Research

A little less uncertainty

Clarity from the pandemic, the election and fiscal policy may now be on the horizon

November 11, 2020
>> Quick takes:
  • Slightly less uncertainty abounds
  • Possible light at the end of the vaccine tunnel
  • More transparency on government policy
  • Economy still growing, but slowing
  • CRE should avoid disruptive policy changes

As we have stated numerous times, massive uncertainty has clouded the economic outlook. Yet, events of last week provide some improved transparency and even some hope for the economy as 2020 nears its end. We review some of the key factors and their impact on our outlook.

Checking in on our base case

The pandemic remains the paramount factor for the economic outlook since it caused the recession. Unfortunately, the trend in daily cases continues to worsen over time and projections look like we are headed for even higher case levels this winter. But greater clarity on the trajectory helps with forecasting. The issue for the economy: how severely will government officials implement measures that limit the spread of the disease but restrict the economy. Thankfully, even at elevated case levels, measures should be marginal, having a far less deleterious impact on growth than more draconian measures from the spring. Consumers will exercise caution, but also not as much as earlier in the year, and do not require adjustments to our base case. 

The recent announcement from Pfizer about the strong efficacy of their vaccine, greater than 90%, also provides some clarity. If the preliminary results hold up when more-complete data are released later this month, and vaccinations begin before the end of the year, that tentatively implies that widespread vaccinations will occur around mid-2021 due to issues surrounding distribution and refrigeration. That timeline generally agrees with our base case.

“…the high probability of a divided government in 2021 means that changes to taxation, spending and borrowing should prove modest.”

Government policy retains its slot as the second key factor. On the monetary front, recent notes and commentary from the Fed indicate that it will remain accommodative, continuing to support financial markets and the broader economy. Again, little change from our base case. On the fiscal policy side, the recent election provides somewhat more clarity. At a minimum, the passing of the election removes general uncertainty from the equation which businesses dislike. They can plan better knowing the outcome, even if the likely policies are not their preferred policies. But the high probability of a divided government in 2021 means that changes to taxation, spending and borrowing should prove modest.  Split government also means that the largest mooted stimulus packages (in the $2 trillion to $3 trillion range) seem highly unlikely. Something smaller (up to $1.5 trillion) and potentially targeted toward certain industries now seems more probable. The timing of such a package has likely shifted to early 2021 from late 2020 given the current administration’s focus on other concerns. If so, that would occur a bit later than in our base case projection of year-end 2020, but not enough to alter the trajectory dramatically. 

The current heading

The overall trend in the economy still roughly hews to our view: the economy continues to convalesce, but the rate of improvement is decreasing after a strong snap back during the summer. The employment-situation release for October confirmed this. Net job gains totaled roughly 638,000, the lowest figure since the labor market began recovering in May. We remain net short roughly 10.1 million jobs from the peak in February. The unemployment rate fell to 6.9%, the lowest rates since March, but the labor-force participation rate has stalled temporarily at 61.7%, down from 63.4% at the beginning of the year, with many people dropping out of the labor force, especially woman who typically assume caregiver responsibilities. 

Struggling to recover

 

Public markets feeling upbeat 

Public markets have performed relatively well recently, nearing highs from this summer and above levels from earlier this year. The markets perceive the outcome of the election as stable (divided government) and the seemingly good news on the vaccine buoyed markets over the course of the last week. While markets do not equal the economy, a strong public market at this stage of the business cycle typically hints at continued economic growth, supporting our view. Moreover, rising markets produce the wealth effect, whereby wealthier households feel more upbeat and spend more money. That dynamic, coupled with households’ ability to temporarily draw on their savings, should provide some support to the economy until we reach a new stimulus package or begin to move past the pandemic.

|  What we are watching this week  |

Inflationary readings (both the consumer price index and the producer price index) coupled with consumer sentiment and employment claims should provide more information on the trajectory of the economy as we head into the important holiday season.

>>  What it means for CRE  <<

For commercial real estate (CRE) the events of the past week unfolded as close to ideal as possible. If we get a divided government, as seems likely, some of the most potentially troublesome policy changes (e.g. the elimination of the 1031 exchange, change in the treatment of long-term capital gains tax) fall off the table. That should preempt any adjustments to valuations and rents that would have accounted for those changes. The low probability of restrictive lockdowns and shutdowns, coupled with more transparency on the efficacy of a vaccine, should provide a boost, particularly for the retail and hotel sectors where demand from consumers cratered during the crisis as they looked to avoid indoor spaces, particularly crowded ones.  

|  Thought of the week  |

Estimated spending on the 2020 election totaled roughly $14 billion, more than double the amount spent on the 2016 election.