Q2 2021 U.S. MACRO-OUTLOOK: EXPECTING STURDY GROWTH - CBRE ECONOMETRIC ADVISORS July 30, 2021 - CBRE Hotels
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July 30, 2021 Q2 2021 U.S. MACRO-OUTLOOK: EXPECTING STURDY GROWTH AHEAD CBRE ECONOMETRIC ADVISORS
2021 OUTLOOK – SOME HIGH-LEVEL THOUGHTS THAT DRIVE OUR FORECAST • We assume that COVID-19 will be manageable as the U.S. economy normalizes. Although COVID-19 cases will fluctuate the deployment of vaccines will limit the number of chronic cases that overwhelm the health system and materially impede economic activity. • Presently, air travel and restaurant visitor volumes are back to pre-pandemic levels. U.S. consumers will remain aggressive in coming quarters and continue to shift spending from goods to services. This will push the U.S. economy from a ‘recovery’ to an ‘expansionary’ phase. • Growth in labor-intensive sectors, such as leisure & hospitality, will drive 4.5% employment growth in 2021 and the labor market should exceed pre-pandemic levels by mid-2022. This outlook is predicated upon rising labor market participation, which should get a boost from children going back to school in the autumn and unemployment benefits being scaled back. • Our outlook for inflation has shifted upwards as the combination of surging demand, supply bottlenecks, wage growth and index base effects have increased prices by >5% Y-o-Y. But most of the factors driving CPI are transitory and inflation should fall back to the low-2% range by next year. Specifically, imbalances in the microchip space—a key input into many durable goods—are expected to even-out in coming quarters, putting downwards pressure on inflation. CBRE ECONOMETRIC ADVISORS 2 JULY 31, 2021 | MACRO OUTLOOK
HOW HAVE OUR MACRO FORECASTS CHANGED?
GDP Forecast Employment Forecast CPI Forecast
Y-o-Y change Q1 2021 GDP Forecast Q1 2020 Employment Forecast
Q1 2020 CPI Forecast
Q2 2021 GDP Forecast Q2 2021 Employment Forecast
Q2 2021 CPI Forecast
8 8 8
6 6 6
4 4 4
2 2 2
0 0 0
-2 -2 -2
-4 -4 -4
-6 -6 -6
2019 2020 2021 F 2022 F 2023 F 2019 2020 2021 F 2022 F 2023 F 2019 2020 2021 F 2022 F 2023 F
• Our outlook for GDP and employment were revised only slightly upwards from Q1 2021.
• Supply-side constraints combined with surging consumer/business demand sparked notable inflation during 1H 2021 and CPI growth this year should be about 4%.
But many of these drivers will fade and the pace of inflation should drift towards more normal levels during the next 18 months.
Source: U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, CBRE Econometric Advisors.
CBRE ECONOMETRIC ADVISORS 3 JULY 31, 2021 | MACRO OUTLOOKINFLATION IS PARTLY DRIVEN BY EXCEPTIONAL ECONOMIC GROWTH
GDP, annual Y/Y change (%)
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 2021
• Economic growth this year is expected to rival the early-1980s when the economy was recovering from an interest rate shock.
• Consumers unleashing pent-up demand (evidenced by high savings rates) and business investment are driving activity.
• The pace of residential investment is coming off the boil from 2020 when demand far outstripped supply of housing.
Source: U.S. Bureau of Economic Analysis, Oxford Economics.
CBRE ECONOMETRIC ADVISORS 4 JULY 31, 2021 | MACRO OUTLOOKSUPPLY BOTTLENECKS ARE INSTRUMENTAL IN DRIVING INFLATION
CPI, Y-o-Y change (%) and contribution from key components CPI outlook and scenarios, Y-o-Y change (%)
Up Severe Downside Down Base
Housing Food & Beverages Transport Other Medical Care CPI
5.0
6
4.5
5
4.0
4
3.5
3 3.0
2 2.5
2.0
1
1.5
0
1.0
-1
0.5
-2 0.0
2014 2015 2016 2017 2018 2019 2020 2021 2019 2020 2021 2022 2023
• The revival of the U.S. economy has triggered inflation in excess of 5%. The transport component of the CPI index is the predominate driver and this is caused by: 1) A
chip shortage that is curtailing international auto production; 2) A shortage of rental cars; 3) Rising fuel costs. Y-o-Y inflation levels are also a result of base effects that
are rapidly fading.
