Cushman & Wakefield, Inc. 1290 Avenue of the Americas New York, NY 10019-6178 www.cushmanwakefield.com
A Cushman & Wakefield Research publication
the thAW IS heRe
Improved household Spending & Global environment
expected to Accelerate economic Growth
mAY 2014
•
the U.S. economy is expected to grow at the strongest
rate since 2005 this year with real gross domestic product
(Gdp) expanding by around 2.5% to 3.0%.
•
the main driver for this growth will be a strong increase
in household spending brought about by three important
developments: rising home sales and prices, accelerating
employment and income growth and the ongoing need to
replace worn out durable goods.
•
Further support to growth will come from an improving
global economic environment with europe, a major market
for American goods and services, growing at the fastest
pace since 2010.
•
While economic activity slowed in the first quarter due to
severe winter weather in much of the country, there are
signs as spring arrives of a rebound in activity following the
december-February dip.
•
We expect the pace of economic growth in the U.S. to
accelerate significantly in the next several months, making
up for lost time.
2 mAY 2014
the thAW IS heRe
<INSERT SERVICE LINE / DEPT NAME> (3 LINES MAXIMUM)
-7.0 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
M
ILLI
O
N
S OF
P
ER
SON
S
U.S. Employment Growth
Job Growth Recovery Average
Source: U.S. Bureau of Labor Statistics
In every economic recovery, there comes a time when business attitudes
shift. Confidence in the future rises and businesses (as well as consumers)
become more willing to take risk. Businesses shift from worrying about
holding down costs to worrying about losing sales.
When that shift occurs, the pace of employment growth accelerates and economic growth shifts into a higher gear. Since 1970, there have been five economic recoveries not including the current one. the average year-over-year increase in employment during those recoveries was 2.1 million jobs. In each recovery there was a period of a year or more when job growth accelerated sharply, usually topping 3.0 million.
the current recovery began in mid-2009, but that shift to higher employment growth has not yet occurred. It has been delayed largely as a result of the uncertainty caused by a number of factors - among them the seemingly endless confrontations between the Administration and Congress, financial regulatory reform (dodd-Frank), the Affordable Care Act and the double-dip recession in europe. these events sapped confidence and left businesses less willing to take risk and hire in advance of growth.
ReCoveRY tReNdS — U.S. emploYmeNt GRoWth, 1970-2013
tempurature’s Rising
With the weather turning
warmer, signs of spring are
emerging in the economic
statistics
By the end of 2013, uncertainty was diminishing as a budget was passed and the debt ceiling was raised. In addition, a recovery had emerged in europe. Business confidence as measured by moody’s Business Confidence Index improved to its highest level since before the recession and there was a high level of optimism that the long awaited spurt in economic growth was about to take place.
3 then, the U.S. got hit with unusually severe weather and instead of accelerating,
economic activity slowed as employers held back and consumers, unable or unwilling to leave home, cut spending. Job growth in december 2013 and January 2014 averaged 114,000 per month, the weakest two months since summer 2012. First quarter 2014 real Gdp grew at an annual rate of just 0.1%, the weakest showing in three years.
momentum’s Building
the pace of economic growth
in the U.S. is expected to
accelerate significantly
ReBoUNdING StAtIStICS — AUto SAleS & hoUSING StARtS
0 CUSHMAN & WAKEFIELD
-15% -10% -5% 0% 5% 10% 15% 20%
November-13 December-13 January-14 February-14 March-14
Rebounding Statistics
Auto Sales Housing Starts
Sources: U.S. Department of Commerce, U.S. Census Bureau
today, as the second quarter progresses, the U.S. economy is emerging from the deep freeze of the 2014 winter and is finally starting to exhibit the growth that has been widely anticipated since the end of 2013. With the weather turning warmer, signs of spring are emerging in the economic statistics.
