Change of Seasons

By George Ratiu

George Ratiu, director of quantitative and commercial research for the National Association of Realtors

This year March proved that the exception reinforces the rule. The month came in like the proverbial lamb, but by mid-month it had donned its lion’s coat and surprised the early cherry blossoms in the nation’s capital. The East Coast, along with most of the country, seemed ready for spring and new directions.

Economic activity data retained echoes of a choppy wake from 2016, a year filled with turbulence and rough waters. On the upside, we had the Rio Summer Olympics, new heights for U.S. financial markets, the opening of the Panama Canal expansion and the Chicago Cubs winning the World Series for the first time in 108 years. On the downside, we had global central banks pushing interest rates into negative territory to stimulate growth, several South American economies struggling with recessions, and continued geopolitical turmoil. On the surprising side, we had the outcome of the U.K.’s Brexit referendum to leave the European Union and the result of the U.S. Presidential election.

As we passed through the first quarter of 2017, we certainly found ourselves facing multiple intersections, ranging from political shifts to demographic changes and from technological disruptions to accelerating urbanization. These alterations are placing tremendous pressures on global economies. However, the outlook for global output is hopeful. After a shaky first half of 2016, the latter half of last year witnessed slight rebounds in economies around the world. The Euro area closed the year with a 1.7 percent rate of growth, on the strength of peripheral countries like Spain, Slovakia, Slovenia, Poland, Iceland and Sweden. Even the U.K. posted a 2.0 percent annual rate of growth in its gross domestic product by year’s end, as markets and investors regained their composure and came to terms with the fact that Brexit would be longer-termed and more convoluted than anticipated. Asian economies continued on an upward growth trend, even as Chinese GDP rose at a more modest sub-7.0 percent rate. India, Vietnam, the Philippines and Pakistan posted GDP gains exceeding 5.0 percent.

Standing out from the crowd, the U.S. Federal Reserve closed 2016 with the second interest rate hike of the past decade, moving in the opposite direction from other central banks in its monetary stance and signaling optimism in the strength of the U.S. economy. In March of 2017, the Federal Reserve amplified its assessment, with another rate increase and hints of two additional ones likely during the year.

With fourth quarter 2016 GDP growth pegged at 1.9 percent, U.S. economic activity closed the book on 2016 with an annual growth rate of 1.6 percent. The fourth quarter increase in economic activity stemmed from moderately positive contributions across most of the main GDP components, with the exception of net exports. Consumer spending—the main driver of GDP—continued on an upward swing throughout the year, marking 28 consecutive quarters of gains. Americans opened their wallets wider for cars and light trucks, recreational vehicles, furniture and appliances. Spending on transportation, recreation, health and financial services also picked up.

Shifting Currents

It was not surprising to witness these changes, as the employment landscape provided fuel for growth. Payroll employment closed the year on a positive note, with more than 2.2 million net new jobs. The growth in jobs brought the unemployment rate down from 4.9 percent in January 2016 to 4.7 percent by the end of the year. Mirroring the positive trend, real wage growth advanced during the year to the tune of a more than 2.0 percent gain. Just as important for households’ finances, the personal saving rate hovered around 5.5 percent.

What these figures partly obscure are the major undercurrents moving through the economy. The U.S. population has grown by 9.0 percent over the past decade, and stands at about 325 million. Household formation also picked up over the past few years, moving toward the long-term 1.3 million average. This is a positive—if easily overlooked—development.

However, this growth has been economically uneven and stands in contrast to a shrinking labor force participation rate. In addition, younger Americans—generally lumped into cohorts such as Gen X, Gen Y, Gen Z—have been facing the lingering effects of a slow economic recovery. While housing values have been rebounding, housing construction has lagged noticeably, averaging about 600,000 to 700,000 units per year. Compounding the shortage of new supply, over the past year, the inventory of existing homes has been shrinking to a tight four to five months’ supply—and even tighter in some metropolitan areas like San Francisco. In turn, many consumers find themselves priced out of the housing market and facing escalating rents, which further squeeze their paychecks.

For the past few years, marketers and advertising companies have been touting the many ways in which young Americans—predominantly Gen Y—would change the economy. The theme has been: Millennials want to live downtown, in apartments with amenities, close to work; they don’t want to own a car but rather use public transportation or bicycle, while spending their discretionary income on restaurants, bars, specialty retailers and mobility-centered electronics. Millennials don’t want offices, cubicles and hierarchies; they want elbow-to-elbow collaborative open spaces, game lounges and meaning-centered work. Millennials are willing to pay more for sustainable, fair trade, organic products, especially those with value-infused stories.

The data supports some of these hypotheses, while debunking others. Millennials have been entering their adult lives with an average of $30,000 in student debt, reduced willingness to change geography and lower entrepreneurship rates than comparable cohorts in previous generations. Those factors have less to do with their preferences and more to do with economic constraints. Akin to prior generations, young Americans are also facing evolving stages of life, which are shifting their behaviors and preferences. A single professional may prefer downtown apartment living and a car-sharing service. However, life changes—marriage, children, etc.—tend to lead to alterations in preferences. Demand for suburban housing remains solid, as does interest in homeownership among young families. In a surprising twist, even the overlooked Gen X cohort is showing signs of renewal, having recovered from the slump suffered during the housing crash—Gen X buyers were the largest group of homebuyers in the early months of 2017.

Looking at the rest of the year from between spring’s early green shoots, the outlook remains positive. U.S. GDP is projected to advance at a quicker 2.4 percent annual rate in 2017, accompanied by employment and wage gains. In Washington, as campaign promises from the new White House administration and Republican Congress met with legislative and regulatory reality, the surviving cherry blossoms were thawing and the sun shone down as we weighed the next path to take from the current intersection of change.

Originally appearing in the April 2017 issue of CPE.