MID-JULY ECONOMIC UPDATE
Written by: Harrison LaHaie
What's In the News
The U.S. added 372,000 jobs in June. Economic turmoil further sinks in globally as Sri Lanka’s President is forced to resign after mass protest due to poor economic management and conditions. China has begun to ease lockdown measures in Shanghai and elsewhere, hopefully giving the opportunity for the supply chain to recover. U.S. Treasury Secretary, Janet Yellen, is on a world tour seeking to put a price cap on Russian oil. The G5 Credit impulse, a measure of credit creation in the world’s 5 largest economies, is the lower than 2008. Inflation surprised on the upside with its highest MoM increase in this economic cycle, reaching 9.1% on the year.
Economic Outlook for CRE
With inflation reaching new heights and the labor market still looking strong from a jobs standpoint, CRE investors should expect another rate hike of 75 bps. Green St, CRE research company, found that commercial property prices are down 4.9% from a peak in March. Falling in line with both stocks and bonds, it seems that CRE is finally experiencing a price correction. Overall, there is an increasing sense that the market must slow down. With industrial and multi-family running hot, economic forces are causing a moderation. With higher interest rates, limited room for rent growth, and inflation putting a squeeze on average people, the market appears to be reaching a ceiling.
With inflation beating the consensus expected increase, the Federal Reserve will have no choice but to raise rates by at least 75 bps. The Atlanta Fed is predicting a second quarter of GDP contraction, making it is highly likely that in the coming months we will see unemployment begin to rise. Recently, we have seen initial jobless claims climb above the 3-month moving average, potentially signaling that the labor market may be weakening. Inflation is forcing the everyday consumer to restrict spending, which will undoubtedly have an impact on economic growth, being that 70% of GDP is consumer spending. The general sentiment of Americans regarding the economy is highly negative. Thin times are ahead, it is a matter of how long they will last. Fundamental headwinds such as food supply restrictions, fuel prices, and the supply chain make it difficult to predict how long inflation and economic instability will last. Frankly, it would take a confluence of miracles to restore all those factors to normal levels in a timely manner. For now, expect the worst and hope for the best.
Sources: Globe St, WSJ, First Trust, Federal Reserve.