The Briefing: Economy Shrank in Q4, but Forecast is Not Discouraging

THE ECONOMY

The initial 4Q12 numbers showed the U.S. GDP slid into negative territory, -0.1%. Many informed watchers believe this was due to temporary influences and that the number will be revised up to +0.3% once the improved trade numbers are factored in. The economy continues to power through the international headwinds and dysfunctional political environment here at home. Despite the fiscal cliff, postponement of sequestration, debt ceiling and a meaningful budget, our economy continues to produce jobs and chug along. Conditions will continue to be choppy, but ultimately slow and moderate growth will prevail.

The economy shrank in 4Q12 – but the details are not as discouraging as the headline:

1. Primarily driven by sharp drop in government spending after sharp $90 bn pre-election spike in 3Q12.
2. Inventories also grew at slower rate.
3. Housing, consumer spending and business investment in equipment and software were all stronger.
4. Commercial and industrial loans up 4.4% in 4Q12 and 16% at YE 2012.

JOBS & HOUSEHOLDS

1. Employers added 157,000 jobs in January 2013. Yet unemployment remained persistently high, increasing from 7.8% to 7.9%.
2. November was revised up to 247,000 jobs from initial estimates of 161,000. Average for 2012 rose to 180,000 from 150,000.
3. 3.37 job seekers per opening in Dec 2012 vs. 3.18 in Nov. Comparatively, 6.7 at the start of the recovery and 1.8 prior to recession.
4. Household net worth is 7% below the all-time high, after being off more than 25% in 2009.
5. Household debt payments have declined from record high of 19% of disposable income in 2007 to near record low of 16% as a result of low interest rates and debt repayment and forgiveness.

AUTOMOBILES

Auto industry recovery continues despite slumping sales in Europe.

1. 14.4 million light vehicles were sold in 2012.
2. January sales were on an annualized pace of 15.3 million light vehicles; very strong but well below the average of 16.7 million in the 10 years preceding 2007.
3. Future auto sales expected to begin slowing after pent-up demand from the recession is exhausted.

Long-term auto sales could be impacted by several factors:

1. Population growth expected to slow to 7.9% growth rate this decade vs. 9.6% the previous decade.
2. In 2020, 21% of the driving-age population will be over 65, up from 16.6% in 2010.
3. Younger generation less committed to cars. In 2001, 81% of the driving-age population under 40 had driver’s licenses. Figure dropped to 77% in 2011.
4. Census reports in 27 of the nation’s largest 51 metropolitan areas, city centers grew at a faster rate than suburbs.

THE HEADWINDS

In 2013, the economic growth continues to face issues: EU, staggering Japanese debt, threat of trade wars around the globe and drag of higher taxes, sequestration and budget issues coupled with a lack of discipline here in the U.S.

1. Europe: Overall EU combined GDP forecast to decline 1.0% in 1Q13 while unemployment rises in Spain, France & Italy and PMI falls.
2. Germany showing signs of rebounding.
3. Spain unemployment rose to 26%.
4. France showing signs of further decline.

In a slow growth environment countries are actively debasing their currencies to encourage exports. There is a real risk of currency wars and even a slide back to trade protectionism.

CAPITAL MARKETS

Corporate bond prices are near record highs with yields hitting record lows as many are providing negative returns after inflation and taxes. Treasuries are providing negative returns after inflation alone. REITs are at their highest prices in five years. Gold has increased six-fold since 2000. 10-year Treasuries are at approximately 2.0%.

1. The average U.S. money-market fund yielded 0.04% on an annualized basis as of February 3rd – to avoid leaving investors with losses 98% of funds reported waiving some portion of their management fees.
2. Average spread for Morningstar’s Corporate Bond Index ended last week at +136 bps.
3. There appears to be a "great rotation" as money invested in bonds and sitting on the sidelines pours into stocks. $38.1 bn flowed into long-term equity mutual funds over the past 4 weeks – more than the record month set in February 2000 (After withdrawing an average of $12.7 bn per month in 2012 and $10.7 bn per month in 2011).

U.S. Treasury planning to issue floating rate notes – the first addition to the department’s products in nearly 15 years – the main unresolved issue is choice of index. They are currently considering both repo rates and three month Treasury bills.

2013 REAL ESTATE FORECAST

CRE continues to provide an attractive return to both institutional and non-institutional investors.

1. Investors continue to see commercial real estate as an attractive investment asset class.
2. Investors starved for yield see CRE as an attractive alternative to the anemic yields on Treasuries, money market funds, savings accounts, etc.
3. In a world of financial and political turmoil hard assets are seen as a safe harbor.
4. In a world of heightened fear of inflation hard assets are seen as a hedge.
5. New construction in all assets has been at a virtual standstill for several years; with the obvious exception of apartments (Permits for new apartment construction hit 300,000 nationally, about the annual long-term average historical construction rate).

The Briefing is information on the U.S. economy aggregated by Tom McNearney, Transwestern’s Chief Investment Officer, who oversees capital market efforts for development and investments nationwide.