Economic and Policy Outlook

Transcription

1 Economic and Policy Outlook BOMA National Advisory Council April 7, 2016 Carl Hudson, Director, Center for Real Estate Analytics The views expressed are those of the presenter, and do not necessarily reflect the position of the Federal Reserve Bank of Atlanta or the Board of Governors of the Federal Reserve System.

2 2 Economic and Policy Outlook Agenda and Summary Forecast recommendation made back in December has been maintained. Progress in the labor market continues and jobs growth remains robust. Some signs of a pick-up in underlying inflation have appeared. Multiple headwinds appear to be continuing to impact output growth. Are we in the middle of good times for commercial real estate?

3 3 The latest FOMC statement on monetary policy. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. FOMC Statement, March 17 th, 2016

4 4 The latest FOMC statement on monetary policy. In determining the timing and size of future adjustments TRANSLATION: to the target WE ARE range GUIDED for the federal BY funds CONGRESSIONAL rate, the Committee MANDATES will assess OF realized and PRICE expected STABILITY economic AND conditions MAXIMUM relative to its objectives EMPLOYMENT. of maximum employment and 2 percent inflation. FOMC Statement, March 17 th, 2016

5 5 The latest FOMC statement on monetary policy. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. FOMC Statement, March 17 th, 2016

6 6 The latest FOMC statement on monetary policy. This assessment will take into account a wide range TRANSLATION: of information, AND including WE LL measures MAKE of labor OUR market JUDGMENTS conditions, BASED indicators ON of THE inflation pressures DATA LOTS and inflation OF DATA. expectations, and readings on financial and international developments. FOMC Statement, March 17 th, 2016

7 7 Labor Market Spider Chart - Levels

8 The latest FOMC statement on monetary policy. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. FOMC Statement, March 17 th,

9 The latest FOMC statement on monetary policy. In light of the current shortfall of inflation from 2 percent, TRANSLATION: the Committee AND will DATA carefully THAT monitor actual GIVE and INSIGHT expected INTO progress THE PRICE toward its inflation STABILITY goal. The OBJECTIVE Committee WOULD expects that economic SEEM TO conditions BE ESPECIALLY will evolve in a manner that IMPORTANT will warrant only RIGHT gradual NOW. increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. FOMC Statement, March 17 th,

10 10 The latest FOMC statement on monetary policy. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.. FOMC Statement, March 17 th, 2016

11 11 The latest FOMC statement on monetary policy. However, the actual path of the federal funds rate TRANSLATION: will depend on the WE economic CAN T TELL outlook YOU as informed EXACTLY by incoming WHAT THE data.. PATH OF INTEREST RATE NORMALIZATION FOMC WILL Statement, BE. March THAT 17 th, 2016 WILL BE DETERMINED BY HOW THE DATA UNFOLD AND HOW IT AFFECTS THE FORECAST.

12 So what is the economic forecast? I don t trust people who tell me they can see the future The Fortune Teller (De La Tour)

13 So what is the economic forecast? I don t trust people who tell me they can see the future The Fortune Teller (De La Tour)

14 Let s check the track record of economic forecasters. Here is what they said would happen to the economy one year ahead. 6 5 predicted actual

15 And here is how it turned out. 6 5 predicted actual Note: Percentage of forecasts within 1 percentage point of what actually happened? 52.1% Source: Bryan and Molloy (2007)

16 What does a forecast of real GDP growth of 2.6% really mean? 6 5 predicted actual Note: RMSE of a one-year ahead forecast is about 1.7% There is about a 3 in four chance that real GDP growth will be somewhere between 4.5% (a boom) and 0.9% (teetering on recession) Source: Bryan and Molloy (2007)

17 Oh, but not your favorite forecaster you say? Think again. 17

18 Oh, but not your favorite forecaster you say? Think again. 18

19 Oh, but not your favorite forecaster you say? Think again. Statistical significance boundary 19

20 So given their inaccuracy, what is the value of an economic forecast? 1) Despite the large average errors, forecasts tend to beat a coin flip 2) Forecasts are valuable as risk evaluation exercises.

