November Economic Update

Reflecting on his party’s losses at the November 2 polls, President Barack Obama offered that “... first and foremost, it was a referendum on the economy.” While the recession has been over for more than a year by the official tally, the President’s assessment conveys that the return to growth has been lackluster thus far. In spite of unprecedented steps to stimulate activity, the forward-looking outlook is both qualified and opaque. In fact, the unusual degree of uncertainty in the economic projections is, in part, a result of the simulative steps themselves. Questions about the sunset of current policies and issues such as tax rates act as drags on consumers’ and businesses’ willingness to make significant or long-term investments.

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

Of clear import for our thinking about commercial real estate fundamentals, the modest pace of expansion has precluded a measurable improvement in labor market outcomes thus far. The most recent jobs report, released by the Bureau of Labor Statistics on November 5, shows that non-farm payrolls increased by 151,000 jobs in October. That beat expectations, but only because expectations were so low. In context, net gains of 874,000 jobs in 2010 are less than 13 percent of the jobs lost over the previous two years.

Job growth in key office-using occupations has yet to emerge as a feature of the market. In financial services, for example, employers shed 1,000 financial services jobs in October. Over the last year, financial services employment has fallen by 89,000 jobs. This is an especially important finding given the strong price performance of core office assets in gateway markets. Private sector job gains have been strongest in education and health services and areas of professional and business services such as temporary help.

And so while some areas of private activity are accelerating, the overarching picture suggests that the job market will remain weak and that the market will struggle to build on early gains in the demand-side fundamentals drivers. Labor productivity is declining, which can presage hiring. But in this case, firms are not necessarily confident that demand for their goods and services warrants payroll growth. 

Given the middling recovery trend, monetary and fiscal policy intervention will linger as central features of the economic landscape. In the short term, a new round of quantitative easing and the general bias of monetary policy mean low baseline rates supporting commercial real estate pricing and mortgage pricing. Quantitative easing is an extreme policy option and reflects more serious concerns about the sustainability of recovery than the Fed has communicated directly and openly. It is a contentious move and there are arguments on both sides as concerns the merits of the program. In the medium- and long-run, however, it is clear that the potential for policy errors in the unwinding of these interventions presents substantial risks to the economy and financial markets. For commercial real estate, the need to draw down the Fed's engorged balance sheet following the immediate crisis introduces the potential for substantially higher interest rates and liquidity shocks while legacy-refinancing challenges still confound the industry.