by Calculated Risk on 8/26/2009 12:35:00 PM

From Atlanta Fed President Dennis Lockhart: The U.S. Economy and the Employment Challenge

On the economic outlook:

With respect to growth, my forecast envisions a return to positive but subdued gross domestic product (GDP) growth over the medium term weighed down by significant adjustments to our economy. Some of these adjustments are transitional in the sense that they impede the usual forces of recovery. Among these are the rewiring of the financial sector and the need for households to save more to repair their balance sheets.

Some of these adjustments, however, are more "structural" in nature. By this, I mean that the economy that emerges from this recession may not fully resemble the prerecession economy. In my view, it is unlikely that we will see a return of jobs lost in certain sectors, such as manufacturing. In a similar vein, the recession has been so deep in construction that a reallocation of workers is likely to happen—even if not permanent. ...

My forecast for a slow recovery implies a protracted period of high unemployment. And labor market weakness is a concern I hear about often as I travel around the Southeast.

And on Commercial real estate:

I'm concerned that commercial real estate weakness poses a serious potential risk to the economic recovery and to the banking system. Commercial real estate loan exposure is heavily concentrated in banks and commercial mortgage-backed securities. Commercial real estate values—that is, collateral values for loans—are being revised down materially by the potent combination of increased vacancy, rent reductions, and appropriately higher capitalization rates. Further, there is a clear link between employment trends (positive and negative) and commercial real estate trends.

On that note, here is a graph from a post in July:

Click on graph for larger image in new window.

This graph shows the office vacancy rate vs. the quarterly unemployment rate and recessions.

As Lockhart noted: "[T]here is a clear link between employment trends (positive and negative) and commercial real estate trends."

As the unemployment rate continues to rise over the next year, the office vacancy rate will probably rise too. Reis' forecast is for the office vacancy rate to peak at 18.2 percent in 2010, and for rents to continue to decline through 2011.