William Small, JD, CCIM
Zenith Realty Advisors
An inverted yield, the trade war with China, Brexit and recession have been the top economic topics covered by the news media for most of the summer. For over two years now, leading economists have been predicting a recession starting within the next 18 months. If that had been the case, a recession should have come and gone by now. So what’s really going on with the economy and what impact could the current economic outlook have on real estate markets like Aspen and Snowmass?
The current economic expansion started in 2009 at the end of what’s referred to as the Great Recession, and as of a month ago, is the longest expansion in US history. During the current expansion, the stock market has reached a record high in July and in the past month has experienced a 3-6% correction. At the same time, other economic indicators such as the unemployment rate, now at 3.8% and wage growth at a 3% annual rate have continued to indicate a solid economy. During this economic expansion, the United States GDP growth has fluctuated between 2-3%. For 2019, the GDP growth rate is projected to be about 2.5%. Despite these encouraging signs, some believe a recession is about to begin.
The most talked about early economic indicators are consumer spending that makes up roughly 68% of the US economy, the inverted yield curve and the Conference Board Leading Economic Index. To try to understand what’s really happening to the economy and the likely direction of the real estate market, let’s examine each of these indicators and what they’re telling us.
One of the most reliable predictors of future recessions is the Conference Board Leading Economic Index, a measure of current economic activity. In the past 8 recessions going back to the 1950’s, this index when it starts to decline has signaled a recession anywhere from 7 to 18 months in advance of the beginning a recession. Currently, this index continues to increase and has not shown any signs of declining. The index was up in July and has risen .06% in the first seven months of the year (about a 1.1% annual rate). Another key index to watch is the US Consumer Confidence Index (CCI). Because consumer spending is such a major part of the US economy, the CCI is closely watched by economists and the Federal Reserve. Despite talk of recession and trade wars, the CCI has for the most part held steady throughout 2019, again not sending any strong signals that a recession is imminent.
The other indicator of a likely recession most talked about in the past two months is what’s called the inverted yield curve which is currently taking place. In a healthy economy, borrowing long-term is more expensive as reflected by higher interest rates than short-term borrowing. When the long-term interest rates become equal to or less than the short-term interest rate, it’s called an inverted yield curve. An inverted yield curve is evidence of concern about the long-term outlook for the economy and is created when investors move money into longer term Treasuries and bonds driving up their price and driving down long-term interest rates below short term rates. The yield curve has inverted prior to the last seven recessions. However, not all inverted yield curves have led to recessions. Prior to the 2009 recession, the yield curve inverted several times before the recession actually started at the end of 2008. In the past few years, the yield curve has inverted temporarily only to reverse direction shortly thereafter. An inverted yield curve is evidence of concern among investors, but not always a reliable indicator that a recession is about to start.
Accurate economic predictions are always difficult to make. A year ago, most economists thought interest rates would move higher in 2019, but just the opposite has happened. Although periodic recessions of some sort are part of a capitalist economy, the numbers don’t support the view that a recession is likely to start anytime soon, and the real estate markets continue to be healthy. Even if the Conference Board Leading Economic Index was to turn down and the yield curve stays inverted, it could still mean that any economic slowdown or recession could be 18 to 24 months away. If interest rates continue to trend lower, any future recession is likely to be mild and short lived. Low interest rates are fuel for the real estate markets, so it’s likely that at worst the real estate market will level off, particularly in cash rich markets like Aspen and Snowmass.