The exogenous variable in our industrial forecast model is total employment growth. It drives availability, stock growth and rent growth in our forecasts. Total employment growth has held to a healthy range of 2.2%-2.5% over the past five years, but we expect it to slow to 0.88% in 2018 and then to -0.33% in 2019 as a mild recession occurs.
Per our model, this weak employment, coupled with rising availability and stock levels, produces the low absorption figure:
Net absorption is an indirect (calculated) output of our model, based on the availability and stock growth forecasts mentioned above. From our stock growth forecast, we calculate a stock level forecast. We use those stock levels and our availability rate forecast to calculate occupied stock:
Net absorption is the change in that occupied stock.
Recent jobs reports have provided mixed signals on wage growth; although there is certainly upward pressure on wages, aside from a strong September figure, wage growth has been sluggish. Whether it will gain—and sustain—any momentum remains an open question, particularly in the context of the softer consumption spending over the past three quarters.
Meanwhile, we expect credit conditions to become tighter, given the Fed’s plans to raise interest rates and to unwind its balance sheet. This would likely be a hindrance to new investment and consumer durables.
There is considerable softness in the auto industry: with a record number of cars coming off lease and a rise in auto loan rates, auto sales—a key economic barometer—are expected to decline 5% in 2017 and 5% in 2018.
We believe that a confluence of these factors, along with a continued general lack of political and fiscal clarity, will lead us to the 2019 recession, negative employment growth, and consequent low industrial absorption.