Why the Recession Is Always Six Months Away | Kanebridge News
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    HOUSE MEDIAN ASKING PRICES AND WEEKLY CHANGE     Sydney $1,526,212 (+1.41%)       Melbourne $950,600 (-0.81%)       Brisbane $848,079 (+0.39%)       Adelaide $783,680 (+0.69%)       Perth $722,301 (+0.42%)       Hobart $727,777 (-0.40%)       Darwin $644,340 (-0.88%)       Canberra $873,193 (-2.75%)       National $960,316 (+0.31%)                UNIT MEDIAN ASKING PRICES AND WEEKLY CHANGE     Sydney $711,149 (+0.79%)       Melbourne $480,050 (-0.07%)       Brisbane $471,869 (+1.52%)       Adelaide $395,455 (-0.79%)       Perth $396,215 (+0.44%)       Hobart $535,914 (-1.67%)       Darwin $365,715 (+0.11%)       Canberra $487,485 (+1.06%)       National $502,310 (+0.25%)                HOUSES FOR SALE AND WEEKLY CHANGE     Sydney 8,985 (+170)       Melbourne 11,869 (-124)       Brisbane 8,074 (+47)       Adelaide 2,298 (-22)       Perth 6,070 (+20)       Hobart 993 (+24)       Darwin 282 (-4)       Canberra 809 (+43)       National 39,380 (+154)                UNITS FOR SALE AND WEEKLY CHANGE     Sydney 7,927 (+125)       Melbourne 6,997 (+50)       Brisbane 1,822 (+3)       Adelaide 488 (+5)       Perth 1,915 (-1)       Hobart 151 (+3)       Darwin 391 (-9)       Canberra 680 (+5)       National 20,371 (+181)                HOUSE MEDIAN ASKING RENTS AND WEEKLY CHANGE     Sydney $750 (-$20)       Melbourne $580 ($0)       Brisbane $590 (+$10)       Adelaide $570 (-$5)       Perth $600 ($0)       Hobart $550 ($0)       Darwin $700 (+$5)       Canberra $670 (+$10)       National $633 (-$1)                    UNIT MEDIAN ASKING RENTS AND WEEKLY CHANGE     Sydney $700 (-$20)       Melbourne $558 (+$8)       Brisbane $590 ($0)       Adelaide $458 (-$3)       Perth $550 ($0)       Hobart $450 ($0)       Darwin $550 ($0)       Canberra $540 (-$10)       National $559 (-$4)                HOUSES FOR RENT AND WEEKLY CHANGE     Sydney 5,224 (-134)       Melbourne 5,097 (+90)       Brisbane 3,713 (-84)       Adelaide 1,027 (-3)       Perth 1,568 (-46)       Hobart 471 (-3)       Darwin 127 (+13)       Canberra 658 (-32)       National 17,885 (-199)                UNITS FOR RENT AND WEEKLY CHANGE     Sydney 8,171 (-343)       Melbourne 5,447 (-170)       Brisbane 1,682 (-22)       Adelaide 329 (+3)       Perth 561 (-11)       Hobart 159 (-6)       Darwin 176 (+16)       Canberra 597 (-12)       National 17,122 (-545)                HOUSE ANNUAL GROSS YIELDS AND TREND         Sydney 2.56% (↓)       Melbourne 3.17% (↓)     Brisbane 3.62% (↑)        Adelaide 3.78% (↓)       Perth 4.32% (↓)     Hobart 3.93% (↑)      Darwin 5.65% (↑)      Canberra 3.99% (↑)        National 3.43% (↓)            UNIT ANNUAL GROSS YIELDS AND TREND         Sydney 5.12% (↓)       Melbourne 6.04% (↓)       Brisbane 6.50% (↓)     Adelaide 6.02% (↑)        Perth 7.22% (↓)     Hobart 4.37% (↑)      Darwin 7.82% (↑)        Canberra 5.76% (↓)       National 5.79% (↓)            HOUSE RENTAL VACANCY RATES AND TREND       Sydney 1.0% (↑)      Melbourne 0.7% (↑)      Brisbane 0.8% (↑)      Adelaide 0.4% (↑)        Perth 0.4% (↓)       Hobart 1.2% (↓)     Darwin 0.5% (↑)      Canberra 1.5% (↑)      National 0.8% (↑)             UNIT RENTAL VACANCY RATES AND TREND         Sydney 1.3% (↓)     Melbourne 1.6% (↑)      Brisbane 0.9% (↑)      Adelaide 0.5% (↑)      Perth 0.7% (↑)      Hobart 2.2% 2.0% (↑)      Darwin 1.0% (↑)        Canberra 1.7% (↓)     National 1.3% (↑)             AVERAGE DAYS TO SELL HOUSES AND TREND       Sydney 27.0 (↑)        Melbourne 28.3 (↓)     Brisbane 32.3 (↑)      Adelaide 26.3 (↑)      Perth 34.9 (↑)        Hobart 33.4 (↓)     Darwin 48.7 (↑)        Canberra 27.6 (↓)     National 32.3 (↑)             AVERAGE DAYS TO SELL UNITS AND TREND         Sydney 27.0 (↓)       Melbourne 29.0 (↓)     Brisbane 33.0 (↑)        Adelaide 27.5 (↓)     Perth 38.2 (↑)      Hobart 33.4 (↑)      Darwin 48.3 (↑)      Canberra 33.2 (↑)      National 33.7 (↑)            
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Why the Recession Is Always Six Months Away

