LAS VEGAS — This is a “Rodney Dangerfield recovery,” declares Dr. Ben Bernanke, former chairman of the Federal Reserve. Much like the late comedian, it gets no respect.
Referred to by President Barack Obama as “the epitome of calm,” the 14th chairman of the Federal Reserve shared his insights during a one-on-one interview with Marcus & Millichap’s new CEO, Hessam Nadji, as part of the brokerage firm’s 18th annual Retail Trends program at the Renaissance Las Vegas Hotel early Monday evening.
The program was held in conjunction with the International Council of Shopping Centers’ (ICSC) RECon event, the marquee convention in the shopping center industry. This year the convention attracted 36,000 registered attendees, up from 35,000 a year ago and a post-recession high. The annual convention is a wall-to-wall networking and dealmaking event with educational sessions mixed in.
“In some dimensions it has been a strong recovery, in others it has been disappointing,” says Bernanke, who served as Fed chairman from February 2006 through January 2014.
The Upside
U.S. employers have added 15 million jobs over the past seven years, says Bernanke triumphantly before rattling off some other positive economic indicators. The unemployment rate is down to 5 percent, housing prices have rebounded significantly since the depths of the Great Recession, gas prices are relatively low ($2.28 per gallon nationally at last check) and consumer sentiment is strong.
What’s more, retail sales rose 1.3 percent in April from the prior month, the best monthly gain since March 2015.
The Downside
Bernanke doesn’t look at the performance of the U.S. economy through rose-colored glasses. Now a fellow in residence at the Brookings Institution in Washington, D.C., he is disappointed by the minimal gains in worker productivity notched in the nonfarm business sector over the past few years.
In fact, worker productivity decreased at a 1 percent seasonally adjusted annual rate in the first quarter of 2016. (Productivity is defined as the output of goods and services per hour worked.) Increased worker productivity would encourage more employers to raise salaries or expand their workforce, say economists.
The tepid economic expansion — approximately 2 percent annual growth during the recovery — also remains a concern. In fact, gross domestic product (GDP) grew only 0.5 percent in the first quarter of 2016 on an annualized basis, sparking renewed concerns among some pundits about the threat of a recession.
Bernanke believes such talk is an overreaction. “Recoveries don’t die of old age, they continue on as long as shocks don’t drive them off course.”
The widening income gap between the richest Americans and the middle and working classes has been occurring for 30 to 40 years, says Bernanke. “It’s becoming more and more a political and policy issue.”
Impact of Global Economy
The biggest risks to the U.S. economy are not from within, but elsewhere around the globe, Bernanke believes. The June 23 referendum on whether Britain should leave the European Union — the so-called ‘Brexit’ vote — and the economic slowdown in emerging markets such as China that has led the government to implement austerity measures are two issues that are being monitored.
The outcomes could cause “financial markets to hiccup and affect us,” say Bernanke. “Emerging markets face a lot of challenges,” he adds. If annual GDP growth were closer to three percent versus two percent, the U.S. economy would be in a better position to fend off any hiccup in the financial markets, he says.
While he expects long-term interest rates in the United States to climb, Bernanke doesn’t anticipate that they will rise to double-digit levels last seen in the 1980s and 1990s. That’s because of the underlying forces driving today’s economy. Inflation is currently in check, and the Fed seems intent on making sure that continues to be the case.
Banks’ Exposure to Real Estate
Nadji asked Bernanke what the Fed’s view of commercial real estate is as an asset class. The Federal Reserve’s role is not to shield investors from risk, but rather to protect the banking system, explained Bernanke. The Fed’s job is to make sure the banks are well capitalized and not overleveraged.
Retail Trends 2016 panelists include (from left) Hessam Nadji, CEO of Marcus & Millichap; Andrew Alexander, president and CEO of Weingarten Realty; Glenn Rufrano, CEO of VREIT; Ben Bernanke, former chairman of the Federal Reserve; Conor Flynn, president and CEO of Kimco Realty Corp.; and Bill Rose, vice president of the national retail group at Marcus & Millichap.
Last December, some members of the Federal Reserve expressed concern that the low interest rates were helping drive up the valuations of commercial real estate at a steady clip and that there had been some deterioration in lending standards.
Although the market indicators appear healthy now, the Fed is trying to manage a soft landing, Bernanke told Nadji. “I think there has been a desire to get ahead of the curve.”
The April minutes of the Federal Open Market Committee (FOMC), which sets credit and interest rate policies for the Federal Reserve System, indicate that growth of commercial and industrial (C&I) loans on banks’ books remained strong and continued to be driven by lending to investment-grade borrowers by large banks.
“Nonetheless, according to the most recent Senior Loan Officer Opinion Survey on Bank Lending Practices, on balance, banks further tightened their lending standards on C&I loans to large and middle-market firms in the first quarter, while demand for such loans weakened,” according to the FOMC minutes.
Long Runway for Housing Market
The commercial segment is much further along in the real estate cycle than the single-family home market, points out Bernanke. It has literally taken years to get the single-family home market functioning normally again following the subprime lending crisis and the Great Recession that ensued. In short, the residential market is just hitting its stride.
From a macroeconomic perspective that’s good news, says the former Fed chairman, because housing is one of the big drivers of the economy.
A Final Thought
Reflecting on his tenure at the helm of the Federal Reserve, Bernanke says, “We were too pessimistic about unemployment, and too optimistic about growth.”
Following Nadji’s one-on-one interview with Bernanke, the program featured a panel discussion on a wide range of issues affecting the retail industry moderated by Bill Rose, vice president and director of the national retail group at Marcus & Millichap. Panelists included Conor Flynn, president and CEO of Kimco Realty Corp.; Glenn Rufrano, CEO of VEREIT; Andrew Alexander, president and CEO of Weingarten Realty, plus Nadji and Bernanke.
— Matt Valley