Business Jets Are Flying Again. Their Manufacturers Aren’t.

Private-plane makers have concentrated on developing new long-range models, but the postpandemic world may end up preferring cheaper, smaller aircraft

 By Jon Sindreu

Can a business jet ever be too cool for school? Surprisingly, it might.

Private aviation has faced headwinds and tailwinds alike from the pandemic. Initially, the outbreak depressed demand and disrupted production, prompting plane makers to dismiss thousands of workers. Yet health concerns about commercial planes and airports also could inject new blood into the long-stagnant industry.

The number of business-jet flights is now only 15% lower than a year ago, following a strong rebound, compared with a 65% drop for commercial aircraft, according to data provider FlightAware.

Corporations aren’t rushing to sell their planes to raise cash, as they did in 2008. Aircraft available for sale made up 7.8% of the total fleet in July, compared with a one-year average of 7.7%, according to analysts at Jefferies.

Brokers report that some firms are even looking to broaden private-jet use beyond C-suites into middle management.

But there’s a catch: It is likely that much of the prospective new demand won’t align well with the type of planes that manufacturers are churning out.

While private-aircraft sales stalled after the global financial crisis, Asia’s economic boom sparked a lot of interest in top-of-the-range private aircraft that could fly executives across continents. These are higher-margin products, and releasing a new model tends to create a jump in orders.

One example is the Falcon 6X, due to be released by French aerospace manufacturer Dassault Aviation in 2021. With a price tag of $47 million, it can carry 16 passengers as far as 6,300 miles. Competitor models include Bombardier’s Global 7500 and Gulfstream’s G650ER. These are planes for billionaires and the world’s 100 biggest companies.

This trend seems to have run its course. China’s growth is gradually slowing and its promise as a user of long-range jets was never truly fulfilled. After an increase in production to meet anticipated demand, many of the planes sold in the country were returned to the U.S. and Europe amid a shortage of proper facilities to operate and maintain them.

Manufacturers may ultimately need to entice more traditional clients who are a better fit for the midsize and super-midsize jet categories. These can fulfill almost all of a corporation’s needs and fly to smaller airports. There, though, development has stalled—Embraer’s Praetor 500, introduced in 2018, being the exception.

Shares in business-jet makers are doing better than their commercial-plane peers, but are still down a lot this year. That may not make them the bargains they appear amid the pandemic-induced rebound in private aviation, though.

Early signs suggest the recovery’s beneficiaries are not plane makers but the likes of NetJets and Flexjet, which offer charter flights and fractional ownership plans—and aren’t traded on the stock market. Since secondhand jets have recently been underutilized, charter companies have room to grow before they need to call the factory.

For all the burgeoning interest in business jets, this is a market where demand and supply alike may fall short.

What happens when asset prices are in the grip of central banks?

Markets contemplate financial repression of the kind operated by the Fed around WW2

John Plender

The US Federal Reserve may now move to a policy of yield curve control. © AP

One innocent explanation for the extraordinary bounce back in global equity markets in the second quarter is that investors have concluded that the worst of the pandemic is over and that recovery is within reach.

A less innocent — but all too plausible — alternative reading is that investors now believe central banks will exercise complete control over asset prices for the foreseeable future. In other words, the categorical imperative of policymakers doing “whatever it takes” to counter the current crisis could ensure a lasting decoupling of equity prices from ailing economies.

Lending support to this latter view is the growing conviction in markets that the US Federal Reserve may now move to a policy of yield curve control. That would mean following the Bank of Japan in capping borrowing costs by targeting a longer term interest rate and buying enough bonds to stop yields rising above that level.

It would amount to financial repression of the kind operated by the Fed in and after World War II, as a means of managing exceptionally high levels of government debt. By keeping nominal rates of interest constantly below the nominal growth in gross domestic product, the debt-to-GDP ratio can be reduced over time. But the question is whether this would work today.

