Macro Issues Shaping Market Pespective
In last week’s column, I discussed several factors market participants take into consideration to determine whether they are optimistic or pessimistic about how the investment sales market in New York City is doing today and its performance moving forward. In addition to many local metrics, there are several macroeconomic factors that are helping to shape those opinions, such as the national debt, unfunded obligations, inflation, consumer confidence/spending, housing, GDP growth, interest rates and unemployment.
This overview led to several emails asking for additional insight on these factors. Here goes:
National debt. It’s cause for concern. Today, United States debt has topped $18.6 trillion—for the first time exceeding our GDP ($18.1 trillion), Based on this level of debt, each U.S. citizen pays $7,500 in annual interest. Each citizen’s share of this debt is over $205,000. Our unfunded liabilities now exceed $100 trillion, while the aggregate sum of our national assets is $118 trillion. These unfunded liabilities total $835,000 per taxpayer. It doesn’t appear that anyone in Washington, on either side of the aisle, is serious about addressing these issues, which creates a significant cloud hanging over our economy.
Inflation. Pessimists from a buying perspective point toward an inflation rate presently at just 0.09 percent—which is remarkable given all of the money that has been printed in the United States (even lower than 2008’s 0.1 percent when things were catastrophic). Optimists look at this and feel that even today’s very low cap rates are great compared to zero, so keep buying real estate.
Consumer confidence/spending. The Conference Board Index declined in October to 97.6 from 102.6 in September and chief executive officer confidence has declined 10 percent over the past 12 months. This concerns the pessimists, but the optimists point to the fact that recent declines in confidence have only been moderate and that the trends since 2009 has been very positive. Confidence has been relatively flat for the past 12 months and consumer spending is generally credited for driving the 3.9 percent GDP growth seen in 2Q15. The pessimists counter with troubling movements within the Small Business Optimism Index (SBOI). This index measures the perspective of small business owners relative to the consumer confidence index. We have seen the SBOI fall well below the consumer confidence index three times previously: in the late ’80s, 2000 and 2008—each time foreshadowed an oncoming recession. Presently, the SBOI is well below the consumer confidence index; the gap has not been this wide since 2008.
Housing. Housing is important because our economy is 68 percent consumer-driven and, for most Americans, the amount of perceived equity in their homes creates a wealth effect upon which they base many of their major spending decisions. In fact, mortgage equity withdrawal was the main reason that in the mid-2000s, the savings rate in the United States reached -4 percent. The pessimists point to the fact that the homeownership rate is just 63.7 percent, the lowest rate since 1993. The optimists point out that home prices have risen 25 percent since 2011 and this year are on pace to grow by 6 percent in real terms, adjusting for inflation. The annual growth rate was 6.8 percent in real terms during the 1998 to 2005 housing boom.
GDP Growth. Growth in 2Q15 was just 1.5 percent and has averaged just over 2 percent in the past four quarters. This rate feels recessionary even though we would have to have negative growth for two consecutive quarters to be technically defined as a recession. During the past four recoveries, average GDP growth has been 3.8 percent. During this recovery, growth has been just 2.2 percent. While these metrics fuel the pessimists, the optimists point to the fact GDP per capita is higher than it has ever been before at $46,004 per person. They also point out that, at $18.1 trillion, our GDP is higher than it has ever been.
Interest rates. History teaches us that long periods of low interest rates create asset bubbles. We have had near-zero interest rates since November 2008, inarguably a long period of low rates. This concerns the pessimists, but the optimists point out that history is being rewritten; U.S. debt was downgraded and interest rates dropped. Our money supply has quadrupled and inflation is non-existent. People are not talking about quantitative easing anymore, but while the Fed is not expanding its balance sheet, it is continuing to purchase new bonds as old bonds mature. This will mute any future rate increases unless it stops buying.
Unemployment. Unemployment is perhaps the most important metric with regard to the underlying fundamentals of commercial real estate. Nationally, employment growth has been mediocre, notwithstanding our present 5 percent unemployment rate. Locally, our job growth been tremendous and is one of the reasons the commercial real estate market has done so well over the past few years. Optimists love these trends, particularly on the local level.
For local market participants, it tends to be how their attempts to purchase a property, or efforts to sell a property, are going that determines whether they are optimistic or pessimistic. Because their attitude toward these issues shapes their perspectives, we try to keep an eye on how each is performing.