Last week, the Fed’s Open Market Committee said thepace of the economic recovery had "slowed" and that growth "islikely to be more modest in the near term than had beenanticipated. The Fed announced it was going to take someof the payments it has received from CMBS bonds and other assets itpurchased as part of the stimulus, and reinvest themin Treasuries – effectively holding down mid-term interest rates - in an attempt to stimulate the economy further. The Fed notedthat high unemployment, modest income growth, lower housing wealthand tight credit were holding back household spending.


Sudeep Reddy of the Wall Street Journalexplained succinctly how the Fed’s plan is supposed to work:

  • "After cutting short-term interest rates nearly to zero inDecember 2008, the Fed essentially printed money to expand itsportfolio of securities and loans to above $2 trillion, from $800billion before the global financial crisis. Its purchases ofmortgage-backed securities and U.S. Treasury debt, aimed at keepinglong-term interest rates down, were discontinued in March. The Fedbegan talking about an "exit strategy" from the unprecedented stepsit took to prevent an even deeper recession.

    But on Tuesday, the Fed shifted its stance. It said it would act tokeep its securities holdings constant at around $2.054 trillion,the level on Aug. 4. Had the Fed not acted, its mortgage portfoliowas set to shrink by $10 billion to $20 billion a month, asmortgages matured or were paid off early. Now, the Fed willreinvest those proceeds in U.S. Treasury securities of between two-and 10-year maturities.

    Some Fed officials have been uncomfortable with the size of theFed's position in the mortgage market. To assuage their concerns,the Fed won't be enlarging its mortgage holdings."

Will this further stimulus work? No one knows. Butthis move is generally not being seen as a good sign for an economywe’ve been repeatedly told is recovering.


The idea that the "recovery" isn’t going so wellhas been common for months across the bleaker reaches of theeconomic blogosphere (such as the comments sections of theCalculated Risk blog, or the ZeroHedge blog, or David Rosenberg’swell considered newletters for Gluskin Scheff -- where he suggeststoday that we may not be headed for a double dip because therecession may not, in fact, have ever ended).


However, concern about the pace of the recovery has recentlybeen cropping up more frequently in the mainstream media –especially since the Fed’s announcement. For example,in Saturday's New York Times, JeffSommer questioned whether a double dip recession is likely,asking, "Will the economy pick up momentum or slip back intorecession?"


After noting that Ben Bernanke had recently called thecurrent economic outlook "unusually uncertain",that Lakshman Achuthan, Managing Director for the Economic CycleResearch Institute agreed that "growth has definitelyslowed" and that Bill Gross of bond manager Pimco said, inessence, that the momentum of the economy from the first to thesecond quarter was downhill, and that it's possible we'reclose to a double-dip recession, Sommer stated:

  • "Still, the economic signs are ambiguous. . . . What’sbeen lacking is broad consumer demand, a revival of the housingmarket and sufficient business confidence in large-scalehiring. And, of course, there are deepstructural economic problems — the highest ratio of publicdebt to gross domestic product since World War II, for example —that will need to be dealt with over many years."

At the risk of stating the obvious, with so manyfolks worried about their jobs, or underemployed, or paying downdebt, and so many companies sitting on money but not hiring, it'ssimply not clear what new business developments are likely to spursufficient "consumer demand, a revival of the housing market andsufficient business confidence" to lead to large scalehiring. I have a sneaking suspicion that we ultimately willregret greatly allowing so many jobs to be outsourced, especiallymanufacturing jobs – ultimately our economic viability as a countryboils down to whether we can produce things that others want to buy-- and in doing so, whether we can keep our own citizensemployed.


Keeping interest rates down to stimulate theeconomy seems to work in smaller economic downturns, where there’spent-up demand and ordinary folks can afford to buy things. But, where so many households are wildly overleveraged and worriedabout their futures, the Fed may simply be "pushing on a string" –trying to create demand that simply won’t be there until theoverhang of debt is paid off by borrowers, or written off bycreditors (who of course then have to recognize their losses), orboth. (Maybe there’s another way to create demand and dealwith that debt, but if so I don’t see it.)


And until the huge amounts of debt are somehowcleared or something else makes businesspeople more confidentabout hiring (and employees more confident about getting andkeeping jobs), the current levels of distress in the commercialreal estate market seem likely to continue and perhapsincrease. According to Costar’sCommercial Repeat-Sales Indices, the largest metro commercialreal estate markets have been "attracting significant institutionalcapital and forcing prices upward over the first two quarters of2010 . . . while the broader market has continued to soften. . . .This divergence of the two worlds may soon change as we arenow witnessing a pause and softening even within the investment orinstitutional grade primary markets."


Doesn’t sound much like a CRE recovery.

CoStar goes on:

  • Many of the opportunity funds continue to seek out distressedproperties, which are affecting the prices shown here, but theexpectations of a tsunami of opportunities have not materializedand overall transaction volumes remain below normal.

    Distress is also a factor in the mix of properties being traded.Since 2007, the ratio of distressed sales to overall saleshas gone from around 1% to above 23% currently.Hospitality properties are seeing the highest ratio, with 35% ofall sales occurring being distressed. Multifamily properties areseeing the next highest level of distress at 28%, followed byoffice properties at 21%, retail properties at 18%, and industrialproperties at 17%.

Since current governmental policies seem to beencouraging a "delay and pray" approach to resolving bad realestate loans, this approach (which I don't think can really becalled a strategy) seems to be to hope for a broad economicupturn. It seems likely that the distress in commercialreal estate won’t improve significantly unless hiring picks up, andthe trend seems to be going the wrong way. PRI’s The Takeawayreported that, according to Newsweek and Slate columnist Dan Gross:

  • "An unemployment rate of 9.6 percent in America may sound bad,but it doesn't include millions of discouraged American workers. .. The real unemployment rate is closer to 16.5percent . . . . That's the Bureau of Labor's U6 number,which takes into consideration so called "discouraged workers" whohave given up looking for work, as well as people who are workingpart time but would like to be working full time. Overall,according to Gross, the number means that there is ‘one out of sixadults in this country whose talents and time and skills are notbeing utilized anywhere near to the extent of their abilities.’"

I hope I’m wrong, or missing something about theeconomy, but it seems to me that the "Slow-covery" is getting evenslower. Instead of a long hot summer, we may be looking at a longcold winter of discontent.

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