Real Estate Forum - September 2011

September Newsletter 2011

Still, major sectors of the economy remain depressed, greatly increasing the economy’s vulnerability to political and/or economic shocks, particularly since the country’s massive deficit and near-zero interest rate severely limits the fiscal and monetary policies the government can use to stabilize the economy. As a result, consumer and business confidence in the sustainability of the recovery is declining, all but guaranteeing that economic growth will remain anemic for the foreseeable future.

RECOVERY STALLS, CAPITAL MARKETS TURN VOLATILE,
COMMERCIAL REAL ESTATE RECOVERY CHALLENGED
Despite a slowdown in GDP growth—initially
estimated to be 1.8% in the first quarter—positive
economic news during the first few months of the
year buoyed the belief that the economy had
turned the corner and had enough momentum to
overcome the impact of severe weather, supply
disruptions stemming from Japan’s earthquake, the
European sovereign debt crisis, and threat of a U.S.
government shutdown. Second-quarter growth was
expected to be around 2%, and many economists
were forecasting strong second-half growth of 3.0–
3.5%.

Unfortunately, the good news turned sour in May as job growth plummeted, the government slashed its GDP growth estimates for the first quarter to 0.4% and reported second-quarter growth of 1.0%, consumer spending dried up, the housing market continued to deteriorate, the European sovereign debt crisis worsened, and S&P downgraded the United States’ bond rating from AAA to AA+, reflecting frustration with the government’s inability to meaningfully address its gaping deficit.

At the end of this year, it will have been five years since the housing bubble burst and the U.S. has struggled with subpar economic growth. Given the underlying weakness in the key drivers of economic growth, the U.S. could be facing several years of marginal economic growth and a “lost decade” similar to what Japan has experienced.

BALLOONING U.S. DEFICITS AND EUROPEAN DEBT
CRISIS NO LONGER REMOTE RISKS
Optimism turned to pessimism with signs that the
economy is headed back into recession. Of 46
leading economists surveyed by The Wall Street
Journal, 13% speculate that the country is already in
recession, and 30% believe that, if not yet in a
recession, we will be in one within the next twelve
months. Fear is again spreading through the
financial markets as investors flee risk, causing
record volatility in the equity markets and driving up
rates on risky, below-investment-grade corporate
bonds to over 9 %.

What started as two relatively remote threats to U.S. economic growth have blossomed into major near-term risks that could send the economy into a double-dip recession.

Despite the recent gloom, enough pockets of strength may keep the current anemic recovery stumbling forward during the second half of the year, barring a major economic shock. We believe that economic growth in the second half will average around 1.8%- 2%, although well short of the 3.0– 3.5% growth many economists had been expecting and the level required to significantly dent today’s 9.1% unemployment rate.

The U.S. debt ceiling–extension debate, which persisted for longer than six months, ended with a compromise that only marginally addressed the unsustainable growth in the U.S. deficit, estimated to exceed $20 trillion by 2020. In effect the responsibility of finding at least another $1.5 trillion in spending cuts were shifted to a newly appointed congressional “super committee” due to make its recommendations to Congress by late November. Given the highly partisan, politically charged atmosphere in Washington—where all eyes are on next year’s election—we will very likely face another stalemate on how to meaningfully reduce the U.S. deficit, which is likely to further shake the capital markets and add to consumer and business angst.