Extravagant spending supported by such measures would require markets to have enormous patience with soaring government debt. When patience runs out, the traditional policy response is to resort to capital controls to prevent outflows to countries where debt looks more sustainable. Yet with the US, custodian of the world’s dominant reserve currency, this would pose extraordinary, maybe insurmountable, difficulties. There could be investor strikes in fixed-income of the kind that disrupted markets in the 1970s.

There would also be malign side effects of keeping borrowing costs artificially low. Among them would be maintaining life support for zombie companies that earn less than they need to cover interest payments. Since the pandemic hit, many such companies now survive thanks to direct central bank largesse. The resulting misallocation of capital damages productivity and thus economic growth.

The morally hazardous consequence of ongoing ultra-low interest rates would be a continuing rise in private sector debt even as the public sector leverage ratio is declining. And to the extent that investors discount future corporate earnings using these artificially low rates to calculate equity market valuations today, those current valuations risk being artificially high.

This approach to economic management would create a perception in markets of an enduring reduction in systemic risk, as liquidity would be so abundant. The mispricing of assets that has been a feature of capital markets over the past 20 years — as central banks have bought more and more bonds — would then become yet more extreme, as would the search for yield regardless of risk.

A further complication is the adverse impact of ultra-low rates on bank profitability, though this is less of a problem for the US — where the banks have relatively high returns on equity — than for Europe and Japan.

The biggest challenge for the central banks would be the potential threat to their credibility. In a recent paper for the Brookings Institution, Sage Belz and David Wessel point out that yield curve control requires the central bank to commit to keep interest rates low over a set timeframe. This is how it can help encourage spending and investment. But it also means, they add, that the central bank runs the risk of letting inflation overheat while holding to its promise.

If overheating does occur the central bank may have to choose between abandoning its promise or failing to hold to its stated inflation objective — “both bad options in terms of its credibility with the public”, as the Brookings writers put it. Certainly, a decision not to tighten policy in response to above-target inflation would lead to accusations that central banking independence was a mere fig leaf for policies designed to keep politicians sweet.

A pick-up in inflation is a far more probable outcome than markets currently allow. It is, moreover, part of the solution to countries’ excessive debt burdens.

The likelihood is that greater resort to direct monetary financing of spiralling government deficits will have a powerful impact on inflation, which will also be encouraged as the labour force gains more bargaining power and governments come under pressure to reward key workers.

Working in the shadow of the pandemic and the last financial crisis, politicians and central bankers may feel that they have had little alternative to fiscal expansion and financial repression. But in doing so, they have thrown caution to the wind.

The prevalent belief that ever-increasing debt is manageable, because servicing costs are low, will ultimately prove toxic.

30-Year Mortgage Rate Reaches Lowest Level Ever: 2.98%

Coronavirus has upended markets around the world. Its effect on the 30-year mortgage is especially significant.

By Orla McCaffrey

Low mortgage rates typically boost home sales, but they did little to ease the pandemic’s impact on the housing market this spring. / Photo: Nick Schnelle for The Wall Street Journal .

In a year of financial firsts, this one stands out: Mortgage rates have fallen below the 3% mark.

The average rate on a 30-year fixed mortgage fell to 2.98%, mortgage-finance giant Freddie Mac FMCC -0.93%▲ said Thursday, its lowest level in almost 50 years of record keeping.

It is the third consecutive week and the seventh time this year that rates on America’s most popular home loan have hit a fresh low.

The coronavirus pandemic has upended markets around the world—sending stocks on a wild ride and yields on U.S. government debt to record lows—but its effect on the 30-year mortgage is especially significant.

Consider its history: In the early 1980s, it peaked above 18% after the Federal Reserve raised rates to fight runaway inflation.

Below 3% is a “tremendous benchmark,” said Jeff Tucker, an economist at Zillow Group Inc.

“It’s also an indication that we remain in a crisis here.”

The average rate on the 30-year mortgage stood at 3.72% at the beginning of the year and 3.81% a year ago, according to Freddie Mac. 

Mortgage rates tend to move in the same direction as the yield on the 10-year Treasury note.

Yields fall as prices rise when nervous investors buy up safe-haven assets like bonds when the economic forecast is darkening.

