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‘We Have Turned the Corner’ on Interest Rates Globally, Says MBA’s Chief Economist

From left, Michael Fratantoni, MBA’s chief economist, and Jamie Woodwell, MBA’s vice president of research, spoke on Sunday at the association’s Commercial Real Estate Finance/Multifamily Housing Convention & Expo 2018 at the San Diego Marriott Marquis & Marina.

SAN DIEGO — Michael Fratantoni, chief economist at the Mortgage Bankers Association (MBA), fully expects the U.S. national unemployment rate to fall well below 4 percent this year — possibly as low as 3.6 percent — leading to an acceleration in wage growth, inflationary pressures and, ultimately, higher interest rates. Nationally, the unemployment rate stood at 4.1 percent at the end of January.

“This is an extraordinarily tight job market,” said the veteran economist, who pointed out that 17 states are approaching record low unemployment rates.

His comments came Sunday afternoon during a special economic outlook session at MBA’s Commercial Real Estate Finance/Multifamily Housing Convention & Expo 2018 at the San Diego Marriott Marquis & Marina. The four-day conference, which concludes tomorrow, has drawn more than 3,300 attendees.

Fratantoni appeared on stage with Jamie Woodwell, the association’s vice president of commercial real estate research. Woodwell provided analysis on the state of the property markets and trends in commercial/multifamily mortgage loan originations.

Wage pressures mount
According to the Bureau of Labor Statistics, average hourly earnings for workers on private nonfarm payrolls were 2.9 percent higher in January 2018 than in January 2017.

“We’ll be between 3.5 percent and 4 percent for 12-month [wage] growth by the end of 2018,” predicts Fratantoni. “You are beginning to hear some companies really talk about the impact that wage pressure is having on their margins. To the extent they can raise their prices, that’s certainly one of the factors that we think is going to put some upward pressure on inflation.”

Source: BEA

Source: BEA

The tight labor market and rising wages have combined to boost consumer confidence. One metric that economists track closely is the personal saving rate as a percentage of disposable income. The saving rate stood at 2.4 percent in July 2017, down from 11 percent some four or five years earlier (see chart).

“In the face of the trillions of dollars of stock market losses of the past couple of weeks, are people going to pull back and start saving some more? That would be a natural reaction,” said Fratantoni, referring to the recent volatility on Wall Street that saw the Dow Jones Industrial Average lose more than 10 percent of its value in late January and early February before rebounding.

Source: MBA Forecast

Source: MBA Forecast

The declining saving rate is a strong sign that the U.S. consumer is very confident, said Fratantoni. “You see it in their approach to the housing market, and you can see it in their approach to other spending.”

For 2018, Fratantoni is forecasting annual U.S. GDP growth to range between 2 percent and 2.5 percent, and for inflation to increase 2.1 percent.

Is era of cheap money over?
The World Bank and the International Monetary Fund (IMF) have been continually upgrading their forecasts for economic growth globally, says Fratantoni. In its most recent World Economic Outlook Update published in January, the IMF wrote that the pickup in growth has been broad-based with notable upside surprises in Europe and Asia.

Among advanced economies, growth in the third quarter of 2017 was higher than projected in the fall, notably in Germany, Japan, Korea, and the United States, according to the IMF. Key emerging market and developing economies, including Brazil, China, and South Africa, also posted third-quarter growth stronger than the fall forecasts.

Consequently, the IMF has revised its global growth forecasts for 2018 and 2019 upward by 20 basis points to 3.9 percent. “The revision reflects increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes,” concluded the IMF.

The healthy economic growth at home and abroad is reflected in moves by central banks to hike interest rates following a decade-long world crisis in which rates hovered near record lows. “I really think we have turned the corner,” said Fratantoni.

The Federal Reserve, the central bank in the United States, raised rates three times in 2017. The Bank of England raised interest rates a quarter-point in November 2017, the first increase in a decade.

“You are beginning to see the European Central Bank at least hint that they are going to follow the Fed. It may be a couple years behind, but they have changed the direction they are leaning,” said Fratantoni.

Even the Bank of Japan, which has kept its yield on 10-year government bonds locked to near zero, has “whispered” the possibility of letting it drift upward, he added.

Tax reform gets thumbs up
President Donald Trump signed a sweeping $1.5 trillion tax overhaul bill into law on Dec. 22, 2017. The Tax Cuts and Jobs Act slashes the corporate rate from 35 to 21 percent and temporarily reduces the tax burden for most individuals. It is the largest tax reform since the 1980s.

“On the whole, we think this tax bill is a net positive for the economy and really a pretty strong positive for the industry,” said Fratantoni. The tax reform legislation will add a quarter-point of economic growth in 2018 and 2019 and will help drive down unemployment rates, he predicts.

“The cost is that it probably means the Fed is going to step up on their toes a bit and be ready to act a little faster,” said Fratantoni. He anticipates four interest rate hikes by the Fed this year alone.

— Matt Valley

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