The Final Countdown

Welcome back to our readers from what I hope was a very happy and enjoyable summer for all. My name is Ryan Severino, CFA , and I am the proud author of BGO 's The Chief Economist. August is officially in the rearview mirror now and we are busying ourselves for what will be a torrid stretch to the end of the year. Let's dive right in!

With just two weeks to go until the Fed’s next Open Market Committee meeting, the countdown is on. Nothing in last week’s data, which included the Fed’s preferred measure of inflation, should prevent the Fed from cutting interest rates. If anything, the strength exhibited in the data should hopefully assuage any lingering concerns in the market that the economy is slowing too quickly. Is the commercial real estate (CRE) market ready? Are you ready?

Still The One

In early August, fears arose that the US economy might be slowing too quickly. That seemed like an overreaction to us then and one month later we feel even more confident in that view for a few key reasons. First, second quarter’s reading for real GDP, already impressive, got revised upward from 2.8% to 3% annualized. Importantly, the rebalancing in the economy that we have previously highlighted – away from consumption toward private domestic investment – looked even clearer in the revised data. ?This shift is helping to support absolute growth levels, but it is also making the economy more resilient by diversifying its drivers. But that doesn’t mean that consumer spending is collapsing - quite the contrary. In fact, the second key reason we thought economic slowing fears were overstated is that nominal and real consumer spending during July got the third quarter off to a good start and puts consumer spending on track to match or surpass its growth rate from the second quarter. Finally, durable goods orders, which have struggled a bit in recent years along with the slowdown in the manufacturing sector of the economy, posted its strongest monthly growth rate in four years during July. The manufacturing sector is still badly trailing the services sector of the economy, but any improvement should prove beneficial at this juncture. In sum, the economy continues to expand and is carrying some notable momentum into the latter half of the year. ?

Break It Down

At the same time that the economy is showing increased resilience, inflation is still cooling down. The personal consumption expenditures (PCE) deflator index showed another tepid reading of just 0.2% for both the headline and core subindexes in July. On a yearly basis headline held at 2.5% while core held at 2.6%. Inflation remains stubborn due to seasonal adjustments and base effects. And of course, housing inflation remains overstated. But none of that should prevent the Fed from cutting rates when the Open Market Committee meets in two weeks. Inflation is not reaccelerating as many feared and should continue to gradually ease, especially as base effects become less impactful over time.

What To Watch This Week

This week is bursting with data releases despite being shortened by the Labor Day holiday. Open jobs for July should remain elevated near 8 million. The employment situation for August should show a slight rebound in nonfarm payrolls. And the unemployment rate should decline slightly while average hourly earnings likely increased at a pace consistent with the Fed’s target inflation rate of 2%. Revised second-quarter GDP growth should slightly boost productivity growth. Finally, we expect the ISM Manufacturing index for August to increase slightly but remain in contraction territory while we expect little change to the ISM Services index for August which should keep it in expansion territory.

CRE Implications

With each passing week we inch closer to the Fed cutting rates and a paradigm shift in the CRE capital markets. Even though CRE is a private market that responds more slowly to information than public markets, we can already see evidence of the market’s preparation for this coming shift. The transaction market is gradually showing signs of increased activity, even if volume is not yet increasing. Pricing is stabilizing as reflected in appreciation returns through midyear. The long end of the yield curve is already proving helpful for borrowing costs as it has pulled back in anticipation of rate cuts. Once the Fed actually cuts short-term rates and market confidence increases, momentum should build and be seen across various measures.

Thought Of The Week

Labor Day, celebrated on the first Monday in September, became an official?federal holiday ?in the US and a statutory public holiday in Canada in 1894.

That's all from me but be sure to check in next week as I do my quarterly deep-dive on the US CRE outlook, which is always one of our more popular reads. Thank you for subscribing and stay tuned for lots more from this newsletter.

Ryan S.

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