MID-SEPTEMBER ECONOMIC UPDATE
Written by: Harrison LaHaie
What’s in the News
Inflation beat expectations, coming in at 0.1% month-over-month, above the consensus expected of a decline. The news sent markets spiraling down. However, the Producer Price Index, which usually leads the Consumer Price Index, decreased by 0.1% in August. This decline was less than the 0.4% decline from the month prior. Mortgage rates have reached 6%, the highest since 2008. Initial jobless claims, a proxy for layoffs, continue to fall, indicating that the labor market has continued to remain tight despite economic uncertainty and pressure on rates.
Economic Outlook for CRE
Inflation beating expectations is not good news for commercial real estate. This could mean more rate hikes from the Federal Reserve, putting more pressure on financing costs. Lending markets will continue to tighten. Inflation’s refusal to drop will continue to put price pressures on new developments. The Federal Reserve will use the real estate market to cool inflation as the housing is the sector most impacted by rate hikes. The secondary effect is financing costs will increase for all transactions reliant on debt. Investors will be forced to understand the Federal Reserve’s goal of bringing inflation down to its target range of 2%.
The recent market rally that has come crashing down was predicated on an unrealistic expectation that inflation would tank and the Federal Reserve would pivot. August’s CPI numbers have thrown this out the window. As core inflation continues to rise, the Fed is going to push up rates. Historically, the Fed has not pivoted until the Fed Funds rate is greater than CPI year-over-year growth. Fed officials have continued to signal that financial conditions must tighten to bring inflation down. CRE markets are predicted to see lending fall by 18% this year compared to 2021 as this reality manifests. Rate hikes at the next two Fed meetings appear to be guaranteed, the question is 75 bps or 100 bps? An interesting development that may play into the current story is the slight decrease in inflation combined with a rise in nominal wages allow for real wage growth. This development makes a recession unlikely as 70% of the U.S. GDP is consumer spending. However, it may also keep inflation above the 2% target. Until the labor market cools off meaningfully, inflation will likely remain above what the Fed wants to see.
Sources: Globe St, WSJ, First Trust, Federal Reserve.