Q1 2020 PREVIEW: U.S. MACRO OUTLOOK AMID …image.cbrecommunications.com › lib › fe8213727c6d0d7475 › m › 1 › ...As key components of the U.S. economy literally shut down

Econometric Advisors

Q1 2020 PREVIEW: U.S. MACRO OUTLOOK AMID COVID-19

MARCH 19, 2020

• Overview

• COVID-19 and the U.S. economy

• How have our forecasts changed?

• Weaker economic growth will weigh on the labor market

• Ironclad U.S. consumers will likely pare back spending

• The Fed is taking aggressive steps to support growth

• Implications for metro level performance

• EA Scenarios

3 MARCH 20, 2020| MACRO OUTLOOK AMID CORONAVIRUSCBRE ECONOMETRIC ADVISORS

MOMENTUM WAS PICKING-UP FOR 2020 BUT FEARS OF A GLOBAL SLOWDOWN FROM THE COVID-19 HAVE NOW TAKEN HOLD.• Before COVID-19, growth was poised to slow a bit in 2020, especially from slower business investment, and some positive factors were

materializing in late 2019. In mid March, CBRE EA lowered its expectations for U.S. GDP growth to 0.4% for 2020, down from a previously estimated 2.0%. Specifically, we expect the economy will contract in H1 2020 followed by a bounce back in Q3. This deteriorating backdrop in the near-term has sparked a flight-to-safety among investors, forcing the Federal Reserve (Fed) to take aggressive action.

• The labor market will come under significant strain in coming weeks and months as many workers, especially non-salaried service employees, forfeit hours and wages.

OUTLOOK FOR 2020 – MUCH LOWER EXPECTATIONS BUT PERFORMANCE COULD VARY BY INDUSTRY

• COVID-19 is having a major impact on investor sentiment. Chinese PMI has fallen to 2008 levels and U.S. equity markets are in a correction. The Fed is taking these events very seriously and has dropped its short-term target rate to the 0.0%-0.25% range.

• Aggressive stimulative action is unlikely to stem the economic slowdown this year. As key components of the U.S. economy literally shut down in Q1 and Q2 2020, GDP will materially contract in coming months. However, reduced demand during H1 2020 will result in stronger growth for H2 2020 and 2021 as some capital outlays are delayed.

• COVID-19 will impact various industries differently. The hospitality sector will likely bear the brunt from the epidemic. Major urban travel markets, such as San Francisco and New York, will suffer from a reduced inflow of high-spending international tourists. Cancelled trips and conferences will translate into a permanent loss in revenue. Conversely, production sectors should see more of a bounce-back as supply chains must be restored. Also, the housing market could potentially see a boost from the material drop in mortgage rates.

2020 OUTLOOK - IT WAS ALL LOOKING SO GOOD


COVID-19 AND THE U.S. ECONOMY

Source: STR, CBRE Econometric Advisors.

THE HOSPITALITY SECTOR IS BEARING THE BRUNT OF COVID-19

• The hospitality sector is showing an immediate response to the economic fallout from the coronavirus. Major corporate travel restrictions began in early March and occupancy rates sharply declined thereafter.

• The hospitality and food service industries, which account for nearly 4% of U.S. GDP, will likely bear the brunt of this pandemic. Our updated downside forecast suggests that hotel RevPAR would decline by roughly 37% in 2020.

• Unlike other sectors, hospitality is unlikely to recover lost revenue once the pandemic subsides. Cancelled holidays and conferences represents a permanent loss in hotel revenue and a medium-term constraint for many operators in coming quarters.

• The lodging sector hires about 1 million seasonal workers for the summer months and continued uncertainty will reduce demand for these jobs and weaken the broader labor market further.

• The drop in foreign travelers—which accounts for 8.0% of total U.S. hotel demand — will especially impact gateway hospitality markets, such as New York, Los Angeles, Miami and Orlando. Initial concerns of a drop in affluent Chinese travelers will now be paired with a one-month travel ban imposed upon continental Europeans.

• Luxury, urban properties are seeing a more pronounced slowdown than hotels in small metros or and along Interstates.

-50

-40

-30

-20

-10

0

10

2/17

2/18

2/19

2/20

2/21

2/22

2/23

2/24

2/25

2/26

2/27

2/28

2/29 3/1

3/2

3/3

3/4

3/5

3/6

3/7

3/8

3/9

3/10

3/11

3/12

3/13

3/14

Y-o-Y Change Occupancy ADR RevPAR


Source: FRED Economic Data – St. Louis Federal Reserve; CBRE Econometric Advisors.