SpRING thAW
We are already starting to see a rebound in growth from the severe winter. two key sectors that will contribute to growth in 2014 are the auto and housing industries. Both are expected to grow strongly as consumer confidence rises and pent-up demand, i.e., consumption deferred during this recovery, is realized. But the opposite occurred at the beginning of the year.
• New home construction is one activity that has historically led the economy out of recession. In the current recovery, however, housing starts have lagged the rest of the economy due to the excess construction that occurred before the housing bubble burst in 2006. housing began to recover in 2011 and by November 2013 the number of new homes started had more than doubled from the bottom and reached its highest level since the recession began. In december and January, however, new housing starts abruptly dropped by nearly 18%. While there was a small recovery in February, it was not until march that the industry bounced back from the steep winter decline.
mAY 2014
the thAW IS heRe
• U.S. motor vehicle sales are in full recovery mode, as pent-up demand has been unleashed and sales have increased steadily over the past few years from a roughly 9.0 million unit annual rate in 2009 to 16.3 million by November 2013. Sales dropped more than 7.0% in december and January when buyers could not get to the showrooms. With the arrival of spring, march sales jumped back to a new high in the current cycle.
• the impact of winter was also evident in labor markets. In November the economy added 274,000 jobs and appeared poised to enter a new growth phase. But growth fell to 84,000 in december and 144,000 in January. Job growth accelerated in February and march, but it was not until April, when the economy added 288,000 jobs, that growth returned to its pre-winter pace.
As the economy emerges from its winter funk, the factors that we have long anticipated to drive growth — a growing housing sector, pent-up demand from consumers, european economic recovery and rising business optimism — are expected to push growth higher.
hoUSING
housing has historically been a leader in economic recoveries, rising ahead of the general economy as falling mortgage rates and prices stimulate demand. that did not happen in the current recovery for a number of reasons, including the sharp declines in employment and slow recovery, a more restrictive mortgage environment and a large number of “under water” mortgages where the mortgage balance was larger than the value of the home. that is why the housing sector reached a bottom during the second half of 2010, a full year after the recovery began. Since then, sales of both new and existing homes have increased along with new home construction.
As of march 2014, sales of new homes were 36% above the trough while existing home sales were up 18%. this growth will bring with it more consumer spending on a variety of other goods and services including appliances, furniture, utilities and financial services. As home sales have increased, so have prices with the Case-Shiller home price index currently up 23% since early 2012. higher home prices are improving confidence levels as homeowners feel wealthier.
55%
percent increase in
automotive sales between
2009 and November 2013,
demonstrating pent-up demand
and full recovery
eCoNomIC UpdAte
A Cushman & Wakefield Research publication
5
23%
percent increase in housing
prices since early 2012, providing
a boost to consumer confidence
It is not all positive for the housing sector however. About a year ago, mortgage rates jumped sharply and home sales fell back. home sales still have not fully recovered in part because of continuing sluggish employment growth and also because of more stringent mortgage requirements. the volume of mortgage loans outstanding from banks in march 2014 was only 1.2% above the level of January 2012, so banks are not lending for home purchases as aggressively as they were in the early 2000’s. We expect housing to resume its recovery and drive overall economic growth but an important key to that recovery will be faster employment and income growth.
peNt-Up demANd
during the recession and sluggish recovery, consumers have been reluctant to replace durable goods like appliances and autos unless necessary. this postponing of purchases can only go on for so long before replacement is required. the combination of a severe recession and subpar recovery has held back consumer demand and resulted in a significant build up in pent-up demand that is now becoming “actual” demand, which will accelerate in the coming year. Consumer spending on durable goods in the first quarter was 4.4% higher than a year earlier, not particularly strong. throughout this recovery, spending on durables has grown at a solid pace, but has not spiked as it frequently has in previous recoveries. this suggests that there is still a healthy amount of pent-up demand in the economy today. Auto sales, for example, while up strongly, have not reached the levels of the early 2000’s, indicating that there is still some upside. the average age of a car on the road was 11.4 years in 2013—an all-time high. As hiring accelerates, we expect more of this pent-up demand to provide an extra push to consumption for several quarters.
