Despite broad improvement throughout the economy, not all economic variables inevitably return to prior levels as structural changes altered the economic landscape.
It’s time to retire the term “recovery” as it relates to this economic cycle. On most counts, the U.S. economy is stronger now than it was in 2008 at the peak of our last cycle. Although economic growth since the recession has been moderate and fitful, cumulative growth has been substantial. It’s no wonder consumer confidence is now above its long-term average.
Some indicators of economic strength include:
- GDP Rising. Real GDP is 10 percent above the prior peak from 2007. After falling through mid-2009, GDP regained its former peak in mid-2011 and hasn’t looked back (excluding early 2014, when GDP declined in one quarter).
- Jobs Are Back. Total nonfarm jobs are almost 4 percent above prior peak, while office-based jobs (including “FIRE” activities, business and professional services, and technology) are up almost 6 percent. The unemployment rate of 5 percent is close to “full employment” and more than 100 basis points below its average rate since 1960.
- Households Stronger than Ever. Per capita net worth is 20 percent above its prior peak due to stronger home values and higher stock prices, while household debt levels are 25 percent below the unhealthy peak during the housing bubble and even 11 percent below its long-term average.
- Production Up. Corporations have been generating record profits, while U.S. exports have never been higher. Our farms, mines and gas rigs have never produced more than they do now (or did last year); our wholesalers and retailers have never sold more products; and our professions have never sold more services.
“Healed” vs. “Changed”
That’s not to say that our economy now is fully “healed” in the sense that it exceeds pre-recession conditions on every last metric. It does not. Our country is much different now than in 2008—in some ways better, some worse, some just different. For example, despite broad recovery in housing markets nationally, the home-ownership rate now stands at only 63.6%, down 580 bps from the peak 69.4% in early 2004, although this is about equal to its long-term average before 1995. With fewer homeowners—due to both economic reasons and lifestyle choices—home sales are down 25% from peak years, and unlikely to regain prior volumes anytime soon. Similarly, we’re building 60% fewer single-family homes now relative to the peak, though we’re constructing 20% more apartments.
Our dynamic economy is always undergoing change, some of it cyclical and some structural. The point is that much of the “recovery” that some analysts are waiting for are unlikely to be reached during this cycle—which is to say, before the next downturn. Rather, structural changes to the economic landscape—demographic shifts, lifestyle changes, new technologies—will significantly delay, and in some cases preclude, reaching prior levels. Thus, continued growth won’t necessarily restore the old order.
It could well be another generation before the homeownership rate returns to its old peak. And the labor force participation rate, which has been declining fairly steadily since the end of the 20th century, might never get back to its prior peak absent significant demographic shifts. More young people than ever are attending higher education, while the huge baby boomer cohort is starting to retire. With fewer people in the labor force, fewer workers will be doing the nation’s work.
An Imperfect Recovery
Despite those positive signs, however, this recovery has been weak by historical standards. Both finance and construction, two large sectors at the heart of the last recession, continue to struggle, with output and employment still well off levels from a decade ago. And many workers have still not recovered: Real median household incomes are down more than 7% from levels before the recession, and wage growth has barely kept pace with inflation.
Despite broad improvement in the housing markets, the homeownership rate now stands at only 63.7%, well off the peak of 69.4% in early 2004, although close to its long-term average. With fewer homeowners – due to both economic reasons and lifestyle choices – home sales are down 30% from peak years, and unlikely to regain prior volumes anytime soon. Similarly, we’re building 60% fewer single-family homes now relative to the peak, though we’re constructing 20% more apartments.
Overall, GDP has grown by an average of only 2.0%, more than 100 bps below its long-term average of 3.1%. But virtually every expansion since 1960 has been slower than the preceding one. If this pattern continues, we may never “recover” to our former growth rates. These weakened industrial sectors and labor markets may represent the “new normal” for our economy.
Both the general economy as well as commercial property markets can be viewed as essentially “recovered.” This key insight holds significant implications for real estate investors. Most broadly, the rising tide of economic growth—and let’s be clear: our economy is still growing nicely and shows no serious sign of declining, notwithstanding recent financial market jitters—won’t raise all boats still stuck near the bottom. If an asset is still idle seven years into expansion, or a submarket continues to underperform, it probably means structural changes have shifted market support away from the asset or submarket.
I look more directly at the implications for property markets in my op-ed published today in Institutional Investor, which you may find here.
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.