Dramatic declines in commercial real estate soured GDP growth in the first quarter, leading to speculation that the Federal Reserve will delay raising interest rates. Analysts are growing increasingly confident that the Fed will delay its rate hike, with a new report by Goldman Sachs calling for the next hike to be delayed until December.
"The low market-implied odds, softer data, and uncertainty about the monetary transmission mechanism lead us to believe that a June hike is now rather unlikely,” said economist Daan Struyven in the note to clients. "In fact, it would be a unique outcome in modern Fed history,” he added.
The tone echoes a previous prediction by economists at BlackRock, a large asset management firm specializing in bonds, who said last week that it is possible that the Federal Reserve will not hike rates at all for the duration of 2016.
Goldman Sachs economist Zach Pandl agrees on the Fed’s delay, although he remains uncertain about the timing. "Uncertainty about the monetary transmission mechanism will probably remain high for the time being," Pandl wrote. "Largely for this reason, we are revising our near-term forecasts for the funds rate, and see two fewer hikes through the end of 2017 than we did previously."
Weak Real Estate
Part of the turn in Federal Reserve policy is a result of the weakness in first quarter GDP growth, which rose just 0.5% despite expectations of significantly higher growth.
The weak growth was due in part to a decline in commercial real estate, with non-residential structure investment falling at a 10.7% annual rate in the first quarter. That was largely driven by weak investment in petroleum and natural gas exploration, which fell 68% on a year-over-year basis.
Some sectors, however, saw investment growth. Lodging rose in the first quarter as hotel occupancy remains near an all-time high.
Residential investment was also strong, with single-family structure spending up 10.4% on a year-over-year basis and with home improvement spending up 11.8% year-over-year.
With uneven growth and uncertainty about energy prices and its impact on commercial real estate, several economists are still concerned that total 2016 GDP growth will remain low, even as inflation ticks upward.
Part of the concern has to do squarely with weak job growth and renewed pessimism that job gains will remain weak despite rising wages, as compensation rose above the rate of inflation in April, but job gains were far below the level required to sustain America’s growing population.
Writing on the jobs numbers, economists at Bank of America noted that the Federal Reserve is unlikely to raise rates in the short term. "To be clear, the jobs report was not the sole factor for the revision to our call for the Fed. It was simply the last of a string of softer indicators that has prompted us to change our forecast," the company’s economists said in a note to clients.