Inflation is on the run, but it is still not defeated. Meanwhile, the U.S. job market remains near full employment, and stocks and home prices continue to boom.
By most measures, the U.S. economy is firing on all cylinders. Ever the tightrope walker, Federal Reserve Chairman Jerome Powell has been telling investors not to expect lower interest rates any time soon.
“The economy is strong,” Powell said in late March at an event at the Federal Reserve Bank of San Francisco. “We see very strong growth ... That means we don’t need to be in a hurry to cut.”
For the past two years, all eyes have focused on inflation. In 2022, growth in the consumer price index hit 40-year highs. The surge of inflation brought a round of denial from Powell, followed by a show of force. In 2022 and 2023, the Fed raised rates 11 times, by a combined total of more than 500 basis points. After the Fed’s all-out assault on inflation, the enemy retreated. The early victories were dramatic, but now the rout is more like a stalemate. Inflation remains well above the Fed’s official target of 2%.
Indeed, national unemployment was at 3.9% in February, and inflation had ticked up to 3.2%. As the Fed snatched away the proverbial punch bowl, everyone expected a recession. Instead, the U.S. economy kept the party going.
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With inflation still hanging on, the Fed has been signaling that it might cut rates three times this year, half as many cuts as previously anticipated. Fed policymakers have conveyed that they are not willing to cut rates until inflation is near the 2% goal.
“This economy doesn’t feel like it’s suffering from this level of rates,” the Fed chair noted.
During his appearance in San Francisco, Powell laid out the pros and cons of rate cuts. Cutting while inflation is still breathing means running a risk – the beast could return.
“If we reduce rates too soon, there’s a chance that inflation would pop back, and we’d have to come back in, and that would be very disruptive,” Powell said. “It would not be good for the economy.”
Meanwhile, the U.S. economy has remained resilient despite high interest rates. Inflation-adjusted consumer spending topped all economists’ estimates in February, and employers are still hiring workers at a robust clip.
“Last year’s combination of resilient growth and moderating inflation is unusual historically and should be celebrated,” said Simona Mocuta, chair of the American Bankers Association’s Economics Advisory Committee and chief economist at State Street Global Advisors.
Economists usually have two hands, of course, and Mocuta noted the warning signs lurking in the data.
“While credit availability remains largely intact, the cumulative effect of still-high interest rates, softening demand, lower consumer savings and a mild uptick in unemployment will drive some deterioration in credit quality,” Mocuta said.
Another challenge comes from the housing market, which has weathered rate hikes surprisingly well. Home prices remain near record levels, and mortgage rates have more than doubled since the pandemic. As the Fed continues to delay rate cuts, “higher for longer” is the new reality for mortgage rates. In one illustration of the changing sentiment, Fannie Mae at the beginning of the year expected mortgage rates to fall to 5.8% by the end of 2024. Now, its forecast calls for the average 30-year mortgage rate to be at 6.4% at year’s end.
“The good news is that the housing recession is over,” said Mocuta. “The not-so-good news is that a structural shortage of housing in the United States is keeping home prices elevated and affordability constrained.”
Our geographic advantage
At Wolfgramm Capital, our acquisitions are focused on the Sun Belt, with a special concentration in Texas. For decades, the Lone Star State has churned out nothing short of an economic miracle.
Texas’ rate of job growth was 2.1% from February 2022 to February 2023, according to the U.S. Labor Department. Nearly 300,000 jobs were created for the year.
Drawn by the combination of a strong job market and reasonable taxes, new residents are flocking to Texas. According to the U.S. Census Bureau, Texas added the largest number of people from mid-2022 to mid-2023, expanding by more than 473,000. And Texas’ 1.6% growth rate was third in the nation, trailing only South Carolina and Florida.
Wolfgramm Capital’s executives have a combined 80 years of experience in hotel acquisitions, ground up development, master planning, refinances, property management and development. From working hotel front desks to acquiring and managing a multi-billion-dollar portfolio spanning a range of asset classes, we have done it all.
What is more, recent history reveals the importance of a crisis-resistant portfolio. Because we manage our own hotels, we can oversee investments at the granular level. Our strategy lets us renovate at a discount, and our reputation wins us access to proprietary deals other firms don’t see.
The last couple of years have revealed the importance of having a crisis-resistant portfolio. Thanks to our barbell approach in hospitality and our diversification across asset classes, including condominium development and master planned communities, we see investments both in the context of the overall macroeconomy helping us refine our approach in each investment at a granular level.
While inflation continues to persist in the economy, compelling the Fed to keep rates relatively high, our geographical focus for new developments and our approach to hospitality at both sides of the economic scale ensures we continue to insulate investor capital no matter how the macroeconomic climate might change.
