November Economic Update

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Reflecting on his party’s losses at the November 2 polls,President Barack Obama offered that “... first and foremost, it wasa referendum on the economy.” While the recession has been over formore than a year by the official tally, the President’s assessmentconveys that the return to growth has been lackluster thus far. Inspite of unprecedented steps to stimulate activity, theforward-looking outlook is both qualified and opaque. In fact, theunusual degree of uncertainty in the economic projections is, inpart, a result of the simulative steps themselves. Questions aboutthe sunset of current policies and issues such as tax rates act asdrags on consumers’ and businesses’ willingness to make significantor long-term investments.

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Will the growth trend accelerate in 2011? The current consensusdiscounts that scenario. The Economist poll, for example,anticipates that US GDP growth will slow from 2.6 percent in 2010to 2.3 percent next year. The Conference Board is more reserved,projecting that growth will slow to just 1.2 percent as the impactof government stimulus programs wanes. Very weak conditions inhousing markets and an absence of stronger wage-income increaseswill limit consumers’ capacity to step into the role of growthdriver.

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Of clear import for our thinking about commercial real estatefundamentals, the modest pace of expansion has precluded ameasurable improvement in labor market outcomes thus far. The mostrecent jobs report, released by the Bureau of Labor Statistics onNovember 5, shows that non-farm payrolls increased by 151,000 jobsin October. That beat expectations, but only because expectationswere so low. In context, net gains of 874,000 jobs in 2010 are lessthan 13 percent of the jobs lost over the previous two years.

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Job growth in key office-using occupations has yet to emerge asa feature of the market. In financial services, for example,employers shed 1,000 financial services jobs in October. Over thelast year, financial services employment has fallen by 89,000 jobs.This is an especially important finding given the strong priceperformance of core office assets in gateway markets. Privatesector job gains have been strongest in education and healthservices and areas of professional and business services such astemporary help.

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And so while some areas of private activity are accelerating,the overarching picture suggests that the job market will remainweak and that the market will struggle to build on early gains inthe demand-side fundamentals drivers. Labor productivity isdeclining, which can presage hiring. But in this case, firms arenot necessarily confident that demand for their goods and serviceswarrants payroll growth.

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Given the middling recovery trend, monetary and fiscal policyintervention will linger as central features of the economiclandscape. In the short term, a new round of quantitative easingand the general bias of monetary policy mean low baseline ratessupporting commercial real estate pricing and mortgage pricing.Quantitative easing is an extreme policy option and reflects moreserious concerns about the sustainability of recovery than the Fedhas communicated directly and openly. It is a contentious move andthere are arguments on both sides as concerns the merits of theprogram. In the medium- and long-run, however, it is clear that thepotential for policy errors in the unwinding of these interventionspresents substantial risks to the economy and financial markets.For commercial real estate, the need to draw down the Fed'sengorged balance sheet following the immediate crisis introducesthe potential for substantially higher interest rates and liquidityshocks while legacy-refinancing challenges still confound theindustry.

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