Continued strong hiring and consumer spending are complicating Federal Reserve Chair Jerome Powell’s campaign to tame inflation.

Tue, Mar 7, 2023 8:37amGrey Clock 7 min

The next economic downturn has become the most anticipated recession in recent U.S. history. It also keeps getting postponed.

Recent strong hiring and consumer spending are the latest evidence that the pandemic and the unprecedented policy measures that followed are interfering with the Federal Reserve’s campaign to tame inflation.

The government’s stimulus measures left household and business finances in unusually strong shape. Shortages of materials and workers mean companies are still struggling to satisfy demand for rate-sensitive goods, such as homes and autos. And Americans are splurging on labor-intensive activities they avoided in recent years, including dining out, travel and live entertainment.

Wall Street economists began 2023 broadly anticipating a recession by mid-year caused by the weight of the Fed’s rapid interest-rate increases. Some still expect that could happen. Many now think it will take longer to cool the economy and will lead the central bank to raise rates to higher-than-expected levels.

“It’s the ‘Godot’ recession,” said Ray Farris, chief economist at Credit Suisse. Mr. Farris found himself among a small minority of economists last fall who predicted the economy would narrowly skirt a downturn this year. Every six months, economists have predicted a recession six months later, he said. “By the middle of the year, people will still be expecting a recession in six months’ time.”

The Fed has been trying to slow investment, spending and hiring to combat inflation by raising rates, which makes it more expensive to borrow and can push down the price of assets such as stocks and real estate. After holding the benchmark federal-funds rate near zero during and after the pandemic, officials lifted the rate more over the past 12 months than any time since the early 1980s, most recently to between 4.5% and 4.75% last month.

The economy’s recent pickup will delay Fed officials’ deliberations about when to pause rate increases. Investors are instead looking for clues about whether they will raise rates by a quarter-percentage-point, as they did last month, or a half-point, as they did in December, at their next meeting, March 21-22.

Fed Chair Jerome Powell is set to begin two days of congressional testimony Tuesday, where he’ll have an opportunity to explain the central bank’s most likely response to a more resilient economy. In December, most Fed officials expected to lift rates this year to between 5% and 5.5%, and officials have indicated those projections could rise at their next meeting.

The economy remains weird

Three factors illustrate the peculiar nature of today’s economic recovery.

