ECONOMIC UPDATE: The Recession Has Begun, the Worst is Yet to Come
Should the Fed hold interest rates where they are, it will be positive for both equity markets and gold prices
NOTE TO READERS: The following is our weekly Economic Update — Market Overview found in this week’s issue of The Trends Journal. Consider subscribing here for in-depth, independent geopolitical and socioeconomic trends and trend forecasts that you won’t find anywhere else.
In the U.S., its service industry, which accounts for nearly 70 percent of Gross Domestic Product, fell from 51.9 in April to 50.3 in May, according to data released yesterday by the Institute for Supply Management’s non-manufacturing PMI. Barely in positive territory, a reading above 50 indicates growth.
Again, as we have long forecast, the higher the Federal Reserve raises interest rates, the deeper the economy will fall. And, as we have made very clear since they started raising interest rates last March and pushed them up 500 basis points since then… it would take time before these hikes hit economic growth. As the data keeps adding up, that time is now.
The ISM readings in March, April, and May registered their weakest numbers since January 2010… the height of the Great Recession.
TREND FORECAST: Simply stated by the facts and indisputable data, the higher the Federal Reserve raises interest rates, the deeper the economy and equities will fall. Therefore, although consumers spend more on services, consumer goods orders fell for three months in a row, hitting its lowest level since last February.
As the Commerce Department reported Monday, factory orders were up just 0.4 percent in April, down from 0.6 in March. Not only is this a key indicator signaling an economic slowdown, when military orders were taken out, factory orders were actually down 0.4 percent for the month… which equals recession.
Therefore, with weakening numbers, according to CME Group’s FedWatch Tool, the guess on The Street is that there is a 80 percent chance that the Federal Reserve will not raise interest rates next Wednesday.
Should the Fed hold interest rates where they are, it will be positive for both equity markets and gold prices. And as we had forecast last November, since the S&P 500 went up some 16.3 percent following U.S. midterm elections over the past 60 years, the trend would continue. To date the S&P, up 12 percent this year, is nearing its peak.
The Worst is Yet to Come
As Trends Journal subscribers well know, when the COVID War was launched in January 2020 and the work-at-home trend began, we had forecast in March 2020 that there would be an office building crisis.
With people being forced to stay home as a result of political science and the draconian dictates of politicians, after months of working from home, workers realized how costly and life consuming it was to commute to work. Thus, when the COVID War ended, many refused to return to work full time.
And, with more people working from home, office building tenants realized they could get what they needed from their remote workers and save a lot of money by renting less office space. The result of this would be a real estate crisis unseen in modern history.
Now, over three years later, the so-called business media that have ignored our forecasts, are reporting on the office building bust dangers and how it will hit the banking system.
This is the front page headline story in yesterday’s Financial Times:
US banks braced for losses in rush to exit teetering commercial property
Some US banks are preparing to sell off property loans at a discount even when borrowers are up to date on repayments, in a sign of their determination to reduce exposure to the teetering commercial real estate market.
The willingness of some lenders to take losses on so-called performing real estate loans follows multiple warnings that the asset class is the “next shoe to drop” after the recent turmoil in the US regional banking industry.
It will be more than just a dropping “shoe,” it will hit the banking system hard as office building owners default on their loans.
Again, this is just the beginning of a mega-trend that will become much worse since many of the office building owners have floating loan rates. Thus, the higher interest rates rise, the more it costs to service its loans at a time when their rental revenue is sharply dropping.
How’s this CNBC headline today that indicates that the worst is yet to come?
The U.S. is projected to grow 1.1 percent, while the euro area and Japan are projected to see GDP growth of less than 1 percent in 2023. U.S. GDP growth is expected to decelerate in 2024 to 0.8 percent amid the higher rates.
The bank estimates overall global growth will decelerate to 2.1 percent in 2023, down from 3.1 percent last year. Emerging and developing economies are forecast to see a slight uptick in gross domestic product to 4 percent, up 0.6 percent from the bank’s projections made in January 2023. However, World Bank chief economist Indermit Gill said excluding China, growth in developing economies would be less than 3 percent.
