US Economic Drivers: Q3 2015

National Economic Overview

GDP Growth

The nation’s total output of goods and services has been and remains choppy and that has investors taking a cautionary stance. Concerns over a variety of issues that could negatively impact GDP rattled the equities markets into a big selloff early in Q3, though the major indexes recovered most of the losses by the end of the quarter. Volatility has been on the rise, as investors scrutinize and react quickly to a wide variety of economic indicators, and GDP is front and center.

After dismal first quarter growth, the economy bounced back in Q2, much as it did for the same period in 2014. But that bounce was not as big as it was last year, and the first estimate for Q3 of 2015, released on October 29th, came in at just 1.5%, well below the 5.0% rise in US output we saw in Q3 of 2014. There is just no denying that the economy is still struggling to keep momentum. Consumer spending, which accounts for roughly 70% of GDP, did improve in Q3, but not enough to offset a drastic drop in inventories, which were less than half of the total reported last quarter. Exports fell in Q3, which is no surprise given the strength of the US Dollar against the world’s other currencies. US goods are services are more expensive abroad and conversely, goods imported to the US are getting cheaper. The most recent report on import prices showed a 1.3% decline. Yet, despite lower prices, imports also fell in Q3, neutralizing the effect of lower exports on GDP performance.


Through the first half of the year, the news regarding job creation was looking good, with the US adding an average of well over 200,000 jobs per month. Unfortunately, August’s total dipped to 136,000 and September came in at just 142,000. The dip was largely unexpected and it has wary investors wondering whether or not the recovery will stall out. The unemployment rate held steady at 5.1% in September and the number of unemployed persons was little changed at 7.9 million.

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The biggest job gains were seen in the healthcare, information and business services sectors. However, changes wages remained stagnant in September, losing a penny to $25.09.

The proportion of part-time positions remains a problem, as well. Businesses uncertain about the economy in the near term have been hiring part-time and temporary workers to enable a quicker response to changing markets. The U-6 Unemployment Rate, which includes those workers who are working part-time but would prefer fulltime employment, stood at 10.8% by the end of September, down 10 basis points since the end of Q2. Over 6 million workers still fall into this category.

The Labor Participation Rate, which many believe is a more accurate indicator of the true state of the job market, was down again in Q3. This metric measures the percentage of those eligible for employment between the ages of 16 and 64 who are currently working. The lack of new jobs and the early exit of Baby Boomers from the workforce have combined to drop this key metric to a four-decade low of 62.4% in September a decline of 30 basis points since June.

Wage growth has become a growing concern over the past year. Even though, net job gains have lowered the unemployment rate to a post-recession low of 5.1%, wage growth has been stagnant, barely keeping pace with the rise in the consumer price index. This is largely due to the mix of jobs being created and too the mainmany of them have been in lower-paying categories. Sluggish wage growth is directly related to lackluster consumer spending, the main driver of GDP. Many of the jobs are in hospitality, retail and restaurant service, which can disappear just as quickly as they appear. Also, there have been substantial layoffs in the energy sector, which, until early this year, had been a main source of full-time, higher-paying positions.

Monetary Policy

Fed Chairperson, Janet Yellen and her Board of Governors, have been repeatedly threatening to raise interests rates to signal a reversal of the Fed’s aggressive efforts to stimulate economic growth. Yet, they have failed to do so, citing one economic indicator or another for sticking with the status quo and frustrating investors who are looking for guidance on how to move forward. While most experts were sure that the first rate hike would come in September, the Fed, citing concerns over China and other emerging market economies, held off yet again. Now many of those same experts are not forecasting a move on rates until next year.

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Until recently, the Fed was focused mainly on unemployment rate and inflation targets to trigger action. But now, global economic issues and wage growth concerns are entering into the mix. With so many variables figuring into the equation, predicting Fed actions are becoming even more difficult. So, savers continue to be pounded and yields in other asset classes remain at record low levels.

Real estate borrowers continue to be major beneficiaries of the current Fed stance. Long term financing is still cheap and that has fueled intense demand to acquire commercial real estate. Low rates have also contributed to cap rate compression in primary and secondary markets from coast to coast. That has raised concerns with some investors that cap rates will decompress when rates finally do move up. Even a nominal increase in cap rates could lead to a significant reduction in property values.

The yield on 10-Year Treasuries has also remained low due to the current interest rate environment’s impacton yields across all asset classes. In Q3, the yield on the 10-Year moved back down into the low 2% range after moving higher earlier in the year. Many attribute that change, in large part, to an increase in foreign investor demand precipitated by shaky economic conditions around the globe.

Click the following link to download Q3 2015 Office Brief

About the Author Michael Staskiewicz

Michael Staskiewicz, CCIM is the Managing Broker/ Senior Vice President of The Garibaldi Group and Founder of Michael helps innovative, purpose-driven CEOs clarify the strategic plan for a world-class work environment, so they can attract the best talent and reduce voluntary turnover.

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