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Real Estate

Bureaucrats insist there’s No recession, but That Doesn’t Change Reality!

The National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee is the singular body in charge of calling a recession. It defines a recession as a severe fall in economic activity that people would feel throughout the economy and lasts for more than a few months. Some variables it tracks include actual consumer spending, real income less government transfers, and industrial production. There are no fast rules or thresholds set in stone, so they determine whether the country is in a recession after studying statistics from the government.

So far, they have not declared a recession because they have not seen a significant decline in economic activity. You can’t really blame them as this is their current view according to the latest data they have received from the government:

So, according to the NBER, the economy is fine; there’s nothing to see here. They argue that there is a strong labor market and corporate earnings. Besides, recessions are not standard fair, with the US only experiencing a recession 8% of the time over the past 30 years.

But how is the economy really performing across the board? That’s what we seek to examine by studying the cold statistics below.

So, is the US in a Recession?

According to the general definition, a recession occurs when there are two-consecutive recorded negative quarters in the gross domestic product. Using that metric alone, the US was in a downturn earlier in the year.

But the NBER insists that you must take a holistic approach to get a clearer picture of the state of the economy because a recession indicates a significant decline in economic activities spread across the economy.

Therefore, here is an examination of 14 key economic indicators. If most show that the economy is ok, that will prove the NBER right. The opposite would be true.

1. Gross Domestic Product (GDP)

In the most recent quarter, economic growth was 2.6%. After the first half of the year’s GDP contraction, this is good news, but it is not exactly something to celebrate. Given the Federal Reserve’s aggressive stance, the economy’s ability to expand through 2023 is still in question.  Keep in mind that we have been depleting the Strategic Petroleum Reserve aggressively, approximately 180 million barrels in 2022.  We have been simultaneously exporting oil out of the US, generating a significant part of our increase in GDP.

2. Consumer Price Index (CPI)

According to data from the Labor Department’s Consumer Price Index, which tracks changes in prices across various products and services sold within the United States, the annual inflation rate has decreased to 8.2% from 8.3% in August.

During its November 2022 meeting, the Federal Reserve announced its fourth consecutive 75 basis points federal funds rate raise.

The less volatile core inflation rate increased to 6.6% in September from 6.3% in August, rising by 0.6% month-over-month. That annual core rise is the highest of its kind Since August 1982.

3. ISM Manufacturing Index

According to a survey by the Institute of Supply Management (ISM) manufacturing reading for October was 50.2. Manufacturing output increased at its slowest rate in nearly 2.5 years, with total readings at their lowest level since Spring 2020, so manufacturing is not doing well.

4. Industrial Production

Industrial production increased by 0.4% in September, and the index rose by 5.3% compared to the same period a year ago. Industrial production is doing well.

5. Retail Sales

In September, retail sales remained unchanged after increasing by 0.4% in August. Consumers are beginning to limit spending as their savings dwindle and prices rise.

The Fed hopes that higher interest rates will have several impacts, one of which is a consumer demand decrease. With further rate hikes in the pipeline, it’s easy to predict that retail sales are not doing well.

6. Conference Board Leading Indicators

In September, the leading index dropped by 0.4%, adding to its recent decline and suggesting that the economy is declining. This worrying trend is among the best indicators that a recession will hit the economy in the new year.

7. Markets Data

The stock market is perhaps the hardest hit of all the sectors, with the S&P 500 falling 19.1% this year, and the Fed’s decision to hike interest rates by yet another 75 basis points added to investors’ woes. Nasdaq is down 30%, The Dow 10%, and The Russell 2000 down 17.5%.

The treasury yield curve does not provide great news either, with the short-term interest rate yield performing better than the longer-term rates, traditionally a good indicator of an impending recession.

8. Unemployment Rate

The September unemployment rate of 3.5% shows the labor market is probably the only steady aspect of the economy. The Federal Reserve’s dual role is to ensure full employment and stable pricing and can now focus on reducing inflation because of the robust labor market.

