Current Market Indications Point to Potentially Robust Economic Growth in 2018

It has been nearly a decade since the end of the Great Recession. After such a lengthy period of recovery, there are now signs that the US economy is finally poised to experience robust growth throughout 2018. Perhaps most importantly, current market trends have economists especially optimistic about the possibility of pervasive growth, with many analysts expecting a significant acceleration in wage gains.

During the long period of economic recovery that began in 2009, the US economy posted an average growth of 2.1 percent, with 2.9 percent (2015) representing the high-water mark. Due to the expectation of continued business investment and rising consumer spending, analysts are projecting a 2.6 percent rate of growth for 2018, an increase of 0.3 percent from the 2017 projection (2.3 percent). Since the 2018 projection was made prior to the passage of tax legislation, it’s reasonable to conclude that the 2.6 percent figure might approach a full 3 percent.

Of course, these projections never rely on any single market indicator, and a number of recent developments have contributed to the optimistic economic projections for the year ahead. Consumer demand for automobiles, combined with continued technological innovation as well as the recent rally in oil production, has been instrumental in the recovery experienced in the manufacturing sector. With the global economy also growing stronger, other sectors in the US have enjoyed significant benefits as well.

These recent domestic and international gains continue to play an important role in the declining unemployment rate in the United States. At 4.1 percent, the nation’s unemployment rate is the lowest posted in the aftermath of the Great Recession, when the unemployment rate reached 10 percent in 2009 (prior to 2009, it hadn’t eclipsed 10 percent since 1983).

Even at the current rate of 4.1 percent, analysts tend to agree that the downward trend will continue in 2018. This is good news for American workers, as employers will be forced to compete for new hires and will likely adopt stronger policies intended to retain current employees. Employers will also have to seriously consider instituting robust training programs to help fill existing vacancies, which will give American workers the opportunity to expand their skill set without investing in potentially costly academic programs or vocational schools.

It’s these conditions — an ever-tightening labor market at a time when companies have immediate and expanding employment needs — that have economists confident that wage growth with finally experience significant gains after stagnating for nearly a decade. According to current projections, analysts are predicting an increase of 2.5 percent for 2018, with gains growing stronger with each passing month until finally exceeding 3 percent at year’s close.

When wage growth rises at a rate approaching 3 percent, it’s only natural to expect a commensurate increase in consumer spending, which is responsible for approximately 70 percent of the US economy. Consumer spending is expected to increase at a rate of 2.5 percent, and business investment is projected to grow at a rate of anywhere from 4.5 percent to 6 percent or more.

The recent tax legislation is expected to further bolster these projections, although it remains possible that the overwhelming majority of corporations will opt to use the tax cuts to increase dividends or buy back stock rather than investing in employees by increasing wages or expanding benefits.

Although the full economic impact of the recently passed tax cut legislation remains to be seen, economists recognize ample reason for optimism about the possibility of economic growth in the year 2018. The most recent projections for economic growth are supported by a number of critical market indicators, including declining unemployment rates, increasing wage gains, and the likelihood of increased business investment, all of which contribute to the growing confidence in the future of the US economy.

An Objective Look at the Potential Impact of Incremental Changes Planned by Federal Reserve

Circumstances in which the Federal Reserve announces a planned increase in short-term interest rates along with the reduction of mortgage-backed securities and Treasury bonds typically serve as an indication of a tighter approach to monetary policy. Even so, the recent announcement from Fed chairwoman Janet Yellen –- which featured the usual conditions associated with a tightening of the monetary policy –- outlined changes so incremental that the typical policy classification cannot be credibly applied in this instance.

Approximately nine years of monetary policy marked by the process of quantitative easing enabled the lower interest rates aligned with a period of sustained economic expansion across the globe. This period of expansion, of course, was preceded by a financial crisis that emerged out of the housing bubble and a relatively loose monetary policy. Arguments over the influence of the monetary policy tend to vary rather widely, but there are many who firmly believe that an earlier tightening of the monetary policy would have discouraged the borrowing that ultimately led to the housing bubble.

