Emerging from a financial crisis of the enormity that the United States has lived through the last several years, it is natural that the road to recovery is slower and bumpier than in a typical recession. This is the opinion of Rick Mattoon, a Senior Economist and Economic Advisor at the Federal Reserve Bank of Chicago, Previously a Policy Advisor to the governor of Washington, he is also a lecturer at the Kellogg School of Management at Northwestern University.
According to Mattoon, the irony of the Monday after Standard & Poor’s downgraded the United States’ credit rating from AAA to AA+ is that while the Dow Jones Industrial Average nosedived by 635 points, investors were still putting their money into Treasury notes. Treasuries, which theoretically should have been affected by the credit downgrade, remain attractive to savvy investors. The most significant impact of the credit downgrade is its effect on municipal bond issuances and the cost of certain kinds of credit that historically have been backed by the United States’ AAA standing.
From the Federal Reserve’s perspective, Mattoon says the central bank is going to continue making it easy for people to borrow and lend money to create the favorable conditions that will turn the economy around. At present, he says the issue isn’t so much one of supply but demand. A lot of people would like to take advantage of the current low interest rates, but can’t because they are not considered creditworthy due to tighter lending standards. The Fed’s policy of quantitative easing (QE) has had some success, primarily — and until recently – the stock market rally and low interest rates.
The expression of “stall speed” is used to describe the pace of economic recovery as compared with the five percent rate of growth the country needs. Mattoon says that this is a difficult process that has not been helped by other one-time shocks to the economy. A case in point is March’s Japanese earthquake and tsunami, which caused supply-chain disruptions. Another was the unanticipated spike in oil prices that dampened consumer spending.
The slow pace of job creation – just 117,000 created in July after two months of little employment growth – is also negatively impacting the economy. The way the public sees it, job creation is currently the # 1 economic factor – particularly to the approximately 50 percent of the unemployed who have been jobless for six months or longer.
One game changer lies in the fact that Americans are currently saving more money than they did in the past – as much as six or seven percent of income when compared with a few years ago.
In terms of commercial real estate, the 1st half of the year saw tremendous amounts of capital raised for acquisitions, primarily for core $100 million transactions. The market’s comeback depends on job growth. According to Mattoon, if office employment ticks up, there will be greater demand for commercial real estate, especially in gateway cities like New York. Retail will be the most difficult sector to recover, especially in strip malls, which were significantly overbuilt. The demise of some big-box retailers – most notably Circuit City and Borders – is opening significant retail space that often anchored shopping centers.
To listen to Rick Mattoon’s full interview on whether the economy is on the brink or on the mend, click here.
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