Where’s the blizzard?
The winter of 2023 has been very mild indeed. The lack of broadly harsh weather in many parts of the country has coincidentally translated to the economy remaining in, overall, positive territory. Consumer and producer prices, while not compressing at a desirable clip, have nonetheless seemed to stabilize. The labor market is still on solid footing with robust job gains and a very low unemployment rate. However, downside risks still loom as there is more to the employment numbers than meets the eye. Meanwhile, the yield curve remains inverted signaling that investors are still wary of the economy’s overall footing. Our output expectations are for small gains for the 2023 year.
The nightmare begins to wane
The interest rate hikes over the last four quarters are beginning to have a real effect on cooling inflation. The upper limit target Fed Funds rate has surpassed the most current Core PCE value and is a leading indicator that the Fed can pump the breaks on the rate hikes and deflation should continue. However, oil and gas prices remain a major downside risk to getting year-over-year CPI growth down to the 2% target.
The yield curve remains inverted
Both the 10yr-2yr and the 10yr-3month treasury yield spreads are still in negative territory. The decline seems to be stabilizing as performance among broader macroeconomic indicators such as GDP, corporate profits, and job creation are in growth territory. However, as long as investors have lower confidence in longer-term securities, an economic slowdown or recession will persist.
Jobs, jobs, jobs
Despite turmoil in financial markets and the technology sector, the broader labor market seems to be on very solid footing. The most recent jobs report of 517K jobs added was highly reassuring and maintains the narrative that the U.S. is not in a recession. The unemployment rate is creeping towards an almost all-time historical low. With the Fed’s full employment objective achieved, there is a risk that it will be more open to rate hikes to further control inflation.
Part-time employment drives gains
The Devil is always in the details. While on the surface the most recent job numbers look spectacular, and can shake-off rumblings of a recession, when looking at where the gains come from it is not just from full-time offerings. Job creation is great and all, but the growing gains in part-time employment vs full-time employment signal that the economy is still wobbling on the proverbial balance beam. The jobs reports over the next quarter will be extraordinarily important to keep an eye on as they will be very indicative of recessionary risks.
Office construction stagnated
On the commercial real estate front, new construction is robust across almost all asset classes. Office space continues to demonstrate signs of weakness. Office space construction should rebound as more businesses require on-site work, especially in larger, higher-social capital markets such as New York and Los Angeles. However, office will remain the laggard on CRE-performance through the long-term since many businesses will still employ hybrid or work-from-home models.
ABOUT THE AUTHOR
Eric Tannenbaum, CFE
Eric is a Sales Director at Blooma where he helps originators, underwriters, and portfolio managers transform their CRE deal due diligence processes. Eric has a decade in financial services experience with most of his career spent at Moody’s Analytics where he was an associate economist and relationship management professional for financial services industry solutions. He holds his Bachelor of Arts with a dual-major in Economics and Biology from Bucknell University, a Master of Science in Economics from Lehigh University, and an MBA with concentrations in finance and analytics from Villanova University.