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The expansion continues, but hopes for faster growth fade

  • Nothing has changed in Washingtonor elsewhere in the worldto fundamentally alter the recent economic growth trajectory, which continues to be moderate.
  • Economic growth for all of 2017 will slightly outpace that in 2016, and 2018 should be stronger still. However, job growth continues to slow as we near full employment.
  • Impacts from the recent hurricanes in Texas and Florida make projections of Q3 GDP less certain, but any impacts are like to be transitory.
  • Despite below-target inflation, the Fed is almost certain to hike its target rate by another 25 basis points at its December meeting, with up to three more such hikes in 2018.
  • Overall, property markets drivers continue to be strong, but we still expect future gains in market fundamentals to weaken over time as the best years of this cycle are behind us.

Stop me if you’ve heard this one before: Recent economic growth has been only moderate, with a mix of stronger and weaker indicators, but no policy changes out of Washington or other economic drivers have materialized to fundamentally alter the course of recent trends. Thus, we can expect the moderate growth to continue a while longer. Yes, we’ve been singing this same hymn for a while now.

Consumer confidence is sky high, with its highest levels in 13 years. However, although highly correlated with consumer spending, this soaring consumer confidence does not seem to be translating into greater spending. Even discounting the temporary hurricane disruptions, consumer spending (green line in graph) continues to be weak, most likely due to anemic wage growth (red line). With the personal savings rate (blue bars) continuing to fall and at a five-year low, consumers will not be able to maintain even this moderate pace of spending unless wages increase. This weakness will hit most directly at retail sales and ultimately the retail property sector, as well as apartments and housing.

Moreover, as noted in our previous newsletter, U.S. job growth seems to have peaked and continues to slow as we near full employment. No doubt the job losses sustained in the September employment report were a one-off consequence of the hurricanes. Employment fell last month for the first time since September 2010, after 84 consecutive monthly job gains. Still, the longer-term trend has been falling. Since job growth peaked in early 2014, job gains have dropped in nine of the past 13 quarters. To be sure, employment is still growing, which will continue to fuel tenant demand for more space. But this trend will likely continue to weaken. To fuel long-term job growth and space absorption, Washington will need to enact policy reforms that trigger a significant economic shift—one unexpected by economists or financial markets.

Finally, the Fed looks almost certain to raise its reference interest rate by another 25 basis points at its meeting in mid-December, with the markets signaling more than a 90% probability, followed by three more such hikes in 2018. To be sure, core inflation remains below the Fed’s 2% target rate, notwithstanding some hurricane-related spikes. But there is growing evidence that inflation is about to accelerate—and, yes, we’ve heard that before too, and Fed minutes reveal growing concern among the governors to stay ahead of any such increased before its too late.

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Andrew J. Nelson is Chief Economist for
 Colliers International in the United States. Based in San Francisco, he covers a mix of general economic topics as well as related issues that bear on the performance of property markets.