Commercial Markets Approach Year End with Caution
Heading into the traditional holiday season, the economy is looking for some sparkle. While the third quarter brought some positive news, it still doesn’t add up to a bountiful season. With unemployment staying high, and European issues continuing to weigh on financial markets, economic concerns slowed commercial real estate markets.
Based on the Bureau of Economic Analysis’s second estimate, gross domestic product (GDP) rose 2.0 percent in the third quarter. Mirroring second quarter’s patterns, all major components advanced, except government spending. Business investments provided a double-digit boost behind the economic advance.
Business spending rose 14.8 percent during the quarter. Businesses have accelerated spending in each successive quarter during 2011. They upped their spending on equipment— transportation was up 31.7 percent, while industrial equipment rose 31.6 percent. Notably, spending on commercial real estate gained for the second consecutive quarter, advancing 12.6 percent.
The major driver of economic growth by scale, consumer spending remained steady, gaining 2.3 percent during the third quarter. While at modest levels, consumers increased their spending on both goods and services. Spending on furnishings and household equipment was up 5.3 percent, while consumption of recreational goods and vehicles rose 10.8 percent. Cars and auto parts registered a 1.9 percent rise.
Consumers also increased their spending on financial services and insurance (2.4 percent), recreation (2.8 percent) and health care (5.5 percent).
International trade, which has proven resilient this year, continued to expand during the quarter. With exports rising by 4.3 percent and imports growing by 0.5 percent, the balance of trade was positive. Along with growth in trade, prices of exchanged goods also increased. Import prices, in particular, have been growing at double-digit rates for the better part of 2011, with September’s prices 13.4 percent higher year-over-year.
Export prices rose at a much slower pace, with September 2011 figures up 9.5 percent from the prior year. The other major contributor to economic growth— government spending—was flat. Federal spending increased 1.9 percent, driven by defense expenditures, up 4.7 percent. State and local governments slashed their spending by 1.4 percent as they continued to face mounting deficits.
On the employment front, the third quarter witnessed a slowdown. Businesses cite general uncertainty, lack of demand and regulatory concerns as the main reason for modest hiring. The number of payroll jobs rose by 368,000 during the quarter.
Manufacturing, construction and mining maintained a steady pace of growth. In a positive sign, professional and business services posted a net 100,000 new jobs during the quarter. The other contributors to employment growth were the education and health sectors.
However, employment conditions remain far from a pace that could support sustainable economic growth. The first-time unemployment insurance claims were stubbornly high, at 412,000 per week, during the third quarter. The figure should fall below 400,000 per week to ensure meaningful, consistent job creation.
In addition, the number of people drawing unemployment benefits rose to 3.73 million in the third quarter, up from 3.72 million in the second quarter of the year. Not surprisingly, the unemployment rate spent the third quarter pegged at 9.1 percent. It declined to 9.0 percent in October.
With the looming specter of unemployment casting a long shadow across the economy, consumers grew weary. Compiled by the Conference Board, the consumer confidence index—a measure that considers respondents’ general feelings about the job market and their finances—declined to 39.8, a low not seen since the first quarter of 2009, during the recession.
More troubling, consumers were pessimistic about both current economic conditions as well as their expectations. Looking ahead, GDP growth will likely close the year at an anemic 1.8 percent annual rate. While the holiday season is expected be positive, it is not expected to provide enough momentum for the year. For commercial real estate, improving fundamentals should translate into a more positive trend into 2012.
For a more extensive look into the Commercial Real Estate Outlook published by NAR Research, visit www.REALTOR.org/Research and click on “Reports by Topic” to find all commercial research publications. Or simply email us at NARCommercial@realtors.org and we will send the PDF to you.
Economic Issues and Commercial Business Trends Forum Keeps You Current
One of the most popular commercial events every year at the REALTOR® Conference & Expo, as well as at the Mid-Year Legislative Meetings, is the Economic Issues and Commercial Business Trends Forum. This event always features Lawrence Yun, NAR Chief Economist, in addition to other top economists.
Stay up to date by downloading audio and slides from the November 2011 Forum, which included 2012 economic forecasts by Lawrence, Kenneth P. Riggs, Jr. of the Real Estate Research Corporation (RERC) and Robert M. White of Real Capital Analytics (RCA).
Just visit PlaybackNAR.com.