exIStING home SAleS, 2008-2014 Ytd
0 CUSHMAN & WAKEFIELD
3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 5.0
2008 2009 2010 2011 2012 2013 2014
Sales of Existing Homes
Source: National Association of Realtors
M
ILLI
ON
S OF
H
OM
mAY 2014
the thAW IS heRe
eURopeAN ReBoUNd
In the first quarter of 2014, real Gdp in the U.K. grew at an annual rate of 3.2%—the fifth consecutive quarter of growth. the eurozone shifted from contraction to growth in the second half of 2013 and the economic indicators for the first few months of 2014 suggest growth on the continent continues, albeit at a subdued pace. the shift from contraction to growth in the eurozone and the healthy acceleration of growth in the U.K. are positive developments for the U.S. the european Union (eU) purchases 18.2% of U.S. exports and is one of the largest global markets for U.S. goods and services. Growth in europe will mean growth in U.S. exports. In the first quarter of 2014, U.S. exports to the eU increased 6.0% from the year earlier level, the strongest growth in two years.
SUmmARY
these factors are expected to boost U.S. growth and were temporarily offset by weakness caused by the severe winter, but the early evidence from the economic data of march and April suggests that the first quarter stall in activity was a temporary blip and a rebound is now underway.
As business confidence rises and companies start to hire in anticipation of future growth, the recovery will shift to a higher growth trajectory. once this happens, the entire economic landscape will change.
• Rising employment will boost confidence and incomes, leading to faster growth in consumer spending and in the housing sector.
• purchases of durable goods will take off as the full impact of pent-up demand is realized.
• Business investment will accelerate as companies seek to boost output.
• Interest rates will increase as demand for funds increases and the Federal Reserve shifts from an easy money stance to a more neutral one.
• Gdp growth will top 3% for a sustained period and the economy will add more than 3 million jobs per year. moody’s Analytics current forecast calls for real Gdp growth of 2.6% in 2014 and 3.9% in 2015.
ReAl eStAte ImplICAtIoNS
this anticipated shift to a sustained period of stronger growth will create a favorable environment for every segment of the commercial real estate sector.
• office markets will see rising demand for space as a result of faster job growth. Since the recovery began, the vacancy rate in central business districts (CBds) across the U.S. has declined from a peak of 15.3% in early 2010 to 13.1% today. In the suburbs, vacancy has fallen from 19.5% to 17.1%. In most major metropolitan areas there is little new construction. Nationally, office construction in CBds over the past 3 years represents only 1.0% of total inventory, well down from the 2.5% in the 2006-08 period and the 7.5% in the 1999-2001 era. Construction is now picking up, but even with current projects, the total square footage under construction represents only 1.7% of CBd inventory. employment in the key office-using sectors has already surpassed its pre-recession peak and is growing more rapidly than the overall economy. over the latest 12 months, employment in office-using industries has grown 40% faster than total employment, a trend we expect to continue in the future.
18.2%
percentage of U.S. exports
purchased by the european
Union, a number expected to
grow as the eU’s economy
continues to strengthen
7
This means demand for office space should grow more strongly than the general economy and far more rapidly than new supply. The result will be a continuing decline in vacancy, upward pressure on rents and particularly substantial upward pressure in markets with low vacancy.
• As employment and incomes rise, so will demand for all kinds of goods. We are already seeing consumer demand increase. Retail sales, adjusted for inflation, were up 2.0% in February and march combined, the strongest two months since early 2010. to be sure, part of this was a bounce back from the bad winter weather, but the improving economic environment is expected to continue to boost demand over the next several quarters. As consumers increase demand for goods and services that they have deferred buying for much of the past seven years, businesses, as they get more aggressive, will invest more in capital equipment. the result will be more manufacturing, more imports and exports and more shipments of goods around the U.S.—all of which indicate more demand for industrial real estate of all kinds. Industrial markets are already strong. the vacancy rate for all types of industrial space has fallen from 10.8% in early 2010 to 7.4% currently and rents are pushing higher. Average asking rents are up nearly 10% since the beginning of 2011 and at the highest level since 2009. Industrial markets are expected to get stronger in the next two years.
