April 25, 2019
Key Economic Trends and Predictions
GDP estimates increase as employment and consumer spending trend positive.
- April saw a 50-year low in applications filed for unemployment benefits. Jobless claims dropped by 5,000, and ended the second week of April of 192,000. With national unemployment at just 3.8%, the tight labor market is causing many employers to be more reluctant to dismiss workers.
- March retail sales had the biggest month-over-month increase since September 2017. A sharp decline in December could not be offset by an initial jump in January. February saw another drop, which had some observers worrying about the strength of first quarter GDP. However due to a 1.6% seasonally adjusted increase in sales from March, GDP estimates have climbed higher.
- The Federal Reserve’s beige book published on April 17th saw slow to moderate growth in March and early April. Despite concerns from manufacturers and agriculture firms about Chinese tariffs due to the ongoing trade row between Washington and Beijing, low mortgage rates are signaling the possibility of a significant increase in home buying during the spring. Overall, Fed governors expect the slow to moderate growth of the economy to continue apace.
Dallas Fed president indicates that rates are unlikely to change in 2019.
- During a Wall Street Journal conference call interview the Federal Reserve Bank of Dallas President, Robert Kaplan, cited low inflation pressure and a slowing global economy as reasons for keeping the benchmark interest rate between 2.25% and 2.5%.
- Despite GDP estimates being revised higher recently due to increased consumer spending, it is unlikely that rates will move much higher. The Fed still projects end of the year inflation at their 2% target.
- The prospect of possible rate cuts also seems unlikely, unless inflation were to come in at 1.5% or lower. The central bank’s rate-setting Federal Open Market Committee has not indicated much concern that high corporate borrowing could threaten the financial system or economy in general, however, shocks could still be amplified by the high rate of corporate borrowing.
Pinterest and Uber pre-IPO filings reveal large footprints and long term commitments.
- Ahead of its’ April 18th IPO, Pinterest filed a prospectus that revealed almost $1.2 billion in long term lease commitments mostly in the San Francisco Bay Area. In March, Pinterest executed the largest lease in San Francisco for the first quarter, agreeing to take on 490,000 square feet of a proposed mixed use project on the site of the former San Francisco Tennis Club at 88 Bluxome St. While the project has yet to break ground, Pinterest expects to be leasing a significant part of the building from 2022 through 2033.
- Filings to the SEC revealed that Uber’s footprint stands at roughly 7.7 million square feet worldwide. In 2018 alone, Uber shelled out $221 million in office and data center leases. A large part of the ride hailing app maker’s footprint is concentrated in San Francisco where it will spend nearly $1.9 billion in leases over the next 20 years.
Pinterest and Zoom surge, while Lyft flounders.
- Thursday April 18th saw the IPO’s of Pinterest and Zoom Video Communications Inc. Both companies’ share prices quickly shot above their initial public offering price, with Pinterest jumping 28% and Zoom leaping up 72% by the close of trading on Thursday.
- After rising 8.7% on the day of their initial public offering, Lyft shares have sunk 19% since their late March IPO. The steep drop off in share prices are said to have caused Pinterest and Zoom to price shares more conservatively to avoid the same fate.
New round of guidelines on Opportunity Zones surprisingly favorable to businesses.
- The Opportunity Zone law that went into effect in 2018 got further regulatory guidance from the IRS recently. Two new criteria for qualifying specify that at least 70% of a leased property must be within an opportunity zone for a minimum of 90% of the lease term.
- Guidance on situations where deferred gains would become taxable was offered for the first time since the passage of the law. Other than an inheritance or transfer upon death of ownership interest in an opportunity zone fund to an estate or trust that becomes irrevocable upon death, a transfer done by gift or other non-monetary transfer will result in deferred gains becoming taxable.
- The new guidelines also addressed treatment of the regulation that stipulated 50% of a business’s gross income to come from within an opportunity zone. The 50% law now will allow the measurement to be related to either 50% of hours of work performed, 50% of the amount paid for services in an opportunity zone, or if 50% of the management of the operation of the business in a zone is necessary to generate 50% of gross income.
- Treasury Secretary Steve Mnuchin is hopeful that this most recent guidance will provide enough clarity for significant investments into Opportunity Zones. The new 169 page guidelines were welcomed from large opportunity funds that have indicated a greater willingness to go forward with large investments in Opportunity Zones.