Why Are Forecasts All Over the Place? ... continued from Page 1

there is a reduction in retail activity when there are threats on the horizon. People who are afraid of losing their jobs become more frugal. There are signs that consumers are changing their patterns in reaction to inflation, but spending is still more robust than would be expected. Much of the rationale for this is that workers still have their jobs and many have been getting raises that have allowed them to maintain a chosen lifestyle. As long as people are willing to spend, there will be price hikes.

These two factors have impacted the potential speed of an inflation slowdown. The Fed’s preferred measure of inflation is the Personal Consumption Expenditure index, and it reached a peak last December. The expectation was that it would keep falling, but it has just stabilized at about 4.6 percent. This means that all the efforts from the Fed have not managed to budge the numbers. There are calls for the Fed to hike the rates again, but the bigger question is whether this will make any difference given the other factors. Thus far labor is not reacting to the rates and neither is consumer behavior.

In the middle of all this came the manufactured crisis over the national debt. This has been almost routine, as the good men and women of Congress can’t seem to address the budget during the budget process and wait until the bitter end to act. As expected, there was a last minute “deal” that did little or nothing to address a debt that is now roughly 135 percent of the national GDP. If it makes one feel any better, other nations are in worse shape (China has a debt that is 280 percent of GDP, Japan is at 260 percent of GDP and the average in Europe is 180 percent).

Now that the debt ceiling has been allowed to expand, the next phase of the problem emerges as the Fed will need to issue over a trillion in treasuries to rebuild its cash balance. This will suck massive amounts of cash from banks and will hike yields on these securities. That ripples through the entire bond market and quickly. Demand for corporate bonds will fall, and there will be a similar reduction in demand for municipal bonds.

The real estate market is already reacting to the concern expressed by the banks regarding commercial activity. Many banks are selling off their commercial loans at a loss even when these loans are stable and current. Their assumption is that commercial property is going to lose a great deal of value in the near future and they had better sell that paper while there is still a market for it. Waiting for the inevitable collapse will create big losses and many now want to cash out so they can buy more of those treasuries that will be on offer.

The assumption in the commercial sector is that office development is not going to recover any time soon. The move back to the traditional office environment has slowed down, as only about half the previous number of office workers have returned from working at home.

One of the fast-growing sectors for commercial development was warehousing and logistics, but that has slowed as well. The supply chain chaos that prompted companies to load up on inventory has passed to some degree and now 65 percent of companies assert they are overstocked and unwilling to buy anything additional until that overhang dissipates.

The sector that keeps growing is related to manufacturing. There have been two major drivers here: the expansion of reshoring and the need to accommodate the introduction of robotics and technology. The manufacturing sector accounts for 35 percent of new construction.

Housing numbers have improved a little but are still far from where they were a year ago. The latest data showed a gain of 2.2 percent over the previous month, but this is still 22.3 percent below the rate a year ago. Permits are showing the same pattern, as they are up 1.6 percent over the last month but still 22.8 percent below the level of last year. Single-family numbers remain far lower than multi-family numbers. In a recent study it was determined that it was cheaper to buy than rent in only four major cities (Detroit, Houston, Philadelphia and Cleveland). This means a steady demand for multifamily in the majority of the country despite the rising rental rates. They have yet to exceed the rising rates of home buying.

Thus far the U.S. economy has been able to dodge the arrival of recession. Many had expected to see these quarterly GDP numbers fall into negative territory by Q3 of last year but instead we got 2.6 percent growth. The next assumption was for negative numbers in Q4 and we got growth of 2.9 percent. The analysts were certain that Q1 of this year would be the negative one and we eked out a gain of 1.1 percent. Now we are close to the end of Q2 and GDPNow from the Atlanta Fed holds that we will see a gain of 2.1 percent.

How long will we stave off these declines? As mentioned at the start of this piece there are about half of the economists predicting recession yet this year and half asserting we will miss that dip. For real estate there has been a similar mixed bag with enormous regional differences and sector variation.

Chris Kuehl, PhD., is an economist and Managing Director of Armada Corporate Intelligence. Visit www. armada-intel.com for more information.