The U.S. economy continues to show slow, steady progress despite fears of a global economic downturn

Domestically, there is little evidence to signal the end of economic expansion

There is now $17 trillion of negative yielding debt in the world

Global stimulus appears to be having its desired effect

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The U.S. economy continues to show slow, steady progress despite fears of a global economic downturn and some domestic headwinds. Declining corporate profits, business investment and net exports combined with a rising dollar have fortunately been offset by consistent job gains, wage growth and resilient consumer spending. GDP growth came in at just 0.8% in Q1 and May employment gains were disappointing at 38,000, yet unemployment claims were the lowest in 40 years.

The European Central Bank lowered the overnight deposit rate from minus 0.3% to minus 0.4% and increased its quantitative easing program by an additional 20 billion euros. Japan sold $19.4 billion of 10-year bonds at a negative yield of 0.24%. Mortgage bank Berlin Hyp AG sold a $500 million three-year bond at a negative 0.162%, a first in Germany. There is now $17 trillion of negative yielding debt in the world, and in Japan and Europe, investors need to go beyond seven years to get a positive return. All this stimulus appears to be having its desired effect with Eurozone Q1 2016 GDP growth pegged at 2.2%, beating the U.S. for the first time in several years.

While 59% of fund managers see an economy in its final innings — the highest percent since 2008 — there is little evidence of the financial excess, weak credit, deteriorating underwriting and surging defaults that typically signal the end of an expansion (other than the energy industry and subprime auto loans). Banks are maintaining, if not strengthening, underwriting standards and have even backed away from higher-yielding, risky loans to energy companies and highly leveraged corporate buyouts. CMBS delinquencies also have dramatically improved. This caution by lenders is likely to prolong the cycle, not expedite a recession. Our biggest threat continues to be from exogenous events, such as a meltdown in Japan, developing countries or the European Union.


1 Business investment was up 1.4% in Q1, but non-defense orders excluding aircraft fell by 2.4%.
2 The number of energy loans labeled “classified,” or in danger of default in 2016, is on track to exceed 50%.
3 S&P 500 Q2 2016 earnings are estimated to decline 4.8%, which would mark the first time the index has recorded five consecutive quarters of year-over-year declines since 2008-2009.
4 S&P lowered China’s credit rating from AA-neutral to AA-negative watch.
5 Exxon was downgraded to AA+ from AAA by S&P.
6 Arbor launched ALEX, the first online agency lending platform for multifamily in early 2016.
  7 Amazon plans to lease 20 767 Boeing Freighters from air cargo firm ATSG to further control distribution channels.
8 Robots are more prevalent on the job as costs come down and programming has become more versatile.
9 Technology has boosted cancer research to light speed, which potentially could cause Big Pharma to lose $1.2T in market cap.
10 New SEC crowdfunding rules went into effect on May 18, 2016.
11 MetLife is selling life insurance business and 4,000 agents to MassMutual in advance of new capital rules and to avoid Dodd Frank designation as “systematically important.”
12 New home sales show continued growth, up 17% in April over March, and a recent U.S. Census update shows suburbs are thriving while urban population growth has slowed.
13 WeWork raised $430M in round of Chinese-led financing providing an implied valuation of $16B for a start-up company with limited owned space.
14 Major retailers such as Sears and Walmart plan to close stores, while Kohl’s, Gap and Nordstrom experienced sharply lower sales and profits, and Sports Authority filed for bankruptcy.
15 Home Depot and TJX Q1 sales were up 10% and 7%, respectively, and Amazon is now second behind Walmart in apparel sales.
16 Auto sales continue at a record pace, with some signs companies are stretching to feed demand.
17 Q1 property sales were down 20%, but pullback was partially due to difficult-to-replicate portfolio and entity-level activity in 2015. Single asset sales were down 11% YOY. Cap rates were largely unchanged.
18 Q1 CMBS issuance was down 25% due to swap spread volatility and ongoing uncertainty about risk retention rules taking effect December 2016.
19 FPL forecasted some tapering of pension investment in 2016 to $40B despite a recent Preqin survey reporting 78% of investors expect to commit the same amount or more to CRE in 2016.
20 The FAA approved Houston’s Ellington Airport as a launch site: The U.S. will begin sending astronauts and cargo to the International Space Station in 2017 — instead of paying Russia $71M per flight.
Tom McNearney

the BRIEFING is an aggregation by Tom McNearney, Transwestern chief investment officer, of other articles and reports. Tom leads Transwestern’s capital market efforts for development and investment nationwide. Tom also serves on the firm’s investment committee and board of directors, and he directs the execution and expansion of the firm’s principal investment activities across the country.


JUNE 2016

Copyright © 2016 TRANSWESTERN. All rights reserved. No part of this work may be reproduced or distributed to third parties without written permission of the copyright owner. The information contained in this report was gathered by Transwestern from various sources believed to be reliable. Transwestern, however, makes no representation concerning the accuracy or completeness of such information and expressly disclaims any responsibility for any inaccuracy contained herein.
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