• the expected acceleration in growth of consumer spending will of course be beneficial to retail markets. As the economy improves, retailers will generate higher revenues and be more willing to expand. In addition, the growing consumer demand in the U.S. will continue to attract foreign retailers seeking to expand into this market. With increasing population and employment growth in many central cities across the U.S., it is likely that urban retail will be particularly strong in the current cycle.
• there is currently a substantial pent-up demand in the economy for housing, as the recession caused many individuals to delay moving out of their existing homes. Now that the economy is expected to grow more rapidly, the pace of household formation is expected to increase. Stronger job growth is expected to lead to greater demand for apartments and housing, creating greater demand for multifamily buildings.
poteNtIAl heAdWINdS
We have an optimistic outlook for the U.S. economy during the balance of 2014 and in 2015, but there are, as always, risks associated with this forecast.
First, we assume calm in Washington d.C. If there are further politically charged debates about budget issues, the building optimism in the private sector could diminish and the anticipated hiring surge would be delayed.
Another risk is in europe. Although the U.K is recording healthy growth, many
continental economies are showing little growth. If countries such as France and Italy fall back into recession, the anticipated boost to exports from a european recovery might be much more muted.
the anticipated increase in interest rates also poses risks to the recovery. the general consensus is that the rise in interest rates will be slow and steady, but markets do not always behave as expected. A spike in interest rates is always a possibility in an accelerating economy. A year ago, members of the Federal Reserve Board began talking
40%
Faster growth rate for
office-using industry sectors compared
to total employment growth, a
trend expected to continue as
the economy builds steam
UNIted StAteS eCoNomIC UpdAte mAY 2014
A Cushman & Wakefield Business Briefing
For more information about C&W Research, contact: Ken McCarthy
Senior managing director, economic Analysis and Forecasting 212.698.2502
Cushman & Wakefield (C&W) is known the world-over as an industry knowledge leader. through the delivery of timely, accurate, high-quality research reports on the leading trends, markets around the world and business issues of the day, we aim to assist our clients in making property decisions that meet their objectives and enhance their competitive position.
In addition to producing regular reports such as global rankings and local quarterly updates available on a regular basis, C&W also provides customized studies to meet specific information needs of owners, occupiers and investors.
Cushman & Wakefield is the world’s largest privately held commercial real estate services firm. the company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the world’s major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and management assignments. Founded in 1917, it has approximately 250 offices in 60 countries, employing more than 16,000 professionals. It offers a complete range of services for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, corporate services, property management, facilities management, project management, consulting and appraisal. the firm has nearly $4 billion in assets under management globally. A recognized leader in local and global real estate research, the firm publishes its market information and studies online at:
www.cushmanwakefield.com/knowledge
this report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments contained in this material. the information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verified such information and we do not guarantee that the information is accurate or complete. published by Corporate Communications. ©2014 Cushman & Wakefield, Inc. All rights reserved.
Cushman & Wakefield, Inc. 1290 Avenue of the Americas New York, NY 10019-6178 about reducing bond purchases and interest rates surged. Another such misstep could cause a spike in rates which would slow activity.
Finally, the global environment is far from benign. the most obvious potential problem is in Ukraine where the confrontation with Russia and local separatists has already become a military conflict. It could become much worse if Russia decides to act. In the middle east, the Syrian civil war continues and could worsen. Anything that increases the possibility of military conflict is a negative for growth.
We are confident that these risks are minor, but they need to be monitored and have the potential to keep growth below the current optimistic projections.