21 21 The consensus view suggests the economy will grow a little in excess of potential GDP growth this year and next. Assumed potential GDP growth

22 As excess slack in the economy is absorbed, inflation will firm and move back toward the FOMC s longer-term objective of 2%. 22

23 23 The FOMC s dot chart. Here s what FOMC participants say about the path for policy. What do you see in the dots? 5 rate increases in rate increases next year 2 rate increases this year March 2016

24 I see a Committee that is viewing the incoming data as being somewhat below expectations. But I also see something else. 24 March 2015 December 2016 March 2016

25 25 I see a downward shift in what the FOMC judges to be the long-run equilibrium interest rate. March 2015 December 2016 March 2016

26 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Growth projections of the FOMC reveal a strong presumption that a 3% growth world would emerge from the recession Elusive 3% world 2 1 Expansion average 2.1% world

27 27 Likewise, it has repeatedly been the view that as the economy strengthened, so too would inflation. FOMC s Inflation Target

28 Economic and Policy Outlook: I m not scared, but I may be a little apprehensive. 28 Mandate Checklist Employment Price Stability How sustainable are they? GDP specifically these components: Consumption Foreign Sector Business investment

29 Here s the good news: Strong signals continue to be seen in the U.S. labor market. Job gains have continued at a solid pace. 450 Payroll Employment Changes thousands of jobs, SA Monthly change month average ,000 threshold (avg. monthly change in payrolls necessary to keep pace with labor force growth) Source: Bureau of Labor Statistics through March

30 The substantial improvement in the labor market, and the U-3 measure of unemployment, is now in the range of FOMC participants estimates of normal Unemployment (U-3) and Underemployment (U-6) Rates percent Unemployment Rate (U3) Unempl+Margin Attach+Part Time Econ Reasons/CLF + Margin Attach (SA,%) month Change in Labor Force thousands of persons, SA 7 5 Central tendency of FOMC participants long-run unemployment rate estimate (from Dec 15 SEPs) Feb-13 Feb-14 Feb-15 Feb-16 Sources: Bureau of Labor Statistics; FOMC, Dec Summary Economic through March

31 Source: Bureau of Labor Statistics through February Trend wage growth has been weak for some time, and what glints we saw of an uptick disappeared in February. Average hourly earnings have risen 2.2 percent over the past year, though this is at least a percentage point below pre-recession levels. 4.0 Average Hourly Earnings percent change, year-over-year

32 The latest PCE inflation report showed some firming in the underlying inflation measures toward the FOMC s 2% inflation objective PCE Core PCE FRBD trimmed-mean PCE PCE Price Index year-over-year percent change, monthly (Annualized % Change) PCE Core PCE Marketbased Core PCE* FRBD Trimmedmean PCE February Past 3 months Past 6 months Past 12 months FOMC Inflation Objective Resource slack or low inflation expectations Other transitory factors PCE NOWCASTS: 1 mo. % (a.r.) Feb-16 "Nowcast" Actual PCE Core PCE MB PCE MB Core Transitory effect of energy prices Sources: Bureau of Economic Analysis; Federal Reserve Bank of Dallas through February

33 Key to this forecast is that inflation expectations hold firm. Consumer Inflation Expectations percent Professional forecasters inflation expectations percent year ahead (median) 5-10yr ahead (median) 2.5 SPF core PCE (1-year, median) Survey of Professional Forecasters (10-year, median) Correlation with changes in Gasoline Prices: 1-year ahead: year ahead: Source: U of M, Survey of Consumers through February 2016 Source: FRB Philly s Survey of Professional Forecasters through Q

34 Going into the March FOMC meeting, our GDPNow tracking estimate showed real GDP is coming in a shade above 2 percent reasonably consistent with our forecast Gross Domestic Product Tracking Estimates percent, annualized GDP: tracker GDP: Q1 tracker FOMC Meets *