The spread between the yield on the 10-year Treasury and rate on the 30-year mortgage has narrowed in recent weeks, largely because lenders had spare capacity to process applications after clearing a backlog of refinacings. Still, the larger-than-usual gap means there is room for rates to fall even farther, Mr. Tucker said.

Not all mortgage rates have declined at the same pace. Interest rates on jumbo home loans, those too large to sell to Freddie Mac or Fannie Mae,have fallen to around 3.77% from 3.84% at the beginning of the year.

Earlier this year, some lenders placed new restrictions on these larger loans—in most markets, loans of more than $510,400—after the investors who typically buy them soured on loans without government backing.

Low mortgage rates typically boost home sales, but they did little to ease the pandemic’s impact on the housing market this spring. Existing-home sales fell 9.7% in May from the month prior and 17.8% in April, according to the National Association of Realtors.

A number of hurdles are keeping people from purchasing homes. A home purchase is out of the question for many of the millions of Americans who’ve lost their jobs in recent months.

And fears that recurrent coronavirus outbreaks will lead to a protracted downturn could also keep some with the means to buy from committing to big purchases.

For those who are looking to buy, inventory is tight and prices are high.

The number of homes on the market fell 27.4% in June from a year earlier, according to Home prices rose 4.7% year-over-year in April, potentially muting any savings from low rates.

Still, there are indications that some of the buyers who stayed home during the spring are venturing into the market. Mortgage purchase applications rose about 17% in June from a year earlier, according to data from the Mortgage Bankers Association.

Economists at Fannie Mae expect sales to peak in July or August as the backlog of delayed spring deals is cleared.

Falling rates often prompt home buyers to speed up their purchasing plans. That was the case for Phillip Caldwell and his wife, Tracey, when they locked down a rate of 3% in late May, much lower than they expected.

The first-time home buyers decided to move from Seattle to Mr. Caldwell’s hometown of St. Louis, putting down an offer on a house in the Creve Coeur neighborhood in late spring.

Shortly after, Mr. Caldwell set out for the 30-hour trip from Seattle to St. Louis with his husky, Rolland.

“A big factor that played in was that mortgage rates were going down,” Mr. Caldwell said. “We thought it might behoove us to get it done now.”

Lower rates can also expand home buyers’ budgets, a major upside at a time when inventory for low-cost starter homes is in short supply.

Tressie McMillan Cottom was thrilled when she was approved for a rate of 3.05%. “It meant I could look at a higher price point and more homes became available,” she said.

The college professor needed to find a house in the Chapel Hill, N.C., area and she knew competition would be fierce. Her Richmond, Va., house sold in hours when she listed it in early July.

“On my second trip to Chapel Hill, I just came with my checkbook and told my agent ‘We’re picking one of these,’” she said.

The ‘Rocket Ship’ Economic Recovery Is Crashing

Real-time data suggest a quick resurgence of business activity is leveling off nationally — and reversing in states like Arizona and Texas.

By Jim Tankersley and Ben Casselman

President Trump and his top advisers are projecting a strong economic rebound this year, but data from states that have reopened suggest a more halting rebound as the virus persists.Credit...Erin Schaff/The New York Times

The nascent restart of America’s economy has begun to stall as a surge in new coronavirus cases dampens consumer and business activity across states like Florida, Texas and Arizona.

After weeks of a pandemic-induced contraction, the economy had begun rebounding faster than many economists expected from mid-April into June, as infection rates stabilized or fell across much of the country and the federal government injected trillions of dollars in the economy. States began to reopen, shoppers increased their spending and employers started to hire back furloughed workers.

But there were signs in late May and early June that the pace of recovery was beginning to slow, even before another wave of infections swept through states that had moved quickly to ease limits on public gatherings. In recent weeks, as that wave intensified, real-time economic data began to show the economy moving backward as rising infection fears spooked consumers.

The national jobs report, scheduled to be released on Thursday by the Labor Department, is expected to obscure that reversal. Forecasters expect the report, drawn from data compiled in the middle of the month, to show the economy added about three million jobs in June. That would represent progress, but nowhere close to victory against the more than 20 million jobs shed at the trough of the recession.

