ELLIOTT D. POLLACK
FOR IMMEDIATE RELEASE
October 29th, 2018
The Monday Morning Quarterback
A quick analysis of important economic data released over the last week
On the surface, it was a best of times, worst of times type week. Stock market volatility dominated many economic headlines. But, that’s unfortunate since most of the economic news was quite good.
Best of times: Initial claims for unemployment insurance continue to be very low by historic standards. Real GDP was up strongly in the third quarter. Real disposable income growth was again up. Consumer confidence, while down slightly, was still at high levels. And mortgage rates held relatively steady. Arizona also reported good news. Taxable sales were up strongly and office and industrial vacancy rates continue to decline in Greater Phoenix as demand continues to exceed new supply.
Worst of times: On the other hand, the pending home sales index, a forward looking indicator based on contract signings, was up for the month but down slightly from a year ago. New home sales were down for the month and when compared to a year ago, by a significant amount.
It’s very interesting to me to see how the press interpreted the good GDP news. Some say it as a continuation of the strong economy. Others, while acknowledging it was a good quarter, focused on the fact that the economy is not likely to continue to be as strong and, indeed, is likely to weaken. They suggested that a recession in 2020 was all but inevitable. Take it from someone who has been trying to predict the economy for nearly a half century, projecting the exact timing and depth of a cycle well in advance is tough to do. Yet, we do know this. The economy is likely to continue to do well at least through 2019. There is a great deal of stimulus right now between tax cuts, government spending and consumer spending. It is late in the cycle but there are no signs of it ending at the moment even given the 50-year low in the unemployment rate and the age of this expansion.
And, in my opinion, most importantly, while the FED is tightening, it clearly has a vested interest in seeing this cycle continue for a while longer. The reason is simple. For the FED to have the tools it needs to help the economy during the next recession (whenever it shows up), interest rates must rise. Those higher interest rates are what the FED needs to have the ability to cut rates meaningfully in the future, but only if rates go up between now and the end of this cycle. That means that we could see rates rise by 200 or so basis points before the end of the cycle. When the cycle end occurs is an unknown. Will it be 2019, 2020 or later? I could guess. But, that’s all it would be this far in advance. Whenever it is, if the FED is ready with sufficiently high enough interest rates, the next cycle is likely to be mild.
The depth of the next cycle also depends on how much fiscal stimulus the government is willing to pour into an economy that continues to see large deficits. My guess is that when that stimulus is needed, the party in power at that time will provide it. The problems that such spending might cause are a discussion for another day. Keep in mind that the economy is inherently cyclical. By the middle of next year, this will be the longest expansion is U.S. history. And also keep in mind that the last recession was deeper than any cycle since 1929. Probabilities are that the next recession will be like most of its post-war siblings: short and shallow. The long-term outlook for the U.S. economy remains excellent regardless of where we presently stand in this cycle.
Third quarter growth moderated but by less than expected. Real GDP expanded by 3.5% after rising 4.2% in the second quarter. Inventories accounted for more than half of the growth. Other areas that did well were consumer spending and intellectual property investment. Drags on the rate of growth included trade, residential investment and investment in structures. Thus, growth in the quarter was, as usual, a mixed bag. It remained strong and exceeded expectations. But, the composition was less favorable than in the second quarter. Overall, the economy is expected to grow by 3.0% for the year as a whole.
The University of Michigan consumer sentiment index for October dropped modestly to 98.6 from 100.1 in September and 100.7 a year ago.
30-year fixed rate mortgage rates averaged 4.86% for the week of October 25th. This compares to 4.85% for the previous week and 4.72% for the week of September 27th.
The pending home sales index, a forward-looking indicator based on contract signings, increased 0.5% in September when compared to August. However, compared to a year ago, the index was down by a modest 1.0%.
New home sales in the U.S. were down to 553,000 units at an annual rate in September. This compares to 585,000 in August and 637,000 a year ago. Thus, new home sales are down 13.2% from a year ago. Given the outlook for interest rates, this is not a good report.
Total taxable sales for the state were up 6.8% in August when compared to year earlier levels. Retail sales were up 6.9% from a year ago.
In Maricopa County, total taxable sales were up 7.5% from a year ago while retail sales were up 7.6% over the same period.
According to CBRE, after a solid first half of the year, metro Phoenix industrial activity continued strong in the third quarter. Net absorption reached 3.96 million square feet in the quarter, pushing vacancy rates down to 5.7%. This compares to 7.3% a year ago and is the lowest vacancy rate since the fourth quarter of 2005.
CBRE also reported on the Greater Phoenix office market. Absorption continued strong in the third quarter with about 600,000 square feet absorbed. Thus, vacancy rates dropped to 15.7%. This is down from 16.8% a year ago and 16.2% in the second quarter. This is the lowest vacancy rate since the second quarter of 2008.
Greater Phoenix retail market vacancy rates were flat for the third quarter according to CBRE. Absorption exceeded new supply but not by much. Over the last four quarters, change in inventory has exceeded new supply by over 300,000 square feet. Thus, area vacancy rates increased modestly to 8.4% from 8.3% a year ago.
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