Is Slow Growth Sustainable?
The unemployment rate inches back up close to 8%, GDP sinks into negative territory for the fourth quarter 2012, and the stock market heads for new highs as its price-earnings ratio stands at a rather lofty 22. Huh? Are we fooling ourselves again?
The February labor market report showed about 160,000 new jobs added last month very much in line with the recent, plodding-along monthly averages, which can barely keep pace with new entrants into the labor force. It’s more of the same slow growth scenario, which has not yet registered the impact of recent tax increases on consumer spending let alone the federal government spending cuts expected by spring —will it be sequestration or more likely some form of sequestration lite? Congress, of course, has not figured that out yet and neither party wants to face the reality of how many jobs will be lost as a result, hot political rhetoric aside.
In fact, what the last six months or so of jobs reports really underscores is how government cutbacks, mostly at the state and local levels to date, have been a major factor in keeping the unemployment rate high (accounting for nearly 400,000 lost jobs during the past 24 months). As the effects of tax increases and federal spending cuts take hold it seems questionable how the employment picture improves and whether consumers can maintain spending. So do we expect the Dow to advance much further?
It was nice in Davos too--all the high financial rollers, government poohbahs, and Derek Jeter were more upbeat about the prospects of Europe. But after everyone left, France lowered its growth (non-growth) forecast and the UK triple dipped back into recession thanks to austerity policies (cutting government spending and increasing taxes). In Italy and Spain banks pay back government loans, but the unemployment rate across the Eurozone remains in the low double digits. Government financial gymnastics cannot change the fact that ageing populations and expensive social safety nets in many European nations, including Germany and Italy, will monkey wrench any chance for sustained recovery at a time when Europe is essentially bankrupt.
For the U.S. economy and specifically our real estate markets, low interest rates continue to keep businesses and investors afloat… for now. But as we have been saying for several years, everyone has been putting off paying the piper hoping all the debts incurred over the past three decades will somehow vanish. But the piper keeps hanging around playing his doleful tune, because those debts haven’t disappeared and won’t without consequences—either you pay them off or inflate your way out with inflation’s devaluing consequences.
As more real estate borrowers recognize debts, pay off loans or find banks foreclosing to finally clear balance sheets— the true-ups allow markets to find proper pricing levels, which no surprise aren’t particularly robust except in the top markets where investors are willing to pay up for quality and location (what else is new?).
So you come back to the economy and how it will affect demand for space, which is the only way to drive revenue growth and appreciation consistently in real estate. And you come to the conclusion that slow growth is still the best you can hope for… and far from assured given the outlook for stubbornly high unemployment.
But at least real estate isn’t overpriced. That said, care to pour more money into the S&P?
For an irreverent take on the macroeconomic environment, check out GlobeSt.com's Chief Economist authored by Dr. Sam Chandan.