FINANCIAL MARKETS ARE STRAINED BY THE PANDEMIC


• The global pandemic has sparked concern around corporate revenue growth and a global sell-off of risky assets, which will be an impediment to capital formation, hiring and overall economic growth in the near-term.

• Corporate debt markets are also showing signs of strain. Low grade corporate bond yields have spiked by the greatest magnitude since the 2008 financial crisis.

• A key cause-for-concern is that there are far more BBB-rated firms today relative to previous market downturns. Many of these BBB-rated firms are clustered in the U.S. oil & gas sector and will struggle to operate profitably as oil prices remain low.

1,500.0

1,700.0

1,900.0

2,100.0

2,300.0

2,500.0

2,700.0

2,900.0

3,100.0

3,300.0

3,500.0

Mar-15Jul-

15Nov-1

5Mar-16

Jul-16

Nov-16

Mar-17Jul-

17Nov-1

7Mar-18

Jul-18

Nov-18

Mar-19Jul-

19Nov-1

9Mar-20

S&P 500 Index

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2.5

3.0

3.5

4.0

4.5

5.0

Mar-15Jul-

15Nov-1

5Mar-16

Jul-16

Nov-16

Mar-17Jul-

17Nov-1

7Mar-18

Jul-18

Nov-18

Mar-19Jul-

19Nov-1

9Mar-20

BBB US corporate bond yield (LHA) WTI, USD per barrel (RHA)% USD



Source: BEA, BLS, CBRE Econometric Advisors.

HOW OUR HOUSE VIEW HAS EVOLVED IN RESPONSE TO THE CORONAVIRUS

• Prior to COVID-19, 2020 was expected to be a weaker year due to delayed business investment and slower job growth and household spending. But now COVID-19 has forced us to revise our annual outlook down further.

• The figures highlighted in the charts to the left show how we have downgraded our forecast in response to pandemic. U.S. GDP growth will merely break even in 2020 as a painful contraction in the first half of the year is followed by a bounce back in Q3.

• Compared to other OECD economies the U.S. should perform relatively well, as its economy was in a stronger position before the pandemic began. The chronic spread of COVID-19 across Italy’s industrial core will result in a 1.6% contraction for 2020, with significant downside risk. The APAC region’s economy will slow by more than a percentage point to 2.7%.

• We expect economic growth in 2021 to hit 3.3%, well above our previous expectation of 1.7%, as supply chains are rejuvenated and firms move ahead with delayed investment plans. However, some consumer-facing sectors (e.g. hotels, restaurants, and services) are likely to see a permanent revenue loss in H1 2020.

• The labor market should see a net decline this year as firms cancel events and suspend operations. Service workers are most vulnerable to seeing a drop in hours worked and wages. Firms with strong balance sheets will attempt to retain staff during the pandemic. Government stimulus for distressed industries will help maintain employment.

0.0

1.0

2.0

3.0

4.0

2017 2018 2019 2020 F 2021 F 2022 F 2023-27 F

Historical and Q4 2019 GDP Forecast Q2 2020 GDP ForecastY-o-Y change

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2017 2018 2019 2020 F 2021 F 2022 F 2023-27 F

Historical and Q4 2019 Employment Forecast Q2 2020 Employment ForecastY-o-Y change


JOB GAINS WEAKEN; WAGE GROWTH MODERATES

Source: BLS, CBRE Econometric Advisors.

JOB GAINS TO SHRINK IN 2020 AS DEMAND FOR LABOR SHRINKS

• Although unemployment remains at its lowest rate since 1969, the labor market will face a period of severe dislocation in H1 2020, especially as demand for food service, hospitality and transportation workers grinds to a halt. On the upside, most of these effects will be transitory.

• Even before the COVID-19 hit there were signs the labor market was cooling. Both the job openings rate and headline wage growth were trending downward in recent quarters. These shifts mainly reflect industry-level movements. The decline in new openings was concentrated in the manufacturing, transportation/logistics and mining sectors.

• The employment-to-population ratio for those aged 25-54 is 80.5%, approaching the record high of 82% back in 2000. Although the U.S. labor market is poised to slacked in the near-term, the reduced supply of labor and ageing population will limit the longer-term pace of future job growth.

(800)

(600)

(400)

(200)

0

200

400

600

800

0

1

2

3

4

5

6

7

8

9

10

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

ThousandsY-o-Y Change, %.