35 35 Since that time, however, the data have been less encouraging. 3.5 Gross Domestic Product Tracking Estimates percent, annualized GDP: tracker GDP: Q1 tracker FOMC Meets * Feb. Retail sales Feb. Retail sales Feb. Durable goods spending Feb. consumer spending ISM Manufacturing Index Auto Sales, Manufacturing Report

36 Here is the pattern of consumer spending relative to the overall economy. It s stronger than the economy as a whole, but it isn t moving in the direction of strength. 4 Real Gross Domestic Product and Personal Consumption Expenditures percent, year-over-year Real personal consumption expenditures Real GDP *Estimates for Q1 based on GDPNow * * Source: Bureau of Economic Analysis; staff calculations through

37 But consumer fundamentals are quite positive. Real disposable income was boosted by the decline in oil prices during % 4.0% 3.5% 3.0% 2.5% Real Disposable Personal Income year-over-year percent change, SA *Oil prices declined from $95/bbl. in early Sep. 14 to $47/bbl. by the end of Jan Personal Savings Rate percent Sep Source: Bureau of Economic Analysis through February 2016 University of Michigan Consumer Sentiment Index Q1 1966=100 Sep % 4-year growth rate: 2.0% % Source: Census Bureau through February Source: University of Michigan Survey of Consumers through February

38 The foreign sector is still looking uncomfortably soft. Forecasts for global growth were further notched down in the latest update from the IMF. 10 Foreign Gross Domestic Product average annualized quarterly percent change 8 China World IMF Forecast Revision to IMF GDP growth Forecast (percentage point difference in annual growth rates compared to October 2015 report) U.S. Euro Area United States Japan Japan Euro Area Emerging Markets China World Sources: Haver Analytics, IMF World Economic Outlook, January

39 Source: Federal Reserve Board through February These numbers suggest that manufacturing activity will likely remain a drag on overall GDP in March. 7% 6% Industrial Production percent change, year-over-year Total Industrial Production IP: Manufacturing Trade-Weighted Dollar % 120 4% 115 3% 110 2% 105 1% 100 0% 95-1% 90-2% 85-3% Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 80

40 40 Something appears to be restraining business appetite for business expansion. 10 Quarterly % (a.r.) Real Business Fixed Investment Growth GDP growth trend (over the recovery) 0-2 * Q1 tracking estimate (-1.1%) Q Q Q Q Q Q Q Q Q

41 Roughly one-in-five of the firms we surveyed indicated that recent financial market volatility has (negatively) influenced their capital or employment plans for this year. 41 Has the volatility in financial markets materially changed your capital investment or employment plans for 2016? 100 Number of executives % 88% 30% 70% % 86% 22% 78% 0 Sales "Normal" or better Sales Less than "normal" 0 Large firms Small firms

42 Summary of economic data and the policy environment 42 We are holding to the forecast recommendation we made back in December. While financial markets have been turbulent, the macroeconomic data we have in-hand appear consistent with our previous forecast. We ve made substantial progress in the labor market and jobs growth remains robust. However, wage growth has been tepid, showing only hints of acceleration. We have seen some signs of a pick-up in underlying inflation. However, declining energy prices will likely continue to impact headline inflation measures over the next few months. Household inflation expectations have softened recently, though our preferred measures of inflation expectations appear stable at target-consistent levels. Multiple headwinds (a strong dollar, restrained investment, and an inventory overhang) appear to be continuing to impact output growth, although domestic spending appears to be resilient in the face of these impediments.

43 Thoughts on Commercial Real Estate The best loans are made in the worst of times; the worst loans are made in the best of times.

