March 7, 2017

Four key indicators revealed in late February have given hope for a resurgent U.S. economy:

  1. The National Federation of Independent Business (NFIB) small business survey showed optimism at its highest level in 12 years
  2. Both the Philadelphia Fed and New York Fed manufacturing surveys are at very high levels
  3. Housing starts are exceeding expectations and continue to trend upward, matching homebuilder sentiment
  4. The stock market continues to set record highs, with investors showing faith that policy changes will result in stronger corporate earnings

Furthermore, retail sales for January exceeded expectations while both consumer spending and inflation are increasing, according to JLL’s Chief Economist, Ryan Severino and author of JLL’s Economic Insight research series.

“Even the Atlanta Fed’s Sticky-Price CPI, a basket of goods that changes price very slowly, moved up in February and continues to increase over time,” Severino says. “This index is now consistently above 2.5 percent and that has not occurred since the years leading up to the recession.”

While the trend for commercial real estate (CRE) won’t be quantified until the end of the first quarter, anecdotal evidence suggests positive sentiment about the economy is already migrating to CRE.

“For example, some larger leases that were delayed in late 2016 – due, at least partially, to political risk – were signed in the first quarter,” Severino says. “While it is too early to see if positive sentiment is having any systematic effects, the anecdotal evidence looks positive for the markets.”

However, investors should remain cautious.

“The risk for the economy and CRE is that the data continues to suggest a good economy while the expectations are more reflective of a great economy,” Severino says. “If policies beneficial to the economy are not enacted or even fall short of expectations, then market sentiment is likely to turn negative quickly. When that occurs it can impact consumer spending, investing, trading and leasing decisions. While the good times are rolling for now, we will need supportive policies to not only keep things rolling, but also growing.”

The Trump administration is only now beginning to discuss tax law changes and the plans are still fluid. Furthermore, there has been little substantial movement on infrastructure spending.
Severino’s concern is that boosted optimism in the U.S economy may be short-lived.

“Even deregulation, which has been touched up, might be a tougher battle than previously expected,” Severino says. “While we remain cautiously optimistic, we are beginning to worry a bit that expectations are running too hot and economic reality could be disappointing. Empirically speaking, when expectations run super-hot in the market, they are not usually met.”

“However, there is a case to be made for increased optimism above the levels of the last few years. The leading economic indicators – the stock market, consumer confidence, business orders, etc – can be decent canaries in the coal mine. Though imperfect, they often provide good insight into whether optimistic feelings will persist or not.”
If expectations for a U.S. economic recovery turn out to be inflated, it will be a mixed bag for real estate, Severino says.
“On the one hand, real estate is often a good – if partial – hedge against inflation. On the other hand, if inflation runs too hot it can erode real returns, increase the cost of borrowing, and put the brakes on a growing economy.”

“The severity and duration will, to a large extent, be determined by what happens with fiscal policy. In the absence of fiscal stimulus, I think inflation will accelerate, but likely not overheat.”

“If we do receive some kind of late-cycle fiscal stimulus – for example, tax cuts or reform, or increased defense spending, which has already been signalled – then the probability for too-hot inflation increases considerably.”

View the full report


Ryan Severino

Chief Economist, JLL

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