GDP numbers came in great far exceeding expectations at 3.2%. President Trump tweets “we knocked it out of the park”. At the same time inflation remains low/nonexistent which has enabled mortgage rates to fall over 1%. Even with all this good news, home sales continue to languish with price cuts accelerating in many markets. Is the latest GDP number as great as it looks on paper? Why is real estate not following GDP up?
About GDP (Gross Domestic Product)
What is GDP? GDP represents the total dollar value of all goods and services produced over a specific time period, often referred to as the size of the economy. In the US GDP is reported quarterly. It is important to note that GDP is a backwards looking tool to see what happened in the prior quarter. The actual GDP number on the whole is not a good predictor for the future. It is therefore important to look at the drivers of GDP to see why it changed and look for clues on future performance.
What was the primary driver of GDP growth?
The recent GDP exceeded all economists’ expectations. The primary driver in the first quarter of U.S. economic growth was a big boost from inventories and trade that offset slowdowns in consumer and business spending. It is important to note that buildup of inventories is temporary and not “sustainable growth” as down the line either a business or a consumer must buy the inventory. This alludes to the headwinds for future quarters.
Headwinds for future growth
The GDP picture was not all rosy as consumer and business spending fell. Although it is impossible to fully know why consumers and business pulled back, their pullback could be an indicator of a storm on the horizon.
According to Bloomberg economists:
While this is encouraging news at face value, particularly given the growth concerns that rattled economic sentiment around the turn of the year, a closer inspection exposes a much more sluggish underlying profile. Much of what made first-quarter GDP look great, will make second-quarter GDP look considerably weaker — namely an unaddressed inventory overhang.”
Consumer spending slows
Consumer spending is the largest driver of the economy therefore it is important to look deeper into why consumer spending is slowing. It is interesting that the stock market reached all-time highs, yet consumers are no longer feeling euphoric about the economy. Why is the consumer pulling back? Something has changed with consumer sentiment causing concern for the future. The consumer for whatever reason is not as confident in the economy as the GDP numbers suggest. I speculate that the consumer, like the treasury market, is becoming nervous about the future. Is a recession lurking? Are they concerned about their debt load (credit cards, autos, etc…)? Is something else causing the consumer to pull back?
It is interesting to note that the treasury market picked up this indicator months ago as long term treasury rates have declined below short term rates indicating problems ahead.
Residential Real Estate continues to languish
While GDP accelerated, residential real estate continues to languish for the 5th straight quarter. Residential real estate contracted 2.8% as housing starts and sales remained relatively sluggish. Even though rates have fallen well below their highs, real estate continues to remain soft. This is a further indicator that the consumer is starting to pull back for whatever reason. Ironically this could be a self-fulfilling prophecy as values soften consumers will pull back even further as they feel their property is now worth less than it was and they feel less wealthy due to this loss of equity in their house.
What does this all mean?
The recent GDP report appears to be a mirage. When you dig deeper into the numbers it is apparent that consumers and businesses are not as excited about the future of the economy which highlights trouble on the horizon. How much consumers and businesses pull back is the million-dollar question that will dictate the course of the economy and when a recession will rear its head.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).