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Aug 19, 2020

The State of the Southeast

The State of the Southeast

The world economy has faced unprecedented challenges since the onset of the COVID-19 pandemic, and the southeastern region of the United States is no exception. Due to stay-at-home orders, social distancing, and capacity limits, the day to day for many businesses has been completely disrupted, leading to record increases in unemployment and drops in GDP. The economy has gradually climbed its way out of the gutter since bottoming out in late March and early April. In the southeast, the easing of restrictions has been balanced out by an increase in COVID cases and resulted in a mixed recovery. Specifically, the residential real estate, retail, labor, and tourism markets have shown significant improvement, while commercial real estate, manufacturing, and banking have lagged.

While economic indicators can be useful in evaluating the recovery, the fact that this one, unlike the Great Recession of 2007-2009, was caused by a pandemic has created novel, untraditional metrics for measuring economic growth. One such tool is measuring mobility. Google’s COVID-19 Community Mobility Report shows that across the southeast, as well as the rest of the country, mobility is down in retail, transit, and workplace locations. Still, it is up in outdoor spaces such as parks and at home. Mobility to grocery stores and pharmacies is largely flat. This data demonstrates that people have changed their habits from last year in an effort to mitigate the spread of the virus. The Dallas Fed’s Mobility and Engagement Index traces mobility in a way that reflects the decline and subsequent recovery of the economy.

Southeast 7 day mobility average

Much like the stock market and unemployment, this graph shows a sharp drop followed by a recovery that increased from April to May but then leveled off in June, July, and August. Following mobility, which is reported weekly, could help give indications of where GDP, which is updated monthly, is heading and prove useful in adjusting clients’ asset allocations.

Perhaps the strongest sector in the current recovery is the housing market. Core southeastern markets such as Atlanta, Miami, Birmingham, and Charlotte have seen rapid rises in new listings, sales, and prices, while the number of days on the market stayed mostly flat. In many of these markets, specifically Miami and Birmingham, key indicators have recovered from being down as low as 50% from 2019 to up year-over-year. Pent-up demand and low-interest rates on mortgages are producing an increase in demand. Basically, people who would have bought a house in March and April delayed that purchase to June through August, in addition to the people who would have bought a house during those months anyway. Similar themes are driving a strong automotive market as well.

However, it is not just the housing resale market that is benefiting from these trends. Due to the increase in sales across the southeast, inventory of homes for sale has contracted, which has pushed up both prices of existing homes and demand for new homes. According to the Census Bureau, building permits for new homes in June were up 5% year-over-year and exceeded May’s expectations by 2.1%. This has driven strength among both construction and materials companies in addition to housing. On the other hand, commercial real estate is one of the coldest markets in the southeast. This weakness is likely due to tenants missing payments, capacity limits for retail and hospitality, questions about the future of the office, and constrained loan availability.

There is ample data that shows the mixed nature of the recovery across industries. Transportation was flat from May to July, but the total rail volume was weak. Oil and gas saw weak demand, excess supply, and constrained storage capacity, resulting in an extremely fragile market. In better news, utilities had a smaller decrease than expected in the south, and major utility companies announced their intention to continue capital investments. Despite exceeding expectations, utility stocks have not performed as they typically do in a bear market, likely due to the unprecedented cause of this recession.

Meanwhile, tourism, retail shopping, and restaurants all saw significant improvements in June, July, and August from their April lows, but capacity limits prevented them from making a full recovery. Agriculture in the southeast was mostly mixed; orange and grapefruit production was notably down in Florida. However, across the board, prices paid to farmers varied by crop. On the financial side, most loan action revolved around government PPP loans. Small businesses struggled to attain outside loans due to rising credit qualifications caused by the high levels of uncertainty. Still, many consumers started or refinanced mortgages on large purchases such as houses and cars, taking advantage of the low rate environment. Lastly, deposits in banks increased, reflecting the rise in savings and fall in consumer spending due to uncertainty.

Despite positive signs in the recovery, unemployment remains at levels not seen since the Great Depression. After peaking in April, the unemployment rate has been decreasing. At first, it decreased sharply, but it has since leveled off around 10%, up from 3% pre-pandemic. The unemployment rate varies by state in the southeast. Last week, Georgia reported that 1.6% of eligible employees newly filed for unemployment, but the rest of the southern states reported less than 0.6% of employees filing for unemployment (with the exception of Florida where the number was 0.8%). While unemployment is an issue, wages held strong and increased by about 1% from March to June.

At the end of the day, COVID-19 underlies all economic activity and any possible recovery. As the country and the southeast struggle to get the virus under control, it becomes apparent that a vaccine is necessary for a full recovery and for life to return to normal. Georgia, Alabama, Tennessee, and South Carolina have all begun to see plateaus in cases, hospitalizations, and deaths, while Florida doesn’t see plateaus they see decreases in those categories, but as long as the virus is present, the economy will remain muted in wait of a vaccine. Despite this significant headwind, the southeastern economy has shown some resilience, and a continued mixed recovery seems likely in the near term.

Please see our General Disclosure.

Jason Seeb

Investment Analyst

Jason started at Narwhal in the summer of 2020 after graduating from Vanderbilt University with a bachelor’s in Economics and History. While at Vanderbilt, he also completed minors in Finance and American Politics. Jason spends most of his time researching and analyzing anything and everything to do with client’s investments, from stocks to real estate to the macroeconomy. In his free time, Jason enjoys playing sports, boating, traveling, and being disappointed by his local college and professional sports teams.

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