Three (economic) ghosts

Quick takes:

• Economy made substantial progress in 2021
• Strong momentum to close out the year
• Data indicates positive 2022 ahead
• Outlook for CRE remains bright

Three (economic) ghosts

Heading toward the holidays and the end of the year almost reflexively makes us to eager to consider where the economy has been, where it stands now, and where it could head in the future. The economy made substantial progress over the last year and we still foresee positive things ahead. But challenges remain and a complex environment continues to evolve in sometimes unpredictable ways.

Christmas past

Around this time last year, the economy had already made substantial progress after the deep downturn during the second quarter of 2020. And though the last winter’s pandemic wave slowed things down – most visibly in job growth, which slowed and turned negative in December before recovering - optimism abounded. Vaccination had begun and Congress passed a $900 billion fiscal stimulus bill. Those provided a foundation for solid economic growth in the first quarter. Vaccination proceeded apace through mid-year and Congress passed the $1.9 trillion American Rescue Plan, signed in March. The combination of the two unleashed a torrent of demand into the economy with which supply could not keep pace. Consumers spent stimulus funds and unleashed pent-up demand from 2020, creating significant economic expansion and labor market recovery, but introducing greater-than-expected inflation. 

Christmas present

The situation today remains complicated but certainly better than last year. The economy continues to reach new record-high levels and appears set for a strong fourth quarter to close out 2021. Consumers continue to drive that sleigh, even if retail sales data for November came in below expectations. Demand growth continues to exceed supply growth in the economy, pushing prices higher as the economy expands. The producer price index (PPI) for final demand came in at a record year-over-year growth rate for that time series during November. Import prices also increased at a robust pace during November.  Last week Fed Chair Powell cemented the Fed’s shift toward a more hawkish stance and the forecast for 2022 now shows three rate hikes of 25 basis points each and more aggressive pullback on quantitative easing. 

Housing starts and building permits for November rebounded after a lull in October. And jobless claims continued to hover near record-low levels in mid-December. Even on the pandemic front progress continues. While the Omicron variant presents a different challenge, vaccination (including boosters) puts us in a different position than last year. Correspondingly, consumers seem more willing to engage in the physical economy. And as of this writing, the recent increase in government strictures is not repeating the more draconian measures of 2020. Therefore, any drag on economic growth should fall below last year’s experience. 

Christmas future

Data releases heading toward Christmas this week provide hope that even as economic growth will almost surely slow in 2022 following this year’s torrid pace, the outlook remains bright. GDP growth for the third quarter could get revised slightly upward. Personal income and spending both likely increased in November, even if inflation is weighing on real spending a bit. Correspondingly, the personal consumption expenditures (PCE) index should also show heightened inflation, just as other major inflation indexes have done. Consumer confidence for December should increase modestly after taking hits from the pandemic and inflation during autumn.  Final consumer sentiment for the month might dip a bit versus early December, but also tick up versus November’s level. That should help support ongoing consumer spending heading into next year. And new and existing home sales for November both likely increased with strong demand remaining, even in the face of still-limited inventory. Even the likely demise or scaling back of the Build Back Better Plan means only marginally less growth in 2022. 

|  What it means for CRE  |

The outlook for commercial real estate (CRE) also remains bright. While we still do not have finalized data for the fourth quarter, our proprietary forecasts remain positive at the national and metro levels for all major property types. While some notable differences in the outlooks exist by property type and geography, we continue to foresee a CRE market that benefits from an ongoing economic expansion, characterized by the retraction of concession, increases in asking rents, and falling vacancy rates. Our model correctly predicted stabilization for industrial in 2020 and for retail and multi-family in 2021. It continues to foresee office reaching stabilization (and subsequent recovery) in 2022. We will provide a more thorough 2022 outlook in the new year but for now we remain heartened by the improvement we see in the market. 

|  Thought of the week  |

According to a recent survey, 85% of respondents said that they were celebrating the holiday season this year. 

Note: Economic Insights will not publish for the next two weeks. We wish safe and happy holidays to everyone. Thank you for reading our weekly take on the economy.