By Rocky Tarantello
How Do We Truly Measure
An Economic Recovery?
SO MUCH IS TAKEN FOR GRANTED IN OUR
understanding of common terminology. This is especially true in attempting to define economic conditions
or real estate market activity. What exactly constitutes
a recovery in the real estate market? We are all aware
that current market conditions are depressed, but
even this simple comment implies that we know the
indicators, levels and consequences of what that
means. We’re all awaiting the inevitable recovery. But
what combination of rents, values, vacancy absorption and capital investment represents the recovery
we seek? How will we know when we get there?
The stock market is up nearly 50% since March.
To the extent the stock market anticipates future
economic growth and corporate profits, this is a very
positive sign of investor sentiment. In like fashion,
third quarter GDP grew at an annualized rate of 3.5%
following declines of - 6.4% and -0.7% in the first and
second quarters, respectively.
Despite healthy increases in stock prices and productivity, the economy has lost roughly seven million
jobs since late 2007. The October unemployment rate
reached 10.2% and many leading economists and
forecasts are predicting a rate between 10.5% and
10.75% by the middle of 2010.
It is conceivable that some combination of events
could blunt the impact of the highest unemployment rate in a generation. There are three things that
continue to show up on my radar screen: the federal
stimulus program, potential growth in US exports and
increased US business investment.
Regardless of whether one supports massive deficit spending, the fact remains that federal spending
will help to contain job losses. The extent to which it
actually creates jobs is being debated between the
administration and its detractors. But federal spending definitely helps state and local governments retain
public-sector jobs. Creating private-sector jobs is
entirely another matter.
It is possible that many of the job losses in the
manufacturing and financial services sectors may be
lost forever. The restructuring of these sectors eliminates some positions as obsolete, and redirects others
to lower-cost global labor markets. But there are other
forces at work. European and Pacific Rim countries
have not all suffered the same degree of economic
decline nor are they likely to follow the same path to
recovery. Many countries, especially China, are already
showing growth ahead of that in the US.
In conjunction with a decline in the value of the US
dollar, this positions American businesses very favorably. We are already witnessing a significant reduction in trade imbalances and increased US exports.
With lower labor costs, an export currency valuation
advantage and the restoration of inventories depleted
by months of reduced output and corporate cost
cutting, US businesses are poised to increase their
spending, adding fuel to the recovery.
But the biggest piece of the US economic pie is
the consumer. Roughly 70% of total output is related
to consumer spending. Until it shows tangible signs
of recovery and growth, the US economy will continue to struggle. Current estimates for GDP growth
in 2010 are consistently below 3%, with some estimates below 2.5%. Though exports and business
investment will improve, employment growth will lag
for most of next year.
So how do we measure the recovery of the real
estate market? I suspect that will happen when
absorption rates increase, causing rents, cash flows
and values to follow suit. Absorption rates will grow
as a result of increased demand for space caused
by increased demand for goods and services, both
globally and domestically.
Rocky Tarantello is
president of Tarantello
& Associates, which is
based in Canandaigua, NY.
He may be contacted at
We will know the recovery is real when the old
jobs return, the new jobs are defined and the
growth in US employment is once again on track.
But the linchpin is jobs. Without job growth, a real
estate recovery is problematic at best. It is possible that
real estate capital flows and investment will increase
as risk takers anticipate the recovery, but genuine
lasting recovery cannot and will not be present until
those seven million jobs are replaced, and then some.
Many of those jobs may be lost forever, but replacements may be in industries and job descriptions yet
to be determined as technology, communication and
research evolve. We will know the recovery is real when
the old jobs return, the new jobs are defined and the
growth in US employment is once again on track. ◆
The views expressed in this column are those of the
author and not necessarily REAL ESTATE FORUM.
Reprint orders: www.remreprints.com