U.S. National Retail Report 2014 Forecast 2 Main Menu (Click on an item below to take you to the section) 2014 Forecast Northeast Southeast Texas South Central National Midwest Mountain Pacific U.S. National Retail Report 2014 Forecast 3 RETURN TO MAIN MENU The Macro Overview In late April 2014 the macro economy is growing slowly. Figure 1 displays trends in aggregate national GNP and Figure 2 (page 4) presents ten years of national unemploy- ment data. In recent years, the unemployment rate has been decreasing and now stands at 6.3%. Macro economists have stressed that the unemployment rate actually understates the challenges in the labor market because there are many working age men collecting disability insurance from the government and there is a growing group of working age men not in the labor force. Many macro economists suggest that a better measure of the health of the labor market is to use the share of prime age men who are working. This ratio remains at a historic low of 64.7%. These facts matter for the retail sector because the new Chair of the Federal Reserve Board, Janet Yellen, has stated her commitment to a monetary policy that prioritizes low interest rates even if this triggers some inflation. Dr. Yellen is well known to be a Keynesian and this school of economics posits that “loose money” helps to create job growth and this will eventually create jobs. While it is an open question whether this world view is correct, the key point is that her Federal Reserve Committee is likely to keep interest rates low. Many economists debate whether this will unleash inflation. Such inflation would help to reduce the real costs of financing the nation’s large budget deficit but would worry foreign bond holders such as China who have invested huge amounts of money in the U.S economy. The bottom line is that relative to her predecessor Ben Bernanke, Janet Yellen will focus on reducing national unemployment even if this causes rising inflation. The challenge of inflation lurks in part because of gridlock in the U.S Congress. The nation’s large deficit could be closed by introducing a combination of new taxes and expenditure cuts. In the absence of a bipartisan compromise the interest payments on the debt will become a growing share of the budget and inflation will be a tempting tool for reducing the debt. A second relevant macro trend is the slowdown of the Chinese economy. In the recent past, this nation’s real GNP was growing at 10% per year. While this nation’s macro statis- tics are often questioned, it is likely that its growth will slow to roughly 7% over the next few years. This is likely to have at least two implications for U.S real estate. First, there could be a slowdown in Chinese tourists visiting U.S coastal cities. In recent years, this group of tourists have represented a major consumer group. Second, the aggressive bidding by private Chinese investors in U.S real estate markets such as California could cool. Stock Market Evidence While many macro economic statistics paint a “so-so” picture of the aggregate U.S economy, asset market returns suggest a more optimistic viewpoint. The Dow Jones Industrial Average is roughly at an all time record high. The stock market’s overall index is a leading indicator of where investors believe the economy is going. In October 2013, Eugene Fama of the University of Chicago shared the Nobel Prize in economics for his work on the Efficient Markets Hypothesis. This Hypothesis posits that at any point in time that Wall Street asset prices for compa- nies such as Facebook or real estate REITS reflects all available information about future earn- ings. For example, if a company such as Facebook is expected to announce excellent earnings in the next quarter that the stock price of Facebook should already reflect this anticipated effect. In this sense, current asset prices reflect traders’ expectations of the future. With this logic in mind, it is useful to look at the performance of different REIT asset categories. Between March 2013 and March 2014, retail REITS prices increased by 3.8%, shopping centers by 1.7%, regional malls by 4.1% and freestanding REITS by 3.6%. 1 Household Income Inequality In considering the implications of these macro trends for the retail real estate sector, it is crucial to remember that national averages mask huge variation across individuals. At any point in time, a Bill Gates has a purchasing power that vastly exceeds hundreds of poorer people. The total share of 16,000 15,800 15,600 15,400 15,200 15,000 14,800 14,600 14,400 14,200 FIGURE 1 - Real Gross Domestic Product 2009 2010 2011 2012 2013 BILLIONS OF CHAINED 2009 DOLLARS SOURCE: U.S. DEPART. OF COMMERCE: BUREAU OF ECONOMIC ANALYSIS2014 RESEARCH.STLOUISFED.ORG The bottom line is that relative to her predecessor Ben Bernanke, Janet Yellen will focus on reducing national unemployment even if this causes rising ination.