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Economic Pain? Or a Soft Landing?
There’s been plenty of discussion about the current tightrope the Federal Reserve is walking. Will the ongoing rate hikes tame inflation? Will they tip the economy into a recession? According to Marcus & Millichap Senior Vice President, National Director, Research and Advisory Services John Chang, the Fed’s efforts are starting to yield fruit.
In a recent Marcus & Millichap video, Chang explained that there is a definite loss of economic momentum, with job creation slowing and core retail sales flattening. Inflation was down to 3% on June 2023, while the Personal Consumption Expenditures Price Index (core PCE) hovered around 4.6%.
But . . .
“We’re coming to the point where things will become a little tricky,” Chang said. He noted that using interest rates to steer the economy is similar to steering a giant cargo ship. “After you start turning the wheel, it takes a while for the ship to actually turn,” Chang said. “If you turn the wheel too much, that ship will over-correct, forcing you to spin the wheel in the other direction.”
The effective federal funds rate hikes within the past year mean the economic ship is just now turning. “What we don’t know yet is whether they oversteered,” Chang said. “We probably won’t know the answer to that question until sometime around the fourth quarter.” If the steering was too hard, a recession could be likely. However, with a durable job market, that recession could be mild.
But again . . .
Reinstatement of student loans could reduce consumer spending. According to Deutsche Bank, the resumption of student loan payments could decrease consumer spending by $14 billion per month, or a drop of 3%.
Chang acknowledged that there could be some economic risks beyond interest rates that might show up in the second half of 2023. But right now, a soft landing is increasingly probable. And this is good news for commercial real estate.
Chang mentioned revived apartment demand and a retail sector that’s performing well. “Structurally, most property types in most markets remain on sound footing,” he added. “If rates stabilize and we achieve a soft landing, the underlying demand drivers should re-assert, supporting commercial real estate fundamentals.”
- ◦Financing
- ◦Economy
- ◦Policy/Gov't
