Economic Bottom Reached; Recovery’s Shape Still Uncertain


Due to the depth of the recession and complexity of issues leading to the global financial crisis, government intervention and stimulus have escalated to unprecedented levels. In addition to the Fed’s interest-rate reduction to almost zero, the government’s unconventional initiatives have helped spark market activity. These include the doubling of the Fed’s balance sheet over the past two years as result of various rescue packages and liquidity injection and programs such as Cash for Clunkers and tax credit for first-time homebuyers, which targeted trouble spots in the economy. These programs have not compensated for the unprecedented drop in consumer and business demand; however, they have worked in averting the worst-case scenario for the U.S. economy and are providing a much-needed spark to reignite economic activity. Most importantly, the “fear” psychology of the past six months and extreme risk aversion by investors has clearly shifted in the right direction.

Recent Fed statements suggest interest rates will remain low for an extended period, though sentiment could reverse if inflation were to spike unexpectedly. A rapid tightening of monetary policy could derail the recovery and result in another deep contraction (W-shaped cycle), most similar to the twin recessions in the early 1980s. Given the amount of slack in the economy today, runaway-inflation fears appear overblown, for now. There are, however, other risks that could spawn a double-dip recession, including another financial sector shock, which could set a new negative feedback loop into play. Additional risks include a wave of commercial mortgage maturities over the next several years, the prospect of a supply-induced energy shock, or the possibility of higher taxes to offset the deep fiscal deficit. These risks are well recognized at this point, however, the slack in the economy should give the Fed plenty of room to avoid measures that risk a second recessionary dip.

The sudden and deep recession would lend some expectation of a V-shape recovery, which is also supported by historical post-recession periods, the majority of which saw first-year growth rates well above long-term averages. In fact, the tremendous volume of cash on the sidelines throughout the economy points to a potential of surge in investment and spending that would normally support a V-shaped recovery scenario. However, given the depth of consumer debt, high and lingering unemployment, and corporate focus on keeping a lid on costs for some time, the real estate industry is best served to prepare for a more gradual, U-shaped recovery starting in the latter part of 2009. Given the depth of the still-lingering credit market issues, a somewhat choppy pattern should also be expected before a sustainable cycle of growth takes hold.

Hessam Nadji is the managing director, research services at Marcus & Millichap Real Estate Investment Services. Contact him at or (925) 953-1700.