Talk of a “Goldilocks” situation belies real danger
tale is not usually the best use of an investor’s time. But there may be an exception. The internal logic of “Goldilocks and the Three Bears”, and the idea of whether the economy can be “just right” for financial markets, merits some inspection.
They are unlikely to return to earth any time soon. On top of buoyant growth figures—one closely followed estimate suggests that the American economy may be growing at nearly 6%—underlying supply and demand also point upwards. The government will run a budget deficit of around 6% ofthis year, a figure that is expected to grow over the coming years. Meanwhile, the Fed has allowed around $765bn of Treasuries on its balance-sheet to mature without replacement since last summer.
Take commercial property. American office-vacancy rates reached 16.4% in the middle of the year, according to Colliers, an estate agency, above the previous record set after the global financial crisis of 2007-09. The combination of entrenched work-from-home habits and rising interest rates has been brutal for owners of commercial property. Capital Economics, a research firm, expects another 15% decline in prices by the end of 2024, and for the west coast to be hit particularly hard.
Problems in commercial property could spread. Many American lenders have extended credit to the industry. In early August Moody’s downgraded ten small and mid-sized institutions and placed several larger ones on watch for downgrades. Banks with under $10bn in assets have exposure to commercial real estate worth 279% of their equity cushions, the rating agency noted, compared with 51% for those with over $250bn.
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