominal private fixed investment in nonresidential structures, compared with about 35% before the slump in oil prices that began in the second half of 2014. As a share of GDP, private fixed investment in mining exploration, shafts and wells accounts for less than 1%.

Question: What are the most important indicators to watch going forward?

Answer: We are closely monitoring high-frequency economic data but also financial market conditions, primarily the A2/P2 spread and the components of change for the Fed’s balance sheet. Discount window borrowing has picked up recently but some of this likely was volunteering, since some large banks publicly stated they were taping the discount window. This was likely done to try and address the stigma on borrowing from the discount window. As in the financial crisis, we will be watching to see how much activity occurs in the Fed’s various credit facilities. The A2/P2 spread will also be important to watch. As for the economic data, weekly initial claims will provide a timely look at the number of layoffs. Timely measures of either business confidence (our weekly survey) or Morning Consult’s daily consumer sentiment index are also important.

Question: How will the U.S. auto industry be affected by the coronavirus?

Answer: The impact that COVID-19 will have on the U.S. auto industry is unprecedented. Demand will be sapped not once but twice as the ripples of this devastating virus pulse through the American economy. The impacts of the virus will drive down units sold and prices for both new and used vehicles and force automakers into difficult decisions on production and plant operations.

The good news is that most states—in large part because of their newfound use of stress-testing in the budget process—are well prepared for an economic downturn of that magnitude. In our most recent 50-state stress-testing exercise, we found that 28 states had sufficient money set aside to handle the impacts of a moderate recession without having to raise taxes or cut spending. An additional 12 states were relatively close to having sufficient funds set aside, while only 10 were substantially unprepared.

That preparation will come in handy over the next few quarters as revenues decline and demand for social services increases. Those states that have set aside sufficient reserves will be able to continue on without having to make any contractionary policy decisions that could lower aggregate demand even further. Those not prepared will likely have to impose spending cuts or tax increases at a time when their economies can least afford them. As a result, look for those economies with state budgets best situated for the current crisis to outperform those whose governments are least prepared through at least 2021.

Question: How will consumer defaults impact recession?

Answer: The good news is that U.S. consumer balance sheets were in good shape heading into the recession as debt service burdens and financial obligations were low. There will likely be moratoriums on foreclosures and evictions. Also, the fiscal stimulus should provide direct payments to consumers. Delinquencies will rise because of the damage to the labor market. However, this is unlikely to magnify the recession. The bigger concern is the possibility of a wave of small-business bankruptcies.

Question: Are there long-term effects that linger beyond the solution of the health crisis?

Answer: It is unclear what normal will look like after the crisis. Will a large number of small businesses make it to the other side? Also, COVID-19 could permanently impact business travel. Will there be a larger shift toward working from home, and what are the productivity implications? We do not expect that COVID-19 and the recession will cause an increase in structural unemployment.

Question: Are you able to tell if the layoffs are concentrated in the small-business sector or is it something else or a mix?

Answer: We expect to see large declines across many industries, particularly those hardest-hit by social-distancing measures—leisure/hospitality, retail trade and other services. However, manufacturing, construction and transportation could also be hit hard.

Question: There is an estimate of the peak unemployment rate hitting 20%, but in the critical pandemic [scenario] it is just above 6%. Why not higher?

Answer: The official U-3 unemployment rate will be too narrowly defined to capture the true depth of the impact to workers. To be counted as unemployed, workers either must be on layoff awaiting recall—which will account for some of the COVID-19-related layoffs if businesses have just temporarily suspended operations—or not working but actively looking for a job within the last four weeks. With entire swaths of the economy shutting down, it is unrealistic to think that all laid-off workers will be actively looking for work, as there may not be anywhere to look. Broader measures of unemployment will help. The number of discouraged workers is likely to rise in response to the crisis. If someone is out of work and the primary reason they have not searched for a new job is because they believe there are no jobs available, they count as discouraged. Another category likely to show a large impact includes people working part time for economic reasons or involuntary part-time workers. Firms that have not completely shut down may be cutting hours of existing employees to cope with diminished demand. For both reasons it will be important to watch the broadest measure of labor under-utilization, U-6. One other thought to consider is that even the U-6 measure of labor under-utilization may not fully capture the unique fallout from COVID-19. For people who are out of the labor force—meaning without a job and not actively searching—a key requirement to be included in the broader measures of unemployment is that you want a job now. To the extent that there are people who were laid off and either do not want a job now given the risk of contracting COVID-19 or they are not available for work now, possibly because they are already infected or caring for family, they will not be reflected in any measure of unemployment.

Source: Prepared by Mark Zandi, Chief Economist of Moody’s Analytics, where he directs economic research. Moody’s Analytics, a subsidiary of Moody’s Corp., is a leading provider of economic research, data and analytical tools. Dr. Zandi is a cofounder of, which Moody’s purchased in 2005.

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