Predictions of a U.S. recession seem to be fading away, with recent economic data showing better-than-expected numbers in consumer spending and unemployment and pointing to a resilient U.S. economy.
The economy is looking so solid, in fact, that the Federal Reserve will likely double its projections for growth when it publishes its economic outlook next week. One estimate produced by the Atlanta Fed shows the economy expanding by 5.6% in the third quarter. And last week, Goldman Sachs cut its odds of recession to 15%, well below its projection of 35% in March.
While the Atlanta Fed’s data is often volatile, and the numbers will likely change in the coming weeks, one thing is clear: The U.S. economy is doing well, which is always good news for real estate investors.
What the Data Is Telling Us
The summer was a great time for retailers, with robust consumer spending numbers in June and July and unemployment around a five-decade low. Economic activity in the service sector rose for the eighth month in a row in August, while inflation has eased slightly but still remains above the Fed’s 2% target.
Financial markets have also shown resilience, even amid ongoing uncertainties. While corporate profits were down for the second straight quarter, investors remain undeterred, and some analysts are predicting the optimism will continue.
The numbers weren’t so positive three months ago, when Fed officials last updated their projections, estimating the economy would expand by a mere 1% in 2023. Still, it was much higher than the Fed’s projections in March, when they predicted a recession.
Now, the Fed is expected to increase those projections even more at the conclusion of its Sept. 19 and 20 policy meeting. And that could also mean the central bank scales back on the number of rate hikes in the coming year.
What This Means for Real Estate Investors
For over a year, the Fed has been adamant about raising interest rates to stop the threat of persistent inflation. Now, however, the central bank seems to be contemplating a rate hike pause as it evaluates its next steps.
The Fed raised rates in July from 5.25% to 5.5%, representing a 22-year high, but according to a recent poll from Reuters, economists expect rates to remain unchanged until at least the end of March 2024 before the Fed starts cutting rates.
Federal officials have cautioned over any major moves and have left the door open for more rate hikes, with Fed Chair Jerome Powell saying in August that the central bank would “proceed carefully” as it decides what to do next, given that inflation “remains too high.”
A potential pause in increasing Fed rates is good news for the real estate market, and it’s even better if rates are cut. Mortgage rates continue to hold at around 7%, increasing already high real estate costs across the country.
Of course, there are several factors that could change. We don’t know exactly what the Fed will do or how the data will play out in the coming months. And even if third-quarter GDP is strong, the numbers have been delayed and won’t be released until mid-October.
The other unknown factor is whether consumer spending will keep up when student loan payments resume in October. Moody’s Analytics estimates that about $70 billion a year will be pulled out of the economy when repayments begin. But while some economists are expecting consumers to cut back on spending, Moody’s doesn’t expect it to drag the economy into a recession.
The Bottom Line
The U.S. economy appears to be in a good place. While inflation continues to elude the Fed’s target rate, the rest of the economy is doing so well that the central bank is likely to increase its GDP projections for the rest of the year. It may even pause rate hikes in the coming months, hopefully keeping mortgage rates from rising further than they have.
While there are still some unknowns, it seems that the fear of a recession this year is easing, which is good news for the economy and real estate market overall.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.