In The Sweet Spot

The US economy is now entering the sweet spot it has not seen for decades. Unemployment is nearing record lows, U6 is headed toward a record low, low skilled workers are moving off the part time rolls into full time work. The number moving to full time was 457,000 in the past month. Black unemployment is nearing what was once considered full employment for all workers at 5.9% and dropping fast. Even felons who have served their time, are getting training for low skilled jobs. Home prices and 401K’s are at a historic high, and consumers are as confident as they have ever been. Capital spending by corporations is increasing materially.  The Fed under Powell seems to be very aware of needing to keep rates moderate to keep the boom going. All of this together means GDP in Q2 is likely to reach 3.5% and maybe even 4%, and to continue at those levels into Q3, and maybe longer. At those levels of growth, compared to around 1.5% on average under Obama and Democrats, it so is now very likely that the Republicans will hold the House and materially increase their Senate seats. It is the economy stupid.

For CRE there is a lot of good news in this. Retail sales will increase, and online is still just around 10-12% of total retail sales. Department stores may become obsolete, and malls may have to be reconfigured to add entertainment and medical office, etc, but overall retail is not going away. It is just being reconceptualized to meet a changing consumer mindset. The mix of tenants may be changing, but consumers are stepping up spending now, as the tax reform and rising wages become believable to 90% of workers who got some benefit either through wage increases or a combination of wage increase and lower taxes. Retail did not die, it just got disrupted and a makeover. Like all industries over time, things change, and the weak got obliterated, and the fast movers get success.