First, Washington’s reaction to the initial shock of Covid-19 in March 2020, including holding interest rates at very low levels and showering the economy with cash, left household, business, and local government finances in unusually strong shape.

Through last June, U.S. households had around $1.7 trillion more in savings accumulated through mid-2021 than if income and spending had grown in line with the pre pandemic economy, according to estimates by Fed economists. Even after it is spent, money can still slosh through the economy (one person’s spending is, after all, someone else’s income).

“We are going through the second, third, and fourth-round effects of the initial savings spurred by all these transfer payments during the pandemic,” said Peter Berezin, chief global strategist at BCA Research in Montreal. Rate increases can slow the economy more immediately when expansions are fuelled by credit growth, as opposed to incomes and stimulus, the big drivers of the post-pandemic recovery.

Businesses were able to lock in lower borrowing costs as interest rates plumbed new lows in 2020 and 2021. Just 8% of junk bonds, or those issued by companies without investment-grade ratings, mature over the next two years, according to Goldman Sachs.

Secondly, shortages of materials and workers have made the rate-sensitive housing and auto markets more resilient to higher interest rates—for now. Home builders are resorting heavily to what’s known as buydowns, where they pay to lower the buyer’s mortgage rate for the first year or two. Many current owners are reluctant to sell because they’d have to give up a much lower rate, a phenomenon that is holding for-sale inventories at historically low levels.

Typically when the Fed raises interest rates, demand for housing and cars fall, leading builders and automakers to cut production and lay off workers. This time around, companies are still playing catch-up.

Construction employment hasn’t fallen despite a severe slump in home sales. Builders are still completing homes and apartments started before the Fed increased interest rates. Supply-chain disruptions have extended the amount of time it takes to complete construction. In addition, apartment building ramped up sharply after the pandemic, and those take longer to finish.

In the auto sector, brands of popular fuel-efficient cars are benefitting from pent-up demand after shortages of semiconductor chips kept inventories of new cars at very low levels.

That could make the usual rate-induced slowdown in autos and housing more gradual, said Eric Rosengren, who was president of the Federal Reserve Bank of Boston from 2007 until 2021. “It may take higher interest rates or interest rates higher for longer to get supply and demand back in alignment.”

Thirdly, U.S. consumers, throwing off their pandemic caution, have ramped up spending on services that require lots of workers—think dining out and travel—another example of pent-up demand interfering with the typical business and interest-rate cycle.

Those sectors are often among the first to see demand fall, prompting job cuts, when consumers worry about losing theirs. The easiest way for households to reduce their expenses is to stop eating out and taking vacations.

Consumer spending has enjoyed a rebound in recent months thanks to lower gasoline prices and an additional boost in January from bigger Social Security checks, which are indexed to prior-year inflation. Gas prices jumped last spring after Russia’s invasion of Ukraine. They then steadily declined over the second half last year, easing a cash-crunch for some households that may have offset higher rates on auto loans, credit cards, and mortgages, said economists at Morgan Stanley in a recent report.

Travel, live entertainment and eating out, such as at this Chili’s in Flower Mound, Texas, are booming. PHOTO: LAURA BUCKMAN FOR THE WALL STREET JOURNAL

Economists at Goldman Sachs said Sunday the Fed could end up raising rates to just below 6% this year if consumer spending runs at higher-than-anticipated levels. That could extend a string of quarter-point rate increases into September.

Labor market conundrum

The labor market sits at the centre of Mr. Powell’s worries about inflation. That’s because steady income growth will sustain consumer spending power and allow companies to keep raising prices.

In the 2000s, then-Fed Chairman Alan Greenspan called it a conundrum that longer-dated bond yields stubbornly refused to rise as the Fed increased rates. For Mr. Powell, the labor market’s strength represents his version of the conundrum. Recession calls keep getting delayed because companies keep hiring and holding on to workers rather than letting them go.

Employers added 517,000 jobs in January, a big figure that shocked economists who were anticipating a slowdown, and pushed the unemployment rate down to 3.4%, a 53-year low. Revisions to earlier reports also pointed to less weakness than initially thought.

