What’s New
U.S. real GDP growth in the second quarter was revised down to an annualized rate of 2.1 percent from 2.4 percent, according to today’s release from the U.S. Bureau of Economic Analysis, still marking the fourth consecutive quarter of positive economic growth.
This continued growth of economic output highlights the resilience of the U.S. economy amidst the Federal Reserve’s aggressive series of interest rate hikes over the past year and half – the effective federal funds rate rose from 0.08 percent in February 2022 to 5.33 percent in August 2023 – and increases the odds of a soft landing.
The labor market has also held strong, despite showing some signs of loosening:
- The unemployment rate ticked up from 3.5 percent to 3.8 percent in August, the highest since February 2022.
- The job openings rate decreased 20 basis points (bps) to 5.3 percent in July – while the job quits rate increased 10 bps to 2.3 percent – indicating continued easing from record tightness in the labor market, which should translate to less upward pressure on wages going forward.
What We’re Tracking
But we’re not out of the woods just yet. The following risks could thwart the Fed’s attempt at a soft landing:
- Persistently high shelter prices. The growth of U.S. asking rents – what residents pay to sign a new lease – has been moderating for over a year now, but there is a significant lag between changes in market rents and what is captured by CPI (what residents are currently paying). For this reason, the shelter component of inflation remains stubbornly high (even though we know it will come down). This could prompt the Fed to enact additional rate hikes.
- Rising energy costs. While core inflation – which excludes the more volatile elements of food and energy – has moderated for five consecutive months, headline inflation jumped 50 bps to 3.7 percent year over year in August due to a surge in energy prices. A more prolonged period of rising energy prices could induce the Fed to tighten policy further.
- Long and variable lags. Monetary policy operates with long and variable lags, which means that we have yet to fully feel the effects of Fed interest rate hikes already enacted, let alone any additional increases going forward.
Why This Matters
Rising interest rates have already caused both debt and equity capital to pull back from the apartment market. This higher cost of capital has made it more difficult to build new housing and caused apartment sales volume to decrease sharply.
- Multifamily starts (5+ units in structure), when looking at a three-month moving average, fell to a seasonally adjusted annual rate (SAAR) of 420,000 units in August, down 19.6 percent from the prior year.
- According to data from Real Capital Analytics, apartment transaction volume decreased 68 percent in 2Q 2023 compared to the prior year.
These rate increases also pose a threat to the apartment industry from the demand side, as a rapid rise in interest rates raises the odds of slower economic growth and higher unemployment going forward.
While today’s positive GDP reading is good news for a Federal Reserve that is trying to bring down inflation without meaningfully impacting economic growth and jobs, there are still significant obstacles to achieving this sought-after soft landing.