• Because these factors are transitory the pace of inflation is expected to halve in during the next six months. Fading supply imbalances suggests there is less room for
inflation surprising on the upside, even if economic growth exceeds expectations.
Source: national sources, CBRE-EA.
CBRE ECONOMETRIC ADVISORS 5 JULY 31, 2021 | MACRO OUTLOOKRISING WAGES ARE ALSO PUTTING UPWARD PRESSURE ON PRICES
Employment Cost Index, Q-o-Q change (%) Leisure & Hospitality, avg. hourly earnings Job openings rate (%)
Job openings rate, Leisure & Hospitality (%)
Counterfactual Leisure & Hospitality (RHA)
Job openings rate, Total (%)
3.0 17 10
9
2.5 8
16
7
2.0
15 6
1.5 5
14 4
1.0
3
13 2
0.5
1
0.0 12 0
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2018 2019 2020 2021 2000 2004 2008 2012 2016 2020
• Rising labor costs are also exerting upward pressure on CPI. Indeed, the Employment Cost Index posted the greatest quarterly growth in Q1 since the early 1980s.
• Wage acceleration has been most significant within the leisure & hospitality sector, where average hourly wages have now exceeded their pre-pandemic trend. The
cause of this wage spike is a significant mismatch between supply-and-demand evidenced by the heightened job openings rate in the leisure & hospitality space.
Source: U.S. Bureau of Labor Statistics.
CBRE ECONOMETRIC ADVISORS 6 JULY 31, 2021 | MACRO OUTLOOKTHE LABOR SHORTAGE IS ABOUT MORE THAN GENEROUS UNEMPLOYMENT BENEFITS
Labor force participation rate index, Feb 2020 = 100 Reasons people are not working (millions)
25-54 years 55+ years Fear of COVID-19 Child Care
101 9
100 8
99 7
98 6
97 5
96 4
95 3
94 2
Jan-15 Oct-15 Jul-16 Apr-17 Jan-18 Oct-18 Jul-19 Apr-20 Jan-21 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21
• Generous unemployment insurance (UI) are likely contributing to the labor shortage, but it is uncertain to what degree. A San Francisco Federal Reserve study suggests
that 1 in 7 people who received a job offer whilst receiving UI would turn it down.
• Other explanations for the labor shortage include a reported uptick in ‘Boomers’ choosing to retire. Evidence for this includes very sluggish labor market participation
amongst the 55+ age cohort. Further, many are not working due to childcare issues. In recent months people citing fear of contracting COVID-19 as a reason for not
working has declined but those staying home due to childcare responsibilities has escalated.
Source: U.S. Bureau of Labor Statistics, U.S. Census Household Pulse Survey, Federal Reserve Bank of San Francisco: Petrosky-Nadeau and Valletta
CBRE ECONOMETRIC ADVISORS 7 JULY 31, 2021 | MACRO OUTLOOKTHERE IS ROOM FOR UPSIDE RISK IN THE LABOR MARKET
Employment index by forecast vintage, February 2020 = 100 Employment index by sector, Q4 2019 = 100
2021 Q2 Upside Scenario Leisure & Hospitality Total (ex Leisure & Hospitality)
2021 Q2 Baseline Transportation & Warehousing Professional & Biz Services
110 2021 Q1 Vintage Financial Activities
105
2020 Q4 Vintage
100
History
105 95
90
100
85
80
95
75
70
90
65
85 60
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 2019Q4 2020Q2 2020Q4 2021Q2 2021Q4 2022Q2
• We only slightly increased our baseline employment forecast for 2021 and 2022, to 4.5% and 4.1% respectively. However, there is room for upside risk, especially if stronger wage
growth brings more workers back into the labor market.
