MID-JUNE ECONOMIC UPDATE
Written by: Harrison LaHaie
What's In the News Mounting concerns about the near-term economic future of the United States has kept markets in turmoil. On Monday the NASDAQ and S&P 500 both opened significantly down, with the S&P officially reaching bear market territory of -20% from a recent high. Concerns regarding inflation, the Fed, and consumer sentiment have caused this precipitous drop in asset prices. The University of Michigan Consumer Sentiment index reached its lowest level since 1980 in May. Consumer price index, CPI, increased by 1.0% in May, signaling that the Fed has yet to rein in inflation. While the Fed’s Global Supply Chain Pressure Index has eased from the high in December, it remains at a level far elevated from any time in the last 25 years pre-pandemic.
Economic Outlook for CRE
The Federal Reserve will need to continue to raise rates to gain control, as they did on Wednesday. The 75-bps bump is the highest since the 90’s. As a result, sales volume in CRE will decrease. Rising interest rates mean that it is becoming more difficult to secure loans with high LTV and present the potential of debt creating negative leverage. In April, investment sales were down 16% year over year. This drop will likely continue as the Fed will likely have to raise rates by at least 50 bps in its next meeting. With sales volume fallings, CRE prices could begin to decrease. In retail, inflation has put pressure on retailers. The most glaring example is that of Target which has overstocked inventory and has now seen a drop in demand as consumers can no longer afford many goods due to rising prices. It is unlikely that many retailers will be economically secure enough to expand their footprint.
The current situation presents a conundrum for the Fed. The policy tools available to the Federal Reserve are blunt and imprecise. Unfortunately, the Fed’s only way to tame inflation is to slow down demand. By raising the Fed Funds rate and now decreasing money supply through quantitative tightening, interest rates will further increase. As credit becomes more expensive, demand will have no choice but to slow down. To what extent this will slow down the economy remains to be seen. Fewer analysts by the day are confident that the Fed can avoid a recession. Only time will tell the degree of demand destruction that the Fed will inflict.
Sources: Globe St, WSJ, First Trust, Federal Reserve.