As predicted, the U.S. economy hit a major slump at the start of the second quarter. The COVID-19 pandemic negatively impacted employment, manufacturing production, retail sales and consumer sentiment across the country. Some of the lowest economic measures were reported during the second quarter as the country officially entered a recessionary period. According to the National Bureau of Economic Research, a recession is determined by the depth of economic contraction, its duration and whether economic activity declined broadly across the economy. We officially entered into a recession in the second quarter due to the unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, even if the duration turns out to be briefer than earlier contractions. The record expansion that began in June 2009 ended in February 2020 — the month of the U.S. stock market crash — and has been in a recession since then. The 128-month expansion was the longest in U.S. history, beating the previous record of 120 months from March 1991 to March 2001.
The good news is, June economic indicators were mostly positive, which should slow the rate of contraction in the coming months. After losing a record 20+ million jobs in April, setting the U.S. unemployment rate to 14.7%, the highest level since the Great Depression of the 1930s according to the Bureau of Labor Statistics, the economy added 4.8 million jobs in June, bringing the employment rate down to 11.1%, down 360 basis points from its peak in April. Notable job gains occurred in leisure and hospitality (+2.1 million), retail trade (+740,000), education and health services (+568,000), manufacturing (+356,000) and professional and business services (+306,000). Other sectors directly impacting the industrial market showed positive momentum, as well as job gains were also seen in construction (+158,000), transportation and warehousing (+99,000) and wholesale trade (+68,000).
Consumer sentiment also rose month over month in June, yet at a slower pace than expected. According to the University of Michigan Consumer Sentiment Index, most consumers believe that economic conditions could hardly worsen from the recent shutdown of the national economy, and prospective growth in the economy is more closely tied to progress against the coronavirus. The early reopening of the economy has undoubtedly restored jobs and incomes, but it has come at the probable cost of an uptick in the spread of the virus. Consumer sentiment measured 78.1% in June, up from 72.3% in May, yet reduced significantly from the 98.2% recorded a year ago.
Consumer spending has also slowly risen, as government stimulus checks and unemployment insurance payments facilitated an 8.1% increase in purchases in May, to offset much of the 12.2% drop seen in April. Spending was up sharply in every category, a clear indication that people were able and willing to spend more despite the circumstances, according to the National Retail Federation’s (NRF) latest monthly economic review. Overall retail sales were up 17.7% in May from April, but still down 6.1% year over year. Retail sales as defined by NRF — excluding automobile dealers, gasoline stations and restaurants— were up 11% from April and up 1.7% year-over year. These retail figures should encourage demand for warehouse distribution space in the coming months, given the continued growth of ecommerce as well. According to the U.S. Department of Commerce, as of Q2 2020, ecommerce accounted for a total of 11.8% of retail sales, up from 11.3% in the previous quarter, a record for online shopping. We remain cautious in predicting a rebound in retail spending, however, as the recovery was only partial and largely supported by April’s massive fiscal stimulus injection.
Manufacturing production shines a bright light on the industrial sector, as the Institute for Supply Chain Management’s Production Manufacturing Index (PMI) registered 52.6% in June, up 9.5% from the May reading of 43.1%. This figure indicates expansion in the overall economy for the second straight month after April’s contraction, which ended a period of 131 consecutive months of growth. A reading above 50 signifies growth, while a reading below 50 represents manufacturing production contraction.
Overall, these economic readings in June point to a gradual recovery in market fundamentals that impact industrial real estate. Continued growth in ecommerce should fuel the sector in the months to come and translate demand for industrial space into new leasing activity and continued robust construction, especially in core markets close to large population centers.