• The outlook will vary widely by industry. Presently many office-based sectors, such as finance and professional services, have already seen a full recovery in total employment. The
leisure & hospitality should continue to post notable gains in coming quarters and could fully recover by late 2022.
Source: U.S. Bureau of Labor Statistics, CBRE-EA.
CBRE ECONOMETRIC ADVISORS 8 JULY 31, 2021 | MACRO OUTLOOKCITIES WITH STRICT LOCKDOWN MANDATES HAVE A LONGER ROAD TO RECOVERY
Employment loss at the nadir of the COVID-19 cycle; June ‘21 employment relative to February ‘20 levels (%)
Lowest employment level relative to February '20 June '21 employment relative to February '20 levels (%)
5.0
0.0
-5.0
-10.0
-15.0
-20.0
-25.0
-30.0
Atlanta
Memphis
San Jose
Seattle
Oklahoma City
Kansas City
Las Vegas
Orlando
San Francisco
Baltimore
Boston
Houston
Washington
Salt Lake City
Austin
Hartford
Milwaukee
Raleigh
St. Louis
San Diego
Cleveland
Columbus, OH
Sacramento
Pittsburgh
Riverside
Charlotte
Phoenix
Los Angeles
Bridgeport
Virginia Beach
Detroit
Philadelphia
Miami
Cincinnati
Chicago
Louisville
New Orleans
Indianapolis
Providence
Portland
Nashville
Denver
Minneapolis
Richmond
Jacksonville
Dallas
New York
Tampa
Buffalo
San Antonio
• Cities with high exposure to the hospitality sector (e.g., Las Vegas, Orlando) and places with relatively strict social distancing rules (e.g., San Francisco and New York)
have seen the most intense job losses. Key manufacturing hubs have regained many of the jobs lost in April but maintain a sizable gap from 2019 employment levels.
• Places with a more laissez-faire approach to social distancing now have employment that is less than 2% below pre-COVID-19 levels.
Source: U.S. Bureau of Labor Statistics.
CBRE ECONOMETRIC ADVISORS 9 JULY 31, 2021 | MACRO OUTLOOKDETAILED MACROECONOMIC ASSUMPTION THAT DRIVE OUR BASELINE FORECAST
Current
Topic Key Observations and Forecast Assumptions Risks
Conditions
U.S. GDP returned to pre-pandemic levels during Q2 2021, as the economy grew by an The possibility of a COVID-19 resurgence could derail consumption and especially amongst
US GDP RECOVERED
Top Line Expectations annualized rate of 6.5%. We expect growth for 2021 to top 7%. the recovering consumer services sector.
US Exports RECOVERING As economies around the world recover U.S. exports should grow by nearly 6% this year. Slowdown amongst key US trade partners and/or an escalation of the US/China trade conflict.
No monetary tightening is expected for 2021. The Fed’s recent language has become less Monetary stimulus results in mispricing of risky assets.
Monetary Policy AGGRESSIVE
‘dovish’ and is likely to begin tapering Q.E. by 2022.
US Policy Democrats have agreed upon a $3.5T ‘human infrastructure’ spending plan that will require An aggressive stimulus carries an upside risk for consumption and U.S. growth in the short-
Congressional
AGGRESSIVE ‘reconciliation’ for passage. Meanwhile, a bipartisan group in the Senate has agreed on a term. A growing budget deficit could weigh on upon future growth.
Stimulus
$1T infrastructure spending package. .
Financial markets appear pessimistic about the outlook for the U.S. economy. Yields declined Increased inflation causes an upward shift in interest rates.
Financial Conditions UNCERTAIN
despite Y-o-Y inflation exceeding 5% recently. U.S. 10Y ends the year at 2%.
Business Sector Business Sentiment STABLE Business confidence surveys suggest that optimism is increasing. This is evidenced by real Supply bottlenecks and COVID-19 variants are serious concerns. Alternatively, stronger
money as private investment continues to trend upward, especially for intellectual property. business investment this year is infusing much needed optimism.
