Signals for the US Economy

by francine Hardaway on January 16, 2008

No question that we are in for a slowdown. Economists are arguing: will it be a technical recession or  a slowdown. Are we in a V with a bounceback or just a very long U?

In the next couple of months, watch job growth. Year over year job growth slowed in September to 1.2%. Every time in the past, this has brought us to a recession. More industries are contracting than expanding. This means a recession. Backing off on hiring sends us into a V.

Housing prices are in a new territory. Housing prices usually can fall only 3% before the consumer stops spending. But the consumer is still spending, and prices are still falling. The faster home prices fall,the faster the consumer retrenches.  But the consumer will start to come back, but it takes a while to get all the way back. This is an argument for a U.

When the consumer doesn’t have money in the home, they go to credit cards.  Fully half of the new debt in the past year is on credit cards. Banks are tightening credit in real estate and commercial loans, but not yet in the credit card market.  If they tighten, we won’t have a U, we will have a V.

For 18 months, we have made more money than we have spent.  But incomes are slowing. Even with 5% unemployment we are still seeing income growth, but not corporate profits, ex energy, are flattening.

We are in for an inflation. Wage growth pushes up prices. Commodity prices, due to strong global demand, are at an alltime high.  Europe and Asia have inflation already. The government is pumping out money, and that creates inflation. Bottom line: whatever the Fed does (and it will cut), it will take all of that back before the end of next year because it will be acing major inflation pressure.

The Fed is helpfully pumping liquidity into the system, and that’s helping. But there’s a flight to safety.

So conflicting signals.

In real estate, mistake have only been made for twelve months, before everybody figured it out. Relatively conservative capital is there, patiently looking for deals, but it will be around. There has been a flight to safety.

In the next couple of months, we will know whether recession or not. Even in the recession scenario, real estate doesn’t do as badly has it has done in the early 90s. But the market isn’t distinguishing between corporate debt and real estate right now.

However, debt markets will stabilize before equity and you will get richer returns on debt than equity this time. Capital will flow to debt, not equity. People won’t buy office buildings.

Housing: prices falling. Boomer kids (echo Boomers) moving back in with their parents. But the demographics for household creation get stronger. Good demographics for apartments. But we will see increases in vacancies and rent growth slowing. Apartments are the safest bet.

Retail is another story. Almost all markets in the country will be seeing rent growth below inflation.Phoenix retail markets will suck.

Office market is in better shape than numbers suggest. Rising vacancy rates over the next few years, but most markets are okay. But Phoenix has too much new construction for the demand. Deliveries will outpace absorption by 2:1 in Phoenix.

Industrial markets are usually well-behaved. As long as trade stays decent, industrial should be okay.

Next couple of years: cap rates go up. Phoenix underperforms in four major property types over the next four years. Guaranteed it is not going to be a good year. In a V scenario, opportunities come in ’09 and beyond. In a U, forget it for the next few years.

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