That’s right.   We’re talking about real estate.   What do trade, currency values, homelessness and commercial real estate have in common?   Very little.   

But today is America’s birthday!   Almost.   So let’s dig in anyway!

 

Welcome to this week’s Steak House Index update.

 

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/

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Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.   But is the US economy expanding or contracting?

Expanding … according the ‘advanced’ reading just released by the BEA, Q3, 2024 GDP grew — in ‘current-dollar‘ terms — at the annual rate of 4.7%.

The ‘real’ growth rate — the number most often touted in the mainstream media — was 2.8%.   In current dollar terms, US annual economic output rose to $29.35 trillion.

According to the IMF, the world’s annual GDP  expanded  to over $105 trillion in 2023.   Further, IMF expects global GDP to reach almost $135 trillion by 2028 — an increase of more than 28% in just 5 years.

America’s GDP remains around 25% of all global GDP.  Collectively, the US, the European Common Market, and China generate about 70% of the global economic output.  These are the 3 big, global players.   They bear close scrutiny.

 

The objective of this blog is singular.

 

It attempts to predict the direction of our GDP ahead of official economic releases.  Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.

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Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore “fun” items of economic importance.   Hopefully you find the discussion fun, too.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.

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The Blog:

The burning economic question these days is this:   Are the ‘Trump Tariffs’ inherently inflationary?   FED Chairman Powell would love to know.    As would we all, of course.   But we’re just going to have to wait for the answer.  

In the interim, the always fun and interesting column known as “Wirecutter” over at the New York Times decided to see what’s happened so far.   They wrote a piece titled:

 

“We Tracked Prices on 40 Wirecutter Picks for 60 Days.

Here’s What We Learned.”

 

Here you go — text directly from the article:

 

President Trump’s Tilt-A-Whirl of tariffs has left many consumers feeling dizzy, if not outright nauseated, over the possibility of rising prices.

But have prices actually gone up?

We wanted to find out, so we spent the past 60 days rigorously tracking the prices of 40 Wirecutter picks to see what, if anything, has gotten more expensive since the administration levied (and then, in many cases, paused) tariffs on much of the world.

The answer: Things haven’t changed as much as we expected them to.

Of the 40 products we tracked, 27 of them — roughly two-thirds of the group — didn’t change at all.   Another three actually dropped in price. And 10 went up.

Of the 10 that had price increases, only three jumped in cost by 15% or more. The other seven increases were relatively modest.

Of course, this is a very short window of time and in no way are their findings a definitive answer to our question.   But the findings are interesting.   Are you curious about what prices are UP and which are DOWN?    Here’s the list:

 

 

The questions, however, remains — does it all just cancel out?   If a proposed 10% universal tariff is offset by a 10% drop in the value of the dollar, are we left with a net-zero impact on prices?  And if it does, is the impact on inflation essentially negligible?  

No matter how we slice the steak, a tariff is a tax on imports.  If when the dust settles, the US imposes a 10% tariff on foreign goods, those goods become more expensive when they cross the border and take residency in a US Customs warehouse.  In theory, this discourages imports and encourages a “substitution” for domestic products – assuming a domestic substitute is available.

But here’s the nuance.

If, at the same time, the U.S. dollar weakens by 10%, simultaneously, then foreign goods become cheaper in dollar terms before the tariff is even applied.  That currency depreciation effectively either partially or wholly offsets the tariff’s inflationary effect.   And that has happened:  America’s dollar has slid roughly 10.8%.  This isn’t just a blip — frankly, it’s the worst first-half performance for the dollar since the Nixon era.

So, does it all just wash out? 

Sort of.   On the ‘negative’ side of the ledger, while currency reacts in real-time, the tariff phase in takes place over time.    This asymmetric relationship makes the calculation more complicated.   On the ‘positive’ side, more than 17% of all US imports are “services” – which are difficult, if not impossible, to tariff.   And in the middle, some importers may choose to “absorb” price differentials and some exporters may choose to “eat” some or all of the tariff, given the currency gains.   

In the final analysis, this isn’t math — it’s economics.   The math seems to suggest a 10% drop in the dollar offsetting a 10% tariff “feels accurate,” but the economic impact is more complex than zero-sum.  60 days in, the Wirecutter findings are interesting:   75% of the product prices were unchanged or lower.   Very interesting.  

Let’s talk real estate!   For decades, you’ve heard commercial real estate is a good investment.   Is it?   Well, like all economic questions, it depends. 

Multifamily — apartments — have done the best over the past 2 decades, according to the MSCI, a US based financial services company.   The worst, without a doubt, has been office buildings located in “central business districts,” meaning downtown.    Retail — shopping centers and the link — have been essentially flat.    Take a look this graph:

 

 

Industrial properties — the green line above — have performed quite well too.    If you have been invested in industrial or apartments for the past 10- or 20-years, congratulations:   You picked well.   If you were a big office building investor, well, sorry.    Does this past performance suggest apartments and industrial will be the best sectors going forward — suggesting you wish to invest in commercial real estate at all?    That’s hard to tell.   You know the old investing admonition:   Past results are not a guarantee of future results.   Caveat emptor.  

While our US legislators wrestle with their Big Beautiful Bill … our own just passed right here in California!   Governer Newsom just signed two “budget-trailer” bills — AB 130 and SB 131 — which together roll back meaningful parts of old legislation called CEQA.   Why and why is this important?  

Housing.   And, I’m guessing, homelessness.    California has too little of the former and too much of the latter.   These two bills will exempt “infill housing” projects from CEQA review.    Infill, in this case, is essentially to-be-built housing projects — single- or multi-family — which are a use conversion from another type of property or are located in a built-up, urban location.   These two bills are expected to significantly speed up the development time table.   

Will this help?   Yes.  This is a MASSIVE step in the right direction to put a dent in both the CA housing shortage and the homeless problem.    Frankly, this should have happened 2 decades ago.   But better late than never.   

To the steak houses!

 

 

Hmmm … this is interesting too.    Check out the open tables at MOOO in Boston.   Wow.   This is a first.   Generally, every table at MOOO is fully booked for the upcoming Saturday.   Not this Wednesday.  I’ve never seen this before.   

And the SHI10 has reached a new low point:   This weeks reading is a very negative, very red (79).   Even more concerning is the comparison to this week’s reading last year.   

 

 

Yes, this week the SHI40 is looking as red as a raw ribeye.   Once again, the SHI is suggesting economic weakness across the US economy.   Of course, this is but one indicator.   Others remain more bullish.  But take note:   This is not good.  

Happy 4th!

>:<  Terry Liebman  >:<