Slow Growth’s Silver Lining: Low Interest Rates

NEW YORK CITY-On a day that also saw the US Labor Department’s weekly unemployment figures reach a nine-month high, the locally based Conference Board projected that, based on its Leading Economic Index, slow growth was in the forecast for the balance of 2010. The upside of that sleepy outlook, says Cushman & Wakefield’s Ken McCarthy, is that interest rates remain low.

“That helps a lot of investors and owners to refinance, recapitalize or invest while borrowing at low rates,” McCarthy, C&W’s managing director of research for the New York region, tells GlobeSt.com. “One of the things we have seen over the past six months or so is an increased willingness by banks to lend to commercial real estate.

McCarthy cites the latest results of the Federal Reserve’s monthly Senior Loan Officers Bank Survey, released last week. According to the Fed’s summary, “In the July survey, most respondents reported no change in their bank’s standards for approving commercial real estate loans. The net percentage of banks that reported that their standards had tightened was small, and it dropped slightly relative to the April survey.”

Overall, according to the Fed, “the net fraction of banks that reported that demand for CRE loans had decreased continued to be small.” McCarthy says the banks’ responses point to “a significant improvement” in the availability of credit compared to six months ago.

Thursday’s LEI report from the Conference Board said that the index increased 0.1% nationwide in July to 109.8, following a 0.3% percent decline in June, and a 0.5% increase in May. The index’s 10 indicators—which include consumer confidence, stock prices, manufacturers’ orders and new housing starts, among others—point to “a slow expansion through the end of the year,” Ken Goldstein, economist at the Conference Board, says in a statement.

Goldstein adds, “With inventory rebuilding moderating, the industrial core of the economy has moved to a slower pace. There appears to be no change in the pace of the service sector. Combined, the result is a weak economy with little forward momentum. However, the good news is that the data do not point to a recession.”

His colleague at the board, economist Ataman Ozyildirim, notes that the LEI is “growing at its slowest pace since mid-2009 and it has been essentially flat since March. However, the index is still well above pre-recession levels, and the CEI remains on a rising trend that began in late ’09.”

The report didn’t come as a surprise to McCarthy. Because the LEI is based on indicators that have been previously reported, “We pretty much knew where the strengths and weaknesses were in the numbers,” he says. “So it’s more of an indicator of direction than it is of strength. It’s consistent with an economy that’s still expanding and is likely to continue to expand, but the pace of growth has clearly slowed.”

For commercial real estate, McCarthy says, the index’s most important implication is “what’s going on in the labor markets. Private-sector employment is still rising, at least of July, but the more recent unemployment figures tell us that the August numbers are probably going to be pretty weak. And while we have a lot of activity in the sense that leasing is up, we’re concerned that unless we have consistent, sustained, healthy job growth, that isn’t going to turn into net absorption."