Economic Insights: To believe… or not to believe?
We almost always accept the validity of data, especially when produced by the federal government. But last week’s release of retail sales data for December still has us scratching our heads a bit. The sales data looks so broadly weak that we can’t help but wonder if it is incorrect. Headline sales for December declined 1.2 percent, a figure on par with what occurred during the Great Recession. Core retail sales, which excludes more volatile components, fell by a magnitude we haven’t seen since 2001. While we have been repeatedly warning that the fiscal stimulus implemented last year was fading and that economic growth looked past peak, we struggle to reconcile the sales data with both the trend in retail sales or the broader economic context. The overall trend in retail sales still looks generally favorable — in November core retail sales grew by one percent. And most other assessments of sales activity, such as the Johnson Rebook, showed robust holiday sales.
So, what is going on? Sales data undergoes seasonal adjustments before publication — essentially the numbers are adjusted to reveal the true underlying trends and mute any exaggerated strength or weakness associated with the time of the year. Due to the robust spending that typically occurs around the holidays, seasonal adjustment presents challenges at this time of the year. The longest government shutdown could also have played a role since the people responsible for the publication of this data did not work throughout that period. We will need to examine subsequent revisions closely, but for now we take a more cautious view that economic momentum is slowing, not collapsing as the data seems to indicate.
Other data looks firm
While the inflation data exhibits volatility from month to month, the overall trend (especially in core inflation) continues to show upward pressure.
Other data releases reinforce this view. While the headline consumer price index (CPI) for January showed that consumer prices did not change for the third consecutive month, which lowered the year-over-year change, core prices continue to head higher keeping the year-over-year core CPI above the Fed’s target rate of 2 percent. The producer price index (PPI) for January showed something similar — headline prices declined slightly which lowered the year-over-year rate while core prices headed higher, keeping the year-over-year rate also above the Fed’s target rate. While the inflation data exhibits volatility from month to month, the overall trend (especially in core inflation) continues to show upward pressure. Additionally, consumer sentiment for February rebounded a bit after falling by the largest amount in seven years in January. Consumers likely felt more upbeat after the end of the government shutdown and the rebound in the equity market since the holidays. And our own proprietary JLL business sentiment index still resides at an elevated level, indicative of strong business optimism despite slowing earnings growth and a tumultuous equity market.
The number of open but unfilled positions reached a record high in December of 7.3 million.
Meanwhile data from the labor market also supports our view. The number of open but unfilled positions reached a record high in December of 7.3 million — a figure that keeps pulling away from the number of hires despite the creation of 2.7 million net new jobs last year. Job turnover also remains at elevated levels, another healthy sign for the economy because people tend to remain in the current roles during economic slowdowns. Although initial unemployment claims for the week ending February 9 increased a bit, bringing the four-week moving average to its highest level since last January, claims still look low relative to history. If anything, the slight uptick simply reinforces our long-held view of a slowing (but not collapsing) economy.
What it means for CRE
For commercial real estate (CRE), nothing that occurred last week has altered our view. Even if we take the retail sales data at face value (which for now looks like a specious proposition) the trends in the data simply further support our thesis on a slowing economy in 2019. The economy should continue to support both CRE fundamentals and the capital markets. More signs of trouble should emerge as we get further into the year, but for now asking rents are still growing and vacancy rates are trending flat to slightly up across major property types. Meanwhile, we see very little evidence of rising cap rates, which would indicate a potential inflection point in the capital markets. Broadly, cap rates across markets and property types continue to decline. A handful of markets experienced technical increases in 2018, but just barely with many more showing healthy declines. While we do not expect transaction volume to surprise on the upside again like it did last year, we also do not expect a collapse either. Overall, the environment for CRE remains healthy against a moderating economic backdrop.
What we are watching this week
Durable goods orders for December are expected to show a healthy gain. If so, that would assuage some of the concern surrounding December’s retail sales data. We expect a slight increase in existing home sales for January with mortgage applications on the rise. Initial unemployment claims should tick down a bit for the week ending February 16, but still show an increase in the four-week moving average.
Thought of the week
The International Monetary Fund (IMF) believes that hyperinflation in Venezuela could reach 10,000,000 percent in 2019.