May 22, 2019
Political headlines and Federal Reserve FOMC member speeches will move the markets the next 30-45 days more so than any economic news. Why?
First, we are 95 percent through Q1 Earnings season with retailers wrapping up this week. The next view on corporate earnings – the real measure of economic health – won’t start until late July and August. The news on retailer earnings is good if you are WalMart, Target, Home Depot and TJ Max; and not so good if you are JC Penney or Kohls. What is the differentiator among retailers? If you are WalMart, Target and even Home Depot, it is execution on and growth of On-Line sales. If you are TJ Max or a Dollar-Discount retailer, it is success from focus on off-price and discount. If you are any where in between, the outlook is not so good. Let’s hear what our colleagues share from ICSC RECon convention in Las Vegas later this week. Based on emails and posts thus far, I think the news from ICSC will be: i) more about on-line execution strategies; ii) more about the changes coming to grocery and restaurant via online sales and cashless check out; and iii) more about adaptive reuse of all the closed retail stores. I will let all the night-life stories stay in Las Vegas.
Second, the May and June GDP announcements will be revisions to Q1’s Advance Estimate of +3.2 percent (no initial read on Q2 GDP until end of July). Tariff talk will be just that – talk & Tweet – until we get an initial read on Q2 GDP late July & Q3 GDP data in the Fall (Sept./Oct.). The U.S. and China are not close on a trade deal as we were led to believe; however, as long as the Congress ratifies NAFTA 2.0/USMCA this Summer, the U.S. economy can weather the storm with 2.0 percent range GDP doing plenty trade with Mexico and Canada.
Third, monthly employment growth will likely stay steady in +200k range as Spring/Q2 is the active period for housing construction (except entry-level due to the cost challenges), graduations, and onset of summer vacation and travel. In other words, we are in a period of the year where consumers spend, home buyers with jobs and savings buy homes, college graduates get hired, and companies don’t generally cut workforce.
Fourth, the media will be fixated on “TD-DC-FS” (TD=Tariffs Discussion, DC=Democrat Candidates entering 2020 Presidential race, and FS=Fed Speeches). Like the Republicans in 2016, the Democrats have too many of the same ideology running for President, but it’s good for the economy. Talk about an economic stimulus, campaign spending from so many candidates may exceed 2019 Holiday Sales (OK, a bit of a stretch).
And like Democratic candidates running for President in 2020, the FED does speak too much as well. Does the FED not realize that nine FOMC meetings and press conferences, FOMC meeting minutes a month after each meeting, and the required twice-a-year appearances before Congress are all we need to hear from the FED - unless the Fed Presidents are running for U.S. President? Just this week we have speeches from five (5) FED Presidents (Atlanta, Boston, Chicago, Philadelphia, St. Louis), a Vice Chair - Richard Clarida, and the Fed Chair Jerome Powell. How much more clarification or confusion can the market stand? The FED should simply meet for its 9 FOMC meetings, measure the economy with a micrometer with fresh data, and then decide on interest rates and speak just once. Then it should go back to studying the data it is so dependent upon and be quiet. Enough FED speeches that either say nothing, confuse the market, or contradict the Fed Chair. My one exception is Jim Bullard from the St. Louis FED. When Jim speaks, the market listens - much like they did with the late EF Hutton (I just dated myself again).
All you need to know about the tariffs was communicated by me in a Connect Media May 18, 2019 - Tariffs & CRE article with my fellow real estate economist Jim Costello from RCA (Real Capital Analytics). The bottom line is: “Don’t panic and commercial real estate is not going into a 1929 or 2009 abyss again.”
From the Connect Media interview this past Saturday, the following summarizes it all:
Time to panic? Not so fast, say CCIM chief economist KC Conway and Real Capital Analytics’ Jim Costello. “While the trade dispute and ratcheting up of tariffs on China is a serious matter with economic consequences, the panic being flamed by some that the economy will collapse, unemployment will skyrocket and commercial real estate will plummet into a 1929 or 2009 abyss again is irresponsible—and more anti-Trump rhetoric along the lines of what we heard last summer at the onset of the 10% tariffs,” says Conway.
When the U.S. imposed 10% tariffs on Chinese goods last summer, some headlines proclaimed that the economy would soon collapse. “What happened? A ‘Boom & Vroom’ economy happened, and the tariffs were a marginal nick in some of the best corporate earnings that we have seen in more than a decade,” points out Conway, director of research at the Alabama Center for Real Estate.
