Here's Why We're Not Falling Into a Recession

SAN FRANCISCO—While several macro factors including volatility in the stock market, low oil prices and the stumbling Chinese economy have some economists and investors concerned that the US may be heading into another recession, Colliers International's chief economist Andrew Nelson puts the facts into perspective and says the outlook is actually quite encouraging. (Colliers International is a GlobeSt.com Thought Leader.) In his recent blog, Nelson gives a detailed reason why each factor doesn't necessarily spell out gloom and doom for the economy. Here, he breaks it down for GlobeSt.com exclusively and discusses the economy's impact on the commercial real estate sector.

There are at least three indicators that have people spooked about the economy, Nelson tells GlobeSt.com. "First is the downward trend on Wall Street. The stock market's recent fall of about 10% could be a leading indication that we are falling into recession, but there's an old joke from the famous economist Paul Samuelson that the stock market has predicted nine of the last five recessions—there are a lot of false positives. Just because the stock market goes down, it doesn't mean the economy will, too."

Nelson is cautious about what the stock market's recent volatility indicates about real estate for this year. "I don't forecast the stock market, and I don't trust people who do. But I will say the impact depends on how long and how much. The stock market goes through these periods of volatility and then calms down. It had one period like this at the end of the summer that lasted a few weeks, and then over the next few months it gained back everything it had taken. We are in a correction; we were down about 12% as of January 21, and we've gained back 2%."

Of course, if the losses were to continue, Nelson's view would be different. "If we were to move into bear territory, if we were to fall significantly more than 20% and if this volatility were to keep up, it will start influencing behavior. People stop spending as much. But it's not at that point yet. We do need to be cautious now, eyes wide open, but there are still a lot of positive things in the economy that are easy to overlook. Housing prices are up, consumers are spending—they bought a record number of cars and trucks last year. Consumers are happy right now, and when consumers are happy, the economy is happy."

The second and third indicators Nelson pinpoints are what the stock markets are looking at: the global economic slowdown and the fall in oil prices. Both of these elements have a have a direct or stronger impact on the stock market than on the US economy. "With oil, so far the impacts have been generally negative up front and very concentrated in the oil-patch states, but the impact will be at least neutral, if not positive, for the US economy because oil goes into so many things we consume," says Nelson. "If there's less money going abroad, we can save that money or spend it on other things." As for the global economic slowdown, exports only account for 11% of the US GDP, but offshore revenues account for a very big share of the S&P economy, says Nelson. "A global slowdown has a much bigger impact on global firms than it does on the US economy."

A fourth indicator is technical: the purchasing managers' index or PMI, a survey put out by the Institute of Supply Management. "When this index is below 50, while the number itself means nothing, that level means the economy is contracting, and the PMI has been below 50 for two consecutive months—the first time since the last recession," says Nelson. "That by itself is a concern, but there are two things with which we should qualify it. First, manufacturing is only about 13% of our economy, and second, the index for services and other non-manufacturing is positive (it's off peak, but still positive), which means they're still expanding. So, the rest of the economy is expanding, although moderately."

CAUSE FOR CONCERN?

Therefore, while these indicators are causing some people who study them to raise their eyebrows in concern, in the end, there's enough countervailing data that suggest these are not good leading indicators for this particular cycle, says Nelson. "And, of course, there are a lot of positive things happening. We created almost 300,000 jobs per month in the fourth quarter. Even though the fourth-quarter GDP comes in at 1%, it doesn't mean we're about to fall into a recession."

The stumbling Chinese economy is also causing some economic concern for the US, but Nelson says the direct impact is minor. "The concern is of contagion, that it will spread around the globe and have a more major impact on the global economy. But for now, it looks like the impact is limited. China only accounts for 1% of our GDP, so in terms of imports from the US, they're not falling off a cliff—just slowing.

Nelson adds that even if imports from the US to China slow a little, this will not have a major impact on the US because exports represent only about 13% of our economy, and exports to China only represent about 8% of that. "The Chinese economy is not growing as fast as it was, but it's still growing strongly—6.9%, which is about three times faster than the US is growing. It's still a smaller economy than ours in dollar terms, but their growth in dollar terms has been consistent."

There's actually a positive story in China, Nelson points out. It's not as if growth is just slowing because of the recession—the economy there is transitioning from an investment and manufacturing economy to one that is more consumer based. "There's volatility with that, and it's not easy, but ultimately it is positive."

The final part of the Chinese economic picture is the yuan, which has been devalued a bit compared to the dollar, but not as much as the euro has. "The yuan has only devalued about 7% over the last year," says Nelson. "By contrast, the euro, Mexican peso and Canadian loonie have devalued over the last year-and-a-half between 25% and 35%. That's a much bigger impact than China."

Ultimately, the near-time impact of China's economy on real estate will be limited, says Nelson. "We're hearing rumors that there are fewer Chinese buyers of high-end real estate in major markets like New York and San Francisco. There's no hard evidence of this, but that's what we're hearing. But, there's still strong offshore demand for US property because our economy is growing, and a lot of the demand offshore comes from sovereign wealth and pension funds that still need to invest money. We're still seeing strong demand for US real estate from offshore, including China."

Given all of these macro factors, the real estate sector should proceed with caution, but not be unduly spooked by recent events, Nelson maintains. "The bigger picture is still positive. We are still growing, and in my view there is no compelling evidence that the US is at risk of falling into recession. Although 2016 looks like it will be another year of moderate growth, it will be a little less than 2015, but it will still be positive and better than anywhere else in the developed world. Investors should always be taking the longer-term view on the economy and where the markets are going. It's more favorable than recent macro and market events would suggest."