This week we are writing to you from the International Council of Shopping Centers (ICSC) in Las Vegas, which met in person for the first time since before the pandemic. This provides an appropriate backdrop for discussing the resilience of the American consumer. For much of the last year, we’ve cautioned to monitor what consumers do, not what they say. Despite all the significant headwinds they have faced and some very bleak consumer confidence readings, consumers continue to propel the economy. While equity markets focused on retail earnings last week, retail sales continue to advance, giving us cautious optimism for retail and the broader economy. How do all of these factors influence our outlook? Let’s address a few key questions.
Consumers continued to rain spending on the economy in April. Last week’s release showed retail sales were roughly in line with expectations. So far, overall anticipated retail sales remain on track with our expectation of another strong year, even after record growth in 2021 which is also in line with our forecast. Most subcategories performed well, including the control series that feed into GDP calculations. We continue to see signs of another of our projections – consumers are expected to gradually shift towards spending on services and away from spending on goods. While consumption remains so active, the economy should continue to perform well. As we mentioned last week, overall earnings growth (coupled with strong consumer balance sheets) continues to support consumers. What does this actually mean for us? Keep a close eye on the job market. As the economy continues to create so many net new jobs, it provides hundreds of thousands of consumers with greater ways to spend money. Any signs of trouble in the economy will almost certainly show up quickly in the labor market. So far, the labor market remains strong and incredibly tight. But jobless claims have increased slightly in recent weeks, warranting closer monitoring in the periods ahead.
Useful stock market drop?
The decline in the stock market over the past few weeks has added nervousness to an already nervous environment. As of this writing, the stock market is down about 18% since the end of 2021, reducing household wealth by about $14 trillion. Some see the decline in the stock market as a sign of worsening difficulties: not only as a leading indicator but as the idea that reducing household wealth means reducing consumption expenditure (via the wealth effect) and being negative for the economy. However, its impact could turn out to be ambiguous if not positive. How? Declining wealth could encourage some people (particularly older workers) to return to the labor market and earn income again. We have repeatedly noted the increase in labor force participation in recent periods, including among older workers. The Fed is almost certainly hoping for such an outcome that would add supply to the labor market, helping to offset some of the excess labor demand, embodied most clearly in the 11.5 million jobs open on the work market.
Where does that leave the Fed?
Last week, Chairman Powell reiterated the Fed’s commitment to raising rates to dampen demand in the economy, especially in the labor market. With the labor market remaining so strong, the Fed sees some ability to suppress some demand without disrupting economic growth. We continue to expect the Fed pushing towards our neutral estimate, around 2.5%. As we mentioned earlier, with inflation still so high, the Fed likely has some ability to move beyond neutral to dampen growth. But we will have to proceed with caution. Inflation presents a moving target. And higher interest rates are a machete, not a scalpel. Such an instrument generally produces collateral damage during tightening cycles. The Fed would probably accept that to some extent: some increase, say, in the unemployment rate, if that meant less demand for labor, more supply for labor, and some cooling of wages. But if he goes too far in the tightening, it could lead to job losses and a slowing economy, the typical post-war recipe for a pullback.
| What does this mean for CRE? |
With a consumer still active, the outlook for commercial real estate (CRE) remains positive. Retail continues to benefit most directly. While some have postulated that a return to service consumption portends trouble for the retail sector, this seems overly pessimistic. Consumers should continue to spend in physical spaces, even if they return. However, such a change should occur gradually, and we continue to believe that part of the increase in spending on goods should continue. It would also portend continued strong demand for industrial space. Industry vacancy rates continue to hover near record lows as supply fails to keep pace with demand in many markets. And the return to service spending suggests improvement in hotels as consumers return to both leisure and business travel in a world less disrupted by the pandemic. If the check-in lines at hotels near ICSC this weekend provide any indication (even anecdotal), that change is already underway.
| Thought of the week? |
Airfares jumped about 19% from March to April. This represented the largest monthly increase in airfares and followed the robust gain of around 11% in March.