Caution: Double-dip
Recession Ahead?
(Economic forecast for the United
States)
An article from: Journal of Institute of Real EstateManagement-2002
By Robert
Kehiayan
Certain
economic conditions suggest the current recovery may be short-lived, and that a
more serious "double-dip" recession could lie ahead.
Property and
asset managers must be able to interpret the economic climate in real time in
order to identify the turning point in the economy. Even more importantly, they
need to be able to identify the magnitude of either the growth or decline of
the economy at any particular time, in order to make articulate budgeting,
financing and leasing recommendations to their owners. The sophistication of
investors and lenders today requires that their property and asset managers
plan strategically (long-term) by providing five- and ten-year forecasts in
addition to a traditional annual operating budget.
Weather
Report
A number of
statistics indicate clear skies are ahead. Business inventories are back in
line, manufacturing is expanding, orders for durable goods are growing,
interest rates and inflation are low, oil stocks and prices are reasonable,
productivity is high, liquidity is good, banks' balance sheets are better than
ever, the growth of the money supply is brisk, unemployment looks to have
bottomed, the yield curve slope is positive, and consumer confidence is good.
Further
indications that the recovery is at hand can be found in a recent survey of 35
top forecasters and economists by the Federal Reserve Bank of Philadelphia.
In that survey, the majority of respondents see a turnaround in process with
reasonably good growth forecasts moving forward. Also, in February, Anaarvan
Banerji, research director for Economic Cycle Research Institute (ERCI) said he
believes that this recovery is sustainable, and a double-dip is not likely.
Anthony Chan,
chief economist for Banc One Investment Advisors, told attendees at IREM's 19th
Annual Asset Management Symposium in San Diego
in March that economic indicators are positive. "The Federal Reserve is
not in a rush to raise interest rates, productivity is increasing and the
markets are inching up," he said. "Slow-term expansion is what
long-term recovery is all about." Chan predicted that things will pick up
in the second half of the year, but does nor expect significant improvement
until 2003.
Debt Leads
to Double-Dip
Despite these
positive indicators, some signs suggest the "perfect storm" may be
brewing. Consumer and business debts are at historic highs. Those seemingly
beneficial low interest rates have also served to tap out consumers' purchasing
power, and the consumer accounts for two-thirds of all economic activity.
Interest rates are increasing, and after adjusting for inflation, they are not
as low as they would seem.
Also, fiscal
and monetary policy has adopted a less accommodative stance, the housing market
may be forming a bubble, and the stock market (an uncanny leading indicator)
has been tentative. Typically, many of these items work their way into
equilibrium during recessions. But at this point in the recovery process, some
have yet to show signs of correction.
Stephen Roach,
Morgan Stanley's chief economist, sees a double-dip possibility due to consumer
debt: "Payback is inevitable," he said. "This speaks of an
imminent relapse in consumer demand, precisely the stuff of the classic
double-dip."
Predicting more
doom and gloom for the economy, Michael Dow of CRESA Partners in Minneapolis told members of The Counselors of
Real Estate during their convention in Washington, DC earlier this
year: "There is a danger of a double-dip in the recession. There is a
serious lack of demand for space in most cities, and there is an enormous
amount of sublease space hanging over the market."
The Return
of Investors
Many industry
experts believe 2002 will be a crucial year for real estate. It will be a year
that will determine whether or not real estate is legitimate and if it is a
real asset class. If investments have been made sensibly, Dow believes real estate
will get through the downturn without becoming a whipping boy again.
Real estate has
been a good investment, Dow said, despite the fact that pension fund
allocations have hovered around 5 percent. "Their love affair with the
stock market went on far too long," he said.
As Patty
Nooney, CPM[R], of St. Louis-based American Spectrum Realty, Inc. noted,
"We're going to have to see some big indicators to get people on the
sidelines back into the market."
Multifamily
will likely be the sector that gets hit the hardest from this recent recession.
It suffered from the double whammy of low interest rates and an increase in
homeownership. Prior to 9/11, many investors believed that apartments were a
safe bet, but there has been negative absorption in many markets.
Chan agreed:
"It'll be hard on the rental market because people don't have the income
they once had, and if they do, they're taking advantage of low interest rates
to buy a home."
A Historical
Perspective
Additional
cause for caution, albeit somewhat unscientific, is a disquieting observation
of the historical record. Close to our latest uninterrupted and prosperous
expansion of the '90s and its notorious tech revolution, is a similar expansion
and tech revolution of the '60s. Then, jet airplanes, television and radio
provided the "new paradigm" of low unemployment, high productivity,
fast job growth, low inflation, low interest rates, business expansion and a
stock bubble.
The historical
record of the postwar recessions shows milder recessions have a brief recovery
period, followed by more serious recessions.
Conditions
suggest that the stimulus provided through several months of aggressive
monetary and fiscal policy has worked its way into the economy, and a decent
recovery is underway. However, in the event the debt burden is not worked off,
and inflation accelerates, it would be reasonable to expect a recession more
serious than this one, possibly starting sometime next year and continuing into
2004.
Some have said
that the business cycles can be eliminated because of the advances in
technology. Although they might get smoothed out a bit, and unless technology
can change human nature, the business cycles are here to stay. Strategic
planning and anticipating the direction and magnitude of economic growth will
allow property and asset managers to provide the best value for their clients.
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