Recent detailed data tell a more sobering story. New job postings on the employment platform ZipRecruiter fell in June after rising sharply in May. Data on small business openings and employment from Homebase, which provides scheduling and time tracking software for businesses, show that small business employment and openings worsened over the past week, after plateauing for much of June. The Homebase data showed a nearly 40 percent improvement for small business activity in May; across all of June, that fell to 6 percent.

States suffering infection surges, like Texas, began to see layoffs and business closings even before officials moved to reimpose some restrictions on economic activity, such as closing bars.

Foot traffic to retailers and other businesses declined in the third week of June in Houston, Orlando, Jacksonville, Phoenix and other large cities across the southern states where infections have spiked, according to an analysis of data by researchers at the American Enterprise Institute in Washington. Data from 40 million households compiled by the financial firm Commerce Signals shows that after weeks of improvement, credit and debit card spending declined at the end of May across most states.

That is a pattern economists have been dreading, and a departure from the “rocket ship” recovery that President Trump promised in June. Federal Reserve officials have warned publicly that recovery appears perilous and highly dependent on public health.

“The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus,” Fed Chair Jerome H. Powell told a House committee on Tuesday. “A full recovery is unlikely until people are confident that it is safe to re-engage in a broad range of activities.”

The next few months of recovery could be rocky even if the current infection surge abates. Job losses have slowed but remain at levels higher than in any previous recession, and a growing share of workers now report they have been laid off permanently, rather than temporarily furloughed.

A significant share of small businesses have still not reopened, even as states increasingly lift restrictions on their operations, suggesting some of them may be shuttered for good. By many measures, business activity and employment remains down by a quarter or more from pre-crisis levels.

Child care constraints are keeping many workers, particularly Black and Hispanic women, from returning to work, according to weekly census survey data analyzed by Ernie Tedeschi, an economist at Evercore ISI.

Some economists say the slowdown was predictable — and a natural reaction to Americans attempting to rush back toward normalcy before the virus was under control.

When it comes to the recovery, “the virus is the boss, not the governor, not the mayor, not the president,” said Austan Goolsbee, a former top economist for President Barack Obama and the author of a recent study that found fear of infection — and not government lockdown policies — drove nearly all of the contraction in economic activity this spring.

Mr. Goolsbee, who is a professor at the University of Chicago’s Booth School of Business, and his colleague Chad Syverson used cellular phone records to track visits to businesses during the pandemic.

The research found that just over one-tenth of the drop was attributable to lockdowns themselves, a share that held constant as areas began to lift restrictions in May. The authors say that suggests that if infections accelerate, public officials will not be able to avoid another economic shock simply by refusing to shut down activity. Consumers will make that decision for them.

When cases of the virus first began rising earlier this year, many economists hoped that, with the right set of policies, the United States could avoid most long-term economic damage. The idea was that by providing trillions of dollars in support for households and businesses, the federal government could, in effect, keep the economy in stasis until the health crisis had passed.

There are signs that those efforts were at least partly successful. Nearly a third of the people who lost jobs during the pandemic have already returned to work, according to a poll conducted for The New York Times in early June by the online research platform SurveyMonkey. Another quarter expected to return to their old jobs within the next month.

But that still leaves close to half of all those who have lost jobs still out of work, with no immediate prospects for a return. That group is disproportionately Black and Hispanic, and concentrated in low-wage service industries, the survey found. Perhaps unsurprisingly, those respondents are far less sanguine about the direction of the economy than Americans overall.

“How can we have a recovery when millions of people are now permanently unemployed?” asked John Singh, a survey respondent in Los Angeles. “How can we have an economy when big companies have just thrown in the towel?”

Mr. Singh’s husband was furloughed from his job at a large corporation, but returned to work — from home — this week. The break was a loss of income, but not a major career disruption.

It is a different story for Mr. Singh. He runs a small public relations agency — he is the only full-time employee — and his main client is in film distribution. When theaters shut down in mid-March, his revenue dried up overnight. With theaters expected to be among the last industries to return to normal, he doesn’t expect his business to bounce back anytime soon.

