Passing The Economic Baton

Highlights

·?????? Economy is in good shape

·?????? Inflation outlook solid, for now

·?????? Policy uncertainty mounting

·?????? Markets a bit unsure

·?????? CRE still favorable, but…

Welcome back readers to a fresh edition of The Chief Economist. My name is Ryan Severino, CFA , and this week's edition provides some early commentary on what everyone is thinking about at the moment: how the economy will fare under this next administration. I don't have all the answers, but I've got a few thoughts, so let's get right to it!

The economic baton got passed from one administration to the next this week. Although presidents get more credit and blame for economic stewardship than they deserve, they still have the ability to influence the economy, in sometimes large ways. The good news? The economy is still in good shape overall as the most recent batch of data shows. There are some issues here and there, but it is difficult to find major faults with the economy in early 2025. The bad news? Policy uncertainty has increased and even the rumblings of certain changes are starting to cause consternation in the markets. What should we reasonably expect and what could it mean for commercial real estate (CRE)?

The Good

At the time of the presidential handoff, the economy is still faring well in the most recent data. First, as expected, retail sales grew at a robust pace in December, rounding out a healthy holiday shopping season. Consumers enter 2025 with notable momentum. That agreed with the Federal Reserve’s Beige Book in early January, which saw widespread improvement in economic activity. Second, industrial production for December notably outperformed expectations, boosted by the resumption of activity at Boeing after its strike ended. Third, housing starts for December came in above expectations. That might not be sustainable, but any increase in activity would prove helpful. Fourth, small business optimism surged in December. That’s likely a function of the election but could support activity. Fifth, inflation readings across the various indexes – in particular the consumer price index (CPI) and producer price index (PPI) – came in below expectations. Of note, our “favorite” bugbear, housing inflation, continued to decelerate even as it remains mis-measured and overstated. It should continue to slow through 2025, and more favorable base effects in the first quarter should only further help yearly inflation calculations.

The Bad

Policy remains a bit of a black box at the start of the new administration. For now, the extremes seem like relatively low-probability outcomes. But they are not zero-probability outcomes. We reiterate that even policies that produce headwinds will take time to fully impact the economy. That means that 2025, with all of the momentum from last year, should hold up fairly well, even under challenging circumstances. But markets are already starting to digest some of the communication from the new administration and volatility remains elevated. Stay tuned.

CRE Implications

The economy remains on firm footing – it continues to expand even as inflation gradually eases. That bodes well for fundamentals and income returns. And with a more conducive monetary policy ahead, appreciation returns should get a boost, one way or another. But CRE does not need self-inflicted wounds from the economy. As we said last week, the path forward for CRE could be merely good, or it could be great. The next few months, as soon as February 1, could have a lot to say about which path the sector follows.

Thought Of The Week

The president of the United States receives an annual salary of $400,000, the same amount every president has earned since 2001.?

That's all from me! Thanks for checking in this week, and as always, we are very eager to receive your thoughts and questions in the comments section below.

Ryan S.

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