9. Initial jobless claims

The Labor Department releases the initial jobless claims data weekly, showing how many people have started applying for unemployment benefits that week. The week of October 27 recorded initial job claims of 217,000, while November 5 saw a reported 225,000 initial claims.

A rise in initial unemployment claims may indicate a wider spread of layoffs, which would be consistent with the Fed’s push to lower inflation.

10. Job Openings and Labor Turnover Survey (JOLTS)

By September 30th, the number of job openings jumped to 10.7 million. Overall separations dropped to 5.7 million, while hires dropped to 6.1 million. This is good for the economy.

11. University of Michigan Consumer Confidence Survey

According to the University of Michigan’s Monthly Survey of Consumers, consumers’ sentiments improved in October. That represents a 2% month-over-month increase.

At 59.8%, consumer sentiment might seem rock solid, but it has dropped by 17% since this time last year. That’s due to increased gas prices in recent weeks, rising inflation, and unaffordable housing.

12. NFIB Small Business Optimism Index

The NFIB’s monthly Small Business Optimism Index increased by 0.3 points in September to 92.1. However, the index has been lower than its 48-year average for the past nine months in a row.

13. Housing Starts

As a result of higher borrowing rates and high prices, home construction declined by 8.1% from August. Developers are understandably cautious about taking on too much work in light of these factors.

14. NAHB Home Builders Index

The October reading fell to 38 on the Home Builders Index, showing that most builders consider the housing market weak. That has led to higher mortgage rates and a drop in the number of new single-family homes under construction.

Final word

Even though the economy isn’t technically in a recession, things aren’t looking great. Most of the key indicators above show a worrying trend in the economy. Still, not all the data points provided above give equal weight in determining if the US is experiencing a recession. Low unemployment and many available but unfilled positions have made the labor market the economic engine of the country. At the same time, consumers are handling rising inflation better now than they were earlier in 2022. The real estate and stock markets are both performing abysmally.

 

By Gurpreet Singh Padda, MD, MB

Categories
Real Estate

9 Things Help Investors Thrive During Real Estate Recessions

There is a concern among many investors in real estate about the possibility of a recession in light of recent economic uncertainties and how that will affect the real estate market.

In most economic downturns, people lose jobs, and mortgage rates typically go higher than most can afford, crippling their ability to purchase properties. But that doesn’t always spell doom for real estate, so here’s a look at how a real estate investor can survive, or even thrive, during a recession.

1. Branding and Marketing

The best way to survive a recession is to keep marketing your brand. It’s about building a brand that stands out from the crowd.

Branding isn’t just about getting customers to recognize your business; it’s about getting customers to keep coming back for more business as you have established yourself as a reputable brand. One of the best ways to achieve this is through positive marketing.

While most businesses would understandably cut down on marketing during an economic downturn, that’s the perfect time to rump up your marketing efforts, as it has healthy returns. For instance, the return on investment (ROI) for email marketing is $36 for every $1 spent. Here’s what you stand to benefit from good marketing and branding:

  • Gaining a larger audience
  • Increased cash flow
  • Help you take some of your competitors’ clients

2. Learn More About the Real Estate Market and the Recession

You need to have a working knowledge of the economy and how it will impact the real estate industry to stand a chance of surviving a recession. Get to know the causes of the recession and where the money is headed.

In a recession, not all economic sectors will slump; some might perform better than others. Use this knowledge to pivot your business to cater to those sectors that are doing better during the downturn.

Take the 2020 recession, for instance: while shopping in malls dipped by 70% and the office industry slumped due to work-from-home initiatives, the booming ecommerce industry led to a steep increase in demand for warehouses.

3. Invest in Technology

Investing in a customer relationship management (CRM) tool during a recession is one of the smartest moves you could make, as it has an average ROI of $8.71 for every dollar spent.

As a real estate brand, you can use CRM to track client information and make follow-ups. A sound CRM system should have features that enable you to access information about potential buyers and sellers easily and communicate with them using various channels. 

Similarly, you can use social media sites and real estate apps to showcase your listings and increase your reach.

Consider technologies such as virtual tours and virtual staging to cut down on costs of staging an open day and staging a listing.

