Inflation Watch and Interest Rates
The inflationary hit on household saving accounts should start to ease for the second half of 2023. The Wall Street Journal 7/13/23 article points to a general decline in inflation over a broad array of consumer goods, led by the biggest drops in 2023 for gasoline, major appliances, and eggs.
There is a good news/bad news element to these drops as most items have seen the worst days of their increases, but still finishing above their prices in April 2022. The items still heading north? Vehicle insurance, drinking at bars, barbers, and other personal care services. The U.S. Bureau of Labor Statistics showed a 0.5% increase for the Los Angeles area in the June CPI-U for a 2.5% annual inflation rate. This is the lowest 12-month average since March 2021 and continues to compare favorably with the nationwide figure of 3.0%. Below is a chart for inflation changes during the past 12 months from the Bureau of Labor Statistics.
A Goldman Sachs article from July 19 moved its prediction of a recession down to 20% for the preceding 12 months. This is down from the earlier odds of 25% but still above the historic average of 15%. Of more significance is the rapid descent of economists forecasting a recession of a 61% probability just one quarter ago according to the WSJ. Part of this comes from the evaluation that the job market is stabilizing in openings while labor shortage mentioned in corporate earning calls has dropped from a high last year of 16.5% down to 3%. Additionally, the Fed’s staff economists are no longer predicting a recession for 2023.
On the contrarian side, the Conference Board Leading Economic Index dropped to 0.7% in June. This brings the LEI down 4.2% for the past six months, pointing to an historic trend toward a recession. It is one of the few strong indicators that haven’t stepped away from a consequential recession view.
More good news for degrading the likelihood of a significant recession came from Morgan Stanley in late July. They point to increased public spending on infrastructure, and a strengthened industrial sector for a comfortable soft landing for the economy. These factors lead them to believe the GDP for 2023 will average 1.3% instead of an earlier forecast of only 0.6%. Couple this with the continued decline (however slow) in unemployment with June 0.1% less than May.
Good for the economy but maybe not for interest rates. The mix of good and bad news for the economy created the 0.25% rate increase on July 27. The verdict is still out for increases during the remainder of the year, but many are optimist that this will be the final increase of this cycle.
The day after the hike in interest rates had news from the Bureau of Labor Statistics that wages and compensation rose 1.0% for Q2, marking a decline from the 1.2% for Q1. This helped bring the 12-month average down to 4.5% from the 5.1% rise over the 12-month period ending Q2 2022. This is still higher growth for Fed watchers who are concerned that any indicator above the Fed’s 2.0% goal will push up all indicators.
Additionally, Fitch Ratings downgraded the U.S. credit rating to AA+ early August 2. This downgrade was warned of and came about because of their concern with political brinkmanship regarding debt/budget, rising debt levels, rate tightening by the Fed, and uncertainty about the economy. Their move was quickly criticized by the Treasury Secretary Janet Yellen for use of old data. Interestingly, they now join Standard and Poor’s who downgraded the U.S. to AA+ in 2011 and haven’t changed their rating for 12 years. Moody’s recently reaffirmed their credit rating at AAA.
Multi-Family and Commercial Real Estate Prices
The fly in the ointment for the economy continues to be Commercial Real Estate. Price increases for residential rentals have continued to cool nationwide. This has shown up in the steep price decline for sales of multi-units above 8 dwellings. They rebounded better than other commercial properties following the 2008 recession, then competed with industrial units for the steepest price increases following the pandemic. They now show the steepest decline in the broad decline of commercial pricing. Loans coming due, current demand for their space and anticipation of future demand, all work against a change in this direction for the near term. The July 12 Economic Insight blog by First American points out that all these downward pressures are surfacing in the sharply lower sales prices.
Anecdotally, the Cato Institute points to examples of corporations walking away from mortgages, tax assessor appeals for lower taxable values and recent sales of marque properties in San Francisco as examples of the current problems. This article echoes the concern for many that should become clearer in the next 12-24 months as many CRE mortgages are up for renewal. Small to mid-size banks that have increased their exposure with these loans can be as impacted as CRE owners faced with declining rental fees and increasing interest rates on their notes.
Please give me a call at Premier Funding Network to answer any of your mortgage questions at 714-283-9900.