29 August, 2017
With data looking strong, political risk returns to center stage
Based on data released so far, particularly consumer spending data, we believe that growth for the third quarter should be in the mid-two percent range. But that is not a certainty. Although the data looks strong, political risk is once again rearing its ugly head. That could derail economic performance for the third quarter, as well as performance for all of 2017 because we still have more than four months left in the calendar year. Just last week, the president threatened to shut down the federal government if Congress does not allocate funds for a border wall with Mexico. As we have previously mentioned, a government shutdown would be incredibly damaging to the economy. We do not believe this is likely to happen, but the increasing animosity between the administration and key Senate leaders does not instill confidence. Congress will need to act quickly when it returns from summer recess in order to pass funding for the government before it runs out of money. In addition, Congress needs to raise the debt ceiling before the government defaults on its obligations. Both houses of Congress are jointly in session for only 12 days in September, which leaves a very thin margin for error. It would be unfortunate if political issues tanked the economy at a time when the data looks optimistic. Mid-two percent growth in the third quarter would place the economy squarely on target for a two-percent growth rate for all of 2017.
In such an environment, commercial real estate would continue to perform relatively well – with upward pressure on rents, downward pressure on vacancy rates, and support for valuations.
Wait, what about housing? And durable goods?
While the data continues to be generally positive, it is not all good news. Home sales data from last week shows that the economy still has some challenges. Sales for both new and existing homes turned downward in July, new home sales declined to their lowest level since December 2016, and existing home sales declined to their lowest level since August 2016. Low inventory (measured as months' supply of homes for sale) has put a damper on sales while prices higher, which makes it even harder to afford a home, particularly as mortgage rates increase.
A robust housing market remains a hallmark (if not a necessity) of a healthy economy. Contrary to popular belief, this is not good news for the apartment market.
The for-sale market tends to correlate with the economy and of course the apartment market performs better during better economic environments.
That's not to say the apartment market needs a strong for-sale housing market to perform well, but those of us who operate in the apartment market in some way should not be rooting against the for-sale housing market.
Durable goods orders for July also disappointed, falling by a substantial 6.8 percent. A large decline in orders for Boeing aircraft (a volatile metric) caused this, but remove that metric and the data does not look nearly as negative. Actual shipments of durable goods remained strong, supporting our view of relatively robust economic growth in the third quarter.
Yellen says little about monetary policy as chatter about her job increases
At the Kansas City Fed's Jackson Hole Symposium last week, Chair Yellen said virtually nothing about monetary policy. Instead, she used her time to discuss financial stability and touted the current regulatory regime and its importance in staving off future financial meltdowns. Meanwhile, talk about her position has ramped up in recent weeks. Chair Yellen's term ends in early 2018. Currently, it is not believed that she will be reappointed by the president. The favorite to replace her is Gary Cohn, the president's chief economic advisor and director of the National Economic Council. He is not a trained economist, but that would keep in line with the president's habit of appointing people who are not experts to various positions. Independent central banks and monetary policy have been a hallmark of economic stability for at least the last quarter century, if not longer, in the U.S. and increasingly around the world. Whoever becomes the next Fed Chair will need to maintain this.
What we are watching this week
Many important economic data points will be released this week. We expect little change in job creation and unemployment, but our attention will be squarely on wage growth. The second reading on second quarter economic growth will also be released and we expect to see little, if any, revision to the data, solidifying our belief that second quarter growth came in at the low end of our expected range. Third, consumer confidence and consumer sentiment information will both be released. We anticipate little change to either, supported by a strong labor market. Personal income and personal spending both likely increased in July based on the July retail sales data. Finally, the ISM Manufacturing Index should continue to show expansion in the manufacturing sector of the economy.
Thought of the week
The hunt for yield is not confined to the commercial real estate space. The percentage of bank assets with maturity or rate reset terms greater than five years reached a new record high in the second quarter as banks chase higher yields in a low rate environment.