Uncertainty Saps Economic Recovery; Risks Remain Elevated

July 29, 2011

  • The U.S. economy was beset with several major setbacks in the first half of the year that spurred rising uncertainty and increased caution. The tragedies in Japan, surging energy prices sparked by the Arab Spring, a double-dip in housing, and the continuation of the European debt crisis converged to stall economic growth even more significantly than initially perceived. These challenges, together with the uncertainty of an increasing debt ceiling and risks of a U.S. credit downgrade by ratings agencies, will weigh on growth into the third quarter this year. Despite this, the economy remains better positioned today than during the period leading into the Great Recession. Well-capitalized banks, strong corporate earnings, substantial corporate cash stockpiles, and healthy retail sales all offer the potential for renewed economic growth in the second half if the U.S. avoids a credit-rating downgrade and uncertainty levels subside.
  • U.S. GDP grew at an annualized rate of 1.3 percent in the second quarter, subdued by weakened consumer spending tied to Japanese auto-related products. More worrisome, however, was the sharp downward revision to first quarter output from 1.9 percent to just 0.4 percent. This significant drop in first quarter figures was led by steep reductions in government spending.
  • Personal consumption growth decelerated to just 0.1 percent in the second quarter after climbing 2.1 percent in the January-to-March period. The primary drag on consumption stemmed from automobile and parts sales, which subtracted 70 basis points from GDP, causing the quarter’s output to fall short of the 1.8 percent gain that was expected. Fixed nonresidential investments made the strongest contribution of 0.6 percent in the second quarter, followed closely by net exports, aided by the weak dollar. Government agencies reining in expenditures weighed heavily on U.S. economic growth in the first half, although public-sector cutbacks slowed considerably during the second quarter.
  • Impact on Commercial Real Estate

  • Despite economic headwinds, the near-term outlook for the U.S. office market remains positive, particularly in supply-constrained markets such as San Francisco, San Jose and Seattle, where tech-related startups are fueling strong leasing velocity. White-collar payrolls grew by 252,000 positions through the first half, setting the U.S. office-market recovery in motion. While many employers are first backfilling unused cubicles before considering outright expansion, some large, corporate users are beginning to lease space at favorable rents. With supply growth to fall to a 16-year low and tenant demand strengthening in primary markets, the U.S. vacancy rate will fall 60 basis points in 2011 to 17 percent.
  • The easing of auto parts disruptions and energy prices will make positive contributions to global trade in the months ahead, supporting a modest uptick in demand for industrial space. Moderating gas prices should begin to provide consumers with expense relief, propping up consumer spending in the second half, prompting retailers, wholesalers and manufacturers to replenish inventories. With little in the way of new supply, modernized warehouse/distribution facilities in major port cities or regional distribution markets will lease up, pulling the U.S. industrial vacancy rate 50 basis points to 12.1 percent this year.

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The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.

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