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Insights into the shutdown

A short government shutdown. What does it mean?

The federal government shut down at midnight on January 20 after Congress failed to pass a continuing resolution to fund operations. This Monday legislation passed to keep the government funded for a few more weeks. Federal government shutdowns of varying severity and duration occur more frequently than many believe. Since 1980 federal shutdowns have occurred nine times, approximately once every four and a quarter years. Using the 2013 shutdown as a rough guide, we can make some inferences about implications for the economy of the most recent shutdown. The roughly two-week shutdown of 2013 detracted 25 to 50 basis points of annualized real GDP growth in the fourth quarter of 2013 based on the best econometric estimates. Against that benchmark, a shutdown only two days over the weekend poses little to no threat to economic growth, provided everything is up and running again quickly. Some more serious problems, such as delayed tax refunds, could have occurred if the shutdown persisted, but it appears as if the economy will avoid those problems. 

But the temporary funding still does not address longer-term policy issues. The Treasury can continue to implement extraordinary measures, likely until March, but at some point the government will need to raise the debt ceiling again. Other policies, such as immigration (which was central to the shutdown) hold significant implications for the economy. With the birth rate in the U.S. falling below the replacement rate, labor force growth will essentially have to come from immigration in the future

If the government restrains immigration or deports people currently working, it will almost certainly have a dampening effect on long-term economic growth. 

Pendulum could be swinging back toward single-family housing

Although the housing construction data for December looked superficially weak, the underlying trends remain firm. Housing starts declined by 8.2 percent on a seasonally-adjusted annual basis. But, the declines primarily occurred in the South and East which were impacted by colder than usual temperature. The South experienced a 16.6 percent decline which accounted for roughly 90 percent over the overall decline. Housing permits, an indicator of future construction, changed little in December. Single-family housing construction still remains below historical standards: although starts during 2017 reached the highest annual total since 2007, the current pace of roughly 1.2 million starts per year remains below the historical average of roughly 1.5 million starts per year.  

The sector has faced many headwinds since the economic recovery began. Initially tight residential mortgage underwriting standards and falling home prices deterred buyers which limited construction. After prices stabilized and residential mortgage standards eased, high land prices made construction problematic. More recently, a notable lack of competent construction workers limits new development. But demand for housing remains firm, particularly for entry-level housing. Builders are reducing their price points and entry levels. At the same time, multifamily, which for a number of years reigned as the darling of commercial real estate, is pulling back. 

Multifamily starts and permits are declining because investors and developers are becoming increasingly concerned about oversupply in a number of markets. 

Over the last year a number of noteworthy markets, including New York and Washington, DC, experienced substantial increases in their vacancy rates.  

Jobless claims reflect strong labor market

Last week initial unemployment insurance claims fell to 220,000, the lowest level since February 1973. In 1973 the civilian labor force totaled roughly 88 million people. In December 2017, the most recent period for which figures are available, it reached 161 million people, an 83 percent increase. This agrees with other measures of labor market tightness in recent periods. The unemployment rate stood at 4.1 percent in December, the number of people unemployed continues to drift lower, and business surveys continue to report difficulty in filling open positions and retaining staff. Continued tightness should begin to put continued upward pressure on wage growth, which has slowly been rising over time. But because of weak inflation and low productivity growth, the tightness in the labor market has not yet reached the point when it translates into wage growth. As we have previously noted, severe tightness in the labor market could become the catalyst for faster wage and inflation growth in 2018. Thus far, all indicators seem to agree with this view.

What it means for CRE

The impact of the brief shutdown should be virtually nonexistent for commercial real estate.  But this issue will have to be addressed in a few weeks, with potentially worse results. Immigration policy, the primary reason behind the shutdown, will need to be resolved in order to secure more permanent funding for the federal government and avoid another, potentially more damaging shutdown. Immigration has proven to be a complicated challenging problem and solving it in just a few weeks will be no small task. And beyond funding the government, the debt ceiling will need to be increased in March. 

What we are watching this week

New and existing home sales for December should show declines in both measures. Similar to our view on construction starts, we caution against reading too much into one month of data. The underlying trends continue to show slow but steady increases in both series. The first estimate of fourth quarter GDP could produce growth in the 2.5 percent to 3 percent range. But we should caution – with the government shutdown, economic data produced by the federal government might not be released on time.

Thought of the week

The 10-year Treasury yield recently reached an intra-day high of 2.672 percent, its highest level since July 3, 2014.

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