Job Gains (R) Unemployment Rate (L) Wage Growth (L) Job Openings Rate (L)


Source: FRED Economic Data – St. Louis Fed; CBRE Econometric Advisors.

COVID-19 WILL WEIGH ON CONSUMPTION AND PUSH MORE SALES ONLINE

• Consumer spending accounts for approximately two-thirds of U.S. economic activity. Low inflation, low interest rates, healthy wage gains supported by a 50-year low unemployment rate and strong consumer sentiment provided a solid base for continued spending. This foundation will almost certainly be eroded by COVID-19 which is delivering both demand and supply-side shocks to consumers. Most U.S. households are limiting trips outside the home and many retailers are scaling back operations or closing operations altogether for a few weeks.

• The loss in sales will be permanent for many food, drink and tourism operators; however, most retailers should benefit from a pent-up demand later in Q2 and H2 2020 as sales bounce-back.

U.S. CONSUMERS HAVE BEEN RESILIANT

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jan-10 Oct-1

0Jul-

11Apr-12

Jan-13 Oct-1

3Jul-

14Apr-15

Jan-16 Oct-1

6Jul-

17Apr-18

Jan-19 Oct-1

9

Y-o-Y Change, personal consumption expenditures

50.0

60.0

70.0

80.0

90.0

100.0

110.0

94.0

95.0

96.0

97.0

98.0

99.0

100.0

101.0

102.0

Jan-07 Oct-0

7Jul-

08Apr-09

Jan-10 Oct-1

0Jul-

11Apr-12

Jan-13 Oct-1

3Jul-

14Apr-15

Jan-16 Oct-1

6Jul-

17Apr-18

Jan-19 Oct-1

9

OECD: Leading Indicators Index (LHA) University of Michigan: Consumer Sentiment Survey (RHA)


COVID-19 HAS FORCED THE FED’S HAND

Source: FRED Economic Data – St. Louis Fed; CBRE Econometric Advisors.

THE FED HAS AGGRESSIVELY CUT RATES AND CONTINUES TO GROW ITS BALANCE SHEET

• The Fed’s preferred gauge of inflation, the core personal consumption expenditures price index (Core PCE), grew by 2.4% Y-o-Y in February—just above the Fed’s 2% target. Rising housing costs, especially apartment rents, have been a key driver of inflation.

• Despite core inflation running above 2% the Fed has radically changed its policy stance. Weaker global trade forced the Fed to cut rates in 2019 and now growing liquidity concerns stemming from COVID-19 have forced the Fed to cut short-term rates by 100 bps in March 2020 to a target range of 0% to 0.25%. Further, the Fed has announced asset purchases of $500 billion in Treasury securities and $200 billion in mortgage-backed securities. Following radical stimulation by the Fed in 2020 we forecast that short- and longer-term rates will face upward pressure in 2021.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2007Q12008Q1

2009Q12010Q1

2011Q12012Q1

2013Q12014Q1

2015Q12016Q1

2017Q12018Q1

2019Q12020Q1

2021Q12022Q1

Fed Funds Rate 10 Year Bond Yield%

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2007-01-01

2008-04-01

2009-07-01

2010-10-01

2012-01-01

2013-04-01

2014-07-01

2015-10-01

2017-01-01

2018-04-01

2019-07-01

CPI - Core CPI - Housing%


SUNBELT AND TECH CITIES ARE WELL-POSITIONED; COMMODITY-DRIVEN REGIONS WILL FACE FURTHER DOWNSIDEMETRO LEVEL PERFORMANCE

New YorkLos Angeles

Chicago

Dallas

San Francisco

Houston

Washington

BostonPhiladelphia

Atlanta

Seattle

Miami

San Jose

Minneapolis

Phoenix

Detroit

San Diego Denver

Baltimore

Charlotte

Portland

St. Louis

Riverside

Austin

Tampa

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Employment, Y-O-Y Change, 2019

GDP, Y-O-Y Change, 2019*Axis intersection represents the U.S. average

0

50

100

150

200

(3.0)

(2.0)

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

20032005

20072009

20112013

20152017

2019

Houston, Total Employment (LHA)

Real private fixed investment: Mining exploration, shafts and well s (RHA)Y-o-Y Change Billions, USD

• When comparing economic growth for the largest 25 metro areas (shown in the scatterplot above) the most upbeat stories are generally defined by technology and demographics. Outperformance in the San Francisco Bay Area and Seattle was driven by continued business investment in technology during 2019. Meanwhile, growth in Phoenix, Dallas and Charlotte is driven by strong in-migration—often from more expensive cities—and locally-oriented industries that serve this expanding population base.

