U.S. GDP growth surprised on the upside in Q2 2024, expanding by 2.8% on an annualized basis, surpassing market forecasts of 2.1%. This stronger growth was coupled with a notable easing in inflation, as the Core Personal Consumption Expenditures (PCE) Price Index, excluding food and energy, decelerated to 2.9% from 3.7% in Q1.
Ironsides Group anticipates the U.S. economy achieving a soft landing this year, although stringent monetary policies may pose risks to growth.
We project further easing of inflation in H2, contributing to a year-end 10-year Treasury yield of 4.0%. Consequently, lower interest rates in H2 are expected to invigorate real estate investment activity.
The Economic Landscape: 2024-2028
2024 Outlook:
- Fed Funds Rate (Q4): 4.75% to 5.00%
- 10-Year Treasury (Q4): 4.0%
- GDP (Annual Average): 2.3%
- Core PCE (Q4): 2.7%
2025 Outlook:
- Fed Funds Rate (Q4): 3.75% to 4.00%
- 10-Year Treasury (Q4): 3.7%
- GDP (Annual Average): 1.5%
- Core PCE (Q4): 1.8%
2026-2028 Outlook:
- Fed Funds Rate (Q4): 2.25% to 2.50%
- 10-Year Treasury (Q4): 3.4%
- GDP (Annual Average): 2.0%
- Core PCE (Q4): 1.7%
Economic Trends and Projections
The U.S. economic outlook for the coming years is characterized by a gradual easing of monetary policy, stabilizing inflation, and moderate growth. In 2024, the Fed Funds Rate is expected to range between 4.75% and 5.00%, with the 10-Year Treasury yield at 4.0%. The GDP is forecasted to grow by 2.3%, while Core PCE inflation is projected to stand at 2.7%.
Moving into 2025, the Fed is anticipated to lower rates to between 3.75% and 4.00% as inflationary pressures subside further, with the 10-Year Treasury yield decreasing to 3.7%. GDP growth is expected to slow to 1.5%, reflecting a more tempered economic environment.
From 2026 to 2028, a more stable economic landscape is anticipated, with the Fed Funds Rate falling to 2.25%-2.50%, and the 10-Year Treasury yield stabilizing at 3.4%. The GDP growth rate is expected to average 2.0%, with Core PCE inflation maintaining a steady 1.7%.
Implications for Commercial Real Estate
Despite higher-than-expected Q2 GDP growth, inflation remains above the Federal Reserve’s 2% target, and jobless claims have increased, highlighting the challenges the Fed faces in balancing price stability and full employment.
However, Ironsides Group projects a soft landing for the economy, with inflation expected to continue its downward trajectory and the labor market achieving greater balance.
The anticipated reduction in inflation is likely to prompt the Federal Reserve to implement two 25-basis-point interest rate cuts in 2024, with the 10-Year Treasury yield ending the year at 4.0%.
These conditions are expected to create a favorable environment for industrial and office leasing activities to pick up modestly throughout the year. Although high interest rates pose a challenge for capital markets, improvements are expected in H2 2024 and into 2025.
Looking Ahead
Consumer spending, nonresidential investment, and government expenditures surged in Q2, driving stronger-than-expected GDP growth. Notably, inventories, known for their volatility, significantly contributed to this growth, possibly exaggerating the pace of economic activity.
Consumers shifted their spending towards services over goods, highlighting changes in consumption patterns. On the inflation front, the Core PCE Price Index, a key measure for the Fed, decreased to 2.9% from 3.7% in Q1.
In conclusion, the Ironsides Group remains optimistic about the U.S. economy’s ability to achieve a soft landing, with inflation easing and interest rates lowering, fostering a more dynamic commercial real estate market.
As we navigate these economic shifts, staying informed and agile will be crucial for leveraging emerging opportunities.