The Homebase data suggest a yawning divide in the experiences of businesses that never closed for the pandemic and those that shut down as it began to spread. Employee hours and total number of employees are running just above pre-crisis levels at retailers that never closed.

But many businesses have not reopened, which Homebase officials said in a report this week could be a sign that as many as 20 percent of all small businesses will permanently close amid the crisis.

“For many of our business owners, it doesn’t yet make sense to open at the level of customer demand they’re seeing,” said Ray Sandza, vice president of data and analytics at Homebase.

Data from Kronos, which provides time-management software and related services, tells a similar story. The number of shifts worked by the company’s roughly 30,000 U.S. customers have rebounded strongly since mid-April but remain down 15 percent compared to before the crisis.

Now the pace of growth has slowed in Georgia and some other early-reopening states, and the number of shifts worked has fallen outright in South Carolina and Florida since the beginning of June.

“We bounced off the bottom, and it was a sharp bounce off the bottom,” said Dave Gilbertson, vice president of strategy and operations at Kronos. “Now is going to be what really proves out the full pace of the recovery, and it’s going to take longer.”

Several factors could complicate that next phase. For one, many day care centers remain closed or limited, restricting some parents’ ability to return to work. “I don’t see how parents get back to work in a meaningful way if their kids can’t be in day care or back in school,” said Melissa S. Kearney, a University of Maryland economist who directs the Aspen Institute’s Economic Strategy Group. “Figuring out how to make that happen needs to be at the top of the list.”

Ms. Kearney warned in a report with several co-authors in June that the recovery could stall if Congress fails to maintain the support for people and businesses that has helped buoy consumer spending. Senators are poised to leave Washington this week, returning in mid-July, with negotiations on a new economic aid bill still in their early stages.

Nathaniel Popper contributed reporting.

Brace for an Autumn of Discontent

Economic life in the U.S. this fall will be far from normal

By Justin Lahart

Preparing for fall, school districts across the country are looking to balance the need for in-person instruction with the importance of keeping students and staff safe.
Photo: Ross D. Franklin/Associated Press .

It is hard to know what the U.S. will look like in the fall, but it won’t look anything close to normal.

That much has become more clear over the past week, as new Covid-19 cases surged in several states that had been among the earliest to begin reopening their economies. The possibility that the novel coronavirus will be well enough contained by the end of the summer that there can be a general return to business-as-usual is looking slim.

Investors need to recalibrate their expectations of what the economy will look like through the end of the year. This goes beyond debating whether the recovery will be a V, a W or a U, and considering instead the details of what everyday life could look like. Consider what might happen across three dimensions: Work, school and social gatherings.

It is difficult for people in many jobs to work together safely, and that will still be true in the fall. Sitting cheek-to-jowl in an office, for example, is too risky now, and will likely be viewed as such by many employers and employees, possibly until there is a vaccine.

So desks will be reconfigured, partitions will go up, and many business places won’t be able to accommodate as many workers as before, leading to staggered shifts and work-from-home arrangements where people will only come in a few times a week.

Companies that are able to will allow employees to work entirely from home through at least the end of the year, as Facebookand Alphabet’s Google have already said they plan to do.
 As a result, businesses with sales that depend on commuting workers will continue to struggle. The downtown coffee shop, the fast casual restaurant across from the office park and the business-district gym could be in for a difficult autumn that leaves them employing far fewer workers.

What the fall will look like for schools is up in the air, as districts across the country balance the need for in-person instruction with the importance of keeping students and staff safe. Many are considering hybrid models, where students come in a couple of days of week and learn remotely on other days.

For parents who don’t have the luxury of working remotely as well, and who are unable to secure child care, this amounts to a crisis. Many will opt not to work, resulting in lost income and spending power.

Then there is the matter of what sort of social activities state and local officials will allow. New Jersey on Monday indefinitely postponed plans to allow indoor dining, and New York City on Wednesday postponed its plan to open up indoor dining as well. In parts of the country, dining in at a restaurant may be a no-go into the fall—to say nothing of going to nightclubs, movie theaters and sports stadiums.

