Mixed messages permeate the economy

Real job and wage growth contrast with a three-month decline in consumer confidence

On July 1, we will likely proclaim the longest sustained recovery in U.S. history

CRE leverage levels remain moderate compared to previous cycles

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Mixed messages permeate the economy. January’s headline jobs report indicates a strong gain of 304,000, yet the household survey—tinged by the government shutdown— seems to indicate 251,000 net losses. Real job and wage growth contrast with a three-month decline in consumer confidence.

The Federal Reserve reports economic strength but paused interest rate increases and has recently signaled it will restrain efforts to lighten its balance sheet. Asset prices fell amid great volatility and uncertainty in the fourth quarter, only to reverse course in 2019. Almost half of respondents to a recent industry survey* believe we are in a recession or one is pending this year. How do we find the signal in this noise?

Take comfort. While the European Union, Japan, China and U.S. economies show definite signs of slowing, U.S. job growth powers on. On July 1, we will likely proclaim the longest sustained recovery in U.S. history, but without the unrestrained euphoria that characterizes most market peaks. Growth in corporate profits and gross national product (GDP) should slow and remain modest but steady in the near term, returning GDP to the 2.0 – 2.5% range. Increasing labor participation should enable further job creation while curbing wage growth and inflation. Absent a significant reset in the corporate debt markets, we expect the U.S. economy to persist at a slower, but somewhat more sustainable, rate.

Some might call this a muddle-through economy, but we believe it is the sweet spot for continued expansion without overheating. When the correction comes, commercial real estate appears to be better-positioned than in previous recessions. Construction constraints have limited overbuilding to a few pockets, including high-rise multifamily in some urban submarkets. Labor challenges and rising land and construction costs will limit new building deliveries.

CRE leverage levels remain moderate compared to previous cycles. Today’s market enjoys good liquidity and now is an ideal time to refinance or extend existing loans. Especially for office tenants and landlords, now is the time to blend and extend leases for longer terms.

*RCLCO, January 2019

  • More mixed messages: A 1.2% decline in U.S. holiday sales disappointed analysts and dampened stocks, while a University of Michigan index showed consumer optimism on the rise. Although down from November, December sales were up 2.3% year over year and total sales for the 12 months of 2018 were up 5.0% from 2017.
  • Total CRE sales rose to $562.1B in 2018, up 15% from the previous year, Real Capital Analytics found.
  • The ISM Manufacturing index regained ground in January to 56.6% from 54.3% in December but remained short of November’s 58.8%, a sign that the economy is losing steam.
  • Due to economic softness, the European Central Bank plans to maintain its negative-0.4% benchmark interest rate through summer 2019. It ended its €2.6T ($295T) bond-purchasing program last year.
  • Chinese GDP growth declined to 6.6% for 2018, its slowest pace since 1990.
  • Utah’s labor force grew an average of 1.9% annually from 2010 through 2018, triple the national average of 0.6% and leading labor force growth nationwide.
  • Brookfield Asset Management closed its largest private real estate fund, Brookfield Strategic Real Estate Partners III, with $15B in equity, exceeding its $10B target.


MARCH 2019

Copyright © 2019 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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