Now that budget season is done, are you so exhausted from the grind of herding all the cats in...
Don’t Follow the Herd—A Contrarian View on the Meaning of Our Economic Condition
Last week I was listening to the Walker webcast’s quarterly update with Dr. Peter Linneman. Born of the pandemic lockdown, this series by Willie Walker is “must watch” streaming, particularly whenever Dr. Linneman is the guest (I confess to registering just to get the email link to the recording. I can then watch at double speed thus squeezing an hour-long video into 30 minutes).
This last session was particularly provocative and typically insightful. The preview at the start of the video hits it right on the head! Paraphrasing Dr. Linneman, the very same people who say we’re going to have a recession in 2023 are the same people who said we would have one in 2021 and then said we’d have one in 2022. To modify the old saying about a stopped clock, “A prediction of a recession every year will be right every 8 to 10 years!”
Perhaps even more importantly, he points out that, should we have a recession (it could happen), consumers are generally in very good shape and the resulting recession is likely to be mild and last only 6 to 8 months. Humans suffer from recency bias, and the two most recent shocks were the pandemic lockdown-induced drop in employment which was deeper than anything we’ve experienced in our lifetime and the Great Recession which was the first “Balance Sheet” recession since the Great Depression of the 1930s. Whenever our next recession comes, it almost certainly will be a “P&L” recession which typically has a much quicker and steeper recovery, especially with banks in very good order.
The point for real estate operators is that this kind of timeline is a blip in the evolution of a typical real estate deal. That doesn’t mean it’s not without pain. At worst, we’ll have to find efficiencies, be more careful about how many and what technology investments we make, etc. But as Thomas Jefferson said about revolutions, a little recession now and then can be a good thing. It will speed up efficiencies in centralization, increase the value of investing in actionable data solutions to make better decisions faster and it will prepare us for the next bull market—just like virtually every P&L recession has throughout our history.
Here are a few more highlights and takeaways I had from this wonderful hour (ok, half an hour for me listening at double speed):
- Peter highlighted how YOY inflation numbers are a lagging indicator. November and December, he said, had no inflation. Ed note: subsequent to the webcast, the Department of Commerce announced the Personal Consumption Expenditure (PCE) index was actually down 30 bps from November and up 4.4% annually, the lowest since November 2021
- There are a number of other technical reasons, one in particular related to housing. Housing numbers are based on a survey of the costs of housing. Since any given rental housing price tends to reset on an annual basis, there’s a backward-looking bias to this key statistic compared to the “spot price” (aka current asking rent) that we are all so focused on. And as Yardi just adjusted their 2023 forecast for rent growth down 50bps to 2.6%, it’s virtually guaranteed that this component of PCE and the Consumer Price Index (CPI) will both continue to go down for months to come
- Another interesting takeaway concerns the PCE and CPI themselves. The latter tends to be the favored metric of the press, and at roughly 42% of the overall CPI, over-represents what the average person probably spends on housing. The former tends to be the preferred metric of the Fed; housing in that metric, at only 15% of the total PCE, is likely severely under-represents the real contribution (and, I believe is a primary reason why PCE has been lower than CPI over the past several quarters). Also, the PCE tends to update the contribution percentages more frequently than the CPI.
- Turning to jobs, Dr. Linneman points out that consumers are well situated going into the next year, with $3.5 trillion more in savings than the pre-Covid trend would have predicted. Personal savings rates are down, but that hasn’t eaten through all that past savings. Just look at the amount of “revenge travel” for anecdotal evidence of that
- On the jobs front, there are still many more jobs than applicants and still many people sitting on the jobs sideline compared to the pre-Covid trend. As wages rise, that may hurt inflation, but it helps encourage these people off the sideline which helps GDP. The big news is the first wave of tech layoffs in our lifetime; however, they are getting absorbed. Speaking from a personal and admittedly anecdotal perspective, the layoffs have been good for our company. We are getting many more quality resumes for our job postings than we were just eight months ago. Small business is, and always has been, the engine of growth. Now is no exception.
Personally speaking, I always find the “Monday morning quarterbacking” to be amusing. It’s practically a national sport to criticize the Fed. While it’s true that, back when inflation started rising in mid-2022, the Fed insistence that inflation was only temporary turned out to be colossally wrong, it’s equally true that no one foresaw the Russian invasion of Ukraine. At that time, it looked like a natural reaction to supply chain constraints coupled with stimulus and the “forced savings” from the Covid lockdown. Once the invasion occurred and it became obvious inflation would be more stubborn, the Fed acted quickly and aggressively (the first 25bps rise was in March followed by 50bps in May and then 75bps each in June and July).
I share Dr. Linneman’s concern that the Fed could be overreacting now by focusing on lagging indicators and public optics. I’ve personally been worried for at least the past six months that we could talk ourselves into a recession. I’m comforted that consensus is at most a 25bps increase at the next Fed meeting, but maybe 0 is a better answer especially given December PCE?
Of course, none of us can be certain of what will really happen with inflation; and there’s the potential “black swan” (an over-used but mostly appropriate term in this case) event of the Republican House taking us into the abyss of a national credit default this summer. However, barring that, I’m very bullish that Dr. Linneman is correct. Following the herd just brings us to trampled and over-eaten meadows. Away from the herd, the grass can be plush and plentiful!
Featured image by Hans Eiskonen on Unsplash.