44 Thoughts on Commercial Real Estate The best loans are made in the worst of times; the worst loans are made in the best of times. On one hand... CRE Prices have rebounded Cap Rates have declined Foreign capital attracted Leverage increased

45 Transaction activity is rising quickly 45

46 Bank lending has returned 46

47 CRE prices have rebounded Commercial Real Estate Prices level (dashed lines) year-over-year change (solid lines) 30% 20% 10% % -10% % -30% -40% Peak to Current Apartment: 38.5% Retail: -1.8% Industrial: -9.3% Office: 16.2% Source: Moody's/ Real Capital Analytics through January

48 Cap rates have declined 12.0% Cap Rates 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Office Industrial Retail Apartment All Property Types Hotel 10-year U.S. Treasury Source: Real Capital Analytics through February

49 Record amounts of foreign capital attracted US Major Markets South Florida Atlanta New Orleans Baton Rouge Other Markets (Louisiana) # of Deals 3,240 1, Volume ($ Mil) $91,943.1 $43,307.0 $31,947.7 $23,490.5 $20,466.4 # of Deals Volume ($ Mil) $50,166.3 $25,544.9 $18,236.5 $13,384.6 $12,724.1 # of Deals Volume ($ Mil) $3,296.9 $1,515.6 $546.3 $928.7 $1,187.8 # of Deals Volume ($ Mil) $3,585.3 $447.4 $732.2 $413.6 $416.2 # of Deals Volume ($ Mil) - $ # of Deals Volume ($ Mil) $7.9 $ $30.4 $1.6 # of Deals Volume ($ Mil) $20.6 $4.8 $5.5 $8.2 $6.9 Source: Real Capital Analytics 49

50 Leverage 50

51 Thoughts on Commercial Real Estate The best loans are made in the worst of times; the worst loans are made in the best of times. On one hand... CRE Prices have rebounded Cap Rates have declined Foreign capital attracted Leverage increased On the other hand... Muted construction? Wide cap rate spreads? Activity mostly in major markets? Impact of HVCRE and liquidity regs?

52 Jan 03 May 03 Sep 03 Jan 04 May 04 Sep 04 Jan 05 May 05 Sep 05 Jan 06 May 06 Sep 06 Jan 07 May 07 Sep 07 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 Source: CBRE-EA/Dodge Pipeline through January Muted construction? 700,000 United States, Underway, sq ft x , , , , , ,000 0 Retail Warehouse Office

53 bps Cap rate spreads remain wide 850 Cap Rate Spreads Office Industrial Retail Apartment All Property Types Hotel Source: Real Capital Analytics through February

54 54 Activity mostly in major markets Commercial Real Estate Prices level (dashed lines) year-over-year change (solid lines) 30% 20% 10% 0% -10% % 100 Peak to Current 50 National: 16.6% -30% Major-Markets: 35.4% 0 Non-Major Markets: -14.4% -40% Source: Moody's/ Real Capital Analytics through January 2016

55 Thoughts on Commercial Real Estate On one hand... The best loans are made in the worst of times; the worst loans are made in the best of times. On the other hand... CRE Prices have rebounded Cap Rates have declined Foreign capital attracted Leverage increased Muted construction? Wide cap rate spreads? Activity mostly in major markets? Impact of HVCRE and liquidity regs? Give me a one-handed economist! Harry S. Truman

56 56 Economic and Policy Outlook We d like to hear from you! Please share your business card with me or Carl.Hudson@atl.frb.org if you d like to participate in our quarterly Commercial Construction Poll. Questions include pace of construction, backlog, price of materials, labor costs, availability of credit, and fundamentals by property type (i.e. construction, absorption, rent growth).

57 Economic and Policy Outlook BOMA National Advisory Council April 7, 2016 The views expressed are those of the presenter, and do not necessarily reflect the position of the Federal Reserve Bank of Atlanta or the Board of Governors of the Federal Reserve System.

