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Building on the Budget

​Washington Takes Center Stage

This week, Washington took center stage on both the fiscal and monetary policy fronts. On fiscal policy, Senate Republicans narrowly voted to pass a budget for 2018. This advances the agenda toward tax reform because the spending plan contains instructions that will allow Congress to bypass a Democratic filibuster. Key to the process, the Senate bill adopted language from the House budget that should expedite the bill's passage – the House could simply pass the Senate resolution. Although the budget should outline spending for the next fiscal year, in many respects the budget served as a vessel for finally passing tax reform. The budget would permit the Senate Republicans' tax plan to add an additional $1.5 trillion to the deficit over the next decade. The Senate Finance Committee must report a tax bill by November 13.

Still, the bill spells out spending priorities for the federal government. The bill maintains overall spending at 2017 levels for 2018 but would cut nondefense spending in later years. That would result in a cut to nondefense spending of $106 billion in 2027. Defense spending would continue to rise, reaching $684 billion at the end of a decade. The resolution proposes to cut Medicare spending by $473 over a decade while cutting Medicaid spending by $1 trillion over the same period.

While we will need to see the final details, any changes to spending could potentially impact not only industries but also metropolitan areas depending upon spending cuts and increases. By themselves, these kinds of spending changes are often insufficient to start or derail local economic expansions because changes occur at the margin. 

if cuts fall hard on weaker economic areas, they could have an outsized negative impact, which could have implications for commercial real estate in these areas

Fed Beauty Pageant Finally Ending?

Meanwhile, further up Pennsylvania Avenue, it appeared as if the president had finally arrived at a decision on a new Fed chair. Interviews for the position finished last Thursday and based on post-interview conversations with administration officials, the markets believe that Jerome Powell has the best chance to become the next Chair of the Federal Reserve. Five candidates, including current Fed Chair Janet Yellen, were interviewed. And while the front-runner fluctuated over time, the president is expected to announce his decision before he leaves for Asia in early November.

That would provide the Senate with ample time to approve a new Fed chair before Janet Yellen's term expires next February.  The markets seem relatively unfazed by the potential change in chair. The market does not believe that the next chair will deviate dramatically from current policy, especially since the chair is only one vote on the Open Market Committee. But the chair can have an outsized impact because that person structures the debate at meetings and writes the recommended policy options beforehand. And with numerous vacancies on the board, the administration can certainly leave its imprint for years to come. For commercial real estate, the many moving parts make assessing the impact of a new chair problematic. Aside from the fact that we don't yet know who the nominee will be, we also do not know what will happen with fiscal policy which could also have an impact on how quickly the Fed raises rates in the coming years. 

For now, we agree with the markets and see little real disruption coming from a change in this one position given that the candidates are all qualified, even though not all are academically trained economists. 

What else happened last week?

As expected, housing starts and building permits for September showed impact from the recent hurricanes. Both fell by about four-and-a-half percent. One encouraging sign: single-family permits increased in September. The trend should continue with rebuilding. Existing home sales for September increased on an annualized basis as relatively strong sales in the Midwest and West offset hurricane-related weakness in the South. 

initial weekly jobless claims completely reversed the surge caused by the hurricanes and fell to its lowest level since March 1973 last week

Claims have remained below 300,000 for 137 consecutive weeks, the longest stretch since 1970 when the labor market was much smaller than it is today.

What we are watching this week

The advance estimate of third quarter GDP will be released this week. Although disruptions from the hurricanes will be evident in the data, we still believe that growth should be in the 2 percent to 2.5 percent range, with risk to the upside because economic fundamentals remain strong. Consumer sentiment for October should remain at elevated levels after the hurricanes. Although it may be difficult to maintain such lofty heights, consumers remain optimistic amidst a tight labor market. Durable goods orders for September should have grown for the second consecutive month following a relatively strong pullback in July. New home sales for September should be flat to down due to the hurricanes since a large number of new homes are being built in the South. But the primary factor holding the market back remains a lack of inventory for sale.

Thought of the week

Last Thursday marked the 30th anniversary of Black Monday, the 1987 stock market plunge. On that day the Dow Industrial Average fell 22.6 percent, the largest one-day percentage decline for the index. ​

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