Grubb & Ellis Montana Commercial, LLC

Bellwethers

June 17, 2010 

FedEx, considered a bellwether for the economy, yesterday reported strong results for its fiscal fourth quarter ending May 31^st. The company made a profit of $419 million or $1.33 a share on revenues of $9.43 billion, up by 20 percent from the year-ago quarter. FedEx forecasted earnings for its new fiscal year of $4.40 to $5 a share. Notably, it reported no slowdown in its European business despite the financial turmoil and economic concerns clouding the outlook for the region.

Another bellwether, the Conference Board’s index of leading indicators rose 0.4 percent in May while April’s reading was revised from -0.1 percent to flat – so no sign of a double-dip recession.

Robert Bach

SVP, Chief Economist

Grubb & Ellis

Retail Sales Monthly % Change, Seasonally AdjustedJune 14, 2010

Retail sales slipped unexpectedly in May with seasonally adjusted sales falling by 1.2 percent from April and core sales, which exclude autos and gasoline, dropping by 0.8 percent. For total sales, it was the largest drop since September 2009, the month after the cash-for-clunkers program expired, while core sales recorded its sharpest decline since March 2009, the month when the stock market bottomed. Coming on the heels of a disappointing employment report showing just 41,000 net new private-sector jobs created in May, the retail sales report raises questions about the durability of the U.S. recovery particularly in light of the fiscal and economic headwinds blowing from Europe. The consensus among economists is for growth to continue at a slower pace in the second half of 2010 and then firm up in 2011. The depth of the recent recession coupled with the frustratingly slow recovery suggests that the return to equilibrium for commercial real estate leasing markets will be sluggish and is likely to extend for several years. Source: Census Bureau, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

Don’t Blame Canada

 Canada did many things right before the run-up to the credit crisis and during the crisis itself, and now the Canadian economy is recovering more quickly than the U.S. and Europe. First quarter GDP grew at an annualized rate of 6.1 percent, the sharpest increase in more than 10 years and the fastest growth among G-7 countries. Total employment in Canada fell by 2.7 percent versus a peak-to-trough decline of 6.1 percent in the U.S. Since bottoming in August 2009, Canadian employers have added 115,000 net new jobs, recouping 28 percent of the 407,000 jobs lost in the downturn. More conservative financial institutions and a stable housing market helped cushion Canada’s economy from the crisis while global demand for commodities has given the recovery a leg up.

 Back in the U.S., The Wall Street Journal ran a must-read editorial yesterday on why fears of a double-dip recession are overstated. 

Robert Bach

SVP, Chief Economist

Grubb & Ellis

10-Year Treasury Rate June 7, 2010

The yield on the benchmark 10-Year Treasury note ended Monday at 3.17 percent, its lowest level since May 15th, 2009. Investors are fleeing riskier assets while embracing the perceived safety of U.S. government debt, pushing prices up and yields down. This is in response to the well-publicized deficit problems in Greece and other euro zone countries, the disappointing pace of job creation in the U.S. and slowing growth in China. Not coincidentally, these fears have pushed the S&P 500 lower by 13.7 percent since April 23rd. The silver lining is that low interest rates are putting downward pressure on mortgage rates and oil prices, which is helpful to the U.S. economy in general and the housing market in particular. The impact on commercial real estate is mixed but mostly negative particularly if the recovery does indeed stall and tenants and real estate investors turn more bearish. The likelihood of a double-dip recession still appears to be less than fifty-fifty. The recent return of investment capital to commercial real estate has targeted the least risky assets – core properties with solid tenant rosters in primary markets and, at the other end of the quality spectrum, distressed properties that have been sharply discounted because the owners and lenders want to move on. This suggests that investors will stay in the game unless conditions turn much worse. Source: Federal Reserve, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

ISM Manufacturing Index June 1, 2010

The manufacturing sector continued to hit on all cylinders last month according to the Institute for Supply Management’s purchasing managers index, which came in at 59.7. This was just a shade lower than April’s 60.4, the highest level in nearly six years. Index values above 50 indicate that the manufacturing sector is expanding, while values below 50 indicate contraction. The new orders index, one of the nine composite indexes that constitute the PMI, scored a robust 65.7 for a second consecutive month, which is significant because it is a proxy for future production. At the same time, businesses kept inventories lean, suggesting that the strong order flow will be met primarily through production activity and less by dipping into existing inventories. The May index is evidence that domestic manufacturing activity has thus far weathered the turmoil in Europe, though readings over the next few months will provide more conclusive evidence on whether the U.S. economy can continue to expand. Strong manufacturing activity translates into more goods flowing through corporate supply chains, which will generate demand for warehouse/distribution space. Source: Institute for Supply Management, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

Yielding to Reason

May 28, 2010

With prospects for Greece, Spain and the euro looking shaky, fears of a double-dip recession have grown. But one indicator says that’s not likely at least in the U.S. The yield curve, the spread between short and long-term interest rates, continues to point toward growth. A reliable predictor of recessions, the yield curve is in a normal position meaning that U.S. Treasury securities with longer terms have higher yields. This is normal because investors demand higher yields to compensate for the greater uncertainty (increased risk) of holding longer-term bonds. An inverted yield curve, which precedes a recession by four to six quarters, means that longer-term bonds have lower yields because investors expect a weakening economy to reduce inflation pressures and interest rates, causing bond prices to rise in the future. The current normal yield curve suggests the chance of a double-dip recession remains low.

