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 – even if the risks are rising. (Colliers International is a GlobeSt.com Thought Leader.) In his recent blog, Nelson provides a detailed analysis why each factor doesn’t necessarily spell 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 a famous joke attributed to the economist Paul Samuelson that the stock market has predicted nine of the last five recessions—meaning there are a lot of false positives. Just because the stock market declines, it doesn’t mean the economy will follow, 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 any potential impacts on the broader economy depend on how long and how much. The stock market goes through these cycles of volatility periodically 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 the market gained back everything it had lost. Now we’re in another correction and volatility remains elevated. But so far it has not reached a scary level or duration.”
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. Businesses pull back investments. 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 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 broader impacts 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 less than 13% of the US GDP, while offshore revenues account for almost half of revenues in the S&P 500, says Nelson. “So a global slowdown has a much bigger impact on these large, multi-national firms than it does on the US economy.”
A fourth indicator is technical: the purchasing managers’ index or PMI, a survey conducted by the Institute of Supply Management. “When this index is below 50it 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 we need to qualify it. First, manufacturing is only about 12% of our economy, and the PMI index for services and other non-manufacturing is well above 50 — off its peak, but still above its average during this recovery – which means these sectors are still expanding. So, overall the economy is expanding, although moderately.”
CAUSE FOR CONCERN?
Therefore, while these indicators are causing analysts some concern, there’s plenty of countervailing data that suggest a recession is not imminent for the US, 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. And consumer confidence is strong. Even though we expect fourth-quarter GDP to dip to around 1% (the government’s first estimate was 0.7%), it doesn’t mean we’re about to fall into a recession.”
The stumbling Chinese economy is also causing some concern, but Nelson says the direct impact on the US economy is likely to be minor. “Exports represent only about 13% of our economy, and China accounts for only about 8% of that, so China alone accounts for only 1% of our GDP. And it’s not as if China is falling off a cliff—just slowing. The Chinese economy grew at 6.9%, which is about three times faster than the US is growing. And their growth in dollar terms has been relatively consistent.”
And there’s actually a positive story in China, Nelson points out. The economy there is transitioning from an investment and manufacturing economy to one that is more service and consumer based. “There’s volatility with that, and it won’t be easy, but ultimately it is a move in the right direction.”
A related concern is the devaluation of the yuan, which has fallen against the dollar, but not as much as the currencies of our major trading partners. “The yuan has only declined about 7% against the dollar 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.” So unless we see a significant global recession or financial contagion in emerging markets, the impact of China’s slowdown on the US economy will be limited.
Ultimately, the near-time impacts on real estate also will be moderate, 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. 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, and likely a little less than in 2015, 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.”