Research

Same Story,
Different Day

January 20, 2020

Data from December show that the economy ended the year in the same fashion that existed for most of 2019.

For now, spending appears firm enough to prop up the economy. 

Namely, consumer spending remained relatively healthy and upbeat while businesses, especially in the manufacturing sector, felt pessimistic and retrenched. This continues to be a tale of two economies as we push into 2020. First the good news: consumers continue to feel optimistic and spend, buoyed by a tight labor market and real wage growth. Both headline and core retail sales for December grew at brisk paces, particularly among holiday-related categories such as clothing and electronics. But revisions to sales figures for October and November showed that consumer spending is slowing as we anticipated. For now, spending appears firm enough to prop up the economy. But on the other side of the ledger, industrial output declined in December. A confluence of factors (e.g. trade policy uncertainty, weak foreign demand) produced widespread weakness across a variety of sub-sectors. With those negative factors persisting into 2020, we see weakness continuing this year. That should keep businesses feeling pessimistic, particularly in manufacturing. 

Inflation remains tame

Inflation data released last week showed that business still hold limited pricing power. The consumer price index (CPI) showed modest gains, particularly in the core index which came in below expectations. Meanwhile the producer price index (PPI) also showed relatively tame readings, with both the headline and core indexes failing to meet expectations. Import prices improved somewhat, but also still look soft, particularly core import prices which are still falling. Taken together, the data showed little upward momentum in price levels. With the economy set to slow in early 2020, the prospect of renewed pricing pressure seems distant.

Something to watch

Open positions peaked at roughly 7.5 million back in March 2019 and have trended inconsistently downward since. 

We have repeatedly emphasized the health of the labor market for the overall economy at this juncture. And we continue to look for prospective indicators that could provide some guidance on where the labor market could head. One of our favorite metrics, the number of open positions, is trending in a direction that warrants watching. In November, the number of open positions fell to roughly 6.8 million, the lowest figure since February 2018. Open positions peaked at roughly 7.5 million back in March 2019 and have trended inconsistently downward since. Much of the slowdown in job creation stems from a lack of supply – scarce qualified labor. But if demand is slowing, which at least appears to be the case, that could cause a more pronounced slowdown in job growth.


Phase One Signed

The U.S. and China finally signed the Phase One trade agreement last week. Broadly, the U.S. agreed to halt further tariff increases and roll back existing tariffs on roughly $110 billion of Chinese imports. China agreed to purchase more goods from the U.S., namely agricultural exports. Markets roundly cheered the development. While we view this agreement as a positive step, we do not see it as a panacea. Much trade policy uncertainty remains in place, which will continue to make businesses feel uneasy and will likely restrain investment. Moreover, the agreement does not address greater issues concerning intellectual property theft and forced technology transfers as well as Chinese subsidies.  While they could be addressed in Phase Two, those negotiations should prove to be more challenging. The trade war continues to restrain global trade, creating collateral damage beyond the U.S. and China. Declining global trade volumes historically presage downturns in the U.S. economy. While declining trade volumes alone seem unlikely to cause a recession in the U.S., they could complicate things this year.

What we are watching this week

The holiday-shortened week should provide little data, but a good chance to take stock of the economy in early 2020. Existing home sales for December should show an increase. Although down from its cyclical peak, existing home sales continues to fare better than new home sales during the current expansions. Weekly unemployment claims for the week ended January 18 should remain at a low level, indicative of a tight labor market.

What it means for CRE

For commercial real estate (CRE), the continued divergence between consumers and businesses will likely be met with a shrug. CRE endured this divergence with little difficulty for most of 2019. It seems unlikely that it alone would present a significant headwind in early 2020. The potential downturn in labor demand poses potentially greater concern, though it remains too soon to know for sure if demand is faltering. A downturn in demand would limit job growth which would ultimately filter through to the sector and reduce demand for virtually all major property types. We see no sign of that yet but remain cautious. The Phase One trade agreement will likely provide little boost to CRE (notably the industrial sector) but the trade war has thus far produced minimal damage to CRE. The greater risk comes from underlying economic momentum which remains intact.

Thought of the week

January remains the most popular month for online dating sites and apps. Americans spent roughly $3 billion on dating services in 2019. 

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