Election Uncertainty and the Secretly Struggling US Economy

Next week is a big week, to say the least. Americans will go to the polls once again to determine what kind of nation we want to be. Of course, what happens with the election matters a lot—not just for who wins but how the other side reacts in response as well. The worst outcome is a contested election and a deepening in the distrust of our democracy.

This is more of a moral and ideological contest than an economic one. As we have discussed before, neither candidate / party is offering a platform aimed at making things better for the average American household. In fact, both will probably make things worse. No matter what happens next week, Americans will face an increasingly challenging economic environment.

Meanwhile, we are in the midst of the strangest business environment I’ve ever encountered. It feels almost like we’re in the pandemic again but we’re not. There’s an usual degree of uncertainty in the air and it feels like everyone is just in wait-and-see mode. The uncertainty goes beyond politics. We haven’t quite reckoned with the inflation and interest rate shock of the last several years. At the same time, the rapid rise of AI has everyone kind of spooked, especially the youth whose job prospects appear to be rapidly disappearing.

There’s also a growing disconnect between headline economic data and experience in the real world. If all you pay attention to is the stock market and the major economic indicators, you have to feel pretty good about things. Inflation has come down. The labor market may have softened a little but is still looking quite strong. GDP growth is decent and the stock market is near all-time highs.

However, in the real world things are feeling quite different. I’ll give you just a few examples I have some personal experience with:

1. The headline story in multifamily is that things are going reasonably well. Absorption of the unprecedented number of new units has been much better than expected and rents appear to be holding up. But, here in Los Angeles, we’re seeing massive deflationary pressure in rents. Rents on our new leases at Metros Capital are down around 25%. My friends in the business are reporting something similar is afoot throughout the region. How this is not getting picked up in the data or headlines is beyond me.
2. It’s still really difficult to sell a home. We put a stunning Hollywood Hills home on the market recently—priced to sell—and are not getting any action at all. Given the macro dynamics in the industry where the vast majority of potential buyers are on the sidelines because they are locked in to low-priced mortgages or simply don’t have the downpayment to live where they want to live, we sort of expected things to be slow and quiet. But not this quiet! The local chatter is that the small number of buyers that are still at the table are all spooked by the political environment and waiting for the election to be over. Redfin did a survey recently that confirms the same. I hope that’s true.
3. Hollywood is really slow. A lot of my parent friends are in the entertainment business and they are reporting that the market there is just as dead. Unless you are talking about a sequel or prequel to an already-established branded property or the next season of a hit show, nothing new is getting funded. This cannot be a good sign.

These data points suggest that there’s more to the story than the sunshine and roses being reported by the mainstream media.

I still think the biggest risk for the economy going forward—besides an escalation in global violence or some kind of political breakdown in America—is sticky inflation. With all the debt in our financial system, we are just not set up for higher rates.

In my world, higher rates for longer is almost existential. Until now, people like me and companies like Metros Capital, have been surviving largely on the premise that rates will be coming back down soon. Our banks have been supportive—giving us extensions when necessary and not forcing big loan paydowns or payoffs.? But all that could change if inflation returns in 2025 and the Fed has to reverse course on easing.

Unfortunately, we have some good reasons to believe that inflation might creep back into our financial system. I’ll give you just a few:

• An escalation of the war in the Middle East causes oil prices to jump.
• Trump wins and actually follows through on his tariff plans. This would be instantly inflationary.
• Harris wins and does the same thing.
• Harris and the Democrats sweep and deficit spending grows out of control.
• Drought conditions continue in key food growing regions causing a supply shock price jump in food. This is already happening for coffee, my personal favorite commodity.
• The AI boom continues and global competition for rare Earth minerals, power, and other key resources causes prices everywhere to climb.
• Trump wins and immigration plummets shocking the labor market.

While it doesn’t take much imagination to envision a world where inflation comes roaring back, it’s not all gloom and doom, for there are some very powerful forces pulling in the other direction.

For the last 30-40 years, the main drivers of inflation have been health care, shelter, and education.

In each case, there’s reason to believe that the trend could be reversing:

• For the longest time health care inflation projections have been a disaster but the rise of GLP-1’s like Ozempic could actually change things. Over lunch the other day, my insurance team mentioned that for the first time ever the actuarial calculations for health care are looking more optimistic. Barring some side-effect scandal, which I’m half expecting to happen any day now, this could be the beginning of a welcomed positive trend.
• The outlook for rental inflation outlook is more mixed but there are some reasons to be cautiously optimistic. Ultimately, rental inflation is a function of household formation and what we saw in the last big recession is that formations dropped dramatically as kids stayed home with their parents longer and people took on roommates. This will likely happen again at the first signs of real economic trouble and could alleviate some of the serious damage to housing affordability as a result of the COVID era.

When you zoom out to the long term and consider our domestic demographic problem (people are not having enough kids), it’s not hard to imagine a world where household formations are in permanent decline. What we have learned from demographically challenged places like Japan, which has millions of vacant houses, is that eventually deflation sets in. This may be good for housing affordability but it’s really bad for the economy for other reasons. If we get our act together on immigration, we can probably avoid the doomsday vacant properties everywhere scenario but we’ll see.

• Education has long been in an obviously unsustainable bubble. Costs have skyrocketed in the last several decades and we’ve left a whole generation of Americans in serious debt. I’m starting to believe that the game is up though, for AI has changed things. Why go in massive debt to get a college degree when you can learn anything and everything for a fraction of the price? The “college experience” is set to become a kind of luxury good, sufficient but not necessary. This could bring the end to the great education inflation boom.

Forecasting the economy—always a dark art—is not something you can take to the bank. However, given the uncertainty in the air, it’s safe to say that now is a time for financial restraint.

It’s also a time for political and emotional maturity and self-control. Whatever your politics and whatever happens next week, I hope we can all embody a true American ethos, one that is rational, civil, and constructive and one that prioritizes our sacred common bonds over any partisan feelings.

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Who doesn’t love Halloween, right? We had an epic time last night and hope the same is true for you!

PS.?Does anyone else think this is a really bad idea?