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Giving Thanks

​​Much To Be Thankful For

The partisan bickering and divide dominating Washington can obscure the many things we have to be thankful for in the U.S. economy. Last week's data releases reminded us that the economy remains on solid footing as 2017 turns into the home stretch and heads toward 2018.

Strong U.S. consumer

The U.S consumer continues to propel the economy. While retail sales growth technically slowed in October, that only occurred because of an unusual hurricane-induced surge in September spending. Headline retail sales grew by 0.2 percent in October and by an impressive 4.6 percent on a year-over-year basis. Core retail sales (which excludes volatile components such as autos, gasoline, and building materials) grew by 0.3 in October and 3.4 percent on a year-over-year basis. This bodes well as we head into the important holiday shopping season. We expect holiday retail sales to grow by 4 percent to 4.5 percent this year. But we strike two notes of caution for consumers. First, although the labor market remains firm, wages are growing at 2.5 percent year-over-year, causing many consumers to spend using their savings and increase their debt. Second, credit card delinquencies are creeping up over time along with higher interest rates. Going forward, these trends will limit consumers' ability to spend unless wage growth surges in an unexpected manner.

Inflation remains tame, but firming

Supported by consumer activity, the inflation data, which had been declining through much of 2017, showed firming in October in what is another sign of a healthy economy. The headline consumer price index (CPI) grew by 2.0 percent on a year-over-year basis while the core CPI was up 1.8 percent, its fastest rate of growth since April. The change over the last three months averaged 2.4 percent on a year-over-year basis, surging ahead of the trend and demonstrating underlying inflationary pressures. A jump in core services pushed up inflation and offset the weakness in pricing we observed earlier in the year. Meanwhile, the producer price index (PPI) increased by 0.4 percent in October and 2.8 percent over the last 12 months, its fastest rate since February 2012. Taken together, this data will provide the Fed with enough evidence to raise rates when it meets next month. Although core inflation remains below the Fed's target rate of 2 percent, the Fed has demonstrated its desire to stay ahead of inflation, which they believe will increase in 2018. We agree with the Fed on the general outlook for inflation, but its data-dependence continues to be a moving target.

Corporate sector rebounding

After hurricane-related weakness in August and September, it appears as if the corporate sector is rebounding. Industrial production, which measures the output for all facilities in the U.S., increased by 0.9 percent in October and 2.8 percent over the last year, its fastest rate of growth since January 2015 before the collapse in the crude oil price. Some of this jump can be attributed to hurricane impact, but the underlying trend shows a recovery. Meanwhile, housing starts and building permits also experienced a hurricane-related increase. Starts surged by 13.7 percent on an annualized basis while permits jumped 5.9 percent on an annualized basis. Despite a boost from the hurricanes both items remain on an upward trajectory. Housing investment remains a key missing component of economic growth so any increase should support growth. Recovering corporate investment should provide a growth spark next year which could be vital if consumer spending faces the headwinds mentioned above.


Implications for CRE      

Firmer economic growth implies a strong underpinning for the performance of commercial real estate (CRE) fundamentals. But more subtly, retail sales impacts retail real estate. While we remain encouraged by stronger consumer activity and do not completely buy into the "retail apocalypse" theory, we emphasize that retail real estate remains a world of haves and have-nots. Class A, dominant malls and retail centers continue to show busy foot traffic, strong sales per square foot, and long lines at Starbucks. Class B, inferior retail centers continue to struggle and many will never recover. Some inferior centers will need to be re-tenanted, some will need to be converted into another property type, and some will simply need to be razed. Strong retail sales also benefits the industrial sector, especially properties away from the coasts that are more dependent upon domestic goods storage and distribution than the storage and distribution of imports. Stronger corporate/industrial activity should also hint at better performance for the industrial real estate sector because domestic production of goods supports industrial real estate fundamentals, particularly net absorption.

Tax reform progress

Last week the House passed its version of the tax reform bill. Attention now switches to the Senate which will vote on its version of the bill next week. With Republicans adding a repeal of the individual mandate of the Affordable Care Act (ACA) last week, prospects for passing -- which already looked murky – appear further complicated. The Republicans can lose only two votes and pass the bill and a number of senators have already expressed reservations, if not outright opposition. Even if the Senate version passes, the two versions will need to undergo reconciliation. We continue to believe that the odds of passage by year end are roughly 50 percent. We should see next week whether or not tax reform succeeds this year and that will provide some needed clarity on 2018's outlook.

What we are watching this week

Existing home sales likely declined in October as parts of the country are still working through hurricane effects. Inventory for sale continues to decline which also stymies home sales. Durables goods orders for October should show a solid increase. We expect preliminary consumer sentiment for November to show a modest decline as positives from a strong labor market are more than offset by some negatives from an increase in gasoline prices and the waning post-hurricane euphoria.

Thought of the Week

Per-capita turkey consumption has remained flat for three decades while supply has steadily grown. Consequently, a 16-pound turkey will cost roughly 1.6 percent less than last year and Thanksgiving dinner will cost the lowest amount since 2013. Gobble Gobble!




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