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Written by: BGO — SLC Affiliate
This year many are hoping for a return of the “Goldilocks” economy — an economy that doesn’t run too hot nor too cold — which could enable the Federal Reserve (Fed) to feel comfortable lowering rates, but without the economy slowing too quickly and flirting with a recession. And with two months of the year in the books (at least in the economic data), it appears that we might just get such a thing. The labor market, arguably the most important facet of the economy, seems to suggest as much. What can we take from the data thus far and what does it mean for commercial real estate (CRE)?
Neither Too Hot Nor Too Cold
Last week’s pot of labor market data demonstrated some signs of cooling down after an inordinately hot labor market. The number of open jobs in January remained elevated at 8.9 million. Though down from its record high of 12.2 million in March 2022, it remains above the pre-pandemic level of roughly 7.2 million. Similarly, the quits rate declined to 2.1%, the lowest level since August 2020 when the economy was reopening. The hires rate fell to 3.6%, the lowest levels since the earliest stages of the pandemic, while the layoffs rate continued to hover near a record low, a sign that companies remain unwilling to let go of scarce workers.
Source: BGO Research
Net of all that, total employment increased by more than expected in February, even though January’s outsized figures got revised markedly lower. The unemployment rate increased slightly but remains not far from half-century lows. And wage growth is slowing, even as it remains above inflation, which has been decelerating faster than wages. Is the labor market still tight? Yes. Is it cooling off? Yes. Is that enough for the Fed to cut? Not likely, because it remains focused on inflation. Fed Chair Powell’s testimony to Congress last week reiterated as much. But a cooling labor market certainly doesn’t hurt the case for rate cuts.
Just Right
Despite slowing in the labor market and a downward revision to 4Q2023 real gross domestic product (GDP) growth, labor productivity remained unchanged in its most recent estimate. We have long argued that sizable investments made before, during, and even after the pandemic (especially in data science and automation) would eventually boost the productivity of the labor force. While it remains too early to declare victory on that issue, at a minimum, a rebound in labor productivity would at least partially offset slowing job growth and support the ongoing expansion of the economy.
What To Watch This Week
Inflation readings for February dominate the calendar this week. The consumer price index (CPI) should post increases for both headline and core roughly equivalent to those from January. That could still help slow year-over-year increases. We expect the producer price index (PPI) could also run a bit hot. The CPI and PPI should come under pressure from energy cost increases. Import price inflation should slow versus January levels, but supply disruptions could wreak a little bit of havoc on the data. Retail sales for February should rebound following the weather-related disruption in January. If so, it keeps 1Q2024 real GDP growth on a pace near 2%. Finally, a mix of conflicting forces could keep the preliminary consumer sentiment reading for March largely unchanged.
CRE Implications
The data out of the economy can certainly make CRE investors feel a bit like Goldilocks. Sometimes that data comes in too hot, suggesting it will take time for the Fed to cut. Sometimes the data comes in cooler than expected, hinting at rate cuts as soon as next quarter. We continue to see both sides of this fairy tale and have left our view unchanged — unless something changes dramatically in the short term, the Fed will remain on hold until around mid-year. That potentially sets up a tale of two halves, with the market sleeping a bit in the first half of the year but waking up and starting to run in the latter half of the year. Yet, that means investors can potentially position themselves well by continuing to selectively invest now while reviewing potential future acquisitions and dispositions. We believe investors would be wise not to sleep on opportunities this year.
Thought Of The Week
Last week, Japan’s benchmark Nikkei 225 Index reached a new all-time high above 40,000. After peaking at 38,915.87 on December 29, 1989, the Nikkei did not reach that threshold again until February 22, 2024, roughly 34 years later.