Virtually every confidence indicator is on the rise and the threat of an imminent recession is falling while recent data show that inflation is nearing the Federal Reserve’s goals set more than a year ago.
The overall inflation number reported last week was not what many wanted, as gasoline and food prices led it upward by 20 bps to 3.2%.
John Chang, research, Marcus & Millichap broke down the overall number in a recent video from his firm.
“If you strip out food and gas and look at core inflation, which is a more meaningful number and something the Fed is paying closer attention to, inflation actually went down by 10 basis points to 4.7%, Chang said.
He said two main pressure points are keeping inflation elevated: Services and housing.
Services inflation remains elevated, but it has been going down every month since February this year when it peaked at 7.3%.
Last month, services inflation went down another 10 basis points to 6.1%, and “we’re likely to see services consumption ease in the coming months as excess savings are burned off and that should further reduce the services inflation pressure,” Chang said.
As for housing, it’s commonly known that housing inflation is a trailing indicator. It has also been coming down steadily since peaking at 8.1% in January this year.
Last month, housing inflation declined by another 10 basis points to 6.2% and Marcus & Millichap expects that trend to continue as both home prices and apartment rent growth have flattened considerably.
Therefore, by excluding gas, food, and housing inflation from the headline CPI number, then the core minus housing inflation rate is just 2.5%.
“So overall, inflation is going the right direction and as housing inflation recedes, core inflation should move back toward [the Fed’s goal of] 2%,” Chang said.
Meanwhile, Wall Street has already recalibrated the likelihood of the Fed keeping rates flat in upcoming meetings, with a 90% likelihood that the Fed will not change rates at their September meeting, a 75% probability of no change in November, and a 68% chance that the Fed will hold rates steady in December.
The prospect of falling inflation and interest rate stability has given a boost to all confidence indices.
Consumer confidence has been on the rise for the last couple of months and is now at its highest level since July 2021.
Consumer sentiment, which can strongly align with apartment demand is also trending up.
CEO Confidence, which can influence economic growth is also on the rise, and small business optimism has also made gains.
Something interesting is that commercial real estate transaction activity seems to move in tandem, Chang noted.
“If you look at the year-over-year change in small business optimism and compare it to the year-over-year change in commercial real estate transactions, there is a pretty strong correlation,” Chang said.
“That’s not to say necessarily that small business optimism drives commercial real estate transactions. The more likely case is that the forces influencing small business optimism, also influence commercial real estate investor decisions.”
Nonetheless, the recent upswing in small business optimism suggests that a recovery of commercial real estate transactions could be in the cards for later this year, Chang projected, noting that numerous indicators are looking increasingly positive.
That includes inflation, interest rates, confidence levels, and recession risk, and that in turn suggests positive momentum for commercial real estate investment, he said.
There are always risks, he added, for example, a severe hurricane season or if the banking sector takes another hit, or there’s another major geopolitical incident, then soft metrics like confidence level could be negatively impacted, “but at this point, the outlook is strengthening,” he said.
“Think about that for a minute. Right now, inflation is generally trending lower.”