The Small Balance Intersection Update - September 11, 2024

Watch for Inflationary Pressures

Small Business Optimism Falls as Sales Expectations Decline in August 2024

The NFIB Small Business Optimism Index dropped by 2.5 points in August to 91.2, reversing gains made in July and marking the 32nd consecutive month below the 50-year average of 98. Rising uncertainty among small business owners contributed to this decline, with the Uncertainty Index reaching 92, its highest level since October 2020. Inflation remains the top concern, with 24% of owners citing it as their primary issue, although this is down slightly from July. Sales expectations also deteriorated, with the net percentage of owners expecting higher real sales volumes falling nine points to a net negative 18%. A net 37% of owners reported negative profit trends, the lowest level since March 2010. Labor challenges persist, with 40% of small businesses reporting job openings they cannot fill, and 90% of hiring owners citing few or no qualified applicants. Despite these challenges, 56% of owners reported capital outlays in the past six months, and 24% plan additional investments in the coming months. Compensation increases remain a priority, with 33% of owners raising wages in August and 20% planning to do so in the next three months. Financing difficulties were reported by 4% of owners, while a net 7% found it harder to secure loans than before.

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Manufacturing Way

U.S. Manufacturing Boom Spurs Property Investment, But Challenges Remain

The U.S. is witnessing a manufacturing resurgence, particularly in electric vehicles (EVs) and semiconductors, attracting nearly $500 billion in investments and spurring property development. Investors are targeting regions in the Sunbelt and Rust Belt, aiming to build warehouses, offices, hotels, and residential complexes near emerging industrial hubs. One of the most significant projects is Taiwan Semiconductor Manufacturing Co.'s (TSMC) $65 billion chip plant in Phoenix, backed by $11 billion in federal subsidies. Developers like Mack Real Estate are planning mixed-use projects around these factories, betting on job creation and increased demand for housing and services. Ford’s $5.6 billion EV plant in Tennessee is also attracting real estate speculation, with land prices tripling in some areas.

However, challenges remain, including rising interest rates and delays in factory completion, such as Ford’s BlueOval City, now expected to start production in 2027. Developers are proceeding cautiously, often waiting for better market conditions before moving forward with large-scale projects. Infrastructure improvements are needed to support the increased demand for electricity, water, and transportation in these regions. Environmental concerns, such as water shortages in Phoenix, have also surfaced as potential obstacles. Nonetheless, real estate development is already underway in some areas, like eastern Oklahoma, where new apartments are rising near an expanding industrial park.

Investors remain optimistic that these manufacturing hubs will generate long-term economic benefits, despite the current hurdles. As more factories come online, these regions are expected to experience significant growth in housing and services demand.

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Market Risk Ave

California and Northeast Markets Lead Housing Risk Rankings in Q2 2024

ATTOM’s Q2 2024 U.S. Housing Risk Report highlights market vulnerabilities, particularly in counties across California, New Jersey, and Illinois. These states represent nearly half of the most at-risk counties based on factors like home affordability, foreclosure rates, underwater mortgages, and unemployment. New York City, Chicago, and inland California saw concentrated risks, with 24 of the 51 most vulnerable counties located in these regions. Conversely, areas in Virginia, Wisconsin, and Tennessee were identified as the least likely to experience market declines. Nationwide, 35.1% of average local wages were required for homeownership, but in the riskiest counties, this number rose significantly, such as in Kings County, NY, where it reached 111.8%. Foreclosure rates were notably higher in vulnerable areas, with one in 464 homes in Charlotte County, FL, facing action. Meanwhile, unemployment rates also reflected risk disparities, with central California counties like Merced reaching 9.4%. As market metrics fluctuate, ongoing monitoring is crucial to understanding regional risks.

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Household Spending Blvd

Consumer Spending Rebounds, Auto Loans Pose a Risk

In August 2024, Bank of America’s Consumer Checkpoint report revealed that credit and debit card spending per household increased by 0.9% year-over-year (YoY), rebounding from a 0.4% decline in July. However, spending dropped 0.2% month-over-month (MoM), indicating normalization rather than weakening consumer activity. Services spending continued to outperform goods, with travel-related expenses remaining strong. Housing cost inflation is easing, particularly for renters, as new rent prices flattened, potentially boosting non-housing spending for renters. One emerging risk to consumer spending stems from rising auto loan repayments due to higher car prices and financing rates. Despite this, after-tax wage growth remains robust, particularly for lower-income households, supporting overall consumer resilience. Meanwhile, savings and checking balances for households remain significantly above pre-pandemic levels. Although economic uncertainty looms, housing costs and wage growth trends suggest a stable foundation for future spending.

See the full report here.