• COVID-19 initially hit large coastal cities but its economic impact quickly became a systemic rather than regional story. Risks to specific industries will have a regional pattern. Falling oil prices, due to both weakened global demand and a breakdown in OPEC solidarity, will undoubtedly impact U.S. oil & gas investment and the pace of job growth in Houston and West Texas. Also, the freeze in global tourism will impact spending in major gateway cities and destinations, such as New York, San Francisco and Orlando.

Source: BLS; BEA; CBRE Econometric Advisors.

EA Scenarios


BASELINE SCENARIO

Source: U.S. Congressional Budget Office (CBO); CBRE Econometric Advisors.

• We now anticipate a much weaker 2020 as the global economy suffers a sharp downturn in Q2 followed by an expected bounce back in Q3. Thus, we now believe GDP growth in 2020 will nearly flatline (+0.4) rather than settle in the 1-2% range. Aside from the coronavirus, the U.S. economy will also have to absorb broad impacts of Boeing ceasing production of its Max jet. On the upside, the economy was in very good shape when virus began to spread stateside increasingly the likelihood the US can recovery quickly. Further we expect substantial fiscal and monetary stimulus, including support for important industries.

• A weaker economy will cause the labor market to contract this year. Whilst unemployment is expected to increase significantly for retail, transportation and hospitality workers, it is plausible that corporations with deep cash holdings will attempt to retain most of their workforce. Nevertheless, the risk to our 2020 employment outlook is tilted toward the downside. The stagnant labor market will impact wage growth and household consumption.

• The Fed has taken aggressive action to combat weakening demand and alleviate financial liquidity concerns caused by COVID-19. Significant rate cuts and revitalizing the quantitative easing program will put downward pressure on interest rates this year. Long-term interest rates should be begin to trend upward in 2021 as conditions improve.

Note: GDP is average annual change, EMP, CPI are Q4 YoY Change, the 10-year Treasury is Q4% yield.Source: BEA, BLS, Federal Reserve, CBRE Econometric Advisors, Q1 2020.

CBRE EA BASELINE FORECAST2017 2018 2019 2020 2021 2022 2023

GDP, % 2.4 2.9 2.3 0.4 3.3 2.0 2.6Emp, %. 1.5 1.6 1.4 -0.4 0.8 0.9 1.2CPI, % 2.1 2.4 1.8 1.2 2.3 2.3 2.110-yr Treasury, % 2.4 3.0 1.8 0.9 2.0 2.1 2.5


UPSIDE SCENARIO

Source: U.S. Congressional Budget Office (CBO); CBRE Econometric Advisors

• This scenario assumes an extremely swift end to the COIVD-19 pandemic paired with a set of very stimulative policy moves.

• This scenario assumes that the U.S. and China reach a trade deal more swiftly than under the baseline, and tariffs with other key trading partners subside.

• This scenario also anticipates quick passage of a comprehensive national infrastructure investment plan.

• While these factors lead to a long expansionary cycle, the economy will see stronger inflation, causing the Fed to reverse course and begin to tighten monetary policy.


CBRE EA UPSIDE FORECAST2017 2018 2019 2020 2021 2022 2023

GDP, % 2.4 2.9 2.3 0.9 4.2 3.1 3.0Emp, %. 1.5 1.6 1.4 0.0 1.8 2.0 1.8CPI, % 2.1 2.2 2.0 1.1 2.9 2.6 2.410-yr Treasury, % 2.4 3.0 1.8 1.1 2.4 2.8 3.1


DOWNSIDE SCENARIO

Source: U.S. Congressional Budget Office (CBO); CBRE Econometric Advisors.

• While our baseline assumes the government’s stimulative fiscal policies will produce strong growth multipliers, our downside scenario assumes that these do not come to fruition, are diluted or are misguided. As a result, economic growth slightly contracts for the year and posts only a light bounce back in 2021.

• Economic research suggests that fiscal multipliers—the bang for the buck of government spending and tax cuts—are much lower when the economy is running near full capacity, as it was until the recent pandemic. Further, many Fed policy levers are ill suited to handle the kind of supply-side shocks (global supply chain disruptions, store closures) facing the U.S. in H1 2020.

• The downside scenario also suggests that the U.S. economy will succumb to some long-term structural trends, such as an ageing population and weaker labor force growth. Weak productivity growth will restrain wages and inflation will remain well below target for the foreseeable future.


