Economic Outlook 2018: Steady as She Goes
Experts Don’t Foresee Any Rocking of the Economic Boat
More of the same. That’s what the experts are predicting for this region, and the country as a whole, when it comes to the economy. And by more of the same, they mean growth that is steady if unspectacular — even with tax reform — and few if any signs of what could amount to real trouble. “Another boring year,” was how one economist put it. But for many businesses, boring is more than acceptable.
As a student — and a professor — of economics, Bob Nakosteen fully understands that the region and the nation as a whole are, as they say, due for a recession.
Maybe even overdue.
Indeed, eight and a half years is a long time to be in an expansion, if history and especially 20th-century history is any guide, and that’s about the length of the run the country has been on, said Nakosteen, a long-time educator at UMass Amherst who pegged the summer of 2009 as when the Great Recession ended and the upswing — as unspectacular as it has been, for the most part, in this region — began.
But he quickly noted that there’s no actual relationship between how long a country has been in an expansion and when it’s due for a recession. Time isn’t officially one of the factors that determine such things, he noted, adding that none of the issues and indicators that do are — at this moment, at least — pointing toward recession.
The issues in the state economy, especially in Western Massachusetts, are not macro-economic nearly as much as they are structurally micro-economic; there are individual sectors that are really struggling.”
“The expansion is old, certainly, but there’s nothing on the horizon to interrupt the expansion,” he told BusinessWest, adding quickly that a host of factors will shape what course a continued expansion takes. “The issues in the state economy, especially in Western Massachusetts, are not macro-economic nearly as much as they are structurally micro-economic; there are individual sectors that are really struggling.”
Karl Petrick, an economics professor at Western New England University, agreed, and summoned another word for what he’s projecting for at least one more year: boring.
Trickle-down doesn’t really come to fruition the way people say it will. It’s been promised for decades and decades, but it’s never really happened.”
“Unless you were on Twitter, last year was pretty boring,” he said, tongue firmly planted in cheek while focusing his remarks on what was happening in this region economically. And that was essentially the same thing that’s been happening for the past several years — steady if unspectacular growth that amounts to a few percentage points on average and not the kind of boom times that traditionally follow a recession, especially like the one of almost a decade ago now.
“Even with the tax break, the projections are for the U.S. economy to grow at 2.5% in 2018, and in 2019, 2.1%,” he said. “And if we did see a big increase in growth, it’s very likely that that the Fed will raise interest rates to slow down inflation. The forecast is for another boring year — I hope.”
Indeed, for many in business, boring translates into a decent year, and that’s what Tom Senecal, president of Holyoke-based PeoplesBank, said many of his clients — commercial and residential alike — experienced.
He told BusinessWest that the residential real-estate market is enjoying a surge fueled by low inventories, and that many individual sectors are experiencing steady growth. And he expects tax reform to lift most boats still higher.
Inventory is extremely low in many area communities, and this is having a big impact on prices. We’re going back to seeing sale prices in excess of asking prices, and that hasn’t happened since the late ’80s and early ’90s.”
“With corporate tax rates projected to decrease from 35% to 20%, that will have a significant impact on most businesses,” he went on. “I expect that to be a determining factor in what our local economy will be like in 2018.”
There are other determining factors, obviously, and some areas of concern, both nationally and locally, including persistently stagnant wages.
Despite steady growth in the economy and soaring corporate profits that have fueled a nearly 20% rise on Wall Street this year, wages have remained flat, said Petrick. And he doesn’t believe — despite what leading supporters say — that tax reform will change that equation. And if wages remain stagnant, that might slow the economy down.
“Trickle-down doesn’t really come to fruition the way people say it will,” he explained. “It’s been promised for decades and decades, but it’s never really happened.”
Meanwhile, Nakosteen said the precipitous decline of traditional retail could pose some problems regionally (more on that later), as could a host of other factors ranging from escalating student debt to tighter immigration laws that could keep some foreign students from landing on area college campuses.
But overall, these concerns are not expected to significantly alter the picture or impact those projections for more of what the region has seen over the past several years.
Onward and Upward
That’s the word Senecal summoned early and often as he talked about the local economy, and it’s another word business owners always like to hear.
He said the region’s economy has historically been fueled by education and healthcare (‘eds and meds’), and that trend continues. And those sectors are, well, stable, to say the least.
“If you think of the spin-off economies in the Western Mass. market, we clearly benefit from those sorts of industries [healthcare and education] that are not recession-proof, but they certainly come through recessionary times much more stable than the rest of the economy,” he said. “And I see this in the numbers from our residential loans and our commercial loans. The stability and continued growth has been there, and we expect it to continue throughout next year.”
