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Economics Weekly May 28, 2024

illustration of two people in front of a graph June 3, 2024

U.S. Businesses gained momentum in May

The latest PMI business activity index figures came in much stronger than expected for May, which suggests the commercial side of the economy is strengthening. The index is based on a survey of companies who are asked questions about levels of demand, recruitment plans, prices and other metrics. The responses are compiled into a score whose convention is a figure above the 50 mark points to economic growth. The PMI index increased from 51.3 in April to 54.4 in May, which is an impressive increase that points to momentum building. What makes this all the more impressive is that Wall Street was forecasting a small fall to 51.1. Other major economies like the Eurozone and Japan saw much smaller increases in their PMI indices, suggesting that the US is outperforming on growth.

The PMI sub-indices for the main industry sectors indicate that services firms are leading the way. The services PMI increased from 51.3 in April to 54.8 in May, whereas the manufacturing index rose from 50.0 last month to 50.9. When thinking of the real estate market implications, this favors offices, retail, hospitality and leisure as the sectors that largely draw their tenants from services industries. The PMI figures will also add to the case for the Federal Reserve delaying cutting the Funds Rate until later in the year. For real estate investment, we view the upside potential for leasing demand from the robust state of the economy as the bigger story investors should focus on, not interest rate cuts whose timing appears uncertain and months away.

This week sees data released on house prices and inflation. For house prices we see growth increasing slightly, although shifting expectations on the Fed Funds Rate could cause this indicator to slow in the coming months. Also, the Fed’s preferred measure of inflation, the PCE Price Index, is published on Friday. We are predicting a small decline, but not by enough to change the outlook for interest rates.

Things to watch for this week

Tuesday, May 28

S&P CoreLogic Case-Shiller 20-city home price index, y-o-y, March  

Previous: 7.3%
Forecast: 7.4%   

March saw a decline in mortgage rates, and consequently we are forecasting a slight improvement in house price growth for that month.

Friday, May 31

PCE Price Index Inflation, April

Previous: 2.7%
Forecast: 2.6%

We are forecasting a small reduction in inflation thanks to slower growth for housing costs and declining auto prices.