4. Work on Customer Retention of your Current Clientele

Keeping your already existing clients should be a major priority. When you work hard to maintain good relationships with your clients, they’ll appreciate it and return the favor. That makes them feel special goes a long way toward building trust. Try some of these customer service strategies:

  • Maintain a customer feedback loop
  • Provide personalized customer service
  • Start a customer education program
  • Give offers and discounts
  • Provide incentives 

5. Grow your Network

Never underrate the power of networking, as it can help your business stay afloat during recessions. You can build relationships with friends and associates to expand your business’s reach and abilities.

A more extensive network will help in acquiring new business leads, which you can work towards closing to improve sales. Additionally, it will help you keep abreast of the latest trends in the market and identify best practices.

Further, networking will increase your connections and opportunities to explore new markets.

6. Cut Expenses

Tough times call for tough measures. Everyone has to make sacrifices to ensure the firm makes it through an economic downturn, which means cutting costs. Reducing expenses is a brilliant idea even in good times.

Lower your expenditure by eliminating items that don’t offer much to the business, such as a cable subscription in the office. Alternatively, realign your financial spending by reviewing your insurance providers to get a better deal, consolidating bank accounts, and avoiding unnecessary debt.

Improving efficiency will also help in cutting down costs as it minimizes wastage. Purchase the right tools, go paperless, and improve time and project management.

7. Stick to your Business Plan

Economic recession is part and parcel of every business cycle. You don’t need to panic and sell everything. Just stick to your original business plan with just a few adjustments. To stay focused on the big picture, make it a point to refer to your long-term objectives and plans regularly.

Moreover, set short-term weekly and monthly goals, and tweak where necessary as long as they tally with the master plan. You may need to restructure the business plan as recessions can be unpredictable.

8. Re-evaluate the Business

A recession is the perfect time to take a step back and take a long hard look at the business. Since there’s plenty of time on your hands, use the time to evaluate the company and find any weak points that need fixing.

Maybe business is low because you’re not marketing right, your pricing doesn’t make sense, or you don’t understand prospects. Go over your data, try to work where problems are, and implement potential solutions.

9. Create a Unique Value Proposition

Creating a unique value proposition is one of the best ways to thrive in any market. In real estate, this means differentiating yourself from the competition. That means providing something the others don’t offer. 

That could mean anything that offers extras to clients, like diversifying your business by partnering with a mortgage broker, so you offer mortgage provision services in-house.

Final Word

One of the key lessons to surviving a recession is never to stop marketing. That will help build your brand as well as bring in new business. Alternatively, create a unique value proposition, invest in technology, and grow your network to improve sales.

On the other hand, save money by cutting back on expenditure, sticking to the business plan, and retaining your current clients. It also helps to keep abreast of the current economic environment to find opportunities you had not considered before. 

Despite the macroeconomic headwinds of recession, your individual economic success could be amazing, as long  as you can navigate and anticipate this crisis.  What outwardly appears to be chaos may be an historic opportunity.

By Gurpreet Singh Padda, MD, MBA

Categories
Microeconomics

How the Unemployment Rates Impact the Looming Recession

In the face of higher interest rates and rampant inflation, the jobs market is somehow still going strong. For instance, the economy added an estimated 390,000 jobs in May 2022 and 528,000 in July.

Many businesses have “hiring” signs up, proving that although the current global economic crisis is slowing down the U.S. economy, we are not quite in a recession yet. So, here’s a look at how a recession affects unemployment rates.

Unemployment Rate Measures

To better understand the job market and unemployment rates, it’s essential to know the different categories of ‘unemployed.’ To calculate the unemployment rate, the U.S. Bureau of Labor Statistics (BLS) uses six measurements ranging from U1 to U6.

  • U1 refers to the percentage of people who’ve been unemployed for more than 15 weeks.
  • U2 is the percentage of people who have lost their jobs or finished temporary work.
  • U3 is the official unemployment rate for people without jobs who actively sought work within the past four weeks.
  • U4 encompasses U3 individuals plus those who are discouraged. They stopped looking for work because they believed that current economic conditions were unfavorable.
  • These include individuals described in U4 in addition to marginally attached workers. U5 also includes individuals who would like to work but haven’t looked for work recently.
  • These include people described in U5 plus part-time workers who want to work full-time but economic conditions do not allow it.