This marks “one of the weakest growth rates in the last five decades,” Gill told reporters Tuesday.
Yes, the damage of the COVID War, as we had long forecast, is incalculable. It has destroyed the lives and livelihoods of billions across the globe, the implications of which will continue to spread across the socioeconomic and geopolitical spectrum.
On Monday, the investment firm Park Hotels & Resort Inc. defaulted on a $750 million loan on its Hilton Union Square and Parc 55 hotels in San Francisco. Thanks to the geek-heavy San Francisco tenants that started the trend by forcing their employees to fight the COVID War by working from home—as we had forecast, and is now reality—crime and mental illnesses would rapidly rise. Indeed, as Gerald Celente warned: “When people lose everything and have nothing left to lose, they lose it.”
And lose it they have in crime-and-homeless-land San Francisco that is suffering from a 30 percent office vacancy rate. And according to Savills real estate firm, San Francisco will have the most surplus office space in U.S. cities.
Again, as we had long forecast but just now is making the mainstream news, this trend is global and the socioeconomic devastation will spread far and wide.
Half of the biggest global companies plan to cut office space. US cities will suffer most
CNN — Around 50% of major global companies will need less real estate in the next three years, with American cities — led by San Francisco — most exposed to empty offices, new research has found.
Half of firms with more than 50,000 employees plan to prune office space, with most anticipating a reduction of between 10% and 20%, according to a survey of 347 companies around the world by Knight Frank, a UK-based real estate firm.
The survey, released Tuesday, highlights changes underway in the commercial real estate market, which is under strain from waning demand for office space following a rise in homeworking after the pandemic, as well as from falling property values and rising interest rates.
There are fears that a rise in delinquencies as a result of the downturn could cause significant losses at banks, which finance many commercial real estate deals.
London, Berlin, Madrid and Hong Kong were also forecast to have a large amount of excess office space.
TREND FORECAST: Again, as we had long forecast, this trend is global. CNN notes that “London, Berlin, Madrid and Hong Kong were also forecast to have a large amount of excess office space.”
Yet read CNN, the Cartoon News Network’s final analysis: “There are fears that a rise in delinquencies as a result of the downturn could cause significant losses at banks, which finance many commercial real estate deals.”
“Fears”?
How about reality?
We maintain our forecast that office occupancy rates will top out at around 60 percent and that the office building bust will bring down small and regional banks that hold most of the office building loans.
Indeed, again, three years too late but on it now, The Wall Street Journal reported today that, “Interest-Only Loans Helped Commercial Property Boom. Now They’re Coming Due,” and that “Landlords face a $1.5 trillion bill for commercial mortgages over the next three years.”
Old news to Trends Journal subscribers, WSJ repeated a warning that we had long forecast:
“Interest-only loans as a share of new commercial mortgage-backed securities issuance increased to 88% in 2021, up from 51% in 2013, according to Trepp.
Typically, owners pay off this debt by getting a new loan or selling the building. Now, steeper borrowing costs and lenders’ growing reluctance to refinance these loans are raising the likelihood that many of them won’t be paid back.
Many banks, fearful of losses and under pressure from regulators and shareholders to shore up their balance sheets, have mostly stopped issuing new loans for office buildings, brokers say. Office and some mall owners are facing falling demand for their buildings because of remote work and e-commerce. Interest rates have more than doubled for some types of commercial mortgages, analysts and property owners say.”
Thus, by the data, the banking crisis that began in March and the three banks that have failed since registered a bigger loss than the 25 that crumbled during the Panic of ’08, will greatly worsen as more lenders are forced to take over highly devalued office buildings.
And despite the media hype of converting the empty office buildings into apartments and condos, also as we have noted, office buildings constructed over the past 50 years, according to data, are not suitable to be converted into apartments.