Should We Be Worried About the Economy? A Look at the Latest Numbers and What They Mean for You
If you’ve been paying attention to the latest economic news, you might be feeling a bit uneasy. Some fresh data points have raised concerns about where the economy is heading. But before we jump to conclusions, let’s break it down.
First, the Good News
The Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, is showing signs of cooling. In January, it rose 2.5% year-over-year, a slight dip from December’s 2.6%. That’s a step closer to the Fed’s target of 2% inflation, which could eventually lead to lower interest rates.
Now, the Bad News
This positive inflation news was overshadowed by a sharp drop in consumer spending, which fell 0.2% in January (or 0.5% after adjusting for inflation). That’s the biggest monthly decline since early 2021. The slowdown was especially noticeable in big-ticket items like automobiles.
Why is this a problem? Consumer spending drives nearly 70% of the U.S. economy. If people start cutting back, economic growth slows down.
A Shrinking Economy?
The Federal Reserve Bank of Atlanta’s latest GDPNow forecast is raising eyebrows, predicting a 1.5% contraction in the economy for the current quarter. Just a few days earlier, that same forecast projected 2.3% growth—a major downward revision.
One key factor? Trade. The latest data shows the U.S. merchandise trade deficit jumped over 25% in January to an all-time high of $153.3 billion. This surge in imports, likely driven by businesses stocking up ahead of potential tariffs, is dragging down GDP growth.
Is Recession on the Horizon?
Some economists, like Jay Hatfield of Infrastructure Capital Advisors, think so. He argues that tight monetary policy (high interest rates) is squeezing the economy. Investors seem to agree—bond markets are flashing warning signs, with the 10-year Treasury yield dipping below 4.25%, signaling concerns about economic slowdown.
At the same time, former President Donald Trump’s proposed tariffs—including a 25% tariff on Mexico and Canada and an additional 10% tariff on Chinese goods—are adding to market uncertainty. These trade barriers could increase costs for businesses and consumers, pushing inflation expectations higher.
A Different Perspective from Commercial Real Estate Experts
Despite the troubling headlines, John Chang of Marcus & Millichap thinks some of these fears may be overblown. He points out that some data—like consumer sentiment—may be skewed by political bias. For example, surveys show that:
• Democrats’ confidence in the economy dropped by 30 percentage points.
• Republicans’ confidence increased by 24 percentage points.
• Independents’ views remained unchanged.
His takeaway? “When you consider that the politics in our country are split pretty evenly, the net impact will probably be close to neutral.”
What This Means for Real Estate and Investors
For those of us in real estate and investment circles, this economic turbulence presents both challenges and opportunities.
• Higher interest rates are making financing deals tougher, but they could also slow down development, reducing competition in the long run.
• Slower consumer spending might impact retail and hospitality properties, but it could also lead to more demand for multifamily housing as homeownership becomes less affordable.
• Trade disruptions could shake up supply chains, but they might also create opportunities for industrial real estate as businesses seek to reshore manufacturing.
Looking Ahead
While the near-term outlook is uncertain, Chang believes that growth could rebound in Q2, possibly hitting 4% annualized GDP growth. He also argues that over a five-to-seven-year horizon, these short-term fluctuations are unlikely to have a major impact on commercial real estate returns.
So, should we be worried? Cautious, yes. Panicked, no. The economy is in a transitional phase, and while we’re seeing some warning signs, there are also reasons for optimism.
What are your thoughts? How are these economic trends affecting your business, investments, or real estate decisions? Let’s discuss.