Real biz investment should grow by nearly 8% in 2021. Increased spending will partly be There is upside risk to investment as demand and global trade begin to normalize.
Business Investment RECOVERING
supported by increased corporate profits.
Labor Market RECOVERING Increased demand for consumer services will drive job growth of about 4.5% this year. COVID-19 and childcare issues prevent some parents from returning to work.
Consumer Sentiment RECOVERING Concern is building around inflation. Sentiment surveys are weaker than actual sales. A new wave of COVID-19 cases would weigh on sentiment.
Labor Market and
Consumers remain aggressive and have shifted activity from goods to services as the economy Rising wages is delivering upside risk for consumption. On the downside, supply bottlenecks
Consumption Retail Sales GROWING
has more fully reopened. Consumer spend should grow by about 9% this year. limit consumption.
Housing Market PAST the PEAK Limited inventory and high costs have stalled home sales. The pace of residential investment The outlook for residential investment hinges on the pace of housing starts.
will slow albeit from very elevated levels.
Public Health and Case Count RISING New COVID-19 cases are rising and particularly in regions with low vaccination rates. New variants of COVID-19 cause an upsurge in cases.
Response Vaccinations WAVERING 58% of people ages 12+ are fully vaccinated. The pace of daily vaccinations has stalled. Most of the people who intend to be vaccinated have already received a vaccine.
Source: CBRE-EA; Oxford Economics.
CBRE ECONOMETRIC ADVISORS 10 JULY 31, 2021 | MACRO OUTLOOKEA Scenarios
BASELINE SCENARIO
CBRE EA BASELINE FORECAST
2018 2019 2020 2021 2022 2023 2024
GDP, % 3.0 2.2 -3.5 7.1 5.0 1.7 1.0
Emp, %. 1.6 1.3 -6.0 4.5 4.1 1.6 0.0
CPI, % 2.2 2.0 1.2 4.2 2.0 2.2 2.0
10-yr Treasury, % 3.0 1.8 0.9 2.0 2.5 2.4 2.2
Note: Figures are average annual change—except the 10-year, which is Q4% yield.
Source: BEA, BLS, Federal Reserve, CBRE Econometric Advisors, Q2 2021.
• The Baseline scenario assumes that American economic activity will be able to operate with normalcy even as COVID-19 occurrences fluctuate. Generally
widespread vaccination will keep hospitalization rates low despite an uptick in cases. The likelihood of the Baseline scenario is HIGH.
• Continued normalization of American economic life is expected to drive 7% GDP this year, mirroring growth rates not seen since the early 1980’s.
• Although our view on GDP and employment has not materially changed during the past quarter, we have noticeably upgraded our expectations for near-term
inflation. The combination of significant economic growth and transitory supply constraints has pushed prices by >5% Y-o-Y this summer. But as supply
constraints fade and the U.S. builds capacity the pace of inflation should fall to the low-2% range during the next few years.
• Despite heightened economic activity and inflation bond yields have remained stubbornly low in recent months. We believe yields will ultimately drift upwards
to 2% by year-end. A further change of tone by the FOMC and explicit plans to wind down its quantitative easing program would put upward pressure on
yields.
Source: U.S. Congressional Budget Office (CBO); CBRE Econometric Advisors.
CBRE ECONOMETRIC ADVISORS 12 JULY 31, 2021 | MACRO OUTLOOKUPSIDE SCENARIO
CBRE EA UPSIDE FORECAST
2018 2019 2020 2021 2022 2023 2024
GDP, % 3.0 2.2 -3.5 8.4 7.2 2.2 0.9
Emp, %. 1.6 1.3 -6.0 7.6 4.7 1.9 -0.2
CPI, % 2.2 2.0 1.2 4.5 2.2 2.3 2.1
10-yr Treasury, % 3.0 1.8 0.9 2.3 3.1 2.9 2.5
Note: Figures are average annual change—except the 10-year, which is Q4% yield.
