U.S. Macro Outlook: Mild Recession ≠ Pleasant

CUSHMAN & WAKEFIELD RESEARCH U.S. Macro Outlook

ECONOMY

growth (as measured by the Employment Cost Index and the Atlanta Fed Wage Tracker) in the 5% to 7% YoY range. While receding from peak growth rates, such wage pressure is not consistent with the Federal Reserve’s 2% inflation target, and it is hard to see how wage growth—typically “sticky”— will pull back while the labor market is so tight and imbalanced. Indeed, the mismatch between labor supply and demand is a key downside risk to the monetary policy outlook, especially when markets have optimistically bet the Federal Open Market Committee (FOMC) will pivot by the end of the year.

economic growth without overheating inflation. This is why wage growth is sticky and won’t recede in line with headline inflation. Our view is that the FOMC will continue to raise its target rate with smaller hikes until it reaches a range of 5.0% to 5.25% later this spring, although further rate hikes are on the table. We believe the FOMC will hold the federal funds rate at that level into 2024 to ensure that core inflation (excluding housing) and wage growth are on a sustainable downward path. In 2024, we believe conditions will be ripe for a gradual easing and a concomitant growth pickup. Recessions, even mild ones, are not pleasant. The post-World War II average peak-to-trough decline in real GDP (excluding the pandemic recession) was -2.0%, and our forecast is for a decline of about 1%. Unemployment will increase toward the 5.5% to 6% range, with job losses of about 2.5 million. The post World War II average for job losses is 2.3 million (3.6 million including the pandemic recession). Relatively speaking, the contractions we forecast are below or about average (depending on the measure), as strong balance sheets and excess savings buttress the fundamentals heading in. As the recession passes, we expect the yield curve to un-invert and for the 10-year Treasury to peak in the mid-4% range in the first half of 2024, before gradually trending toward 3.5% over the medium term. NONFARM EMPLOYMENT POISED TO GROW IN 2024 AND BEYOND

LABOR FORCE RECOVERY FAR FROM COMPLETE (U.S. TOTAL, MILLIONS)

150 152 154 156 158 160 162 164 166 168 170

1/1/2011

1/1/2017

1/1/2012

1/1/2021

1/1/2013

1/1/2015

1/1/2018

1/1/2016

1/1/2019

1/1/2014

1/1/2010

1/1/2022

1/1/2023

1/1/2007 1/1/2008 Labor Force - Actual Pre-Pandemic Labor Force Trajectory Source: U.S. Bureau of Labor Statistics, Cushman & Wakefield Research 1/1/2009 1/1/2020

Although the labor market boasted a 3.5% unemployment rate prior to the pandemic, the participation of the U.S. population in the labor force was in a very different position then. Labor force participation has been eroded by early retirements but also by more complex factors that have contributed to some working-age workers dropping out as well. More concerning is that the size of the labor force is a full 1.9 percentage points below its pre-pandemic trend, representing nearly 3.2 million potential workers. The scarring of the labor force is widespread too: In two-thirds of the nation’s MSAs 2 , the labor force has not recovered to pre pandemic trend levels, including in multiple high growth Sun Belt markets. Compared to earlier in the pandemic when a lack of international migration was exacerbating worker shortages, currently, the foreign-born labor force is back at its pre-pandemic trend level versus native born workers, who comprise a majority of ‘missing workers.’ This matters because the economy will be in a position where either higher productivity is needed, or more labor market slack is required to sustain

2,000 4,000 6,000 8,000

-10,000 -8,000 -6,000 -4,000 -2,000 0

2020 2021

2022

2023 2024 2025

Nonfarm Net Job Change (Ths.)

Source: U.S. Bureau of Labor Statistics, Cushman & Wakefield Research

Inflation has not been solely a domestic problem; it remains persistently elevated across various parts of Europe and Asia Pacific as well. The International Monetary Fund (IMF) estimates global inflation averaged 8.8% in 2022, more than double the pre pandemic level of 3.5%. The world has gone from a widespread low-interest-rate environment for the better part of the last decade—prime conditions for property—to a higher-inflation, higher-interest rate environment that is creating major headwinds for property. Look no further than real estate

2 Metropolitan statistical areas.

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