Published September/October 2012
REIT: The economic recovery is proceeding at a frustratingly slow pace and continues to suffer setbacks. What is your outlook for the economy for the remainder of 2012 and for 2013?
Maki: The modest recovery is likely to continue, and we are not looking for a tremendous move up or down in GDP growth. We expect 2012 growth to come in at 2.25 percent on an annual average basis, and 2 percent in 2013. Nobody will be excited by growth like this, but it does look relatively appealing in comparison to the situation in Europe.
The large block of distressed homes is keeping us from enjoying a more robust recovery.
REIT: We are seeing some signs that housing markets are stabilizing; why do you expect GDP growth to slow a bit in 2013?
Maki: We expect some portion of the “fiscal cliff” to hit the economy. There is a potential $650 billion impact that would occur if Congress were to do nothing, and we expect there to be a $200 billion in fiscal tightening to occur in the first half of 2013. After that, we expect GDP growth to edge back up to 2.5 percent in the second half of next year.
On the housing market recovery, we think the house price declines are finished, and expect broad national measures of house prices like the CoreLogic index to increase 3 percent in 2012 and 2013. We don’t expect any boom, though, as banks hold a lot of the distressed inventory and would sell more of these homes if demand firms and prices rise faster. Banks are more strategic in their timing of sales, depending on prices, than homeowners are. Inventories are moving in the right direction, but it won’t be until 2014 or more likely 2015 until the housing market stops being a drag on the economy.
REIT: The labor market is also important to the outlook. What do you expect for job growth and the unemployment rate?
Maki: Our forecast is for the unemployment rate to drop to 7.2 percent by the end of next year. We estimate the potential growth rate of GDP to be 2 percent, so any growth above this rate will push the unemployment rate down.
And that’s what we’ve seen so far, as the unemployment rate has fallen two percentage points with only modest GDP growth.
REIT: But one reason why the unemployment rate has come down is that the labor force participation rate has also declined. Some economists expect a slower decrease in unemployment if the participation rate recovers as jobs become less scarce.
Maki: Demographic forces are a big factor in the participation rate. The labor force is growing more slowly as the baby boom generation ages and begins to retire. We estimate that two-thirds of the fall in the labor force participation rate is due to these demographic factors, and only one-third due to the weak economy.
Because of this, we expect a flattening out of the participation rate as GDP improves, but then for it to begin falling again. With the slower labor force growth, 75,000 to 100,000 new jobs each month are enough to keep the unemployment rate stable, so if we maintain job growth like the 163,000 we saw in July, the unemployment rate should continue to fall in the coming months.
REIT: We have a particular interest in how the macroeconomic trends affect commercial property markets, and growth in consumer spending is critical for the health of the retail property sector. What is your outlook for consumer spending?
Maki: The main thing holding back consumer spending is income growth. Consumers were very cautious in the midst of the financial crisis and recession, but since then the saving rate has moved lower. This suggests it’s not excess caution that’s responsible for soft spending growth, but weak incomes.
Wealth effects are also important. Stock market wealth is within 10 percent of its pre-recession highs, and taking into account the lagged effects on consumer spending, the impact has gone from a sharp negative to roughly neutral. The impact of lower house prices on net worth and consumer spending is still negative, but is less negative than it was in 2009 and 2010.
REIT: The retail property sector still has high vacancy rates and sluggish rent growth. What does your economic outlook imply for retail spending and retail commercial property?
Maki: Retail sales are likely to continue their moderate growth. This means there won’t be a significant break from what we’ve recently experienced.
Although this type of growth isn’t terribly exciting, neither do I see any major downside risks. As long as we don’t hit the full “fiscal cliff” or see the situation in Europe morph into a global financial crisis, we are likely to see retail spending continuing to trend upwards and retail commercial property markets slowly improve.
Dean Maki is a managing director and chief U.S. economist at Barclays. Based in New York, he is responsible for analyzing and forecasting the U.S. economy and monetary and fiscal policy. He was named the most accurate forecaster of U.S. GDP in 2009 by Bloomberg News, and the most accurate forecaster of CPI and PPI inflation by Bloomberg News for 2008-2010. Maki joined Barclays in February 2005 from JP Morgan Chase, where he was vice president of economic research responsible for forecasts of Federal Reserve policy, the federal budget and Treasury debt issuance. Prior to this, he was a U.S. economist at Putnam Investments and a senior economist at the Federal Reserve Board, where his research focused on the relationship between household balance sheets and consumer spending. His research has been published in a number of academic journals. Maki holds a Ph.D. in economics from Stanford University and a BA in economics from St. Olaf College.