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SALT LAKE CITY — As a member of the Utah Economic Council, I had the chance to sit on a panel at the annual Utah Economic Review in late January. Generally speaking, the tone at the event was optimistic. However, the last several years have started off with a burst of optimism (regarding the economy), which is then met by harsh realities. So, is this year any different? Was the tone of the event influenced by seasonal optimism? When asked about my personal expectations for the coming year, I stated that I expected it would be a good year. By "good year," I mean not a bad year and not a great year. Allow me to further explain why.
First, it's helpful to look back at the previous year. At the start of 2013, the nation was dealing with effects of the politically engineered problem known as the "fiscal cliff". Although a compromise was reached, it too had an effect on the economy. Taxes went up, notably on wealthier households, but the payroll tax holiday was also allowed to expire, which shrank the paychecks of millions of Americans. In addition, sequestration was allowed to take effect.
It is worth mentioning that the consequences of these decisions were felt in Utah. For example, one firm with a significant presence in Utah reduced its workforce through a combination of layoffs and employee buyouts during the third quarter of 2013. This reduction represented roughly 12 percent of the firm's area workforce.
In addition to good news out of Washington, household wealth increased significantly during 2013.
Optimism
However, this year began with optimism that policies coming out of Washington wouldn't weigh on the economy quite as much. In fact, before the end of 2013, President Obama signed a bipartisan budget deal into law which reduced the risk of a government shutdown. Furthermore, just days ago the President also signed a bill which lifted the nation's debt limit. In short, policymakers acted in a way that averted the potential for disruptive governance.
In addition to good news out of Washington (it's all relative), household wealth increased significantly during 2013. Many economists and analysts made the case that such an increase in wealth would translate into higher spending levels - an important point because consumer activity accounts for roughly 2/3 of US economic activity. Knowing all of this, why wouldn't 2014 be a great year as opposed to a good year?
Challenges to growth
To give a short answer, there are a lot of factors in play which are affecting the global, US, and local economies and everything from consumer to business confidence. I'll address some of the major issues here. In reality, many of the challenges to growth today were years in the making and have yet to be fully addressed by policymakers. Some of these issues such as unsustainable growth models even predate the Great Recession, but the downturn also created a new set of issues. As economic conditions deteriorated, so did government finances in many cases. This revealed a whole new set of challenges as markets began to worry about finances in countries traditionally associated with safety, particularly in the Eurozone.
As Europe struggles to create a sustainable monetary union, there are other big concerns too. The world's two largest national economies (U.S. and China) are also dealing with long-term structural issues and the way that they are handled will affect growth around the globe. In addition to the challenges in the world's largest economies, other concerns are emerging.
Geopolitical issues are in play with many increasingly concerned about tensions between China and Japan. Furthermore, if an agreement can't be reached with Iran over its nuclear program, stability in the region could be called into question-potentially affecting global energy markets.
On top of geopolitical issues, emerging markets are now experiencing a slow-down in economic growth and volatile capital flows as the US Federal Reserve adjusts its monetary policy (notably the tapering of quantitative easing). Also note that elections will be held in many key emerging markets this year, which injects an additional degree of uncertainty into the picture as frustrated citizens make their voices heard at the ballot box.
What about all of the new household wealth in the US? In a report released last December, Fannie Mae concluded that financial asset wealth recovered "relatively rapidly", but is very concentrated among the wealthy. Wealth associated with housing, which is held by a broad range of households including the less wealthy, has not performed as well. In short, increased wealth that could support consumption is more biased toward wealthy households.
Elections will be held in many key emerging markets this year, which injects an additional degree of uncertainty into the picture as frustrated citizens make their voices heard at the ballot box.
Furthermore, American consumers are still quite indebted. Recently, Stephen Roach of Yale made an interesting point. While debt-services costs are down, the debt to income ratio (at 109 percent) is still 35 percentage points above the average over the last 30 years of the twentieth century. All this combined with a gradually improving labor market and stagnant wage growth helps explain weakness in the most recent retail sales report. Although extreme weather has had some effect, it doesn't explain all of the weakness in recent economic data.
Positive and negative developments
All in all, businesses are looking at both positive and negative developments. However, it is clear that businesses remain cautious. In fact in a recent CEO survey, PwC found that CEOs were just as concerned about opportunities during the next three years as they were a year ago. The same survey indicated that 92 percent of US CEOs were concerned about unsustainable fiscal policy in the US and the response to it. Clearly businesses are aware of the challenges that policymakers must face and they are proceeding forward cautiously.
Although policymakers in the US have a range of policy tools and options to aid economic growth, due to partisan gridlock, it does not appear that a growth agenda could work its way through the legislative process at this time. Consequently, improvement will be slower than it could be.
From my perspective as a commercial real estate analyst (full disclosure: I'm a senior research analyst at CBRE), this will weigh on growth in commercial real estate markets and shape the behavior of businesses and how they use their space. Ultimately commercial real estate markets reflect trends in the broader economy. As executives remain cautious, it will focus attention on expenses. With real estate being a major expense, businesses can be expected to examine ways to increase efficiency of space usage.
Bottom line
So, the bottom line is this: there are still a lot of challenges confronting businesses and economies around the world. While improvements in the US and Utah economies are expected, growth will be weaker than it could be as policymakers (particularly on the national level) do not fully address long-term issues. So, beware of the overly-optimistic forecasts.
Having cautioned against overly-optimistic forecasts, it is important to mention that the US and Utah economies are incredibly dynamic. The next round of innovations that could propel growth in the coming years is possibly being developed in a lab or someone's garage right now. In short, there is reason to be both optimistic and cautious. With this in mind, economic growth in Utah is expected to be near, but slightly below its long-term average - somewhere around three percent. Provided nothing major and disruptive happens on the global or national levels, 2014 may not usher in the spectacular growth of past years; but it should be a good year.