Nearly a decade later, those same arguments are being made in favor of a tightened monetary policy intended to ensure sustained economic growth rather than another downturn. Since many economic opinions closely align with one’s place on the political spectrum — which does not mean that the opinion is thus invalid or based on anything but sound reasoning — it’s important to remember the importance of objective economic analyses that take a wide range of issues into account to determine whether a particular action concerning the monetary policy will ultimately achieve its intended outcome.

The current state of the economy features businesses and households with fairly significant debt. An increase in the short-term interest rate, however incremental, might have a far greater impact on borrowers nationwide. With such widespread debt among American businesses and households, an interest rate hike could leave the Federal Reserve relatively helpless if the economy is suddenly dealing with another downturn. Legislators would likewise encounter difficulties in attempting to mitigate the consequences of another recession.

This is not to say that the Fed’s decision to change course — however slowly the change occurs — toward a tightened monetary policy will trigger a downturn; instead, it is important that policymakers take actions based on well-reasoned analyses that take into account the full breadth of factors that influence economic strength.

Thankfully, a reasoned approach to monetary policy is one of the areas in which ideology does not prevail over logic and reason. In fact, both The Roosevelt Institute and The National Review, bastions of liberal and conservative thought, have expressed a clear preference for a looser approach to monetary policy.

Even several prominent far-right politicians (including Ted Cruz, for instance) have gone on the record to say that the Fed’s recent approach, despite being regarded as loose by the majority of economists, inhibited economic growth in the aftermath of the recession because — in almost diametric opposition to conservative orthodoxy – the Fed’s monetary policy was not loose enough.

Keen observers of the decisions and debates surrounding economic policymaking should be heartened by the fact that the mistakes of the past are being heeded as the Fed takes steps toward tightening the monetary policy. That fact alone bodes well for a sustained period of economic growth.

How Will Labor Market and Job Creation Rate Influence Commercial Real Estate Projections?

Despite widespread job openings now totaling well in excess of 6 million, a lack of skilled labor possessing the qualifications needed to fulfill the responsibilities required of those openings is likely to have a far-reaching impact on the health of the labor market as well as job creation — not to mention the potential effect on the commercial real estate sector’s outlook.

With unemployment reaching its lowest percentage (4.3 percent) in more than 16 years, along with more than 80 consecutive months of positive economic gains — and an economy close to, if not already at, full employment — it is clear that the outlook for the commercial real estate sector will continue to be linked to the overall economic growth rate as well as the rate of job creation.

The positive economic indicators have inspired a greater level of confidence from members of the workforce, including those previously wary — whether warranted or not — of the potential for a sudden backslide into economic instability. Since this newfound confidence is especially apparent among the demographic of young workers still likely to be living at home with their parents, the sustained strength of the labor market is expected to have a positive influence on apartment absorption.

Due to a strong sense of confidence and stability in the economy, the youngest generation of workers is increasingly looking to rent an apartment for the first time. Although the workforce is showing indications pointing to greater levels of confidence in the strength and stability of economy, the lack of skilled workers has still had a limiting effect on new job creation.

Even though job creation numbers may be experiencing the adverse effects of a tight labor market, there is reason to believe that, despite the adverse impact, the commercial real estate market will benefit nonetheless. This optimism can be attributed to the fact that despite a substantial shortage of skilled workers to fill open positions, demand for commercial real estate currently exceeds the pace of construction.

Of course, it is fair to wonder why commercial real estate demand is still on the rise in the midst of a labor shortage in which 6 million open positions remain unfilled. This is because certain companies, including those in the professional, business, and financial services employment sectors, have adopted a recruiting strategy revolving around recent graduates for positions requiring the use of office space. Even in an economy currently enduring a significant labor shortage, the jobs created by these companies alone have spurred increases in demand for commercial office space.

It’s worth noting that the economy has not entirely avoided the drawbacks that typically accompany a labor shortage of 6 million or more, as top-line growth has undoubtedly been limited by the inability of American businesses to fill open positions with skilled workers. As it stands now, however, the labor shortage might not necessarily hinder the current rate of economic momentum. After all, the income gains associated with a 4.3 percent unemployment rate and an 8.4 percent underemployment rate — which is the lowest in the past decade — should continue to have a positive impact on economic consumption for the foreseeable future.