CBRE EA DOWNSIDE FORECAST2017 2018 2019 2020 2021 2022 2023

GDP, % 2.4 2.9 2.3 -0.1 2.3 0.9 2.1Emp, %. 1.5 1.6 1.4 -0.7 0.0 -0.1 0.5CPI, % 2.1 2.2 2.0 0.9 2.4 1.7 1.610-yr Treasury, % 2.4 3.0 1.8 0.7 1.6 1.4 1.8


SEVERE DOWNSIDE SCENARIO

Source: U.S. Congressional Budget Office (CBO); CBRE Econometric Advisors

• Our severe downside scenario is meant as a proxy for the Fed’s Severely Adverse supervisory scenario under its Comprehensive Capital Analysis and Review (CCAR) program. CCAR is meant to evaluate the capital planning processes and capital adequacy of U.S. banks under stressful macroeconomic scenarios.

• This scenario is generated by overriding EA’s baseline GDP with the Fed’s forecasts for GDP under their Severely Adverse scenario, which is then fed through to the other variables in our macroeconomic model. As with the upside and downside scenarios, the overrides are to GDP levels, rather than growth rates. The estimates for the Fed’s Severely Adverse scenario are released annually in February and can be found here.

• The scenario’s supposed recession occurs immediately and wipes close to 11 million jobs between 2019 and 2020. Although the Fed is quiet on what might cause such a severe recession, we can safely assume that financial markets would suffer some sort of systemic failure, likely leading to government intervention.

• The Fed does not discuss a hypothetical reaction in terms of monetary policy, but history tells us it would use everything in its toolbox to stop the bleeding. This could mean the re-introduction of aggressive quantitative easing, or even the introduction of negative interest rates. The severe downside scenario has an extremely low probability, but it offers a useful guide to capital planning under the direct macroeconomic situations.


CBRE EA SEVERE DOWNSIDE FORECAST2017 2018 2019 2020 2021 2022 2023

GDP, % 2.4 2.9 2.3 -5.3 -2.2 3.1 4.2Emp, %. 1.5 1.6 1.4 -3.9 -4.0 -0.3 1.4CPI, % 2.1 2.2 2.0 0.3 1.7 1.6 1.610-yr Treasury, % 2.4 3.0 1.8 0.3 0.3 1.3 1.8

https://www.cbre-ea.com/publications/deconstructing-cre-post/deconstructing-cre/2019/01/31/u.s.-macro-model-briefing-note

https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20190213a1.pdf

THIS DOCUMENT WAS PREPARED BY:

Matt MowellSenior Economist, CBRE Econometric [email protected]

Copyright (C) 2020, CBRE Econometric Advisors (CBRE EA). All rights reserved. Metropolitan employment forecasts are copyrighted by Oxford Economics. Sources of information utilized in this report include CBRE, CoStar, Oxford Economics, and CBRE EA. The information presented has been obtained from sources believed to be reliable but its accuracy, and that of the opinions and forecasts based thereon, is not guaranteed. All opinions, assumptions and estimates constitute CBRE EA’s judgment as of the date of the release and are subject to change without notice. The information and material contained within this product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or real estate assets. This product does not take into account the investment objectives or financial situation of any particular person or institution.

CBRE EA holds all right, title and interest in this product and the proprietary information contained therein. This product is licensed to the Licensee for use in the ordinary course of the Licensee’s ordinary business, subject to the restrictions set forth herein. Unless otherwise agreed to in writing by CBRE EA, Licensee shall not provide this product to, or permit their use by or for, any third party, including, without limitation, any parent, subsidiary, affiliated entity or franchisee of Licensee. Licensee agrees to hold this product and all proprietary information contained therein in strict confidence and further agrees not to sell, sublease or disseminate this product including, but not limited to, computer readable data files, either in whole or in part,without the prior written consent of CBRE EA. Licensee agrees to acknowledge CBRE EA in any reports, presentations or any other materials produced by Licensee using this product as the source of the data in which such report, representation or other material is based. CBRE EA hereby represents that it will use commercially reasonable efforts to deliver the scope of services free from any defects in design, materials and workmanship, and free of “viruses” as such terms are understood in the computer industry.

Documents

Q1 2020 PREVIEW: U.S. MACRO OUTLOOK AMID …image.cbrecommunications.com › lib › fe8213727c6d0d7475 › m › 1 › ...As key components of the U.S. economy literally shut down