A few of the noteworthy economic headlines that may foretell what’s ahead include:
- 1. Chicago FED National Activity Index for April registered a negative 0.45 in April, down from a positive 0.05 in March. The primary reason for the reversal from March was slowing in industrial and factory production. Employment and Consumer input variables remained positive. This index is one of the more relevant and closely followed economic metrics produced by the Federal Reserve Bank system as it is a broad measure of the economy – especially industrial activity and factory production. The Index can be volatile from month to month, so the 3-month average is more meaningful. For April, even the 3-month average registered a negative number (-0.32). The Chicago Fed index is a weighted average of 85 economic indicators, designed so that zero represents trend growth. Only thirty-three of the 85 indicators comprising the Index figure made positive contributions in April, while 52 made negative contributions. As this deterioration preceded the implementation of the 25 percent tariffs on China, this Index is a leading indicator worth watching. This index is an early signal GDP is headed to something less than 3.0 percent in the important Q2 and Q3 periods, and maybe some of the Vroom is coming out of the “Vroom Cycle” of this economy. Stay tuned on this one, as it is the outlier economic metric to GDP, Jobs, and Consumer Spending/Confidence that suggests something may be occurring beneath the surface.
2. Consumer Sentiment The University of Michigan’s consumer sentiment index in May climbed to a 15-year high reading of 102.4, well above expectations and from April’s reading of 97.2. Maybe the Chicago Fed Index will recover in May after new Consumer related input variables. All I can say is Vroom is still in the Consumer segment of the economy. As I have reiterated through all the Q4 and Q1 earnings reports by retailers, it’s hard to have a recession when the consumer is confident and spending as consumption is 70 percent of GDP. Don’t short the Consumer this summer.
3. The Conference Board's LEI And now even the Conference Board is admitting this economic recovery will break the record in July becoming our longest in U.S. history. Leading Economic Indicators (LEI) for the U.S. increased 0.2 percent in April to 112.1 (2016 = 100), following a 0.3 percent increase in March, and a 0.2 percent increase in February. The US LEI rise in April was the third consecutive increase, with a majority of the leading indicators making positive contributions. Despite signs of slowing in manufacturing as indicated in Chicago Fed Index and expected from the 25 percent China tariffs, the Conference Board expects the current expansion will enter its 11th year in July, becoming the longest expansion in US history. That is more validation that 1H2019 has been in a “Vroom Phase” of the economic cycle and Vroom is not done.
4. Existing Home Sales: According to the National Association of Realtors® this week, Existing Home Sales (EHS) saw a minor decline in April. Total sales were down 4.4% from a year ago (5.43 million in April 2018), but still remain above 5.1 million units. The East and South regions saw a slight dip in sales, while the West saw growth and the Midwest was essentially unchanged. Total EHS – that is completed transactions that include single-family homes, townhomes, condominiums and co-ops - fell 0.4% from March to a seasonally adjusted annual rate of 5.19 million in April. The headlines, though, were most bearish on such a small change and were blaming everything from the 25 percent tariffs (which were not even a market influence in April) to Game of Thrones finally viewership interfering with sales traffic and preventing homeowners from readying their properties for listing. Give me a break!
The likely reason for flat to declining EHS is twofold: i) sellers are holding firm on pricing knowing it’s a sellers-market; and ii) existing homeowners are realizing new homes are too expensive to replace their existing home so they are staying put and fixing up homes. Home Depot earnings this week and the rise in HELOC (Home Equity Loans) loans supports this theory. It all boils down to a lack of inventory that is the result of pricing challenges. New homebuyers can’t find affordable homes priced under $250k-$300k - and existing homeowners can’t sell below a price sufficient to replace their housing need. The end-result is not enough housing turnover and home prices just keep climbing exacerbating the inventory problem. Here is the one bright spot. The most active segment of the market is “First-Time Buyers” that now account for approximately one-third of all EHS – the most of any buyer segment. Millennials are buying homes – it is just at a slower pace to save the down payment and afford the higher price. Housing is not awful! We just can’t build enough affordable and entry-level homes. The new term for that affordable housing gap is the “Missing Middle.”
Conclusion: My advice remains: Go to the beach, lake or mountains and recharge – especially if you are returning from the annual ICSC RECon convention in Las Vegas. This week I am off to speak on Affordable and Workforce Housing to the Alabama Affordable Housing Association (AAHA). In 2018, the AAHA facilitated the addition of new affordable housing in 20 communities across the state of AL from Huntsville to Mobile and many rural communities in between. Affordable Workforce Housing may be our greatest economic challenge to tackle. Job well done AAHA!
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ICSC: Retelling the Retail Story
American Property Tax Council: 2019 Annual Client Seminar
Economic Update: Utah Chapter of CCIM Institute
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Keynote Address: St. Louis Chapter of CCIM Institute
St. Louis, MO
PERE Private Equity Conference: New York
6th Annual NAI Florida Conference