Showing resilience

Inflation is gradually slowing and the economy is showing resilience, making the CRE glass half full or half empty, depending upon your perspective

February 22, 2023
  • Ryan Severino
  • Economy showing resilience

  • Inflation slowing, but gradually

  • Retail spending rebounds

  • Multihousing and single-family diverging

  • CRE glass is half full

Recently, we presented at JLL’s largest internal event called Academy. At the meeting we emphasized that while the economy certainly faced challenges, it was proving more resilient than many perceived. Recent data releases reinforced this idea. While that would normally present positive news, the situation today makes the situation a bit more ambiguous. Resilience in the economy also increases the probability that the Fed will continue to tighten, potentially risking a contraction in the economy.


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Inflation graaaaaadually slowing

The headline consumer price index (CPI) increased by 0.5% in January, matching expectations. That represented the strongest growth since October. The core CPI increased by 0.4%, also matching expectations. Roughly half of the increase in CPI stemmed from housing. And both the for-sale and for-rent markets have already rolled over. But because of the way BLS calculates the data, these changes will not impact the CPI until later this year. Yet despite relatively strong readings, the year-over-year changes in both headline and core CPI decelerated. Inflation likely remains headed lower, but the path downward should prove inconsistent and somewhat bumpy. The focus now shifts to supercore inflation (excluding energy and housing services) because labor costs drive this segment of inflation. Wage growth is slowing which should bring down supercore inflation. But that will likely play out over the balance of the year. 

Meanwhile, the producer price index (PPI) showed something similar. Both the headline and core PPI indexes came in hotter than anticipated for January. Like CPI, both the headline and core indexes decelerated on a year-over-year basis. While the Fed does not pay as close attention to producer inflation, it provides a more complete picture of price pressures in the economy. Taken together, the data show that inflation is slowing, but not as quickly as many (including the Fed) would like. Which means more rate increases from the Fed seem in the cards, largely in line with our expectations.

“…more rate increases from the Fed seem in the cards, largely in line with our expectations.”

Retail sales strongly rebound

Retail sales posted a strong gain in January, greatly exceeding expectations and posting the largest gain since 2021. That reversed the trend from November and December when retail sales declined. Notable increases occurred in food services and drinking places and furniture and home furnishing. But virtually all subcategories also outperformed expectations. Why? Some consumers likely waited for post-holiday sales to splurge. In addition, 23 states and Washington, DC implemented a higher minimum wage on January 1. Notably higher social security benefits kicked in at the beginning of the year. The strong net job gain enabled many to increase their spending. And more generally, consumers continue to revert to pre-pandemic spending norms, even in the face of higher inflation and higher interest rates. This outsized spending data connects to the relatively strong reading on CPI for January with consumers becoming more active.

Mortgage rates run housing

The housing market seems in somewhat brighter spirits lately. The housing market index (HMI) increased in January, the second consecutive month of improvement. This largely reflected the decline in residential mortgage rates and the belief the residential mortgage rates have likely peaked despite ongoing Fed tightening. Could that support a rebound in construction activity? Possibly, but that is not showing up in the data yet. January’s data for housing starts and permits came in below expectations. If the housing market rebounds, even slightly, that could spur more single-family construction activity. But that is not occurring yet. On the multifamily side, construction activity remains robust with deliveries this year and next year expected to exceed historical levels by a wide margin.

What it means for CRE

A resilient economy represents a double-edged sword. On the one hand, healthy consumer spending and maintaining momentum presents a positive environment for commercial real estate (CRE) performance. Demand, supply, vacancy rates, and rents all tend to perform better during better economic environments. Yet, this resilience also means that the Fed is likely to raise rates slightly more aggressively, which ultimately runs the risk of overshooting and slowing the economy more severely. That would certainly risk a downward turn in the performance of the CRE space market. For now, property fundamentals are generally slowing, but the Fed remains the greatest source of uncertainty.

“…property fundamentals are generally slowing, but the Fed remains the greatest source of uncertainty.”

Thought of the week

The six-month Treasury yield recently reached 5% for the first time since 2007.

Contact Ryan Severino

Chief Economist, JLL