Key Economic Trends and Predictions

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Economic Trends

Second quarter GDP comes in at 2.1% annualized rate.

  • After a strong finish to the first quarter where GDP grew at a 3.1% annualized rate, the second quarter took a step back to an annualized growth rate of 2.1%. Some trends in the first quarter such as spikes in inventories and exports, as well as a fall in imports reversed course in the second quarter.
  • Business investment dragged in the second quarter, as spending on R&D, software, structures, and equipment fell to negative 0.6% in the second quarter. This was a 5% drop from the 4.4% rise in business investment seen in the first quarter. Some players in the manufacturing sector cited concerns about trade disputes as the source of their pullback in business investment.
  • Consumer spending and government expenditures were the largest drivers of growth in the second quarter, as they rose at annualized rates of 4.3% and 5%, respectively. Consumer spending had the strongest quarter since 2017, with spending on big ticket items and everyday goods surging between April and June. Government expenditures rebounded significantly since the shutdown that lasted through most of January.

Federal Reserve cuts rates as a precautionary measure.

  • Due to slower growth, low inflation, trade tensions, and signals from the ECB that it will take more active measures to spur anemic growth in the E.U., the Federal Reserve cut rates by 25 basis points. Chairman Powell had previously indicated that slow global growth and low inflation would be cause for a rate cut.
  • Eight of ten Fed governors voted in favor of cutting the Fed Funds rate just days after President Trump and former Fed Chairman Janet Yellen come out in favor of a rate cut. The new short-term benchmark rate will be between 2% and 2.25%.
  • The statement given by the Fed indicated that the door is open for even further rate cuts further into the year. Markets reacted negatively to the news, as stocks fell, dollar strength increased, and Treasury yields rose due to the perception the rate cut would be larger.

Tensions in international trade lead IMF to cut global GDP forecast for 2019.

  • The International Monetary Fund revealed that ongoing trade disputes are harming the global economy more than previously expected according to new forecasts by the IMF. Real GDP growth for the world is expected to slow to 3.2%, which would be 40 basis points lower than 2018 and 60 basis points lower than 2017.
  • According to the new IMF forecasts global trade is expected to grow 2.5% this year, which is down almost 100 basis points from April projections. Tariffs and business uncertainty due to trade disputes appear to be the primary causes for the slowing of global growth.
  • Other factors such as tensions between governments and technology companies, as well as the coming exit of the U.K. from the E.U. were also cited as major contributors to global business uncertainty.

Industry Trends

Opportunity Zone fundraising is falling far short of target set for 2019.

  • Despite guidelines delivered in May that were perceived as business friendly, Opportunity Zone funds have raised just $1.59 billion of the roughly $15.46 billion these funds were collectively targeting for 2019. The shortfall is being blamed on delayed clarity on guidelines from the Department of Treasury, lack of real estate assets worthy of consideration for investment, and a smaller pool of potential investors.
  • The excitement for the program led to a surge of property sales within Opportunity Zones in 2018. However, investment sales within these zones are thus far down year-over-year. Opportunity Zone investments have benefitted some of these property owners, but the lack of spillover investment to the community is causing concern among activist groups in these areas.
  • Many experts expect the latter half of 2019 to pick up for fundraising of Opportunity Zone funds. Recently Shorewood Real Estate Group partnered with Bridge Investment Group and Capricorn Investment Group for a $155 million Opportunity Zone fund that plans on building a 315-unit apartment building in the Jamaica neighborhood of Queens in New York City.

Statewide rent control bill passes California Senate Judiciary Committee.

  • On July 10th Assembly Bill 1482 cleared the California Senate Judiciary Committee by a comfortable 6-1 margin. The bill is headed to the California Senate Appropriations Committee, and if cleared there it must then be passed by the full senate. It would then go back to the Assembly for a concurrence vote before going before Governor Gavin Newsom.
  • Many concerned citizens spoke out in favor of the bill that would provide protections against evicting tenants and keep rent from going past 7% plus inflation per year. However, opponents of the bill countered that this would ultimately exacerbate the current housing crisis that has left the state 4 million homes short of keeping up with population demand. Since Oregon passed a statewide 7% rent cap, multifamily investment has decreased 38%.

WeWork comes under increased scrutiny as IPO approaches.

  • WeWork plans to raise $6 billion in debt prior to the IPO, and co-founder Adam Neumann sold shares and took out loans against his holdings, all of which totaled to over $700 million.
  • As a consequence of the debt move, SoftBank Group (which owns a significant share of WeWork) drastically rolled back a planned investment of $16 billion to $2 billion.
  • Neumann is using the $700 million he pulled out to buy more stock, as well as more buildings where WeWork is a tenant as a testament to his strong belief in the business model of the company he co-founded and runs. Buying buildings and then leasing space to WeWork is a noted practice of Neumann and has caused concern among observers that there could be a potential conflict of interest.
  • WeWork will be hosting an analyst day on July 31st for Wall Street banks that will pour over the financials in preparation of an IPO that could raise up to $3.5 billion.

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