Beyond eds and meds, Senecal noted, a number of sectors are doing “pretty well,” as he put it. These include ‘green’ energy businesses, commercial construction (although moreso in the eastern part of the state than this region) and the residential real-estate market, which, as noted earlier, has picked up dramatically over the past few years.
“Inventory is extremely low in many area communities, and this is having a big impact on prices,” he explained. “We’re going back to seeing sale prices in excess of asking prices, and that hasn’t happened since the late ’80s and early ’90s; it’s clearly a seller’s market right now.”
Surveying the scene locally as well as nationally, those we spoke with said there is no indication of anything that will disrupt this stability to any significant degree.
But that doesn’t mean there aren’t some question marks concerning the year ahead. And perhaps the biggest concerns tax reform and what it will mean.
Petrick and Nakosteen said such reforms — usually measures to be administered during a recession, not an expansion — can’t (or shouldn’t) be expected to trigger the wage hikes and subsequent consumer spending predicted by supporters of the legislation, because … well, because history shows this isn’t what happens, they told BusinessWest.
“Tax cuts really have little effect,” said Nakosteen, “especially when the economy is not in recession and is near full employment.”
Also, early and unofficial polling of business leaders indicates that wage increases for their employees are not in their plans.
“Many big corporations have already said that, whatever tax breaks they get, they’ll use them to buy back stock,” Petrick noted. “That will do wonders for the stock market, but there’s no indication they’ll use that tax break to raise wages.”
But Senecal projected that tax reform might, in fact, provide a real boost for the economy in the form of investments made by business owners.
“Tax reform has a significant impact on corporate spending,” he opined. “I think that, right now, a lot of businesses are waiting and seeing on tax reform to determine how aggressive or reserved businesses are going to be come 2018.”
As for other factors that might impact the year ahead, to one degree or another, Petrick put wages, and the stagnancy of same, at the top of that list.
“We see growth, but the foundation for continued growth continues to be a little bit shaky, in terms of wages at the national level and the state level,” he told BusinessWest. “They’re just not growing, even as unemployment comes down.
“And that is a bit of conundrum for us at the state level and the federal level, because that puts more pressure of households, especially with uncertainty with what’s going to happen with the individual mandate and how that might impact insurance rates,” he added. “It also impacts state tax revenue, because if wages don’t go up, the state doesn’t collect more.”
There are many reasons why wages are stagnant, he went on, listing everything from soaring health-insurance costs for employers to the decline of labor unions, to the retirement of Baby Boomers and their replacement by younger workers earning lower salaries. But the bottom line is that, generally, flat wages are not good for the economy.
Meanwhile, Nakosteen said the continued decline of traditional retail would further change the local landscape, and it might impact the economy in some ways.
Giant retailers like Sears, Toys R Us, Kmart, and others are closing stores in huge volumes, leaving malls with large boxes to fill (or not, as the case may be) and worries about their very existence. Meanwhile, many smaller retailers are disappearing from the landscape, for reasons ranging from the intrusion of online shopping to a lack of a succession plan.
All this is creating a number of empty storefronts and a lot of commercial real estate for sale and lease, said Nakosteen, adding that the problem is impacting even the most vibrant of downtowns, including Northampton’s, where tenants are asking, ‘why are lease rates so high if so many storefronts are empty?’
“And that’s a very good question,” he said, adding that the higher rates will impact existing retailers and perhaps dissuade others from coming downtown.
But it’s an issue in nearly every area community.
“There are so many empty storefronts,” Nakosteen went on, “and the retail sector is so important to so many downtown areas.”
Meanwhile, workforce issues might also have an impact on the course and strength of the ongoing expansion, he noted, adding that a lack of qualified workers within some sectors might stifle growth.
“The state, as a whole, has issues with the labor force not growing fast enough to accommodate the economy,” he explained. “And Western Mass. is even worse. We have very slow labor growth here; you can’t grow the economy faster than you can hire people to fill the jobs.”
Interest rates could play a role as well, the experts noted, adding that, if the economy does start heating up, the Fed will likely raise rates to keep it from overheating and sending inflation higher.
“Prime rate effects people’s home-equity loans, and it effects commercial borrowers,” Senecal explained. “And if the Fed increases rates two or three times, and that’s clearly their intent, that could have an impact on spending.”
‘Stable. ‘Boring.’ ‘Steady.’ Those aren’t exactly headline-generating adjectives when we’re talking about the economy and where it might head in the months to come.
But they represent reality, and for many in this region — which, as has been noted countless times in the past, doesn’t enjoy stunning highs and crippling lows like other regions — those words are welcome, and much better than the alternative.
And if tax reform works, as Senecal and others believe it might, the region just might wind up doing better than ‘more of the same.’
George O’Brien can be reached at [email protected]