The Commerce Department reported GDP surged to 4.1% this past quarter from 2% the prior quarter (full article). Is this the beginning of an era of increased economic prosperity or a house of cards ready to crumble? Should you buy real estate now due to expected future increases in the economy?
Before diving into the “excellent” GDP number, it is important to look at what is driving the recent large move. There are three primary drivers: Government spending, reduction in savings, and increase in borrowing. Why are these factors important?
- Government spending: One of the largest drivers of the increase in GDP is government spending at the state and local level. As the economy has improved, more money has flown into state coffers. According to the census bureau: “ The acceleration in real GDP growth in the second quarter reflected accelerations in federal government spending and in state and local spending.”
- Decrease in Savings: Along with increased spending from the government, consumers are also spending more fueled by a decrease in savings. Real wages have not increased substantially so the only way for people to spend more is to save less or borrower more. The recent GDP report highlights that “Personal saving was $1,051.1 billion in the second quarter, compared with $1094.1 billion in the first quarter. The personal saving rate — personal saving as a percentage of disposable personal income –was 6.8 percent in the second quarter, compared with 7.2 percent in the first quarter.” To drive the recent spending growth, consumers are saving less and therefore have less of a cushion for future needs.
- Increase in debt: Consumers are also spending more by increasing the amount of debt they have. The Federal Reserve’s latest Quarterly Report on Household Debt and Credit reveals that total household debt reached a new peak in the first quarter of 2018, rising $63 billion to reach $13.21 trillion. Balances climbed 0.6 percent on mortgages, 0.7 percent on auto loans, and 2.1 percent on student loans this past quarter. (New York Federal Reserve). Unfortunately a debt fueled spending binge can’t last forever, at some point the consumer will have to “pay up” on their debt binge.
None of the three drivers above are sustainable drivers of GDP growth. They are merely a byproduct of the expansion that the economy is currently in. Business spending, innovation/efficiency, and long-term wage growth are the only factors that can maintain the economic expansion. Furthermore, the great GDP numbers are concealing other long term metrics that are painting a radically different picture of the economy.
GDP number not telling the full picture
- Consumer Sentiment: Consumers are the largest driver of the U.S. economy. If the economy is performing amazing why did the U.S. consumer sentiment dipped to a six-month low in July according to a University of Michigan survey . This survey of consumers is clearly pointing to a very different long term future on the economy.
- Business Sentiment: According to a recent Empire Survey of business done by the Federal Reserve of New York planned capital expenditures and technology spending fell to the lowest level in 11 months. The Philadelphia fed survey had similar survey results with the outlook for “business activity” falling to the lowest level since 2016. Business sentiment is clearly not in synch with such a robust GDP number.
- Housing: Housing is one of the key indicators or long term economic prosperity. As consumers become more confident in the economy they are more likely to buy or build a house and make long term commitments. Housing is also telling a very different picture than the GDP numbers. In June, residential housing starts fell 12.3%, multifamily fell 19.8%, and permits (a proxy for future builds) fell 2.2%. Furthermore a recent builder survey found that sales were “sluggish” in June (US housing starts plunge by most since 2016)
GDP and the “market” are looking at the economy very differently. Consumers, businesses, and the housing market are all flashing warning signs of future turbulence ahead in the economy. This turbulence will undoubtedly flow through to all sectors of the economy including real estate. The recent GDP number is not sustainable based on the current drivers of the recent increase. Regardless of the euphoria around the current GDP number, now is the time to be cautious as the “sugar high” from the latest GDP will fade shortly.
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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).