Recession — What Recession?

The recession of 2001 will almost certainly turn out to have been the shortest and shallowest recession that the United States has experienced in the post-World War II period. In fact, technically it was not even a recession. The Federal Reserve Board has already indicated that an economic recovery is underway, and the Board has begun to position itself to tighten interest rates and start to reverse the dramatic reduction in rates that occurred during the past year.
The real estate market typically lags the economic cycle, and a recovery in occupancy rates and rental rates has not yet begun to any great extent. However, there has been a tremendous flow of cash into U.S. real estate in recent months as investors have sought to capture the relatively high cash-on-cash yields that are available in this asset class. We cautioned in our First Quarter Newsletter three months ago that these high cash yields were unlikely to be available for long, and we have already seen at least a 50 basis point rise in mortgage interest rates and a corresponding decline in cash-on-cash yields.
Another principal factor supporting the real estate market has been a shortage of new property offerings. Combining the shortage of quality product with the impressive stream of cash trying to get into real estate has led to strong price competition. As the economic recovery continues, we expect the recovery in the real estate market to pick up steam.

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The Economic Recession —
The Business Correction

The Government has announced that the U.S. economy grew at a revised rate of 1.7% during the final quarter of last year, thereby ending the very brief economic slowdown of 2001. Since only the third quarter of the year showed negative growth and two consecutive negative quarters are required to define a recession, the slowdown that did occur does not qualify as a recession. The slowdown of 2001 was focused on correcting excesses that had developed in three main areas of the economy – areas that had been major contributors to economic growth during the previous decade. These were telecommunications, the internet/dot-com field and capital investment in technology. All three of these areas will undoubtedly show excellent growth in the long-term, but during the 1990’s there had been unsustainable levels of investment in each of them and major corrections ensued.

Accentuating these three corrections was the catastrophe of September 11th. Many sectors of the economy came to an almost complete halt following the tragedy, and the U.S. economy reached its low point at that time. Ironically, the Government’s reaction to the events of September 11th was helpful in turning the economy around and restoring it to the path of growth.

The Elements of Recovery

There were four key elements to the rapid recovery in the U.S. economy. First, was the Bush Administration’s tax cut. It had been enacted prior to September 11th since the Administration recognized that the economy was slowing. The second factor was the action of the Federal Reserve Board in cutting interest rates eleven times during 2001. Short term interest rates were brought down to 1.75%, the lowest level in over 40 years, and this helped provide the necessary liquidity both to corporations and consumers to maintain their respective levels of investing and purchasing. And the huge increase in Government spending necessitated by the events of September 11th had a major and immediate effect on stimulating economic activity. The Government budget swung from a major surplus to a deficit within a matter of weeks as Congress approved new military and security expenditures. The final element in the recovery was the consumer. Although consumer confidence fell, consumer spending remained strong, particularly in the housing and automobile areas. Tax refunds and low interest rates helped the consumer continue the spending pattern that has been so typical of American consumers during the past decade.

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