The Labor Department’s report on February hiring, due for release Friday, will offer clues as to whether January’s was a one-off blip or a sign of an economy that’s accelerating. A separate report Wednesday could show whether workers continue to quit their jobs at historically high rates, which can indicate greater confidence in their ability to find new jobs with better pay.

Economists at Morgan Stanley estimate that staffing levels across the U.S. are still slightly below what would have been if the pandemic hadn’t hit. They expect that gap to close this year, which could lead hiring rates to slow.

M. Keith Waddell, chief executive of recruiting firm Robert Half International Inc., highlighted a disconnect between a resilient labor market and business surveys that point to signs of easing demand for workers. “Having said that, orders have not dried up,” he said on a Jan. 26 earnings call. “It’s just taking longer to get them closed. Our clients are less urgent. They’re taking more steps. They want to see more candidates.”

Fed officials are in a race to slow down the economy before inflation becomes entrenched. They are also trying to guard against raising rates too much and causing unnecessary economic pain.

Some Fed officials say it could take time to see the effects of their moves, because they had pursued such ultra-stimulative policies until a year ago. Because interest rates have only very recently reached levels that could be considered restrictive, “there is a plausible case to suggest that we’re going to see” more slowing to come, Atlanta Fed President Raphael Bostic told reporters last week.

Business owners report confidence about their own prospects but unease about the broader economic backdrop, said Mr. Bostic. “Everyone is wondering if and when the shoe will drop, but they’re all expecting it to drop for somebody else,” he said.

The need for speed

Uncertainty over when and how much the economy will slow is due in large part to Mr. Powell’s decision to raise interest rates rapidly. The Fed previously spaced out increases, such as in the periods 2004 to 2006 and 2015 to 2018, when lower inflation allowed officials to move more gradually.

The strategy appeared to work because it prevented households and businesses from expecting higher future inflation, which would have kicked off a destructive price spiral, said Kristin Forbes, a professor at the Massachusetts Institute of Technology and former member of the Bank of England’s monetary policy committee. Now, the downsides of that strategy are coming into view.

“If you front-load hikes, it makes it harder to tell whether you need to wait a little longer to see the effects, or whether the economy is just more resilient,” she said.

Officials slowed the pace of rises in December and again last month to have more time to study the effects of their past moves. Despite reports of hotter growth and inflation over the past month, Mr. Rosengren sees the slower rate-rise pace as appropriate. “You still are waiting for information about when the previous tightenings are going to have more of an impact,” he said. The timing of a recession “is impossible to predict, but the likelihood remains quite high,” he said.

Since October, the Fed has faced a challenge in which bond investors began to anticipate inflation would fall quickly without a serious downturn. As a result, they expected the Fed would cut rates sooner and faster than central bank officials said they anticipated.

That risked an unhelpful feedback loop for the Fed. While the central bank controls short-term interest rates, long-term rates are influenced by broader market conditions, and they ticked lower between October and February, leading borrowing costs to ease slightly. The 30-year fixed rate mortgage slid to around 6% from 7% last fall.

That has led to a perverse sequence where expectations that the economy will slump are holding down long-term rates, which can stimulate economic activity and make it harder for the economy to slump.

Long-term Treasury yields have since ticked up as investors become more concerned about inflation and stopped believing the Fed would cut rates anytime soon. A big question is whether the run-up in yields will be enough to shift the economy into the slower gear the Fed seeks.

“The Fed needs to get long-term yields high enough to slow the economy,” said Mr. Berezin. “There won’t be a recession until more people are convinced that there won’t be a recession.”


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First, the good news for office landlords: A post-Labor Day bump nudged return-to-office rates in mid-September to their highest level since the onset of the pandemic.

Now the bad: Office attendance in big cities is still barely half of what it was in 2019, and company get-tough measures are proving largely ineffective at boosting that rate much higher.

