Currently, the US economy is operating close to full capacity. Although consumer spending is strong, the risk that inflation will start to accelerate is relatively low, as the current capacity utilization of around 80% is still well below the levels seen in previous expansions of around 85%.
With an unemployment rate below 4% and a job vacancy rate of approximately 1.25, this implies that more open jobs are available than officially registered unemployed persons. Over the past five years, the US economy has created 210,000 jobs on average per month, resulting in 12 million payrolls. At the same time, the participation rate stands constant at around 63%, meaning that additional demand cannot be absorbed by a growing pool of workers returning to the labor market.
It is a surprising phenomenon that nominal wages - which grew by around 2.5% per year over the past five years - and hence unit labor costs - which were up by approximately 1.2% per annum -, have remained so well-behaved in recent years. If wage growth starts to accelerate in the wake of strong rising domestic demand, wage inflation will occur. Most companies will try to increase prices, which will drive overall inflation.
Should inflation overshoot the Fed’s guidelines, the US central bank might be forced to increase rates. Higher or even rising inflation may lead to a slow down in real estate investment. Elevated costs combined with an upturn in inflation and declining consumer and corporate spending, may even lead to a recession.
Worldwide trade is vital for the health of the US economy. The following data illustrates this: in 1995 trade openness measured against GDP was around 20% for the US. Twenty years later, these numbers have climbed to 40% for the US accord¬ing to the World Trade Organization (WTO). Based on first estimations by the WTO, the full implementation of the announced tariffs on the trade account deficit of the US with china of around 500 billion USD would sharply reduce worldwide economic growth. First gauges indicate a slowing of GOP growth by approximately 2%, with a severe cut in economic expansion in the US, China and the rest of the world.
Another risk associated with the trade tension is a severe slowdown in China due to the impact of the imposed tariffs on US imports by China. In this scenario, we would expect signif¬icant policy accommodation in such a situation, either in the form of infrastruc¬ture investments, easing of financial conditions or a combination of both.
Should this policy stimulus fail, a decel¬eration of the Chinese economy cannot be ruled out. How important is the growth of the Chinese economy to the US? If the growth rate of the Chinese econo¬my falls by one percentage point, this will subtract 0.3% from worldwide growth. A severe recession in China would most probably lead to a recession in the world economy.
The best advice we at the Center For Real Estate Studies can give, is to establish a wait-and-see posture as to what the new Congress will do. The White House is still in turmoil and the battle between China and the US has not been resolved.
ABOUT THE AUTHOR: Eugene E. Vollucci is the Director of The Center for Real Estate Studies, a real estate research institute. He is author of four best selling books and many articles on real estate rental income investing and taxation. To learn more about the Center for Real Estate Studies, please visit us at CALSTATECOMPANIES.COM