Is our economy capable of driving commercial real estate performance?
The current economic expansion has run for 84 months through June, prompting discussions on how much fuel remains in the tank. History tells us that the length of a cycle in itself will not induce a downturn. In fact, we are experiencing longer expansion periods than previously recorded, according to economic models.
Key segments of the economy, including the labor market, consumer spending, and the availability of credit for businesses remain positive forces capable of driving additional expansion despite volatility in other areas, according to a new economic analysis by Marcus & Millichap. A choppy pattern of growth that has prevailed throughout the cycle has yielded an unintended but positive tempering effect. The modest pace of expansion, combined with a healthy level of risk aversion, has greatly minimized the threat of “bubbles” developing and largely eliminated the need for governmental policy prescriptions to avert potential overheating.
Overall, some headwinds continue to decelerate the pace of economic growth and nurture uncertainty but the economy remains solid and capable of driving commercial real estate performance. The U.S. labor market continues to consistently provide the clearest indication of a healthy economy although the pace of growth has eased. Job gains have averaged nearly 200,000 per month over the past year and job openings hover near an all-time high. The number of workers quitting jobs, presumably for higher pay, is also elevated.
Unlike the circumstances that triggered the recession at the end of the previous business cycle, the credit markets are in sound condition. Healthier bank balance sheets and favorable terms are enabling additional borrowing by U.S. businesses for the purposes of funding expansions and other capital requirements. Commercial and industrial loan balances on the books of U.S. banks have climbed to all-time highs.
Outlook: GDP will grow in the 2 percent range this year, and U.S. employers will create roughly 2.1 million jobs. The integration of Millennials in the workforce and greater leisure spending by retiring baby boomers will continue to support growth in consumer spending.