58 Economic and Policy Outlook BOMA National Advisory Council April 7, 2016 Appendix

59 The ECB meets today and is generally expected to ease policy in light of low inflation and slower growth. Other recent policy easings were implemented by New Zealand, China, Sweden, and the Bank of Japan. 59 Central Bank Current Policy Meeting Date European Central Bank Meets today--expected to cut rates further and expand QE operations. 10-Mar New Zealand Cut rates 25 bps to 2.25% citing weakening global growth. 10-Mar Canada Holds policy rate at 50 bps. 9-Mar People Bank of China Cut reserve requirements. 6-Mar Australia Held rates at 200 bps, but hinted at lower rates should inflation move lower. 29-Feb Israel Policy rate 0, "considerable time" language in place 22-Feb Mexico Raised policy rate 50 bps to 3.75 amid concern over falling peso and rising inflation. 17-Feb South Korea Rate held at 150 bps but recently lowered its growth projection. 15-Feb Sweden Cuts rates 15 bps to negative 50 bps. Indicated it was ready for more stimulus to ensure inflation outlook to target. 11-Feb Bank of England Held rates at 50 bps, but lowered their inflation forecast 4-Feb Bank of Japan Cut deposit rate to -10 bps and continues QE to return inflation to target. 28-Jan

60 GDPNow forecasts for 2016: Q1 60

61 Atlanta Fed GDPNow forecasts for 2016: Q1, growth rates and changes Date Major Releases GDP PCE Equipment Intell. prop. prod. Nonres. struct. Resid. inves. Govt. Exports Imports Change in net exp. Change in CIPI 1-Feb Initial nowcast Feb GDP, Pers. inc./pce, Adv. intl. trade Mar Wholesale trade, Foreign trade (Fri) Mar Monthly Treasury Statement Mar Import/export prices Mar Retail trade Mar Housing starts, CPI, Ind. Prod Mar Existing home sales Mar New home sales/construction costs Mar Advance durable manufacturing Mar GDP, Pers. inc./pce, Adv. intl. trade Apr Employm., ISM Man., Constr. Spend Apr Auto sales, Manuf. Report (M3) Apr International trade, ISM Nonmanuf Note: CIPI is change in private inventories. Changes in net exports and CIPI are both in billions of 2009 dollars (SAAR). All other numbers are quarterly percent changes (SAAR). **Note: Nontrivial downward revisions are shaded red.

62 **Note: Nontrivial downward revisions are shaded red. Atlanta Fed GDPNow forecasts for 2016: Q1, contributions to growth Date Major Releases GDP PCE Equipment Intell. prop. prod. Nonres. struct. Resid. inves. Govt. Net exports CIPI 1-Feb Initial nowcast Feb GDP, Pers. inc./pce, Adv. intl. trade Mar Wholesale trade, Foreign trade (Fri) Mar Monthly Treasury Statement Mar Import/export prices Mar Retail trade Mar Housing starts, CPI, Ind. Prod Mar Existing home sales Mar New home sales/construction costs Mar Advance durable manufacturing Mar GDP, Pers. inc./pce, Adv. intl. trade Apr Employm., ISM Man., Constr. Spend Apr Auto sales, Manuf. Report (M3) Apr International trade, ISM Nonmanuf Note: CIPI is change in private inventories. All numbers are percentage point contributions to GDP growth (SAAR).

63 63 Labor Market Spider Chart - Levels

64 Statistical models indicate the given our growth and unemployment rate projections, the most probable scenario is that U.S. productivity growth will rebound to around 1 ½ percentage points this year and next. The pace of jobs growth will slow and labor force participation will resume a downward path as baby-boomers retire. 64 Current FRBA forecast Alternative productivity scenario Alternative productivity scenario Current FRBA forecast Alternative productivity scenario Current FRBA forecast Alternative no productivity growth scenario: If productivity doesn t rebound, something has to give. With no productivity growth, our forecast can only be sustained with considerably stronger jobs growth something averaging around its current strong growth trend of 225 thousand per month. At this pace, we would expect labor costs to accelerate significantly.