Posts Tagged ‘Moodys’
FED raises rates — now what?
There is plenty of news about the FED bumping rates today — a whopping 0.25% (“yawn”) and only the 2nd time in a decade. The argument is that the FED no longer sees low rates as a needed crutch for the economy. Perhaps they’re right. My interest is real estate — how will higher rates impact property returns? More to the point, if the Trump administration goes ahead with infrastructure spending, as was promised, and the FED follows with further rate bumps, as has been projected, will real estate continue its upward climb?
Rather than answer that directly, there’s a great piece on that topic from TIAA — you can access it by clicking here. Looking at data from back to 1980, TIAA finds that real estate appears to perform just as well during periods of rising rates as it does in other times. Indeed, they find a 70% correlation between acquisition cap rates and long-term Treasury rates, suggesting that real estate buyers are agnostic on rates, within reason. Indeed, as the graphic above indicates, the most upsetting quarterly property returns came during periods of relatively stable, downward trending long-bond rates. For the last half-decade, quarterly property returns have tracked the long-bond quite nicely.
So there ya have it, folks.
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Philadelphia FED Survey
My “touchstone” for economic forecasting is the quarterly Philadelphipa FED Survey of Professional Forecasters. They survey about 50 or so forecasters each quarter representing the top forecasting “shops” in the country. (The number isn’t exact, because many of the forecasters wish to remain anonymous.) Included in the mix are the usual suspects — Mark Zandi from Moody’s, Ethan Harris from BofA, Dean Maki from Barclays, Ardavan Mobasheri from AIG, Sean Snaith of U. Central Florida, and so forth. I mention these names as examples to demonstrate these are folks who span the broad array of economic perspectives, and who usually represent firms that are actually putting their “money where their mouth is.”
An additional strength of this survey is methodological — the Phily-FED reports not only the mean of the responses, but also the distribution of those responses. Thus, it’s very helpful to see when individual forecasts are highly coalesced around a central tendency, or if there is a great degree of dispersion in the estimates.
Bottom line — the current projections for 2012 and 2013 are now weaker than they were three months ago (in the previous survey). While a double-dip recession doesn’t appear to be in the offing, the panelists expect real GDP growth to end up at 1.8% for 2011, 2.4% in 2012, and 2.7% in 2013. While 2011 will end slightly rosier than previously forecast, the numbers for out-years are about 0.2% lower than previously expected. The outlook for 2014 is also less than previously expected.
Courtesy Philadelphia FED Quarterly Survey of Professional Forecasters
These downward revisions in GDP growth come primarily from “…upward revisions to unemployment and downward revisions to job growth.” Specifically, unemployment is expected to end this year right at 9.0%, and is expected to fall to 8.8% next year, 8.5% ini 2013, and 7.8% in 2014. The prior survey had a fair amount dispersion in estimates for end-of-year 2011 unemployment, with over 30% of respondents optimistically thinking that unemployment could end the year between 8.5% and 8.9%. That number has now dropped to about 20%, and about 75% of respondents now believe that unemployment will end this year between 9.0% and 9.4%.
Courtesy Philadelphia FED Quarterly Survey of Professional Forecasters
Intriguingly, the central tendency of next year’s forecast didn’t change much from the last survey to this one, with between 30% – 40% of respondents thinking that unemployment would hover between 8.5% and 8.9% next year. The real change in the forecast came in the next-lower and next-higher brackets of estimates, which nearly reversed themselves from last survey to this survey. A quarter ago, about 25% of respondents thought that unemployment would end up around 8.6% in 2012, and only about 20% projected 9.2%. Today, only about 15% forecast the lower range, and about 32% are opting for the higher range.
Finally, while forecasts of inflation over the next ten years is still nearly flat-lined around 2.5%, there have been slight up-tics in forecasts ever since mid-2010. The following chart shows the general sentiment among forecasters, as well as the “track” of their forecasts over the past 20 years, which as you can see is pretty neatly distributed in a tight range. In general, inflation has not been a major issue in over a decade, but it is still worth tracking.
Courtesy Philadelphia FED Quarterly Survey of Professional Forecasters
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Phily Fed — Econ Forecast
One of my favorite economic touchstones is the quarterly survey of professional economists by the Philadelphia Federal Reserve Bank. Forty-four economists are surveyed, including such notables as Mark Zandi from Moodys, John Silvia from Wells Fargo, and Neal Soss from Credit Suisse. The focus is on “practicing” economists rather than “academics”, and as such gives a great snapshot of what decision makers at major corporations are thinking.
The Phily Fed then takes a synopsis — both a mean and a distribution — of their collective thinking in several key areas, such as Real GDP growth, unemployment, monthly payroll growth, and inflation. The interesting factors include both the current thinking, the CHANGE in current thinking (from the previous projections) and the probability distribution.
Current thinking about GDP growth is a bit less optimistic than it was before. As noted in the graph below (reproduced from the Phily Fed’s report), prior consensus thinking put GDP growth in the 3.0% to 3.9% range, while the current consensus mid-point is between 2.0% and 2.9%. Good news — hardly anyone projects negative GDP growth for this year. As we get into out-years (the graphics are on the Phily Fed’s report), which you can download by clicking here ), the consensus is a bit blurry, but in general most economists still see GDP growth postiive and between 2% and 4%. Unfortuantely, this isn’t the best of news — for the U.S. economy to really get back on track, much stronger GDP growth is needed (solidly high 3% range and even above 4%).
Philadelphia FED GDP Projectsions 2Q 2011
Unemployment projections for 2011 are somewhat rosier. In the prior survey, the mean projection was in the range of 9.0% to 9.4%, with a significant number of economists projecting from 9.5% to 9.9%. Currently, the mean is 8.5% to 8.9%, and a signficant number project in the 8.0% to 8.4% range — a very real shift in the outlook for the nation’s economy as we head into the second half of the year. On the downside — projections for out-years (2012, 2013, and 2014) show a very slow restoration of “normality”, with mean unemployment projections above 7% in all years.
Philadelphia FED Unemployment Projections 2Q 2011
One piece of good news — and this may be the FED patting itself on the back a bit — is that its inflation projections have been quite accurate over the years, and they continue to forecast exceptionally low CPI changes over the next ten years. While the median forecast is up slightly from last quarter (2.4% up from 2.3%), this continues to be great news for consumers and bond-holders. Notably, as you can see from the graphic, there is a fair degree of agreement among economists surveyed — the interquartile range is less than a percentage-point.
Philadelphia FED Ten-Year Inflation Projections as of 2Q 2011
From a small northwestern observatory... 