While the overall economy remains very healthy on a relative basis, and may in fact be finally showing signs of more robust growth, deal making in Washington will stand as a key influence in determining when – and if – such robust growth will come to fruition. The stock markets have set recent highs in part because Trump appears more willing to make “deals” with Democrats in order to get policies implemented. These deals historically lead to significant tax reform, something the market is already factoring into future expectations. While market analysts place expectations on the potential for a major boost in business investment, and even hiring, this will take time to come to fruition, if ever.
Economic Health
Overall estimates of Gross Domestic Product (GDP) growth for the third quarter of 2017 increased to 3%, a key level that is considered the minimal threshold for robust economic growth in the US. Whether this growth is sustainable, however, is yet to be determined.
The beginning of the third quarter saw slightly lower job growth in August, with 156,000 added jobs per the Bureau of Labor Statistics, and a minor uptick in unemployment to 4.4%. While these shifts are slight, these numbers are representative of an overall tight labor market.
In 2016, median household income hit an all-time high at $59,039, according to the Census Bureau. These higher incomes are no doubt contributing to the still high and rising levels of consumer confidence, up to 122.9 in August of 2017, according to the Conference Board.
Third Quarter Impacts
Meanwhile, the third quarter will likely see distorted results in economic indicators due to the temporary effects of the hurricanes impacting the Southeastern US; a recent report by the Census Bureau showed monthly retails sales in August have gone down -0.2%, likely due to Hurricane Harvey. With Irma impacting Florida, there will be broader effects in the short run. In the long run, the rebuilding effort has the potential to have a positive impact on economic growth.
Commercial Real Estate on the Rise
Interestingly enough, what remains steady and more certain in these economic times is commercial real estate. CoStar reports continued growth in commercial real estate prices, up 1.2% in July. Also of note, REITs posted their largest gain in Funds From Operations (a measure of cash flow) in the second quarter of this year at 7.9%. By contrast, the many stock market indices appear highly valued on a relative basis.
If the economy does not grow at a more robust rate, a likely result if Washington remains in a stalemate, then stock prices could be negatively impacted. Commercial real estate, however, is generally showing signs of demand outpacing supply according to many data providers including REIS. In addition, new construction is flattening rather than accelerating; overall it was down 0.6% in July according to the Census Bureau and has remained mostly flat for all of 2017.
As a result, it is evident that the real estate sector is on far more solid footing than the broad stock markets. Investors should consider rebalancing from stocks and bonds and into real estate, especially while mortgage rates remain so low. In fact, research from the Mortgage Bankers Association shows availability of commercial real estate debt continues to increase in 2017 from 2016, thus it is actually getting easier to invest in real estate today.