Situs RERC, in partnership with Deloitte and the National Association of Realtors, recently released its report Expectations and Market Realities in Real Estate: Stability in a Risk Environment.
Based on 3Q 2017 data, Situs RERC made predictions for economic indicators through the end of 2018 including US GDP growth, inflation and unemployment. Their estimates for the base case scenario are presented below.
With the first quarter now behind us, let’s look at how Situs RERC’s predictions are tracking against reality.
US GDP Real Growth
Base case scenario: 2.0-3.0 percent
In late March the Bureau of Economic Analysis (BEA) released its third and final estimate of real GDP growth for Q4 2017, of 2.9 percent.
Base case scenario: Faster growth from tax reform will enhance job creation, lowering unemployment and causing moderate wage growth.
This first couple months of the year have proved favorable for US employees: The labor market added 313,000 jobs, and unemployment remains at a 17-year low at 4.1 percent; and, according to the Bureau of Labor Statistics, wages have grown 2.6 percent, compared to a year earlier.
Base case scenario: Momentum slows and affordability becomes an issue as home prices rise, especially for first-time home buyers. Overall economic indicators, however, continue to be positive for the market.
Overall indicators are proving positive for the overall market, and demand remains hot although volume continues to be an issue and millennials continue to favor renting over buying.
Base case scenario: Confidence continues to grow, benefitted by higher wages and increased tenure for homeowners; consumer spending also continues in line with tax reform and low energy costs.
Although positive economic indicators should mean a significant rise in consumer spending, increases have only been marginal. The Commerce Department reported a 0.2 percent increase in both the months of January and February.
Base case scenario: Business investment increases, anchored by increased demand for goods and services and lower corporate tax rates.
Gross private domestic investment rose by 0.78 percent in 4Q 2017 according to the BEA, indicating increased business spending. This increase was primarily driven by a surge in fixed investment – up 1.31 percent from the previous quarter. Private inventories were down, but because personal consumption, exports and government funding all positively contributed to GDP, it is expected that inventories will increase in the short term as production ramps up to meet demand.
Base case scenario: Tax cuts contribute to an increase in the deficit, but growth is not hurt. Spending declines in 2018 as nondefense expenditures are scaled back and infrastructure spending does not materialize.
After shutting down in January, and almost again in March, Congress passed and the President reluctantly signed a $1.3 trillion spending bill to fund the government through the end of September. In February, the Treasury Department reported the government accumulated a $215 billion deficit, the biggest monthly amount in six years.
Base case scenario: US manufacturers continue to see favorable conditions; imports grow more slowly than exports, leading to an improvement in the balance of trade.
President Trump imposed tariffs on solar panels and washing machines in January, and also tariffs on steel and aluminum in March inciting fears of a trade war and roiling the markets. China hit back in April with 128 tariffs on American-made products, amounting to about $3 billion.
Base case scenario: Driven by a tight labor market and wage growth, inflation remains slightly above the FOMC’s 2.0 percent target.
On a 12-month basis, inflation continues to run slightly below 2.0 percent, according to the FOMC statement from March.
Base case scenario: Rates increase steadily through 2018 and 2019. FOMC will continue to wind down the balance sheet gradually to avoid disrupting markets. The 10-year Treasury rate rises gradually to the high-2 percent range.
At the end of March, the Federal Reserve lifted its key interest rate from 1.5 percent to 1.75 percent, the highest level in a decade, signaling that the state of the US economy is strong.
Learn more about Situs RERC’s analysis of the CRE market in our recently released Expectations and Market Realities in Real Estate: Stability in a Risk Environment.