This is the way the recovery was supposed to work out.
A set of emerging nations, including China, India, Brazil, Russia, Indonesia, Nigeria, South Africa and Turkey, was supposed to supplant the United States as the leading engine of global economic growth. The emergence of these nations as increasingly powerful economic drivers was in turn expected to bolster the demand for key inputs into production, including oil, natural gas, copper, iron ore and grains.
Many of the associated implications were deemed to be poverty, including in the form of the rapid alleviation of poverty, growth of middle classes, and more money available to invest into infrastructure and social services. For producers of key inputs to production, including oil producers, the implications of this scenario were particularly benign.
Things haven’t worked out that way. Many emerging nations, including Brazil, Turkey and Russia, have stumbled. Moreover, economic growth in many of the advanced nations of Europe, as well as in Japan, has proved deeply disappointing.
As a result, America’s economic performance is roughly as important in shaping global economic performance as it was many years ago. Despite generating soft economic growth by its own standards, the U.S. economy has remained among the strongest performers in the advanced world.
Recent economic data suggest that U.S. economic performance continues to be stable. The nation added another 178,000 jobs (preliminary estimate) in November 2016 on net and added more than 2.2 million jobs during the 12-month period ending with that month, according to the Bureau of Labor Statistics. The nation also expanded at roughly a 3% rate during the third quarter of 2016 and looks poised to complete an eighth year of economic recovery this coming June.
Trump Goes to D.C.
However, the upbeat assessment of the U.S. economic outlook is not simply related to recently observed trends. The election of Donald Trump as America’s next president has resulted in shifting expectations. Economists, pundits and most of America have been puzzling over what the election results from this past November will mean for the U.S., both in terms of public policy and economic performance.
The president-elect has already indicated that he intends to slash corporate and personal income taxes, renegotiate trade deals with U.S. partners, end commitments to follow certain environmental rules, follow through with his promises on immigration reform, partially deregulate banking, and make it easier to tap into America’s oil and natural gas reserves. He’s also promised an infrastructure-led stimulus package and significant reforms to America’s health insurance setup.
Trump and his coterie of advisers believe these moves will supercharge the sluggish U.S. economy, which has failed to expand at more than a 3% pace or better since the middle of the last decade. Many economists have expressed skepticism regarding the wisdom of this package of these economic promises, indicating that such policies could ramp up the national debt, initiate trade wars, speed global warming and accelerate inflation.
For Trump and his ilk, these appear to be speculative, longer-term problems. In the near-term, the U.S. economy is expected to enjoy added stimulus, even as the country already approaches full employment. The stimulus the president-elect promises will likely push prospective economic weakness back towards the end of the current decade, possibly beyond. When the next recession does arrive, however, it may be much deeper than it otherwise would have been.
During the weeks following the election, equity markets adopted a glass half-full posture. Some of the rise in stock prices was perfectly predictable. After all, if corporate taxes are reduced, corporate after-tax profits rise, all things being equal; that translates into healthier balance sheets and perhaps larger dividends, which renders holding U.S. equities more valuable.
Even before the election, most construction firms appeared to be reasonably well positioned going into 2017. Many report significant backlog, including in surveys conducted by Associated Builders & Contractors. Rising commercial estate values have been inducing developers to continue to construct more hotels, office buildings and multi-family units. The red-hot e-commerce economy has also lifted demand for distribution centers and flex space.
Most construction executives seem to agree that the leading issue facing them is a lack of adequately skilled and credentialed personnel to work on projects. Data from the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey indicate that construction job openings stand at a 10-year high. The Christian Science Monitor recently reported that demand for construction workers is so strong in Portland, Maine, that the Southern Maine Community College has had to suspend its construction technology program because too many students were leaving the program to accept employment offers. During the course of 2016, average hourly earnings for construction workers rose above $28 per hour.
While the near-term U.S. economic outlook appears to have improved, Maryland’s outlook has become a bit more confused. The state’s economy has been expanding at rates similar to the nation’s in recent years. Rapid growth in the state’s health care, medical research, tourism and professional services segments has helped. And the state’s unemployment rate has consistently remained below the national average, most recently sitting in the low-fours.
The state’s housing market has also performed well, bringing unsold inventory down and median prices up. Between November 2015 and November 2016, the pace of home sales rose by a bit more than 18% while median price rose by nearly 3%. Median price would have risen more quickly but for the fact that more first-time homebuyers began to engage the marketplace. These buyers tend to purchase less expensive homes, suppressing increases in both average and median price statistics. Active inventory recently declined below 24,000 units, down from nearly 29,000 units just one year prior.
The presumption among many is likely that Maryland’s economy will continue to improve, in part because of factors also relevant to the national economic outlook. As one of the nation’s wealthiest states, Maryland stands to benefit disproportionately from proposed tax cuts. The state’s aging infrastructure also stands to benefit, including in older communities like Baltimore, Annapolis, Salisbury and Hagerstown.
However, economic forecasting is never so simple. The president-elect’s promise to “drain the swamp” could translate into job loss at key federal agencies, including the Environmental Protection Agency and Department of Energy. Many federal workers live in Maryland, and this could impact the local economy. On the other hand, Maryland officials are hoping to attract a new FBI headquarters, which could help countervail potential job losses at other agencies.
For its part, the state of Maryland has recently written off several hundreds of millions of dollars in expected revenue. Agency spending cuts have been an ongoing phenomenon in Maryland in recent years, and this set of circumstances has not changed. In addition, Baltimore City has a new mayor, one who holds significant promise to put the state’s largest city back on the right track from the perspective of public safety and perception.
Anirban Basu is chairman and CEO of Baltimore-based Sage Policy Group. He can be contacted at 410-522-7243 and [email protected].