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Many Surprises

A week full of surprises

President Trump surprised just about everyone by making a deal with the Democrats last week. The agreement keeps the government open through December 8, extends the debt limit suspension, and provides $15 billion in funding to aid in the recovery efforts of Hurricane Harvey. The legislation passed both houses of Congress and now awaits the president's signature. President Trump promised that he would work with whoever he thought had the best ideas, but it is still surprising that he would go around his own party. Apparently, the president believes that this legislation clears the deck (at least temporarily) so that he and Congress have a few months to focus on tax reform. But this agreement effectively kicks the can down the road – it avoids a potential shutdown in late September but only until early December. It also avoids a potential default on government debt obligations in early October. But even by utilizing extraordinary measures when the debt limit suspension runs out, a deal will have to be reached by March.

Clearly, the issues surrounding the budget and debt ceiling have not been fixed. This move theoretically increases the chance of some sort of tax policy change occurring in the next few months, but nothing is guaranteed. We believe that the likelihood of a tax deal in 2017 is low, especially if the administration's deal with the Democrats undermines confidence in Republicans. If a deal occurs, it is far more likely that any change will take the form of temporary tax cuts and not widespread reform. Nonetheless, if done correctly, tax change could provide a temporary boost to the economy, even at this late stage of the current expansion. 

Such an economic boost would provide support to the commercial real estate market at a time when most of the major property types are in a mature phase, signified by a slowdown (if not outright reversal) in both vacancy compression and rent growth.

A surprise resignation

In another surprise last week, the Federal Reserve announced that Vice Chairman Stanley Fischer would resign from the Board of Governors on or around October 13. Despite a high level of speculation surrounding the resignation, there are few hard facts. Predictions concerning the next Fed Chair have also been ramping up in recent weeks, but as of right now it is just conjecture. The resignation means that the president can now nominate three more individuals to the Board of Governors. This is in addition to Randall Quarles nomination to fill the vacant position of Vice Chair of Supervision which is awaiting Senate confirmation. That means the president will appoint four of the seven Governors on the Open Market Committee. That four could easily become five if Chair Yellen is not reappointed. Although the Fed is not a political entity, filling that many positions would make it far easier for the administration to advance its agenda on financial and banking regulation.

Hurricane Irma rapidly intensifies, pounds Florida

In the third surprise of the week, Hurricane Irma rapidly intensified and became one of the strongest hurricanes in history before slamming into Florida. The United States has yet to fully assess the impact from Hurricane Harvey. The combined impact from Harvey and Irma will show up in GDP growth in the third quarter. 

We estimated that Harvey could detract up to 50 basis points from economic growth. It is too early to assess the impact of Irma, but it will no doubt worsen that estimate. 

While the hurricane struck Florida on the Gulf Coast, it affected many commercial real estate markets such as Miami, Tampa, and Jacksonville due to its sheer size and power. It will be some time before we know the extent of the damage across these markets. We also cannot know that impact on waterfront development at this point, but that issue often arises in the wake of damaging storms such as these recent hurricanes.

What else happened last week?

The ISM Non-Manufacturing Index, a measure of the performance of the service sector of the economy, rose in August versus its July level. The August increase follows little movement in July and still indicates that the service sector of the economy remains in a solid expansionary phase. The index saw relatively widespread improvement in August, including the employment component. While that is a healthy sign, September's reading could be disrupted by the two hurricanes. 

Nonetheless, continued expansion in the service sector bodes well for commercial real estate. Many service sector workers utilize office space (which generates demand for office space) and are paid well above the median in the U.S. (which generates demand for all of the other major property types). 

​Initial unemployment claims leaped by 62,000 during the week ending September 2. This was no doubt due to Hurricane Harvey – initial unemployment claims in Texas leaped by 51,637 to a record 63,742 according preliminary data. The hurricane-related spike is not a surprise. However, the timing is. Claims were processed faster than many had anticipated given the severity of the damage. This is likely due to improvements in technology that enable such a rapid response.

What we are watching this week

Inflation and sales data will be front and center this week. Final demand PPI and core and headline CPI for August will be released this week. All are expected to have increased modestly, primarily due to recent increases in food and energy prices. We will be watching weekly jobless claims to see how long the impact from Hurricane Harvey will influence the data. By next week, the data may reveal the effects from Hurricane Irma. Core and headline retail sales will also be released this week. We expect a slight increase decrease in headline sales due to weakness in the auto component. Excluding this factor, we expect core sales to have increased slightly following a relatively strong showing in July.

Thought of the week

Recent research suggests that the primary cause of the housing bubble and crash was middle and upper class house flippers and not poor subprime borrowers. This conforms to previous research that showed the rise in mortgage delinquencies was driven by people with sound credit scores, not those with low credit scores.  

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