Policy Outlook

Quick takes:

• Government policy at critical juncture
• Fiscal spending currently in doubt
• Debt ceiling becomes political football again
• Fed messaging future tightening
• CRE could become collateral damage

As the calendar heads towards October, government policy is taking on a dominant role in the economic landscape, with the potential to help or hinder the economic recovery. Monetary policy seems headed for a transition. The future of large government spending bills seems uncertain. And the debt-ceiling issue once again rears its ugly head to at least stir things up a bit. Together, they add an element of uncertainty at a time when economic growth is already slowing as we expected.

Monetary policy: partly sunny

Of the main policy areas, monetary policy now seems the most transparent and certain. Last week both the Federal Open Market Committee (FOMC) and Chair Powell suggested that tapering would begin in November (provided the September employment situation looks good) and likely persist until the middle of 2022. This generally corresponds with previous guidance from the FOMC. The FOMC’s dot-plot projection now suggests that interest rate increases should begin as early as 2022, though FOMC officials remain split between starting in 2022 and 2023. And FOMC officials are turning slightly more hawkish in the face of what they believe will become more persistent inflation. Nonetheless, rates should remain low by historical standards even as the FOMC raises them. And tapering means the slowing of asset purchases, not the halting or sale of asset purchases. Overall, we expect monetary policy to remain accommodative, even as the FOMC begins the process of tightening. 

FOMC Projection, Median Fed Funds Rate

Fiscal policy: mostly cloudy

The outlook for fiscal policy, once clear, has turned cloudy in recent weeks. Fault lines across and within parties have placed some of the spending agenda in jeopardy. Progressives in the House do not wish to move forward on the bipartisan infrastructure bill without also moving forward with the broader $3.5 trillion spending bill. Meanwhile, Republicans and some Democrats view that amount as excessive and dangerous, creating a stalemate. This is occurring while the deadline for the debt ceiling approaches, temporary funding for the government remains a political football, and the impact of fiscal stimulus from earlier this year continues to fade. Leaving aside the issues of the debt ceiling and short-term funding, scaled back government spending could impede growth in the short run. And the failure once again to pass an infrastructure bill would once again leave the 21^st-century U.S. economy saddled with 20^th-century infrastructure.

Debt ceiling: storm watch

Once again, the issue of raising the debt ceiling lurks on the horizon. And like much else these days, it has become political, a cudgel to wield against opponents rather than an important policy debate. Treasury Secretary Yellen estimates that the U.S. will run out of money by October 18. Thereafter, a default could arise in just weeks if action on the ceiling does not occur. Without taking a policy stance, we acknowledge the enormous downside risks associated with defaulting, or even threatening a default, on government debt. The last time a showdown over the debt ceiling occurred it resulted in a downgrade of the credit rating of U.S. sovereign debt.  

|  What else we are watching this week  |

We expect durable goods orders for August to exceed expectations, as spending continues to recover. Housing prices for July should continue to tick higher due to strong demand and limited supply for sale. We expect a decline in consumer confidence as the delta variant and a low vaccination rate continue to undermine people’s mood and their expectations for the timing of the full reopening of the economy. We expect moderately robust growth in personal income and personal consumption for August, fueled by ongoing wage increases. We expect a slight increase in construction spending in August. Lastly, we anticipate that the ISM Manufacturing Index for September remained at elevated levels, indicating healthy activity in the face of ongoing supply-chain disruptions.

|  What it means for CRE  |

Commercial real estate (CRE) could become collateral damage, like much of the economy, if Congress kicks up a storm by failing to increase the debt ceiling. Slower economic growth would hinder the ongoing recovery in space market fundamentals. And anything that roils the debt markets, including potential downgrades to U.S. sovereign debt, could put upward pressure on Treasury rates, mortgage rates, and even potentially cap rates (though this seems a more remote possibility). As we have repeatedly emphasized in the past, the modern economy concerns movement – of people, of goods, of information. Anything that facilitates that movement supports both the macroeconomy and CRE which houses – in offices, in apartments, in retail centers, in warehouses, in hotels, in data centers – those moving parts that remain of paramount importance to the health of the economy. CRE continues to grapple with the challenges faced by the limited movement of people and goods due to the pandemic. That provides a preview of the issues the industry could face as our infrastructure gets older and less reliable. Monetary policy changes, somewhat counterintuitively, pose the least risk to CRE now. While many in the industry fear the prospect of rising interest rates, we do not anticipate significant increases in rates unless other aspects of government policy fail. Failing that, rates should remain low and accommodative, especially as space-market fundamentals continue to recover, supporting net operating income (NOI) growth and values. 

| Thought of the week |

According to a study by McKinsey, roughly 10% of the American population set up home gyms or have accessed fitness resources online during the pandemic.