Part 4 -- U.S. 2020 Economic Conditions, the Pandemic, and Where We Are at the Beginning of June 2020

This is the fourth in a series of posts focusing on year-to-date economic conditions in light of the impact of the COVID-19 pandemic and continuing government economic recovery legislation. See the first post, second, third, fifth, and stay tuned… there’s more to come.

E.  Economic Indicators at May 31, 2020 and Entering June

At May’s month-end, the S&P Index closed at 3,040, posting a year-to-date gain of 5.8%%. The DJIA closed at 25,383; a 7.8% gain for the year. The NASDAQ Composite close was 9,490 and posted a 5.76% year to date gain.

According to Bankrate, the average 30-year fixed mortgage rate average was 3.57%, and the average 15-year fixed was 2.86%.  At June 1, the average rate for the benchmark 30-year fixed mortgage was 3.52%, down 6 basis points from a week ago, although on May 1 the average rate on a 30-year fixed mortgage was essentially the same, at 3.52%.

According to the Federal Home Loan Mortgage Corporation (Freddie Mac), with much of the U.S. under stay-at-home orders, although this is loosening, it expects to see housing markets deviate from their typical spring surge. At a seasonally adjusted annual rate, home sales could fall 45% through the second quarter of this year. Home sales will bounce back, but it estimates it will be a year until a recovery is attained.

In the current economic environment, at May 29, the yield on 30-year Treasuries were 1.44%; ten-year Treasury bond yields were .7%, and three-month Treasury yields were .22%. Regarding long-term bond yields, at present levels (June 2) they appear to reflect no sign of concern regarding an inflation increase. The annual inflation rate for the United States is 0.3% for the 12 months ended April 2020 as compared to 1.5% previously, according to U.S. Labor Department data published on May 12, 2020; the next inflation update is scheduled for release on June 10.

More important is the forecasted May 2020 U.S. employment rate, compared to the April 30 rate of 14.7%. While the unemployment rate consensus for May is 19.5%, decreasing to 15.5% in June (see D. above), at June 1, there is no May unemployment data from the U.S. Bureau of Labor Statistics -- related information is not likely to be announced until the week ending June 1 (or following).  Regarding consumer spending, the Bureau of Economic Analysis U.S. Department of Commerce cited a decrease of 13.6% in April; disposable personal income increased 12.9% in the same period due to government payments through the federal rescue programs and primarily due to the household stimulus payments of $1,200 and unemployment insurance payments; in April there was an 8% decline in wages due to job losses. While consumers spent less while striving to save, The University of Michigan May 2020 Survey of Consumer Expectations fell, reflecting 65.9; in April the Survey reflected 70.1; in April consumers received approximately $20 trillion in income from all wages, salaries and other sources. However, the amounts received that represented stimulus check, unemployment payments, and government transfers received were essentially converted by individual recipients to savings, and not deployed into the economy and spent on goods, services and other items (Wall Street Journal, May 30-31, page A1 and 2).                                   

In late April, the U.S. Congressional Budget Office (CBO) developed preliminary projections of key economic variables through the end of calendar year 2021, based on information about the economy that was then available, and including the effects of an economic boost from legislation recently enacted in response to COVID-19. In addition, the CBO developed a preliminary assessment of federal budget deficits and debt for fiscal years 2020 and 2021.

According to the CBO in late April, in the second quarter of 2020 the economy will experience a sharp contraction, and the CBO’s economic projections at that time included the following:

Inflation-adjusted gross domestic product (real GDP) is expected to decline by about 12% during the second quarter, equivalent to a decline at an annual rate of 40% for that quarter. The unemployment rate is expected to average close to 14% during the second quarter. Interest rates on three-month Treasury bills and ten-year Treasury notes are expected to average 0.1% and 0.6%, respectively, during that quarter.

For fiscal year 2020, CBO's early look at the fiscal outlook shows the following:

The federal budget deficit is projected to be $3.7 trillion. Federal debt held by the public is projected to be 101% of GDP by the end of the fiscal year.

Additionally, regarding unemployment nationally, we know that April 2020, unemployment rates in 43 states were at their highest levels since state unemployment data tracking began in January 1976. Unemployment rates in Hawaii and Nevada exceeded their previous highs by more than 10% each, while the rates in Michigan, New Hampshire, Rhode Island, and Vermont exceeded their previous highs by more than 5%.

Separately, as we examine estate planning and lifetime assets transfers, the current economic environment, while highly unsettling, has created an environment to address estate planning needs, the update of wills and advance health care directives, and related matters.  The current low interest rate environment provides very meaningful asset transfer and estate planning opportunities for individuals with significant assets. The applicable federal rate (AFR), which is used to determine the minimum interest rate for related party loans, was 0.91% for short-term loans and 0.99% for mid-term loans in April 2020. These rates were 0.25% for short-term loans and .58% for mid-term loans in May 2020, and the long-term rate was 1.15%. The June 2020 rates have decreased again, to 0.18% for short-term loans, 0.43% for mid-term loans, and 1.01% for long-term loans. It is an especially prudent time to review estate plans and asset transfer techniques that are tied to the AFR, for example sales of assets to defective grantor trusts, the formation and utilization of a grantor annuity trust, and as pertaining to sales and gifts generally.