People’s perceptions of the risk could matter more than what the rules say. Harvard University economist Raj Chetty has pointed out that while Minnesota relaxed restrictions earlier than Wisconsin, spending in both states have moved along the same trajectory. So official announcements that it is safe to resume some activities will need to be credible.

None of this seems very promising for the economy’s near-term prospects. A fall where the coronavirus pandemic continues to put constraints on people’s ability to work, where parents are forced to balance their need for income with their children’s need for an education and where millions of people in service-industry jobs such as restaurants remain out of work isn’t what anybody wanted. The case for another round of fiscal stimulus is growing.

The hope is that this time around the whole country will take the necessary steps to contain the pandemic, and come up with ways to get back to business without imperiling people’s health. Then the economy can find more solid ground while we await a vaccine.

Who Says Emerging Economies Shouldn’t Print Money?

Developing countries are copying the bond-buying policies of their rich peers, and with some success

By Jon Sindreu

Activist central banks aren’t just a rich-nation story anymore.

Emerging markets are reclaiming their right to play with money too—and it is probably a good thing.

Traditionally, experimental central bankers were pictured as money printers who inevitably stoked inflation.

While a decade of unconventional monetary policy and low inflation has taught investors that Federal Reserve announcements are a signal to buy stocks, this newfound love for stimulus hasn’t often extended to developing nations.

There, the same policies still tend to be seen as destructive.

On Tuesday, however, the Basel-based Bank for International Settlements published research suggesting that this hasn’t been the case during the Covid-19 crisis.

Over the past few months, central banks in countries like India, South Africa and Poland have followed the example of their Western peers and, for the first time, launched “quantitative easing” programs to buy government bonds.

In its annual report, the BIS found that these moves improved market conditions, lowering bond yields and shoring up domestic currencies.

A staff member prepared banknotes for customers at a bank in Hanoi, Vietnam, on July 7, 2016. / Photo: luong thai linh/European Pressphoto Agency .

In South Korea, Mexico and Thailand, central-bank stimulus has even extended to the domestic corporate-bond market, in imitation of what the Fed and the European Central Bank are doing.

Market stability has in turn helped poorer countries’ deployment of fiscal policy.

In U.S. dollar terms, the MSCI Emerging Markets stock index is now down only 11% since the start of the year, better than its eurozone equivalent.

That is despite the perfect storm that has battered many countries, including a plunge in the price of oil, disruptions to global value chains and a collapse in exports.

After an investor exodus that broke records for speed, flow data suggests that international money is slowly starting to return.

Calculated fromlinear regressions, controlling for country and time fixed effects and changes in domestic policyrates.

Unlike in rich countries with stronger currencies, the exchange rate is the main constraint on policy in developing nations. When it plummets, the availability of key imports also drops, sparking both recessions and inflation.

Since 2010, emerging economies have deepened their domestic financial markets. This has made them more liquid, the BIS report stressed, but it also means that international money managers own a bigger chunk of local currencies.

That explains the rapid selloff when they ran for the door earlier this year.

Yet bigger problems would have followed if the debts were written in U.S. dollars, or if central banks hadn’t stepped in to buy the bonds from these foreigners.

Too often, investors have taken it as a given that activist policies come at the expense of a country’s currency.

This confusion likely comes from the fact that, when the most beleaguered nations grapple with depreciating currencies and evaporating tax receipts, they often have no choice but to print money.

Calculated fromlinear regressions, controlling for country and time fixed effects and changes in domestic policyrates.

Developing countries remain in grave danger in the current health crisis. Infection rates in Latin America and Africa haven’t significantly come down. And they are more vulnerable both to the global economic slowdown and to a potential second wave of the pandemic.

Help from international institutions like the International Monetary Fund would most likely be insufficient.

But the fact that Western-style policies can’t fix all of emerging markets’ woes doesn’t mean they necessarily make them worse.

There may be further room for quantitative easing to provide liquidity to markets and even finance fiscal policy.

Rather than a cause for alarm, greater monetary sovereignty for developing economies should be a reason for tentative optimism.