Grubb & Ellis Montana Commercial, LLC

Last week’s article covered the basics of letter-shaped recoveries and how the terms are being used in current economic discussions. But what about the shape of the pending recovery? A “U” is the most likely scenario. Though GDP is expected to turn positive in the current quarter, the labor market could languish for several more months, perhaps through the first half of 2010. Pessimists anticipate a W-shaped recovery. Following a burst of activity led by inventory restocking and stimulus spending, this group expects growth to fade in 2010 as households remain focused on saving rather than spending. Inflation hawks reside in the “W” camp, too. They think the Fed will be forced to clamp down on a burst of inflation caused by too much liquidity and government spending, thus triggering a follow-on recession similar to the double-dip profile of the early 1980s. On the other side of the debate, optimists anticipate a V-shaped recovery. They believe that employers, panicked by the frozen credit markets last fall, laid off too many workers and will need to staff up more quickly than expected. The optimists also point to the strong recovery under way in China and the surprisingly rapid end of the downturn in parts of Europe, which was thought to be trailing the U.S. For the commercial real estate industry, it would be most prudent to plan for a sluggish U-shaped recovery with the labor market unlikely to make a decisive turn for the better before the middle of 2010. A V-shaped recovery would be beneficial, although it could set the stage for inflation and a double-dip recession if it forces the Fed to withdraw liquidity and raise interest rates at a rapid pace.

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 First In, First Out?

The housing sector, which led us into the woods in the first place, is slowly leading us out. New and existing home sales increased in July by 9.6 and 7.2 percent, respectively, buoyed by the $8,000 tax credit for first-time buyers and competition for entry-level homes between first-time buyers and investors. The months’ supply of new homes on the market is headed down at a brisk pace, ending July at 7.5 months versus a balanced market of five to six months. The supply of existing homes, at 9.4 months, also is trending lower but at a more leisurely pace. According to the closely monitored Standard & Poor’s/Case-Shiller 20-city home price index, the seasonally adjusted average price of a single-family home rose 0.7 percent from May to June, the first increase since May 2006. (The index is based on a three-month moving average, i.e. the three months ending in June compared with the three months ending in May.)

Like housing, the long-suffering manufacturing sector is poised to break out of its multi-year slide. Durable goods orders surged 4.9 percent in July, its biggest gain in two years. Orders for civilian aircraft led the way.

 One particularly hard-hit corner of the manufacturing sector, the recreational vehicle industry, is on the mend. Northern Indiana has been among the hardest-hit regions in the country, prompting President Obama to visit the city of Elkhart on three occasions. But several RV manufacturers in the region are adding jobs, and one new company is being launched. (Click here for article.) Can cash-for-campers be far behind?

Robert Bach

SVP, Chief Economist

Grubb & Ellis