Pittsburgh August 2023 Key Take-Aways
• Jim Scalo (NAI Burns Scalo): The Vision on Fifteenth started right before COVID. We continued to build through Covid, as soon as non-essential construction was permitted to resume. When evaluating speculative development, three boxes need to be checked – Market Risk, Construction Cost Risk, and Interest Rate Risk. They have all changed a lot in the past several years. We decided to move forward with Dollar Bank. You have to take similar risks in industrial real estate. Interest rates are why everyone is here today. People are trying to gain insight as to what discussions regarding interest rates are being held at the Federal Reserve level. I’m here in hopes that Russell will expand on that.
• John Altman (Metz Lewis Brodman Must O’Keefe LLC) – Multi-family boom end of last year. People are going back to work and making spaces better. Our leasing work is about a third or more of our work this year compared to 2021 which was 5%. Development activities are robust this year.
• Russell Mills (Federal Reserve Bank of Cleveland): What is my role at the Federal Reserve? To collect intelligence from groups like this to inform monetary policy decision making at the FOMC level. I actually see my job as very akin to a CIA officer in a lot of ways. Igo out and try to gather intelligence from a variety of business leaders across the region, and then translate that into data into usable information for the Federal Reserve leadership to make policy decisions.
o Organization: We are an organization of 24000 people – 1. The seven Board of Governors in Washington, DC. 2. The twelve Federal Reserve Presidents 3. The primary role of the Federal Reserve is to set and monetary policy for the US banking system Board of Directors: Gene Boyer is on the Pittsburgh Branch board. There is also a branch in Cincinnati. Senior- level executives provide industry-specific intelligence on a real time basis. Business Advisory Council – We engage with, a separate group of additional industry leaders on a quarterly basis to get additional real time intelligence with regard to what they’re seeing in their individual day to day business.
o Why are the interest rates elevated?
Reason number one is because consumers in the US economy continue to demonstrate quite a bit of resilience. This time last year, many analysts, many experts predicted we would be in a recession which did not appear to be the case.
Super spending remains robust and continues to sustain.
The labor market remains very tight. Unemployment rate at 3.5% and job openings remain much more elevated than they were prior to the pandemic so people have options to move around.
When workers have options, that usually means higher wages.
Job openings have declined in recent periods along with people voluntarily leaving.
Banks continue to tighten lending standards. According to the Senior Loan Officer Survey, vacancy rates continue to rise for many office buildings in particular.
There’s a lot of worry out there about the stress on the banking system and also in the commercial real estate environment.
GDP continues to be strong and resilient. In quarter 2 of 2023, GDP came in at 2.4%.
For the future, in terms of a reaction to the current data, it’s projecting the GDP growth will be 5.9. That’s a very high estimate. man is somewhere in the 2.72 range. GDP is expected to be strong and robust going into the future.
According to the data, consumer spending was relatively strong in quarter 2.
Business fixed investment increased in the last year by 1.7-2.4.
Labor market – job growth remains robust with 187,000 jobs created in July 2023 (down slightly from the previous 3 month average which is about 200,000
Pittsburgh is still roughly 1-2% behind where they were pre pandemic.
Unemployment rates in Pittsburgh are 3.8% (National is 3.5%)
When you look at the labor force as a whole, the labor market is actually recovering. However, in Pittsburgh, we are .8% lower than where we were in terms of the raw size of the labor force prior to the pandemic.
Nationally, the raw size of the labor force is larger but the participation rate is lower.
Why does Pennsylvania lag in the area? We have an aging population.
Last month, there was a decline in the number of layoffs.
While we continue to see some slowing in job openings, we’re not seeing what we would expect to see if the economy were slowing down.
Another measure includes the Real Worker Adjustment Relocation Notes – a large indicator of what might be coming. This number has increased by a hundred percent from where it was last year but it was at a very low level. 7% above where it was in 2009. Some evidence is showing that there are more layoffs coming.
With all of that said, the number of job openings to the unemployed remains exceptionally high.
1.7 job openings for every unemployed worker which is 5% higher than where it was.
Like inflation, the ability to move and pick jobs is beginning to dwindle.
We are seeing moderating wage growth.
In regard to inflation, PCE was 3% in June but when you take out food and fuel costs, that number was actually 4.1%. Our goal is to get to 2%.
Last month, we saw good disinflation, prices are growing slower. In the case when it’s a negative, the PCE metric the price has come down since June of 2022 with all of the supply chain issues.
Services inflation remain high at 5% – it hasn’t budged, and it is the biggest component of the inflation metric. Until we can get this under control, it’s going to be hard to move the needle down below 2%.
The CPI metric is a similar pattern and continues to see inflation elevated.
The expected inflation rate for next year has come down quite a bit, it was at 5.5% before and it’s down to 3.4.
Truth rates – Federal funds rate skyrocketed in March of 2022 it’s now at 525 basis point.
Treasury yields are a fairly firm indicator of recessionary conditions and that continues to be the case.
The strong demand for commercial/industrial work has fallen.
Reports indicate that 50% are tightening lending standards and higher demand for small business loans.
Recent Comments