The Local and National Economic Outlook for 2018
At a recent meeting of the Atlanta Board of Commercial Realtors, Roger Tutterow, professor of economics and director of the Econometric Center at Kennesaw State University, provided an update on the 2018 economic outlook for the U.S., Georgia, and Atlanta.
An Ongoing Recovery, with a Brighter 2018
Tutterow noted that, while the U.S. economy has been expanding for eight years, it has taken a long time for the public to feel “normal” again. The inflection point may have come in 2014, when consumer confidence finally ticked up. The lag may be due to the fact that the financial crisis of 2008 triggered an unusually severe and lengthy recession. The average recession lasts 58 months, Tutterow said, but this recovery has just entered its 102nd month.
Tutterow blamed “bad economic policy” for the crisis and asserted that the current risk of recession is low. While the GDP seems sluggish, it is stronger than the rates reported by the media. If inventory numbers are subtracted, GDP growth is at 2.7-2.9 percent. The number of products sold, Tutterow contended, is more important than the amount produced.
The Federal Reserve has just raised interest rates and is expected to do so again at least two more times next year. These rate increases should move GDP growth beyond 2017’s 2.2 percent.
According to the MISM’s (Manufacturing Institute of Supply Management) PMI (Purchasing Managers Index), manufacturing has shown strong growth over the last few years. Decreasing energy and labor costs will bring manufacturing back to the U.S., Tutterow predicted. For some plants in Georgia, electricity costs are higher than labor costs; lower utility bills will boost these companies’ production. The U.S. dollar’s nine percent decline this year is also helpful to manufacturing, as demand for U.S. products is now up.
Consumer Confidence Rising, Retail Changing
The 2016 election results drove up consumer optimism at the end of that year—at least among Republican and Independent voters. Tutterow believes that Democrats’ outlook will become brighter this year as post-election doldrums dissipate. Retail sales have steadily risen since March 2016, but they still trail behind pre-recession numbers. The nature of retail is changing rapidly with the rise of e-commerce. Today’s widespread distribution of products is decimating the demand for big-box retail space. Many of these spaces will be vacant and will need to be redeployed to other uses.
At present, 146 million people work in the U.S. economy. To maintain economic growth, at least 100,000 jobs must be added each month to the U.S. labor market. Currently the rate of job increases is outpacing labor growth. Truck drivers to move products are in especially high demand.
Georgia was one of the top ten states for job losses during the recession, as the state’s labor market was heavily concentrated in housing. Now Georgia has risen to the top third of states for job creation.
Construction jobs from building two new stadiums have stimulated much of Georgia’s job growth. Now that those two projects are complete, Tutterow expects healthcare and professional services to drive job creation. Again, lower energy prices will help to add more jobs to the market; lower gas prices in particular will stimulate the Atlanta economy.
Effects of Rate Increases
Rate increases by the Fed could push prime rates as high as 4.5 percent, according to Tutterow. Ten-year Treasury bonds were at 1.4 percent after the Brexit vote in the UK but rose to 2.5 percent after the 2016 U.S. election. They have now leveled out.
Long-term borrowing costs have been dominated by “push and pull,” Tutterow observed. The European Central Bank has committed to keeping rates low, even as the Fed continues to push U.S. rates upward. Capital will flow in to “correct” rates as they increase. The Fed’s balance sheet has quadrupled since the financial crisis, so the central bank is now allowing Treasuries to mature and roll off its balance sheet. This will put upward pressure on rates and push ten-year bonds to three percent in 2018.
Commercial Real Estate in Atlanta
The U.S. lending market is still “extremely cheap” for borrowers, Tutterow maintained. There is an oversupply of multi-family projects nationwide, but not in Atlanta, and “money is getting tight for apartments” here, he noted. Pension funds and insurance companies have suffered in the low interest-rate environment, which has put pressure on them to chase yield. Hence, multifamily projects are often financed by banks and then sold to pension funds for the higher yield. This trend will change as interest rates climb.
Non-residential construction, meanwhile, is down, particularly for manufacturing space, but industrial projects will increase next year. Lodging construction will fall in the future.
Office construction is in its fourth year of recovery. Even though jobs are being added to the economy, office space is being used differently. The average number of square feet per employee has dropped dramatically over the past ten years—a trend that has put a damper on office construction. However, risk tolerance for office development and construction cost per square foot have both increased. Atlanta will not be overbuilt in 2018, and valuations are going up. “We will gradually see more office space in Atlanta,” Tutterow predicted.
Tutterow believes that housing—particularly multi-family housing—is “under-supplied” in the U.S. Millennials want vertical, urban housing but often find in-town apartments to be too expensive. Overall, though, Atlanta housing prices have stabilized. The recovering residential market has freed many people to sell their homes and relocate to Atlanta, which can only improve the already expanding economy here.