For more information on the yield curve,

• Click here to view a graph from the Federal Reserve Bank of New York showing a 50-year history of the yield curve versus recessions. Note how the yield curve has fallen before every recession (the gray bands) including the one that began in December 2007 (not shown.) Note, too, the bottom graph indicating that the current probability of a recession remains low.
• Click here to view a “dynamic yield curve” from StockCharts.com. Wait a few seconds for the graphs to appear, then click on the “animate” button to view the relationship between the stock market and the yield curve from 2002 through yesterday.
• And finally, click here for a discussion of the yield curve in Q&A format from the New York Fed.

 Robert Bach

SVP, Chief Economist

Grubb & Ellis

Inflation Trends % Change Year/Year, Not Seasonally Adjusted   May 24, 2010

Core inflation, which excludes food and energy, rose by 0.9 percent in April compared with April 2009. This was the smallest year-over-year increase in 44 years and well below the Federal Reserve’s informal target of 1.5 to 2.0 percent. Inflation is low due to excess capacity in the economy resulting from the recent recession, specifically such factors as high unemployment, low factory utilization, excess housing supply and high vacancy rates in commercial properties. The slowing rate of inflation gives the Fed plenty of cover to maintain low interest rates and postpone the sale of government and agency debt that it purchased over the past 18 months to keep credit markets liquid (a strategy called quantitative easing). Low yields on cash have encouraged investors to assume more risk in search of higher returns across all asset classes. In commercial real estate, this trend is evident in investors’ willingness to compete aggressively for core properties in primary markets, driving down cap rates. Though overall inflation remains in check, global demand is pushing commodity prices higher at a faster clip, which helps explain the 5.1 percent increase in construction costs for nonresidential buildings over the past 12 months even though construction starts in the U.S. are minimal. The increase in construction costs translates into rising replacement costs, which, if the trend continues, will make existing properties look more attractive to investors. This is one reason why real estate is viewed as an inflation hedge along with the fact that landlords can raise rental rates to keep pace with inflation. Though inflation is dormant now, many investors expect it to rise as the economy recovers and private demand for credit begins to compete with government borrowing required to finance growing levels of debt. Source: U.S. Bureau of Labor Statistics, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

Where Will the Jobs Come From?

 May 21, 2010

Many people I speak with are skeptical that the labor market recovery is real and sustainable. It’s true that the 573,000 net new payroll jobs created year-to-date is merely a down payment on the 8.4 million jobs lost in 2008 and 2009, but the trend is moving in the right direction. A particularly hopeful sign is that new business creation surged to a 14-year high in 2009. “Challenging economic times can serve as a motivational boost to individuals who have been laid-off to become their own employers and future job creators,” according to the Kauffman Foundation, the study’s author. Entrepreneurship is strongest in the West and South. Click here to view a summary of the study, and click here to listen to a story from American Public Media’s “Marketplace” radio show.

What kinds of jobs are being created? Moody’s Economy.com reports that the following sectors will see the biggest percentage gains in jobs added this year:

• Medical Services
• Industrial Services
• Computer Software & Services
• Restaurants
• Biotechnology
• Environmental Services
• Retail Stores – General
• Banking
• Medical Supplies
• Retail Stores – Specialty Lines

The American free enterprise system is working as advertised.

Robert Bach

SVP, Chief Economist

Grubb & Ellis

TED Spread May 17, 2010

The Greek debt crisis continues to roil financial markets and test the stability of the euro. The specter of Greece and other highly indebted countries being forced to restructure their sovereign debt raises the possibility of losses at banks that bought the government bonds and a growing reluctance among banks to lend to each other for fear of incurring losses — another contagion, at its worst. Those fears are beginning to show up in the TED spread, a gage of risk-aversion in the credit markets. This is the difference between interest rates on 3-month Treasury bills (“T”), considered risk-free, and the 3-month Eurodollar futures contract (“ED”) as represented by the London interbank offered rate (Libor), which is used for lending between banks. When financial markets are stressed, lenders charge higher rates to make loans (Libor) while lenders and investors park their cash in U.S. short-term debt obligations until the stress subsides, driving down those rates. Thus, Libor goes up while T-bill rates go down, widening the TED spread. The spread ended Monday at 31 basis points, up from a recent low of 11 bps in March. The good news is that this spread remains within a safe range and is well below the levels during the peak of the crisis following “Lehman Brothers weekend” in the fall of 2008. The nearly $1 trillion rescue plan from the European Central Bank and the International Monetary Fund helped shore up confidence at least temporarily, though some analysts remain skeptical that the European Union can get through this without losing some of its weaker member countries or seeing the debt from those countries restructured. If lenders and investors once again become more conservative, it could reverse the newfound availability of investment capital for commercial real estate. Source: Bloomberg

Bob Bach is our Senior Vice President, Chief Economist

Monthly Payroll Job Change Seasonally Adjusted         May 10, 2010

Employers added a robust 290,000 net new payroll jobs in April while February and March numbers were revised higher by a combined 121,000, bringing year-to-date job growth to 573,000. Private sector hiring accounted for 231,000 of the jobs created in April, led by professional and business services with 80,000, leisure and hospitality with 45,000 and manufacturing with 44,000. The unemployment rate increased from 9.7 to 9.9 percent as people who had given up looking for work re-started their searches in response to more opportunities. As a result, the labor force expanded by 805,000, raising the labor force participation rate, which had dropped to a low of 64.6 percent in December, to 65.2 percent in April. Unemployment remains distressingly high, but April’s uptick, caused by more people actively seeking work, suggests a more hopeful outlook. Job growth is the last piece of the economic puzzle necessary to put the recovery on a sustainable course. For commercial real estate, the April employment data combined with the emptying construction pipeline signals that leasing market fundamentals are close to bottoming out. Source: U.S. Bureau of Labor Statistics, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist