Solving for Success in a Changing Economy

Ryan Severino:I am the chief economist at JLL. I've been there for about six and a half years. I have been in some kind of economics research capacity almost my entire career. It just gets progressively nerdier and more technical. And I find that that suits me well.

I don't swim upstream anymore. I just embrace the dark side and go with that. But it's actually a really interesting job thinking, big picture, what's going on in the world economically, demographically, geopolitically. And then, trying to understand the implications specifically as you mentioned for JLL, how it pertains to what's going on in the real estate world and how I can help internal stakeholders, external stakeholders, clients, and then sometimes the public at large, which is always a nice thing to be able to do.
DW:It's interesting you said nerdier because we were talking earlier and one of our partners, Travis Epp mentioned that you were the coolest economist anyone will ever meet.
RS:That's a really low hurdle to clear, but I'll take that if that's-
DW:I don't know about Travis' gauging of cool.
RS:... that's what I can get at this point in life. But I'll take that as a compliment. That's nice of him to say.
DW:Okay. Great. Let's recap last year and I realize that's a loaded statement. So, how would you describe what's happened in the past year with regards to the global economy?
RS:Maybe a better way to think about it is almost what didn't happen last year.
DW:True.
RS:Around this time last year, I remember we were having our big internal event and our head of Europe had come over and was doing a session or was presenting and asked about what was going on in Europe. And I said, "I'm not an IR theorist or a military strategist, but the thing I remember from those classes is that there's only really a downside to geopolitical risk." And we'd started the year with a lot of optimism and then very quickly started to backslide.

Obviously, the fighting started in Europe. We still had some pretty stringent lockdowns in China, which wasn't so great. For the supply side of the economy, we had port backlogs that needed time to alleviate getting goods around the world. We had inflation that was running hot... everywhere, running hotter than expectations, central banks raising rates. We had markets melting down, we had crypto scandals.

The list is pretty exhaustive and I think the good news about that is despite all of the things that were thrown at the global economy last year, even if it wasn't quite as optimistic as we'd hoped at the beginning of the year, we still ended up in a pretty good place. Most economies around the world, with the exception of a few continued to grow, we definitely ran into some trouble increasing trouble toward the end of the year, but I think on the whole economy acquitted itself pretty well last year despite all of the things that were thrown in its way.
DW:Certainly. Do you have your eyes on any other hotspots in the world?
RS:These days, I really think the major areas are what's going on in Europe because that translates most directly into energy prices for them, energy resources, how that translates into growth, which can have knock-on effects. And then, really what's going to happen in China with the abandonment of zero COVID policy, there could be a little bit of a whipsaw effect where at first it might not be beneficial to the economy as people are adjusting. But eventually, once they get through that phase, there could just be this deluge of economic activity that ends up really reverberating through the global economy. So, I'd say those, there are no shortage of wild cards these days, but those are probably the two that I think are maybe the biggest swing factors right now.
DW:Okay. That's good to know. And you mentioned it a little bit, but what about supply disruption? Where do you think we are? Do you think we're leveling off or is it going to continue? And where will we feel it most?
RS:I think it's mostly good news. If you compare where we are now to where we were 12 months ago, even maybe a little longer than that, 18 months ago, we're certainly in a better place than we were. We're not dealing with the port backlogs at Los Angeles, Long Beach that we were dealing with and reading about this time last year. And a lot of the underlying factors that drive those kinds of issues have really abated. Shipping costs have come down considerably.

Shipping times have come down considerably. That said, I don't think we're in the clear on this just yet. There still is some disruption in global supply chains, but we're starting to get through a lot of the... I don't want to say shock, but that's probably a decent word to use. Shock that the supply side of the economy felt. And now we're starting to see goods flowing more freely, especially a lot of the goods that have been in I think significant demand over the last few years.

Autos, semiconductors for electronics. I think you're really starting to see that turning the corner. Again, maybe not out of the woods just yet, but significant improvement relative to where we were just 12 months ago, even six months ago.
DW:Okay. Great. What impact did the supply chain disruption have on inflation? And I know we're going to touch on that a few times, but it feels like a good time to bring that in.
RS:Not good is the way that I would characterize that. It was certainly one of the key factors. It was almost the perfect storm for inflation over the last couple of years because you did have a significant supply-side disruption, especially on the good side of the economy.

And that mattered because if you think about what transpired over the last few years, even though we're out of the acute phase of lockdowns, there was increased demand for goods as a lot of people were staying at home. It was relatively easy to order stuff online, have it shipped to your house, less potentially precarious than consuming services, which are often consumed in the presence of other people. And that was I think a relatively more dangerous proposition once.

We increased demand for the part of the supply chain, that came under a lot of stress. Because as the world's going through lockdowns, we weren't producing a lot of the stuff that we would typically produce. That didn't help because it was that almost perfect storm of we're restricting production of the things that were increasingly demanding and as a consequence of that, we had the highest inflation that we've seen in about four decades.

The good news is, fingers crossed, but not holding my breath on. This may be possibly perhaps, it does feel like we've turned the corner on this. Partially because the supply side has improved. I think demand has been at least I'd say moderating but also recalibrating as we've gotten past that acute phase, people are now going back to some semblance of pre-pandemic norms.

Some of the demand that was getting reallocated toward goods is now getting allocated back toward going out to bars and restaurants and disco techs or whatever the cool kids are doing these days. Not the cool economist, but the cool kids are doing these days, going on vacations, revenge travel and those sorts of things. And so, that has helped I think rebalance demand a little bit. Again, fingers crossed on this, we're still have some things to navigate. But I think the worst of the supply disruption as it impacts the economy and inflation is probably in the rearview mirror at this point.
DW:I like what a true economist maybe, possibly, perhaps was all in one sentence.
RS:Well, it's always better to be vaguely correct than precisely wrong.
DW:Oh, okay. That's another one. I hope everybody's taking notes. What about the Fed's actions to rate hikes to curb inflation? What do you think about how that wound up?
RS:Very interesting how quickly we went from this environment where interest rates were basically at zero and the Fed was saying they weren't really going to do anything to the end of the year and they're up 400 plus basis points. And it had a significant impact on... most directly on the interest rate sensitive parts of the economy. But I think broadly on the economy. The Fed clearly is concerned about inflation. They're worried that if it stays too hot for too long, it starts to change.

Expectations become a little more entrenched. I think they're very happy about... very is maybe a little bit hyperbolic, but they're happy about the trajectory of inflation over the last six months or so since it probably peaked last summer around June. I don't think they're done yet. I think they believe they can moderate the pace of rate hikes from here on out, but I don't think they're finished. I think they'd like to see more convincing evidence that we're really headed back toward their target rate.

I think we're on the way there and the stars are aligning, but I believe that they will need to see more evidence that we're really headed back toward 2%, 2.5% inflation before they even pause. And I think once they're done hiking, they will probably leave in interest rates somewhere north of 5% for some period of time and make sure that inflation is really migrating downward the way they would like to see. I don't think they're done just yet.
DW:It can't maybe possibly, perhaps that one?
RS:You know, Diane, one of two things could happen if inflation really decelerates, if we get this inflation faster than I anticipate, I think most economists anticipate there's a chance. Or on the opposite side of the ledger and maybe even relatedly, if the economy performs more poorly this year than they're anticipating, the Fed wants to be careful about getting the message right. Because part of how they manage monetary policy is not just adjusting interest rates, but it's also their communication with the economy and the public.

They want to come out brandishing their inflation fighting credentials. They don't want to undermine that message at all. But I think if you ask them quietly behind closed doors, they would say, yes. If it seems like things are deteriorating faster than we anticipated, then we could back off right interest rates fast. But they don't want to undermine their own ability to manage things.
DW:How about the crypto meltdown? Give us some thoughts on that. It's like watching a movie.
RS:It's funny. In addition to working for the man at JLL, I also teach as an adjunct. And a lot of my students are, I'll just say younger than I am and they love crypto and tokens and I'm not against that. But I've been warning you be careful about this because this is a little bit of the wild west of finance, or at least it's out in the frontier of finance at this point. I think there were a lot of lessons learned this year with tokens being stolen and maybe outright fraud.

I'm not with what's gone on with FTX, I'll leave that to prosecutors to figure that out. But I think it was a sign that there still is a lot that is unknown and unregulated in that space. And I'm not saying to avoid it completely, but be careful about that. There are very famous equity investors who are going to get wiped out in that bankruptcy. There are a lot of investors in crypto itself, other cryptocurrencies that have taken a very significant hit over the last, call it 18 months or so, even worse than equity markets, fixed income markets.

Now, I'm just warning my students, not saying don't play in that space but be more cautious about that. Then, what I think is a more transparent regulated market where you have relatively more confidence if you're trading equities or bonds. That's where I get a little concerned because there are just so many unknowns in that space still to this day.
DW:A lot of it was driven by excitement and I think instead of really taking the time to look into it and beware, like you said.
RS:There's a lot of that fear of missing out. And again, I don't want to traffic in stereotypes, but it does seem like younger generations have embraced this more than older generations. And that probably, because of the technology component that's associated with it. But I'm just trying to get them not caught up in that. A lot of my students have been trading meme stocks over the last couple of years, same kind of thing.

You can definitely make some money doing that, but you have to be careful because there's a component of that that it's pretty opaque. It's not transparent at all. And if you don't really understand what you're getting into, then the downside can be significantly greater than something that has a lot more transparency and clarity.
DW:When you get to my age, you have the joy of missing out and so the fear of missing out. So, overall with the crypto topic, what does it really mean to the institutional and the individual investors?
RS:I think it has a role to play. Clearly, it's an additional offering in the investment landscape that has value. I think the blockchain technology that backs it has a lot of value in potential. And I think there's a way for both, I'll be a little more technical when we're talking about retail investors versus institutional investors. I think there's a way for everyone to play in that space.

I just think we probably need to get to a point where the investment investing public at large has more confidence in that and I don't think they do just yet. And I think every time there is some kind of meltdown or scandal, it serves to undermine that confidence and set us back. I'm a pretty laissez-faire economist. So, I'm usually not advocating for massive regulation, but I'll be curious to see where this ultimately ends up. Because I think in the absence of any kind of regulation, there are certain categories of investors who are just going to stay on the sidelines and maybe that's to their detriment in the long run.
DW:Yeah. So, we go back a little bit to a topic. We brought up inflation and a lot of what you hear is it's really impacting energy prices, and electricity, and people heating their homes. Is that really where it's going to be felt the most or are there other areas you think that are really going to impact people's pockets like food and whatnot?
RS:Seems like energy has really run its course that we had this significant run-up in energy prices last year and then it has backed off considerably. Certainly, if you look at oil prices, if you look at gasoline prices, even natural gas, especially because we've had a warmer winter in Europe than I think was originally anticipated. I mean even here in North America it's been warmer in some of the colder parts of the country. That should help for a while. What I'm hoping is there'll be other participants in this downward move for inflation.

Because there's a chance because of the cyclicality of energy that we could see a run-up again, especially if the government starts to replace the strategic reserve, which they haven't really been able to do just yet. Couple that with seasonality, you get to warmer months, people start driving more, going on vacations. There could be some lift to that, but I don't expect prices to rise to the degree that we saw last year.

So, hopefully, that should still help contribute to a lower inflationary environment. And we're starting to see some other major components. I mentioned goods earlier, we're starting to see goods inflation rolling over. We're starting to see services excluding shelter rolling over a little bit. Shelter is its own kind of peculiar thing that's going to take a little bit of time.

But it does seem like as we move forward in time, more and more of the components of inflation are starting to roll over and they're starting to decelerate, which I think again fingers crossed, portends better inflation in the future, which should help, I think consumers at large. They'll start to feel like their dollars are going or whatever currencies they're shopping in going further than they have over a lot of the last 12 to 18 months or so.
DW:Okay. Great. And how about the labor supply? Everybody's feeling it. I'm sure JLL is not excluded from that. What are your thoughts on that in regards to inflation and in general, we all would like to see that change?
RS:It's interesting. I not straining my arm, patting myself on the back, but I started warning clients about this probably about seven or eight years ago, maybe even before I joined JLL. And I was just looking at it from a pure demographics point of view. I was seeing the baby boomers getting older, leaving the workforce. And then, subsequent generations entering the workforce but not really being able to keep up with the demand.

And I think what's happened over the last few years has only served to exacerbate that. We were already going to go through this structural demographic change. I think the pandemic has caused and somewhat of an acceleration in retirements and people not coming back into the workforce the way that we might normally expect them to.

And no latent political statement, but immigration policy has changed considerably over the last five to six years partially by then the government mandate but also because I think of a lot of what's happened with the pandemic of the last few years. All of that has really limited the ability of the labor supply to grow. At the same time that labor demand just keeps getting larger and larger as the economy keeps growing.

It's probably going to be a feature and not a bug for the reasonable future, even if the economy goes through some bumps in the road along the way, we really need to focus on improving the supply side of the labor market. However, we can get there because I don't like the idea that the solution to this is just let's erode demand. And I know that's certainly what the Fed is thinking.

They think there's excess demand for labor, we need to cool things off. I would rather, even if it takes some time focus on the supply side. There's no panacea to fix this in the short run. So, if anybody who's out there has had any difficulty hiring in the last 6, 12, 18 months. Again, even with the slowdown, that's probably not a permanent solution to this.

From an inflationary point of view, I think we're starting to see signs that wage growth is cooling off a little bit even as the labor market stays very tight. But maybe there is that Goldilocks environment out there where we can get wage pressures down a little bit without really undermining the labor market itself, but we're going to need to see more data points on that. But the Fed's main concern is that we have too much demand relative to supply and it's pushing up wages.

The one silver lining about all of that is that if we go through some kind of labor disruption this year, next year. Layoffs are starting, at least you're hearing about them a little more. They're starting to increase a little bit. There should be more options for people if they're seeking employment than maybe ever, but certainly over the last few business cycles where there just wasn't a lot of that availability to people who lost their jobs. So, maybe that's the silver lining out of this kind of excess demand situation.
DW:That's what I'm hoping because I think the robust job market is a good thing. I guess it's good and bad, right, if you didn't-
RS:I hate to feel like-
DW:... find the people.
RS:... a good thing is being construed as a bad thing.
DW:Exactly.
RS:I never want to be in a position where I'm rooting against labor or the labor market. Especially when you think back to the last business cycle where was such a difficult prolonged recovery from the global financial crisis. I hate feeling like we're on the other side of this. Somehow we have to root against the labor market. That is not a position that I ever really wanted.
DW:Counterintuitive.
RS:Have to be in.
DW:Yeah. How about a stagflation? You hear that people talking about that a lot. What are your thoughts?
RS:That I think was a concern that a lot of people had last year. I think we're hopefully past a lot of the concern-
DW:Good.
RS:... for that.
DW:Because I hate that word.
RS:That doesn't mean that we might not have bumps in the road for the economy. But if we do, it will probably drag inflation down with it. So, I would say maybe that was on people's radar screens about a year or so ago. I feel like that's less of a concern now. I still think there are some legitimate economic concerns that we'll have to work through.

But I think the idea that we're going to explicitly get bad growth out of the economy and accelerating prices, I'm hoping we're past that. Seems like we are.
DW:Okay. How about we move on to the capital markets and the housing?
RS:I guess it really depends which side of the housing market you're on. We've gone through an incredible evolution in the housing market over the last decade or so. We went from a period of euphoria and almost collapsing the global economy in 2008, 2009 to becoming a bit of a tainted asset class that was kind of lost in the wilderness for a while. And then, things started to normalize. And then, we hit the pandemic and the world really changed.

People were spending more time at home. They decided they wanted more space. They wanted less density, at least temporarily at the same time that central banks like the Fed were cutting interest rates. It was a frenzy. And we have pushed housing prices up to a point where I think it's fair to say that those kinds of increases were not sustainable.

We're now starting to see prices rolling over. We've seen transaction volume rolling over. It's a very interest rate-sensitive part of the economy, of the broader capital markets. And so, I think with where we are now with inflation probably decelerating and getting to at least hopefully a stable rate from the Fed. I would expect to see some kind of renormalization of that market.

Transaction volumes will probably settle into a reasonable range. Pricing will probably pull back for a little while and then stabilize a bit. But a lot of it will depend on where interest rates go. And I think again, maybe we're past the... hopefully, we're past the bulk of those interest rate increases. But it was a shock.

I think if you have been a buyer for the last few years, you've had to grin and bear it. If you've been a seller for the last few years, you've probably been a huge beneficiary. You've been really excited about what's happened over the last years. And if you've just been a homeowner, even if you haven't been someone selling, you've probably been happy with the fact that housing values have appreciated and your net worth has gone up. But those kinds of frenzied environments almost never last.

I don't think this is 2008, 2009 though. We're not seeing the excessive leverage and use of borrowing that we were seeing heading into that. But I do think that there's a bit of a readjustment and a renormalization that the housing markets going to have to go through over the next year or two probably.
DW:Right. I would agree with you. Now, for commercial real estate and we talked briefly before this about returning to the office and all the office space available. Love your thoughts on commercial real estate in general as well as the office.
RS:Office, I think has a pretty unique place in the broader environment right now because the way we work has changed and the future of work has changed. I don't think it's a binary thing. I think there are shades of gray. It's not everybody's at home the way it was a few years ago. It's clearly not everyone is back in an office five days per week.

I think organizations are grappling with this feeling their way. They're kind of moving around the dark without a flashlight right now trying to figure it out. It does seem like most organizations are going to settle on a few days per week in the office.
DW:Some balance.
RS:I think everyone will end up happier with that in the end. I think there's a realization, maybe belatedly that workers are people and they do have responsibilities outside of work. And having flexibility and the capability of taking care of those things probably makes them happier, better workers. At the same time, I think there is a concern on the part of managers that they still want people around part of the time. That there are productivity benefits to sharing information and collaborating and knowledge spillovers.
And at the end of the day, we're social creatures. We're not meant to all be... put it this way if 10 years from now we're all sitting alone at our kitchen tables or counters, something's gone horribly wrong. And I think we need to get to a point where we're not just going through this fits-and-starts process of getting back to that. I feel we're closer to that than we've ever been. I don't think we're quite there yet though.

But I do think most organizations will probably settle on you're in the office part of the time, you're home part of the time. And as long as you're being productive and getting things done, then that matters more than where you are. Unless this particular meeting, event going on, really riveting economics discussion that might mandate being around in person. But otherwise probably don't need to be there physically. I think the rest of the commercial real estate market is actually holding up really well.

The industrial market has never been hotter. We just never. Partially because of the pandemic, partially because of what we've seen with the evolution of shopping in retail over the last, let's call it 20-ish years with the real advent of eCommerce and now mobile commerce. Vacancy rates are at historically low levels. Rents are at record-high levels.

But that is not the death knell for bricks and mortar retail either. Physical retail centers have actually held up much better than the average person thinks. I can't tell you how often I'm having a conversation with a friend or a relative and they just say, "Oh, nobody goes shopping any mall. Malls are dead." And have you been to Short Hills mall on the weekend? Every time I go there I have to park seven miles away and take an Uber to get to the Macy's entrance.
DW:You have to go there on the right day because you actually have to dress up to go there.
RS:You do have to dress up to go there. I think what's happening is that retail is just going through this continued evolution. And maybe it's accelerating relative to the way that it had been evolving. But in my mind, it's a constant process. There are some centers that probably will not cease to exist as a fund of saying retail is overbuilt and under-demolished in the US than I think some other parts of the world.

We probably don't need as many centers as we've had in the past. But I still think there's a very important role for retail to play, whether it's the grocery store and that grocery-anchored center that people go to on a frequent basis that's almost, there's security blanket. The malls that people still like to frequent, whether it's a dominant mall like Short Hills or it's an outlet center or even kind of what we call a power center.

It's got a few big box retailers that people really like and some other retailers, the smaller ones that are complimentary to that. Those will always have a role to play. Whether it becomes more entertainment-oriented, whether it becomes more of a mixed-use with some housing component, I don't think it will go away completely even as it goes through a shakeout. And then, lastly, I would say we talked a little bit about housing. The other major asset class that I think about a lot is the apartment market, which tends to fall under the domain more of commercial real estate than residential.
DW:True.
RS:A lot of demand in that space. Also went through I think a bit of an adjustment where people tend to think, "Oh, apartments little bit stigmatized in some ways." But clearly, over the last 10 to 15 years we've seen incredible performance out of the apartment market.

I don't think that run is over. I think there are swats of society of the economy that either prefer to rent or it's just easier for them to rent. That segment of the housing market continues to hold up well. Even if it goes through-
DW:If the baby boomers-
RS:... some bumps of the road.
DW:... might be doing that actually.
RS:Yeah. There're some-
DW:Oh, anybody, any age.
RS:... don't want to. There are a lot of young people that don't want to be homeowners. They're not ready to be homeowners. There's certain people that just don't want the hassle of dealing with homeownership and maintenance. There's a pretty consistent segment of demand for that.

That it's not immune to the kind of undulation of the business cycle, but in the long run has certainly performed really well. I think most of commercial real estate is holding up well. Office is the one where I think there are just some questions because this is... and I'm going against one of my favorite sayings in economics, which is that the two most dangerous thoughts in economics are this time is different and that will never happen again. This time really is different for the office market.
DW:Yeah. It sounds like it. Do you think that in urban areas some of the office space will be converted to residential or is that way too much of a change?
RS:I think some of it will. I don't think it's the slam dunk that the media often portrays it as, but I do think land in urban areas is still valuable. There's still a lot of value under that land. And these days often the highest and best use is as some kind of residential building. It might require buildings being raised completely and converted into something else.

But I do think that the death knell of cities has been greatly exaggerated. It's always been exaggerated over the last 40, 50 years. But that doesn't mean the way we use the limited space in an urban area, the physical land itself, that doesn't mean that can't change. It's always changing. And it will continue to change based on... that's one of the great things about economics.

It's that that creative destructive process. Something's not working as well as it did before or the same way that it did before. We'll be innovative. We will rethink. We will repurpose.

And I think that will certainly happen. But I don't think it means nobody's ever going into a city ever again or nobody's going into an office ever again. I just think maybe we need to repurpose some of the less competitive, less efficient space that's becoming a bit obsolete into something that's a little more economically beneficial.
DW:Because even in college towns they're doing retail on the bottom and housing on the top. Well, it's interesting to hear your outlook on retail. Because a lot of what you read is that it's dead and I never met them all I didn't like. And I always think, "Where am I going to go?" I'm looking out at the window here and I know we have a lot of warehouses.

So, my next question is around warehousing. It's certainly in New Jersey, there's a lot to... in the scenery. So, it seems like it's popular. How about we talk a little bit about that?
RS:It really is. I think these days that the darling of commercial real estate is the way that I think about it. That there almost couldn't be more demand or at least over the last few years. I think that will start to abate a little bit. But we are in an environment where some markets, including some parts of New Jersey, have microscopically low vacancy rates and rents that just you think they can't keep growing at the rates that they have been and yet they do.

And I think a lot of that is partially because of the advent of eCommerce in the way the world has changed. But also because I think there are benefits to having warehouses of a certain scale in a way there wasn't before. So now, you're starting to see these gigantaur size, monolithic centers being built a million square feet, a million and a half square feet. There are economies of scale associated with that. There is greater technology in warehouses than we've ever seen before that requires at least a little bit of space.

I think maybe not the prettiest buildings always for people to look at, but there are a lot of economic benefits. I know there's some NIMBY-ism sometimes when someone wants to develop. Again, especially those huge centers relatively close to maybe and start to encroach on a residential neighborhood. But people probably benefit from those centers a lot more than they expect, especially in a world where there's a bit of this arms race with eCommerce or how fast can you deliver the goods to my home or business?
Those centers really enable that. So, I know, again, looking out not always the prettiest things to want to see, but hugely beneficial to the economy and to people's lives. Even if it's not as aesthetically pleasing as some other property type.
DW:Well, its jobs and then I love when I look. And it says it'll be delivered by 8:00 tonight. How does that happen? That's a plus. For sure.
RS:Yeah. And I think increasingly you're seeing, especially on the retailer side, not just the pure e-tailer but more traditional bricks and mortar retailers are really understanding the relationship between their physical warehouse space, their physical stores, whether it's in a mall or strip center and how those things can really be complimentary and part of a bigger logistics ecosystem. And not just their necessarily enemies and oppositional. I think that has come a long way over the last 5, 10 years.
DW:Absolutely. Because there's something to be said for trying something on or if you have a growing child, you need to know what's going to fit them.
RS:There will always be a need for physical retail spaces. Even if it changes, I just see it as being more complimentary to how things are purchased and distributed than seeing that as sort of a death knell for physical retail spaces.
DW:So, people are spending. And we talked a little bit about goods and services. Do you think people are moving more towards the services like you mentioned before and eating out, you said going to disco techs, things like that? We'll see that continue?
RS:We're working our way back there. I don't think everyone is fully embracing that just yet. I think there are still some concerns in certain pockets of the population. But the way that I think about it is if you look at people going out and doing things, certainly looks like the fun part of the economy is back. Maybe not the desire to go back into an office, but the fun part of the economy seems back going out to restaurants, going out to bars, going out on vacations, getting on airplanes, maybe even going out to nightclubs and disco techs if you're-
DW:Micro-breweries?
RS:... of that person. Certainly micro-breweries are more popular than ever these days. Maybe not back to where we were pre-pandemic, but I think a lot of that has come back. And I think that's part of the slow rebalancing that we're seeing between demand for goods and demand for services and the commensurate spending levels that we're seeing in the economy.
DW:Absolutely. How about corporate investment intentions?
RS:There's some good news and bad news there, especially when I sort of looking through the lens that I do for commercial real estate. On more of the negative side of the ledger, we're not seeing as much spending on physical structures as we were for a lot of the reasons that we've been discussing. But if you look at the main components that I think are relevant to the economy, not just on a current basis but moving forward to how the economy behaves, there's a lot of investment that's still going on in equipment.

There's a lot of investment that's still going on in intellectual property. That to me is more of a vote of confidence in the economy in the future than anything. Consumers are always going to spend money. That's still what we as Americans do better than everyone else in the world, at least for now. We're still great at spending money.

But if you look at how businesses are spending money, I think that also portends good things about the economy in the medium to long run. We are not flawless here, but we still have a very innovative economy, a very productive economy. And I think the investment on the part of major corporations and enterprises, I think that bodes well for the future.

I think sort of we've been talking about with retail, I think the death knell for the American economy has been greatly over-exaggerated, over almost the entirety of the post-war, but certainly over the last 40 to 50 years. I'm not saying that other economies around the world don't have a prominent role to play. But the idea that it's a zero-sum game and that their rise or their growth is somehow to our detriment. I think that theory's been disabused many times over the last half-century.
DW:Yeah. It's a bit much. Onto government spending, we have a new congress, there's talking about decreases in certain entitlement spending, defense, IRS, you name it. Give us some insight on that, please?
RS:Let's be diplomatic and say more challenging than it's been over the last couple of years. Now, that we have a divided congress, it's just objectively going to be more difficult to get legislation passed, especially spending legislation. And I think after the last few fiscal years where we borrowed and spent trillions of dollars, that was going to be a more difficult proposition to begin with.

But I think with the divided congress now it's going to be even more challenging. Getting the most recent budget passed at the end of the year will probably help a bit, but I think we could be in a situation where if there is some slowing in the economy, we might not have the benefit of fiscal policy the way that we've had in cycles past. They might be more akin to what we saw coming out of the financial crisis where it was more of a conflict between President Obama and Republican Congress.

And maybe the spending amounts weren't as large as some objective observers might have liked to have seen. Maybe not as much benefit. And again, I'm not a very political person, so I'm not taking a pro or anti stance.

Just thinking about it from a purely pragmatic point of view, it's going to be harder to get things done over the next two years than it was over the last two years, including potentially things like fiscal stimulus if we need it. There might be another debt ceiling battle that comes down the road at some point and that could be potentially disruptive the way it was. I think at least marginally disruptive during the last business cycle. So, more tougher battles ahead I think one way or another.
DW:Great, thanks. We touched a lot on inflation and interest rates. How about other rates on the yield curve?
RS:Maybe hopefully past peak and starting to back off. I think one of the things about the yield curve is that the yield curve is now entered the popular vernacular as this thing, potentially insidious thing when you start to see the yield curve inverting, if there's any good news out of that, we have seen the yield curve steepening lately. Financial conditions I don't think are as tight as maybe the Fed would like them to be.

And I think a good takeaway from that is I think there still is movement and efficiency to the capital markets in a way that didn't happen during the financial crisis. I mean that was really one of the main concerns during the financial crisis. Borrowing costs are up certainly, so anybody who is looking for the cheapest rate in town is probably going to be disappointed.

But it's a cyclical phenomenon. So, I'm crossing my fingers that we're past the worst of the interest rate increases and that we'll start to see some alleviation. If the Fed can get to a point where... at least with the messaging, because I think if you look back last year, rates on different instruments started to go up even before they were raising rates, even just because of their communication. I think if we get to a place where they can soften their communication a little bit, I think that will help the capital markets and yields across the yield curve for different instruments.
DW:Do you think individuals and corporations are overextended or is that something that will come?
RS:I think the good news is, certainly relative to going into the financial crisis, we're in a much better position than we were then. Household balance sheets are actually in a pretty strong position-
DW:That's good.
RS:... between wage increases going up. And I think a lot of the government spending of the last few years that has certainly benefited households who are still sitting on a lot of the proverbial dry powder. Corporate balance sheets are also in a pretty favorable position. Certainly, there are some superstars out there that have a lot of cash. I won't name them, but you could probably guess who they are off the top of your head.

But by and large, corporate America is in an environment where profits are maybe backed off a little bit, but still near record-high levels. Balance sheets are pretty healthy. We haven't really overextended on the debt side. I think for now that is not my primary concern relative to say what the case was like 2007, 2008, 2009. We'll have to keep an eye on that and see what happens with the use of debt balances, especially if the economy slows down.

But for now, I think if you look at aggregate debt balances relative to the size of the economy or relative to assets, overall, I think we're in a stronger position than we were certainly last business cycle.
DW:I was reading something about people having there are excess savings, so that helps as well.
RS:That's certainly a buffer. And I think that is a good thing, especially if objectively the economy slowing down. It had to slow down from 2021's pace that was completely untenable. I think that will be a good buffer for people.
Will certainly help them avoid going to debt right away when that could potentially be the first option for people during a downturn. I think it's a pretty decent buffer for us at this point.
DW:I thought you were going to say the R word because I'm up to the R word.
RS:Trying not to say the R word, but I'm dancing around it very delicately.
DW:Well, how about I ask it? No recession or recession instead of the other way around.
RS:I'm still in the camp that thinks we can avoid it. I don't think there's a certainty one way or another. But my perception is that a lot of the popular narrative maybe got a little too pessimistic toward the end of last year. And over the last few months, a lot of the data has trended in the direction that I think maybe we can avoid the R word. Inflation has softened.

We've seen wage growth softened, while the labor market has remained strong. There's still a lot of demand for labor. We do have that savings buffer that you were talking about. We're not overextended on debt. And we are still seeing investment in the corporate economy and profitability in the corporate economy.

I'm not saying it can't happen, but if it's going to, it seems like a more distant proposition to me than the near term. It seems like a lot of the way that the data's been unfolding has probably pushed that risk out. How far exactly it remains to be seen and the Fed will have a lot to say about this, how aggressive they're really going to get over the next quarter or two. But I don't think the risk is as acute. It's not a certainty.

People are talking as if a recession is inevitable. And I don't think it's inevitable. There still is a path to landing the proverbial plane safely. Maybe it's not as wide as we would like it to be, but I don't think it's as narrow as some talking heads are making it out to be right now. And I think a lot of this will rest with the Fed over the next quarter or two.
DW:Great. Thank you. That wasn't as depressing as I thought it would be. Any final thoughts overall global outlook that you want to share with us before we close?
RS:I think the global outlook is still positive. If I use a weather map analogy, there are parts of the global economy like North America where it seems partly cloudy. There are parts of the global economy where it's a bit stormy, Europe. There are parts of the global economy that are pretty sunny. Certainly parts of Asia are not nearly at risk of the same kind of slowdown that we're seeing in Europe and potentially maybe even seeing in North America.

That to me suggests that we should be able to avoid any kind of coordinated, concerted, global downturn. Maybe some pockets of pullback in the economy. I think higher probability in Europe, less so in North America, certainly in the United States and then even less than that in Asia.

I think that especially if China goes through this disruption that they're going through. And then, comes back out and is that massive force for global economic growth that it has been for really the last 40 years, I think that means that the global economy can be in another favorable growth position. But I don't want to discount the risks.

As we were talking about earlier, there's still risk in Europe with everything that's going on there. There is a risk associated with China reopening. There are risks associated with central banks raising rates and ultimately with inflation. But I think the ledger is probably more balanced than I think a lot of the popular narrative that is circulating right now.
DW:Great. Thank you very, very much.
RS:Thanks very much.
DW:Very interesting.
RS:It's pleasure to be here.
DW:Thank you, everyone. I hope that you all have something to take away. Talk about at cocktail parties, disco text. I can't get that out of my mind. We have other sessions to view and we have other information in our solutions insight section of our website, which is eisneramper.com. I hope everybody stays safe and enjoys the New Year.
RS:That was great. That was excellent.
DW:Thank you. That was fun. Thank you.

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