Heightened Energy Prices Restrain First Quarter Recovery Momentum

April 29, 2011

  • U.S. GDP growth remained positive in the first quarter, and two months of strong job increases reinforce that a sustainable,albeit cautious, economic recovery is well under way. First quarter GDP growth was hampered by poor weather, high gasoline prices and slowing consumer spending. Nonetheless, hiring and corporate expenditures set the stage for more substantial private-sector contributions to economic expansion by midyear, which will support further consumption-driven gains in the second half. Over the near term, cuts by the government sector and weak construction activity will remain drags on the economy, and the conclusion of quantitative easing in June will release upward pressure on long-term interest rates. As more people return to work, however, these transitory hurdles will dissipate, and American consumers will push GDP growth above an annualized 3 percent in the fourth quarter.
  • GDP grew by an annualized 1.8 percent in the first quarter as economic expansion continued to transition into the private sector. Strong corporate investment in equipment and software indicates American companies have begun to make purchases delayed during the recession. This trend, coupled with the creation of nearly 500,000 jobs year to date, will translate into healthy GDP gains in the second half. Two factors drove the increase in the first quarter — sales of durable goods rose at an annualized rate of 10.6 percent, and inventories posted solid improvement as companies were forced to restock after fourth quarter buying. Inventories contributed 0.9 percent to the gain, after decreasing by 3.4 percent in the previous three-month period.
  • Two areas have been drags on economic gains so far this year. Spending cuts across all levels of government have removed 1.1 percent from GDP growth, up from 0.3 percent in the fourth quarter. Stimulus-aided expansion has dissipated, and layoffs in the public sector are beginning to match private-sector losses from two years ago. Residential investment also remains an impediment to a robust economy. Although the sector only docked 0.1 percent from GDP growth, it typically contributes a net positive during expansionary periods.
  • Impact on Commercial Real Estate

  • Retail vacancy in the first quarter paused at 10 percent as the pace of seasonal stores shuttering matched new store openings.Additionally, Easter, typically spring’s biggest retail event, fell on one of the latest possible dates, delaying the holiday’s surge in sales until the second quarter. As spending accelerates, retail vacancy will fall to 9.5 percent by year-end 2011.
  • While investment in residential construction is at the lowest level since 1978, builders will begin to push projects forward in the coming months due to improving apartment operations. Apartment vacancy fell 180 basis points year over year to 6.2 percent in the first quarter and will trend down to 5.6 percent by year end. Tighter conditions will facilitate rent growth, though more tenants may opt to transition into homeownership in 2012, stimulating home construction.

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