What The Latest Real GDP Numbers Mean For CRE

Real GDP slumped by 0.9% in the second quarter at a seasonally adjusted annualized rate, marking the second consecutive quarter of negative growth. But despite that, experts from Cushman & Wakefield maintain the declines are “not indicative of a current recession.”

One of the top reasons?  A booming job market and other key labor trends, which economists at the firm say are “crucial in understanding inflection points in the business cycle.” Unemployment held steady in June at 3.6% for the fourth month in a row, with payroll employment increasing by 372,000 net jobs.

“Every recession dating back to 1947 has been characterized by an increase in the unemployment rate during the first six months of the downturn, with the smallest increase being 0.3 ppt in 1973,” Cushman’s Rebecca Rockey, James Bohnaker and Rob Miller note in a new analysis. “So far this year, we have seen the unemployment rate decline by 0.3 ppt, so recent jobless trends are highly inconsistent with recessionary periods…Those suggesting that we are currently in a recession may point to the rise in initial unemployment claims over the past several weeks, and while this could be a precursor for more widespread layoffs in the future, it is more likely a reflection of job-cut announcements by a few hard-hit sectors such as technology companies struggling with plummeting stock values.”

The trio also say recessions typically see hiring weaknesses across a variety of sectors, which is not happening at the moment—and they note that the existing labor demand of 11.25 million job openings suggests most industries are keeping with strong hiring plans. 

“The job market is the best argument in favor of ‘no recession’ at present,” the Cushman experts say.

In addition, income and spending are still on the rise despite crushing inflation. Since consumers make up 70% of overall economic activity, “we can best evaluate the health of consumers by considering how much income households bring in and how much they are spending,” according to Cushman. And real personal income (excluding government transfer payments like stimulus and social security payments) increased 0.25% in the first five months of the year, painting a “health picture of consumer finances.”

“Add in the fact that households have ample income buffers in the form of low debt burdens and stimulus savings and the personal income picture looks even better,” the Cushman economists say. “Solid balance sheets are great but do not add to economic growth if consumers cut back on spending. Real PCE declined in May but, on average, remains higher than three or six months earlier, suggesting that consumers are still purchasing more goods and services. This would not likely be the case if Americans were preparing for a sustained economic downturn. Spending would be even higher absent supply-side factors such as low inventories of automobiles and other goods.”

So what does this mean for CRE? Fundamentals improved in the first half of the year, another sign of positive overall momentum heading into 2022. And “though there has been a broad slowing and a pick-up in choppiness, many measures of domestic demand have weathered these headwinds and point to the economy still being in an expansion,” the Cushman analysts say. Demand remained strong for most of the CRE property types, including historic high watermarks for asset classes like industrial, and apartment demand remained strong against a cooling housing market, with absorption registering 134,000 units in the first half of the year. Office-using employment also increased by 1.9%, with 635,000 jobs added in the same period.

Ultimately, though, “whether it is the details of the GDP report or any other economic data, the backdrop of what is going on is complicated and nuanced,” Rockey and her colleagues note. “This is also true within many types of real estate. Headline figures often mask the true and perhaps more interesting storyline of what is unfolding.”