Written by: Harrison LaHaie
What's In the News
Economic turmoil is being felt globally. Food prices are rising and will continue to due to because of not only the war in Ukraine disrupting access to two of the world’s largest wheat producers but poor weather conditions in the Americas. Consumer sentiment has reached another low according to The Conference Board’s expectations index. In a sea of uncertainty, orders for durable goods were a bright spot, as they increased by 0.7%, well above the consensus expected of 0.1%. At the G7 Summit, world leaders discussed how to counter global Chinese influence and how to better punish Russia for its invasion of Ukraine, signaling more sanctions to come.
Economic Outlook for CRE
CRE continues to reckon with the impacts of inflation and interest rate hikes. On the development side, demand and supply are heavily mismatched for construction materials. Although lumber prices have declined, other materials continue to have heightened prices. Many speculate that as the market cools, these prices will go down. However, the inhibition of a disrupted supply chain remains to be a major obstacle. Retail tenants will continue to have to deal with both inflation putting upward pressure on costs and the need to keep more inventory on hand. While office continues its slow recovery, industrial and multifamily remain strong with sound fundamentals. Still, if inflation surprises on the upside, more painful and exaggerated rate hikes will occur and continue to put a dent in CRE investment sales.
Breakdown: Supply Chain
Source: Federal Reserve
The two biggest economic stories of the past year, inflation and interest rates, have dominated the news cycle as central banks in the U.S. and Europe have been forced to deal with runaway inflation. Their method for taming inflation is to cool off demand by tightening monetary policy, making it more expensive to access credit. While this approach cools off demand, it does little to deal with perhaps the biggest current driver of inflation: supply shortages. Why is there such great disruption in the supply chain? The answer is multifaceted. First and foremost, China, one of the world’s largest exporters, has kept major cities in lockdown due to COVID-zero policies. With Chinese ports shut down, there is a massive bottleneck on the supply of goods to the rest of the world. In the U.S., the tightness of labor market has led to a shortage of truck drivers, dock workers, and warehouse workers, disrupting supply chains domestically. Moving forward, it will take a while for supply chains to normalize. Some have speculated an end to the era of globalization as experienced pre-pandemic. Not to mention that the war in Ukraine ending would also be a requisite for true normalization of the supply chain.
Continuing to pay attention to the supply chain will be vital to predict inflation and monetary policy. It is highly unlikely that inflation will come down significantly until the supply chain approaches normalization. Cleveland Fed President, Loretta Mester, commented that the supply chain will continue to drive inflation, forcing the Fed into action. This means that central banks will be forced to tighten until demand meaningfully slows down, likely causing a recession. With supply chains still in disarray, the Federal Reserve will have to crush demand to reach the target level of 2% inflation.
Sources: CE Pro, WSJ, Globe St, Federal Reserve