Source: BEA, BLS, Federal Reserve, CBRE Econometric Advisors, Q2 2021.
• Should global growth and Federal policy stimulus exceed expectations during 2H 2021 then we would likely see an additional percentage point of GDP
growth this year and 7%+ growth in 2022. This scenario also assumes that future COVID-19 outbreaks have a minimum impact on the health system and
consumer sentiment. There is a MEDIUM likelihood of this scenario coming to fruition.
• Achieving 8%+ job growth this year would require activity in some sectors to exceed pre-pandemic levels. This scenario would require a material increase in
the labor force participation rate, which would be aided by a full reopening of schools for the autumn term.
• The Upside scenario would not result in proportionally higher inflation because many of the underlying drivers behind CPI are being driven short-term supply
bottlenecks that are expected to dissipate in coming quarters.
Source: U.S. Congressional Budget Office (CBO); CBRE Econometric Advisors
CBRE ECONOMETRIC ADVISORS 13 JULY 31, 2021 | MACRO OUTLOOKDOWNSIDE SCENARIO
CBRE EA DOWNSIDE FORECAST
2018 2019 2020 2021 2022 2023 2024
GDP, % 3.0 2.2 -3.5 5.5 2.1 0.9 1.4
Emp, %. 1.6 1.3 -6.0 0.8 3.0 1.3 0.6
CPI, % 2.2 2.0 1.2 4.0 1.7 2.0 1.9
10-yr Treasury, % 3.0 1.8 0.9 1.6 1.6 1.7 1.9
Note: Figures are average annual change—except the 10-year, which is Q4% yield.
Source: BEA, BLS, Federal Reserve, CBRE Econometric Advisors, Q2 2021.
• In the Downside scenario, COVID-19 variants derail consumer confidence and the normalization of the U.S. economy. Although the economy will avoid a
double-dip recession it will operate at below capacity for a period. There is a LOW-to-MEDIUM likelihood of the Downside scenario occurring.
• Specifically, GDP growth will be limited to just 5.5% during 2021. Meanwhile, the labor market stalls as rising COVID cases erodes demand for consumer
services. Employment will not regain its pre-pandemic peak until after 2024.
• Despite weaker economic activity inflation remains heightened due to transitory supply bottlenecks. Economic uncertainty will keep downward pressure on
yields across the duration of the forecast.
Source: U.S. Congressional Budget Office (CBO); CBRE Econometric Advisors.
CBRE ECONOMETRIC ADVISORS 14 JULY 31, 2021 | MACRO OUTLOOKSEVERE DOWNSIDE SCENARIO
CBRE EA SEVERE DOWNSIDE FORECAST
2018 2019 2020 2021 2022 2023 2024
GDP, % 3.0 2.2 -3.5 4.0 -1.3 0.2 1.0
Emp, %. 1.6 1.3 -6.0 -2.8 1.4 0.9 0.5
CPI, % 2.2 2.0 1.2 3.7 1.4 1.7 1.7
10-yr Treasury, % 3.0 1.8 0.9 1.3 0.5 0.8 1.3
Note: Figures are average annual change—except the 10-Year, which is Q4% yield.
Source: BEA, BLS, Federal Reserve, CBRE Econometric Advisors, Q2 2021.
• Within the Severe Downside scenario, the COVID-19 situation deteriorates significantly. Vaccines perform inconsistently against new strains of COVID-19,
health systems begin to be overwhelmed and many states are forced to shutter their economies again. Consequently, the economy will face a double-dip
recession in 2022.
• Growth after the ‘double dip’ will remain weak as the economy faces lasting scars. Specifically, firms and households that were hobbled by 2020 will not be
able to withstand another contraction, which would stress the financial system.
• The severe downside scenario has a LOW probability.
Source: U.S. Congressional Budget Office (CBO); CBRE Econometric Advisors
CBRE ECONOMETRIC ADVISORS 15 JULY 31, 2021 | MACRO OUTLOOKMATT MOWELL Sr. Economist T +1 336 688 6637 Matt.Mowell@cbre.com 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.
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