was $13.9 trillion (seasonally-adjusted annual rate), an increase of $71 billion compared to the previous quarter. With inflation running above eight percent during the first quarter, all the quarter- over-quarter increase was due to higher prices. But consumers nonetheless spent more. This data reinforces the historic reality that inflation rarely reduces consumer spending, even if inflation erodes the value of the consumer spending power.
Another relevant data point is the ratio of personal expenditures on gasoline and other energy to total personal disposable income. With gasoline at record high levels in the U.S., it is assumed that the dollars spent on filling up at the pump would replace dollars spent elsewhere; however, that ratio was 2.5 percent at the end of the first quarter. That was just 10 basis points higher than the average ratio of 2.4 percent during the past 10 years. With wage growth above five percent, workers are seeing personal disposable
income grow faster than during most of the past decade.
Even in a dovish monetary scenario – and the Fed has been anything but dovish – interest rates are likely to be two percent higher in one year. That scenario puts the 30-year fixed-rate mortgage near seven percent and the 10-year Treasury above four percent without other pressures that might hold rates down. Those other pressures, such as a steep decline in home purchase demand or a surge in demand for the security of Treasury bonds, would be the types of desired outcomes for the Federal Reserve, since they would also push inflation lower. In its mid-2022 economic reports, PNC economists forecasted that the rapid rise in interest rates would have the desired effect on demand, which would bring about a mild recession in 2023. PNC Chief Economist Gus Faucher pointed out that, unlike in 2007-2008, there is no sector of the economy that is severely out of balance. The higher borrowing costs should slow demand for homes and durable goods, sectors that need to cool off to re-balance supply and demand currently. Faucher notes that household balance sheets are relatively strong and that employment levels, and the shortage of workers, were further strengths of the economy. Analysts that see a more aggressive Fed response to inflation expect the Fed Funds rate to reach four percent or higher by spring 2023. That scenario would have a more restrictive impact on the economy and on commercial real estate. A Fed Funds rate above four percent will push long-term rates to levels that will increase the risk of commercial development and acquisitions. Lenders will have a reduced appetite for deals and spreads will increase, further reducing the returns on commercial real estate. This more aggressive Federal Reserve Bank scenario may not produce a more severe recession overall, but it is likely to have a more chilling effect on commercial real estate and construction.
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DEVELOPING PITTSBURGH | Fall 2022
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