The race is on!

• Short-term outlook remains uncertain
• Vaccination plan falls behind schedule
• Worsening pandemic creating short-term economic disruption
• Improved vaccination plan and future fiscal stimulus offer hope
• CRE recovery could start sooner if the recovery avoids pitfalls

Since the beginning of the year we have emphasized our optimism about the longer-term outlook for both the U.S. and global economies. Growth prospects look favorable through at least the middle of this decade. But we also reiterated that while we are heading for the light at the end of the long, dark tunnel, we have not reached the end of the tunnel yet. And we highlighted something unusual: the uncertainty in the economy remains concentrated in the first half of 2021, not the longer-term. That presents an unusual circumstance for economic forecasting because projections typically become uncertain further into the future. Events of the past week serve to reinforce this view – the race between positive and negatives forces in the economy is on.

No premature celebration

Data from last week showed that any celebration remains premature. The pandemic itself continues to worsen across many metrics such as the numbers of deaths, cases, and hospitalizations. Even as we draw closer to the pandemic’s end, we have not yet reached a turning point where the pandemic begins to subside. That not only presents clear issues for public health, but also for the economy. Increasing government edicts aimed at slowing the outbreak plus consumers increasingly opting out of certain activities continue to pummel the economy with a one-two combination of supply-side and demand-side punches. And the rollout of the vaccine, disappointing thus far in failing to meet government targets, remains far too early in the process to rescue the economy from the pandemic.

Last week’s data reaffirmed this view. Across several measures, signs of the pandemic’s impact still abound. Retail sales for December declined by 0.7% after falling by a revised 1.4% in November. That marked the third consecutive month of declining sales. Holiday retail sales still held up well, but the downward trend in the monthly sales data sows concern about the nascent economic recovery. Weekly unemployment claims also supported that view, with the most recent reading for initial claims falling just shy of 1 million, higher than anticipated and the highest reading since August.  Meanwhile inflation, measured by the consumer price index (CPI) and the produce price index (PPI), remained tame, especially the core sub-indexes. In short, the path forward remains beset with obstacles that will not abate on their own. 

Help is on the way

Yet the measures needed to rectify the situation have either been implemented or sit on the precipice of getting implemented. First, vaccination is continuing, even if the pace thus far remains below target. The incoming Biden administration intends to push the pace, increasing production as much as possible and better coordinating with state and local officials that administer the vaccines. Their goal of administering 100 million vaccines in their first 100 days seems ambitious but achievable. The benefits from vaccination will accumulate over time, building slowly at first but gradually increasing their impact as more people get inoculated. The incoming administration also intends to utilize additional fiscal stimulus to support the economy. It laid out its “American Rescue Plan” totaling roughly $1.9 billion last week. The plan included various funding programs to support households, businesses, and state and local governments. The plan seems like more of a wish list than a slam dunk, especially with the Democrats holding only a technical majority in the Senate. Yet additional spending appears likely, probably closer to $1 trillion than $2 trillion. If passed and enacted in the first quarter, as expected, that could help the economy stave off a second contraction, reaffirming our base case view that the technical recession has already ended. 

Lastly, as Chair Powell reiterated last week, the Fed will remain in full accommodation mode, keeping interest rates low. He emphasized this stance even if the economy faces rising inflation this year because that would likely prove transitory. Moreover, the Fed’s change in its approach toward targeting average inflation during the business cycle also means that Fed will likely err on the side of caution during the expansion, letting inflation run a bit hot for a while in order to support growth. We can see the light at the end of the tunnel, but the path out remains uncertain, determined by the race that will run between these positive and negative effects over the next six months.

|  What we are watching this week  |

Initial jobless claims should show another increase, reflecting the ongoing impediments to recovery produced by the pandemic and its associated mitigation measures. Housing, a bright spot in the economy during the crisis, should continue to perform well. Starts and permits for December should both change little, with starts nearing the pre-pandemic peak and permits falling back slightly. Existing home sales for December should decline slightly, mostly due to limited inventory for sale. 

|  What it means for CRE  |

Commercial real estate (CRE) takes it cues from the overall economy. And while CRE tends to lag the economy and the different property types will recover at different speeds, the bottom line is this: the faster the economy moves past the pandemic and recovers, the faster CRE will respond. Therefore, even though the longer-term outlook for CRE looks favorable, the current race to get through the pandemic could have significant meaning for investors and users of space as they attempt to make important decisions over the next year. A quicker more successful taming of the pandemic will likely mean market participants will have to make decisions sooner before the recovery manifests itself in the CRE data. A slower recovery means more time to make decisions, but also slightly more pain through a more prolonged downturn. 

|  Thought of the week  |

The American Society of Civil Engineers estimates that the unfunded infrastructure gap in the U.S. has reached roughly $5.6 trillion, presenting a significant impediment to future economic growth.