The different measures of unemployment can be better understood using the table below.

U3 is the most commonly reported of the six measurements, with U6 being a better depiction of the current unemployment rate. Despite the BLS focusing on U3 as the official unemployment rate, many economists feel U6 is more meaningful because it factors in a more significant percentage of unemployed people.

The current rate for U3 is 3.6%. However, this only takes into account unemployed people actively looking for work. So, if unemployed people stop looking for a job, they no longer form a part of the U3.

This “discouraged” person decreases the unemployment rate since they no longer count as unemployed. What this leads to is a false rate of unemployment.

The U6 unemployment rate as of June 2022 stands at 6.7%. One of the best indicators of the employment market is the temporary help penetration rate. June saw an increase in the temp help employment rate to 2.07% of the total labor market, and the trend is likely to continue.

Another issue affecting employment is the number of workers re-entering the job market as there is increased selectivity in looking for new opportunities.

Typically, one of the indicators of a looming recession is high unemployment. Indeed, apart from scrutinizing factors such as income, manufacturing activity, output, and business sales, the National Bureau of Economic Research (NBER) also factors in the employment levels.

While the GDP has contracted two consecutive quarters, a traditional indicator of a recession, the strong employment market is a real head-scratcher. Staffing companies report finding it difficult to fill the number of open jobs available.

But the NBER is on to something because the common denominator in all recessions seems to be jobs. Take 1960, for example. Household incomes rose if you adjusted them for inflation, but that was a recession. In 2001, the GDP didn’t contract for two consecutive quarters, yet the NBER called it a recession.

Through all the recessions, be it the 1960 or 2020 recession, the unemployment rate always stood higher than 6.1%. With the current figure of 3.6%, it’s perhaps easy to see why the NBER is slow to call this a recession.

Besides, payrolls keep expanding, hitting 1.6% between December 2021 and May 2022. Labor is scarce, with the BLS reporting more than 10.7 million job openings as of June 2022. Those are hardly the signs of recession.

Or maybe the job market is slow to react to the downturn. After all, sales and manufacturing have weakened. Whatever the case, recession or not, it’s a long shot to expect unemployment to rise to the ‘normal’ levels witnessed during a typical recession.

With that, some experts expect a shallow recession, and the jobs market will help cushion against severe dips. That employment growth should also assist in productivity. Most corporates also raked in exceptional profits, which should cushion them further.

President Biden lamented that oil and gas companies made profits at the expense of consumers. He famously quipped that “Exxon made more money than God” after the company posted a first-quarter profit of more than $5.48 billion.

Strong job seeker’s market

Despite fears of a looming recession, the current job market favors job seekers. Job openings are high, while layoffs are extremely low. Daniel Zhao, a senior economist at Glassdoor, agrees that this doesn’t look like a job market headed into a recession, as labor demand is still red-hot.

The uptick in hiring works out for the Federal Reserve’s plan to slow the rising inflation rate. In May, the Federal Reserve increased interest rates by 50 basis points; a move meant to slow down consumer demand without tipping the economy into a recession.

Despite higher interest rates and inflation, the labor market continued going strong in May. A LinkedIn survey showed that hiring went up by 9.8% in May 2022, a figure 10% higher than pre-COVID. Industries with the most significant increase in hiring include accommodation, healthcare, and construction.

Final word – Recession threats have little impact on employment

Despite fears of a recession, the job market is not showing any signs of slowing down. This will continue to positively impact the unemployment rate as job openings remain high and employees continue to select the jobs they want.

A critical element that is often overlooked is not just simply the overall employment rate, the quantity of jobs; but the income associated with the job, the quality of the job.  Despite returning overall employment to pre-pandemic levels, global wage growth has not kept pace with real inflation, and actual productivity has fallen off of a cliff.

At a macro level, I suspect we are in deep trouble.