Get it straight

Quick takes:

• Housing market continues to slow
• Industrial production holding up
• GDP likely to rebound
• Inflation and wages still heading up
• CRE faces challenges and opportunities

Key data released last week and data coming this week are likely to send some conflicting signals about the current state of the economy. But don’t get fooled – the data reflects the past and not all will provide useful information about the future. The underlying momentum in the economy is slowing as we head toward the end of the year.

Housing tells a story

The housing market is coming under pressure from interest rates and higher input costs. We see evidence of this across various metrics. Housing starts declined during September at a greater rate than anticipated. Meanwhile, permits in September increased slightly. Yet within the details a noteworthy divergence emerges. Single-family starts and permits are declining faster than multifamily. And though the data is volatile, multifamily permits increased during the month. Overall, the trend for housing construction remains downward with both starts and permits declining throughout the year. Mirroring that data, existing home sales for September declined more than anticipated, continuing their downward trend. Prices are also declining as well, even though they remain elevated and inventory for sale remains limited. Finally, the housing market index continued to decline in October, falling during every month this year and now standing at its lowest level since May 2020. With rates set to increase further and input costs likely to remain elevated in the near-term, the housing market should continue to slow, a likely harbinger for the overall economy.

GDP is an unreliable narrator

While the housing market provides important information, GDP looks set to remain an unreliable narrator about the health of the economy. Readers of this weekly know of our concerns about the GDP data from the first two quarters of the year. Those concerns remain and continue to cloud the narrative because they will impact subsequent readings. GDP growth should show a rebound during the third quarter. But because growth technically contracted during the first two quarters of the year, the growth rate could mislead some to think the economy is stronger than it is. The economy likely performed better than the GDP data suggest during the first half of the year. In addition to our previous arguments, industrial production data, which correlates with GDP growth, performed better during 2022 (including through September), even though momentum is also slowing. Undoubtedly, despite whatever the third quarter GDP data say, the economy is slowing. We look to a broader set of data beyond GDP to understand this. But for now, we look for a rebound in GDP growth during the third quarter.

Unusual Divergence

|  What else we are watching this week  |

More housing data is coming this week. New home sales for September should follow existing home sales’ lead and decline. Personal income and spending should have held steady in September. We expect both the consumer confidence index and the consumer sentiment index to both decline in October. Inflation, as measured by the personal consumption expenditures (PCE) index likely increased again in September. Finally, the employment cost index (ECI), a broad measure of compensation, likely increased again during the third quarter. 

|  What  it means for CRE  |

The commercial real estate (CRE) industry will see through the backward-looking data toward the future. With economic growth projected to slow, the outlook for the sector remains challenging but also fraught with opportunities. Any disruption to the economy should prove relatively short and shallow, with CRE reflecting that. Market participants are already thinking about when interest rates and inflation will peak and how to capitalize any opportunities. The same could be said of the economic cycle, especially with any slowdown likely far less severe than the previous two slowdowns. 

|  Thought Of The Week  |

Halloween spending is projected to reach a new record of $10.6 billion this year, up from last year’s record of $10.1 billion.