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Data Distortion?

​Uncertainty abounds    

Uncertainty continues to play a prominent role in the economy. We observed this in the recent data releases and in policymaking. Major data releases last week continued to show distortions from the impact of the recent hurricanes and thus should be viewed with caution. 

Retail sales for September surged to a 1.6 percent monthly gain in September, the fastest pace of growth in roughly two-and-a-half years.

This translates to a 4.4 percent year-over-year increase, much stronger than August's 3.5 percent increase. But much of this was due to increases in auto and gasoline sales, primarily due to the recent hurricanes. Excluding volatile items such as autos and gasoline shows that core retail sales grew by roughly 0.4 percent – a relatively strong showing, but clearly slower than overall headline sales. The pace of headline sales is not sustainable.

Inflation data demonstrated similar issues last month. The headline consumer price index (CPI) grew by 0.5 percent in September. This translates into a 2.2 percent year-over-year increase, the fastest since March. Yet once again the hurricanes are distorting the data – core CPI increased by just 0.1 percent in September, a 1.7 percent year-over-year increase. Core CPI remained below the Fed's 2 percent target rate for the sixth consecutive month. The distortion in inflation measures is increasing over time as headline CPI once again pulls ahead of core CPI after converging earlier this year. The producer price index (PPI) also demonstrated the same weather-related effects, but in recent periods the correlation between consumer prices and producer prices has been somewhat limited.

Which Fed should we believe?

The minutes of the Fed's September meeting affirm that it remains committed to hike rates once again in December. 

By itself, this would not be unusual. But the Fed itself remains unsure why inflation remains so stubbornly low and the Fed risks violating its data-driven objective. A rate hike in December looks like a sure thing now that the Fed has managed everyone's expectations, but that will make forecasting increases in 2018 more problematic, especially with the prospect of modest fiscal stimulus remaining in play.

Unemployment claims are instructive

For those who are still unsettled by the technical job decline in September, trends in unemployment claims indicate that we are right to treat distorted data with skepticism. Weekly unemployment insurance claims surged after Hurricanes Harvey and Irma and then declined as those impacts disappeared. We still have not seen the effects of Maria on the data (because of limited power and communications in Puerto Rico), but we expect another surge when those claims are finally processed. But the examples of Harvey and Irma are instructive – short-term disruptions abate relatively quickly.

Policy uncertainty not abating either

The news on the policy front last week will not calm any fears concerning uncertainty either. Last week the president chose to decertify the agreement with Iran. Political grandstanding aside, because we do not know Congress's decision on the issue, uncertainty has increased. Rumors continue to fly about high-ranking administration officials either resigning or being fired. Tensions in East Asia and the Middle East remain at elevated levels while foreign policy looks somewhat inconsistent. 

The probability of some modest tax plan passing remains around 50 percent

but time is running out, especially with the issues surrounding the budget and the debt ceiling delayed, but not eliminated.  And healthcare reform continues to lurk in the background.  By contrast, monetary policy now looks less certain too with a December rate hike coming.

What should CRE make of all this?

We continue to view uncertainty as a double-edged sword rather than a pure negative. Yes, uncertainty can be a paralyzing force in the economy. 

But uncertainty can also create opportunities. 

When consensus on the appropriate course of action breaks down, opportunities arise. In recent weeks we have been having conversations about property types, such as retail, where the conventional wisdom differs from reality. Investors and tenants can capitalize on these kinds of divergences. We do not expect uncertainty to abate in the short- to medium-term which means that opportunities will continue to persist in the marketplace.

What else happened last week?

Business inventories increased in August, the fourth consecutive monthly increase. Coupled with stronger-than-expected sales, these inventory increases could provide an upside surprise to GDP growth in the third quarter which could help to offset some of the drag on growth that will surely come from hurricane-related effects.

Thought of the week

One last note to give some context surrounding the labor market. In order to meet surging demand for new soldiers amidst a very tight labor market, the Army is increasingly resorting to tactics unseen in a number of years. It's begun accepting lower-qualified recruits, offering hundreds of millions of dollars in bonuses, and increasingly granting waivers for marijuana use.

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