Indeed, a number of forces—from the prospect of more Covid-19 cases in the fall to a weakening economy—could push the return rate into reverse, property owners and city officials say.

More than before, chief executives at blue-chip companies are stepping up efforts to fill their workspace. Facebook parent Meta Platforms, Amazon and JPMorgan Chase are among the companies that have recently vowed to get tougher on employees who don’t show upIn August, Meta told employees they could face disciplinary action if they regularly violate new workplace rules.

But these actions haven’t yet moved the national return rate needle much, and a majority of companies remain content to allow employees to work at least part-time remotely despite the tough talk.

Most employees go into offices during the middle of the week, but floors are sparsely populated on Mondays and Fridays. In Chicago, some September days had a return rate of over 66%. But it was below 30% on Fridays. In New York, it ranges from about 25% to 65%, according to Kastle Systems, which tracks security-card swipes.

Overall, the average return rate in the 10 U.S. cities tracked by Kastle Systems matched the recent high of 50.4% of 2019 levels for the week ended Sept. 20, though it slid a little below half the following week.

The disappointing return rates are another blow to office owners who are struggling with vacancy rates near record highs. The national office average vacancy rose to 19.2% last quarter, just below the historical peak of 19.3% in 1991, according to Moody’s Analytics preliminary third-quarter data.

Business leaders in New York, Detroit, Seattle, Atlanta and Houston interviewed by The Wall Street Journal said they have seen only slight improvements in sidewalk activity and attendance in office buildings since Labor Day.

“It feels a little fuller but at the margins,” said Sandy Baruah, chief executive of the Detroit Regional Chamber, a business group.

Lax enforcement of return-to-office rules is one reason employees feel they can still work from home. At a roundtable business discussion in Houston last week, only one of the 12 companies that attended said it would enforce a return-to-office policy in performance reviews.

“It was clearly a minority opinion that the others shook their heads at,” said Kris Larson, chief executive of Central Houston Inc., a group that promotes business in the city and sponsored the meeting.

Making matters worse, business leaders and city officials say they see more forces at work that could slow the return to office than those that could accelerate it.

Covid-19 cases are up and will likely increase further in the fall and winter months. “If we have to go back to distancing and mask protocols, that really breaks the office culture,” said Kathryn Wylde, head of the business group Partnership for New York City.

Many cities are contending with an increase in homelessness and crime. San Francisco, Philadelphia and Washington, D.C., which are struggling with these problems, are among the lowest return-to-office cities in the Kastle System index.

About 90% of members surveyed by the Seattle Metropolitan Chamber of Commerce said that the city couldn’t recover until homelessness and public safety problems were addressed, said Rachel Smith, chief executive. That is taken into account as companies make decisions about returning to the office and how much space they need, she added.

Cuts in government services and transportation are also taking a toll. Wait times for buses run by Houston’s Park & Ride system, one of the most widely used commuter services, have increased partly because of labor shortages, according to Larson of Central Houston.

The commute “is the remaining most significant barrier” to improving return to office, Larson said.

Some landlords say that businesses will have more leverage in enforcing return-to-office mandates if the economy weakens. There are already signs of such a shift in cities that depend heavily on the technology sector, which has been seeing slowing growth and layoffs.

But a full-fledged recession could hurt office returns if it results in widespread layoffs. “Maybe you get some relief in more employees coming back,” said Dylan Burzinski, an analyst with real-estate analytics firm Green Street. “But if there are fewer of those employees, it’s still a net negative for office.”

The sluggish return-to-office rate is leading many city and business leaders to ask the federal government for help. A group from the Great Lakes Metro Chambers Coalition recently met with elected officials in Washington, D.C., lobbying for incentives for businesses that make commitments to U.S. downtowns.

Baruah, from the Detroit chamber, was among the group. He said the chances of such legislation being passed were low. “We might have to reach crisis proportions first,” he said. “But we’re trying to lay the groundwork now.”


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