Market Insights: February 14, 2019: Piloting a Soft Landing

by | 14 February 2019

Odds Rise for Avoiding/Postponing a Recession

  • U.S. economic growth last year almost certainly was the strongest, at least since 2015, if not of the entire cycle (final figures are delayed due to the partial government shutdown), job growth remains robust, even as wage gains and labor shortages escalate.
  • However, GDP growth is decelerating in the face of fading fiscal stimulus, slowing global growth and trade, and tighter financial conditions, while downside risks are mounting.
  • Nonetheless, prospects are rising for a “soft landing” that avoids an actual downturn as the Fed reversed course in January, pausing additional rate hikes, perhaps indefinitely.
  • The Fed’s abrupt reversal was likely motivated by heightened financial market volatility and weakening economic indicators and was enabled by fading inflation pressures.
  • Interest rates are likely to remain at relatively moderate levels, enabling greater business investment and consumer spending to continue.
  • Escalating trade tensions still present the greatest significant downside risk to U.S. economic prosperity, potentially compounding slowing global growth, and threatening U.S. exports, manufacturing and business investment.
  • In addition, robust and escalating wage gains, while positive for consumers and the economy overall, could force yet another Fed course reversal if wages start to fuel inflation.
  • Property market fundamentals continue to improve, but we expect further gains to soften in most sectors as the economic slowdown bites; tenants and investors alike should adopt more defensive strategies reflecting late cycle market trends.

Despite a cascade of unfavorable economic news in recent weeks, the underlying story remains quite positive. Indeed, from the narrow perspective of the Fed’s twin mandates, namely promoting maximum employment and stable prices, conditions are positively rosy. The latest jobs report was especially positive, as the U.S. economy registered its 100th month of consecutive positive job growth in January—the longest such streak since government record keeping began. Though it ticked up one-tenth of a percentage point to 4%, the unemployment rate remains at the low end of the Fed’s target range.

But perhaps the best recent economic news registered barely a blip amidst all the noise about the federal government shutdown, stock market volatility and trade tensions with China: Inflation seems to be moderating and very much under control. Year-over-year “headline” inflation, as indicated by the Consumer Price Index, declined to just 1.9% in December, continuing a gradual decline since peaking at 2.9% in July (blue line right chart), in part thanks to a steep drop in gas prices. This “Goldilocks” moment—the economy growing strongly with few signs of overheating—provides the Fed with license to ease off its efforts to slow the economy by implementing further interest rate hikes.

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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.

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