The onset of the
economic fever

• Onset of economic fever
• Prices heating up as demand returns
• Consumer sentiment getting febrile
• Fiscal stimulus provides shot in the arm
• CRE could be misdiagnosed 

Vaccination producing economic fever 

Recently data showed that while vaccination prevents fever in individuals, it can induce one in the economy. Inflation data released last week generally showed upward pressure on pricing, congruous with a warming economy. The producer price index (PPI) heated up in February, with headline PPI accelerating to a steamy 2.8% on a year-over-year basis, up from 1.7% in January. Core PPI increased to 2.5% year-over-year, up from 2.0% in January.  Overall, producer prices are starting to smolder, but the year-over-year changes appear exaggerated due to base effects (essentially low prices last year due to the pandemic).

The headline consumer price index (CPI) for February heated up a bit, pushing the year-over-year change to 1.7%, up from 1.4% in January. The core CPI cooled slightly on a year-over-year basis, from 1.4% in January to 1.3%, but this appears temporary and anomalous. Airline fares and lodging away from home, with notable declines during the month, threw some cool water on core CPI. Yet both of those categories should become more feverish on the other side of the pandemic. We have already seen tentative signs of this. Air travel last weekend reached its highest levels in over a year. The Transportation Security Administration (TSA) screened more than 1 million people for 4 consecutive days through Sunday, March 14^th, the best run in roughly a year. Meanwhile, hotel occupancy recently neared 50%, its best performance in roughly 5 months. 

Accelerating vaccination is providing many with the confidence to spend money, reengage the economy, and even resume traveling. Saturday, March 13th set a record with roughly 4.6 million doses administered, with a boost coming from the Johnson-and-Johnson vaccine. On the same day the average daily rate also reached a new record of 2.5 million doses. As more people become vaccinated, prices should accelerate due to rising demand, proving vaccination can ironically produce feverish conditions in the economy. As we previously discussed, we continue to view all this as unambiguously positive and see inflation continuing to increase, reflecting a recovering economy, but do foresee it becoming an impediment to economic growth. 

Consumer sentiment also getting febrile

Consumers’ expectations for the future are rising as optimism about a post-pandemic world seems more justified than at any point in time during the crisis. Sentiment for March exceeded expectations and rose to its highest level since the onset of the pandemic. Consumer sentiment is also getting a shot in the arm from vaccination, though clearly other causes are boosting sentiment. Job growth in February, for whatever faults exist in that data, also played a role in elevating consumers’ mood. And the expectation of benefits from another round of fiscal stimulus certainly played a role. 

Next dose of stimulus

Speaking of the next dose of fiscal stimulus, the president signed the American Rescue Plan into law last week and the funds have begun reaching consumers’ accounts this week. While the size of the plan continues to generate debate, it will clearly provide a boost to aggregate demand that should persist until at least 2022. This is helping to fuel our sizzling outlook for the economy and the labor market.

|  What we are watching this week  |

The Fed’s Open Market Committee (FOMC) meets this week and will discuss monetary policy against the backdrop of rising inflation and rising long-term interest rates. While we do not expect any action from the FOMC, it will likely look to address rising concerns about the upward pressure on inflation and long-term interest rates, especially the latter. The FOMC will likely reaffirm via forward guidance its dovish stance and reiterate its continued willingness to intervene in markets to hold down long-term rates if it feels rates are rising too quickly. The FOMC maintains credibility with the markets, as evidenced by such little upward movement in short-term rates. Keeping this credibility intact will remain essential for the FOMC. Generally, we expect continued volatility out of the Treasury markets. Often, markets react to changes in data more than levels in data and that appears true once again during this cycle. The FOMC will need to manage that delicately. 

|  What it means for CRE  |

For commercial real estate (CRE) any feverish symptoms will likely set in after the economy heats up because CRE generally lags the business cycle. But certain property types are already feeling the burn. Industrial remains incredibly hot. While ecommerce sales are cooling off a bit as the economy opens, the demand for space should remain searing. Multi-housing also retains a favorable position, as befits a property sector that serves a nondiscretionary need, particularly during a pandemic when many remained at home. Yet, the other major property sectors could be misdiagnosed by many in the CRE market. They have held up better than many had anticipated and though some tougher days lie ahead, they are likely not headed for critical condition. Opportunities abound for those who do not think these property types are going on life support. A similar situation played out during the last cycle when many quickly wrote off certain property types, only to see certain sectors mount a full recovery.

|  Thought of the week  |

The NRF expects those celebrating St. Patrick’s Day to spend $40.77 on average, a total of roughly $5.1 billion.