Strong Job Creation Numbers Inspiring Young Workers to Enter Housing Market for First Time

For an entire generation of young people, growing up during a time of economic uncertainty has had an undeniable impact on way they approach all manner of financial decisions. Members of this generation have exercised great caution while adopting a risk-averse financial philosophy, and this philosophy has in turn limited their willingness to consider entering the housing market for the first time.

The limited interest among members of this youthful demographic has had a measurable effect on the real estate industry, but it appears that the strength of current economic conditions might finally be enough to convince these young people to test the housing market. It appears that the recent reports of strong job creation numbers — along with a wealth of job openings representing a record high — have inspired a sense of confidence among the group of people least likely to act hastily based on a report of the most recently available economic statistics.

Of course, this does not mean that this youthful generation has not faced difficulties upon entering the housing market for the first time, particularly since the inventory of single-family homes available for purchase is currently at an all-time low. Combined with the fact that apartment vacancies presently stand at just under four percent (3.8 percent, to be precise), it is clear that the sudden increase in demand cannot be met given the currently available supply even when one considers that 371,000 new units are expected for delivery in the next 12 months — not to mention the fact that new apartment construction has never been higher in the past 30 years.

It is not only the residential real estate market that is experiencing the influence of the continued return of strong economic indicators, as the commercial real estate market is also dealing with a level of demand that cannot be met by the current pace of new commercial real estate construction.

This is especially true as it relates to financial services employment as well as professional and business services employment, all of which have outperformed the labor market as a whole. Since companies within these fast-growing categories have primarily targeted recent college graduates for recruitment to new, office-based positions, the demand for new commercial real estate has increased at a rapid rate greatly exceeding the current pace of commercial sector construction.

With the expectation that 2 million new jobs will be added by the close of 2017, there is some concern that a large percentage of these positions will nonetheless go unfilled due to a shortage of skilled workers available for what is now a total of 6 million job openings currently available in the United States. Keeping these and other economic figures in mind, the Fed has continued to favor a moderate monetary policy in an economy lacking any sign that it may be prone to overheating.

Declining Trade Deficit Indicates Potential for Substantial Gains in GDP Growth

Just a single month after an increase in the US trade deficit inspired at least some degree of pause among economists, the $4-billion decline in the trade gap measuring goods has offered ample reason for economic optimism as well as the likelihood of continued GDP growth. While the January numbers indicated a trade deficit totaling $68.8 billion, data from the month of February indicated the trade gap closed to just $64.8 billion, leading some economic analyses to alter GDP growth prognostications by as much as half of a percentage point.

It is necessary to point out, however, that data taken from the opening months of any new year are subject to substantial variances because of a number of factors that remain somewhat fluid — yet not entirely unpredictable — on a year-to-year basis. The Chinese lunar new year, for example, has a significant influence on the national trade deficit of the US, as the overwhelming majority of China’s businesses shut down for the duration of the holiday. With China, more so than any other country, the US holds its greatest trade deficit, which is why the annual holiday wields so much influence over early year trade deficit metrics.

Even after accounting for the influence of the Chinese lunar new year, the decline in the US trade deficit supports the notion held by many economists regarding the potential for continued economic growth going forward. In fact, the likelihood of continued GDP growth is further bolstered by increases in inventory production, including both retail and wholesale inventories. In the case of both retail and wholesale inventories, the February data shows an increase of 0.4 percent.

With the closing of the trade deficit gap of $4 billion from January to February, along with significant data demonstrating a 0.4 percent increase in inventory production across retail and wholesale inventories, it seems clear that the economy is poised for a period of sustained growth in GDP, even in the face of the recently released data indicating a first-quarter slowdown for the 2017 year.

As most economists — not to mention the officials at the Federal Reserve — have concluded, the first-quarter slowdown in GDP growth does not appear indicative of an emerging economic trend. Instead, a closer look at the data reveals the existence of the necessary preconditions supporting the onset of a sustained period of stable economic growth. Given the fact that service-related trade patterns tend to remain stable and relatively predictive on a month-to-month basis, the $4-billion decline in the trade deficit pertaining only to goods offers ample support for an optimistic economic view for the foreseeable future.