It is once again, dear readers, time for that question: Where is the economy headed in 2018?
Upward, it appears. The Corridor’s high educational levels, high incomes and access (though often on clogged arteries) to important things and places for work and play within aren’t beyond compare on the national level, but they’re close enough for the locals.
While upward is usually a good thing, know that the economy has been creeping, rather than zooming, upward for upwards of the last decade. And what is often thought of as an economic “cycle” hasn’t really displayed a particular big bang of growth that observers have been hoping for.
Still, economists seem to have generally good things to say about where the U.S. economy is headed for the next year or two, though some caution that different factors could eventually point toward another r-e-c-e-s-s-i-o-n.
The below observations from movers and shakers of the local business community offer a keener look at what’s going on in their respective markets, industry by industry.
These forecasts are provided by the individuals and do not necessarily reflect the opinions of The Business Monthly.
Banking
Joe Thomas, president and CEO, Bay Bank
The outlook for the banking industry in 2018 is very favorable. Positive tailwinds are emerging across the waterfront — strong economic growth supporting loan demand, increasing interest rates bolstering revenue growth and relaxed regulatory requirements enabling higher profitability. This will translate into community banks in Maryland focusing on serving customers, investing in communities and improving shareholders’ returns.
The new, $1.5 trillion tax bill is expected to stimulate corporate investment, hiring and growth in small businesses. Our strongest industries in Maryland, health care, professional services and manufacturing/logistics, will benefit and buoy loan demand for community banks, which began to stagnate in the second half of 2017.
The Federal Reserve increased the Federal Funds Rate in 2017, and it has indicated the possibility of four rate hikes in 2018; the fixed income market is pricing in only two hikes. The 10-year Treasury has been anchored around 2.25%, but is expected to be closer to 3% by the end of 2018. This will increase the net interest margin of banks and overall revenue growth.
The Senate recently passed the Community Bank Regulatory Relief bill, which prescribes more tailored regulation, such as longer exam cycles, less onerous reporting and simpler capital requirements. Community banks in Maryland will begin to divert resources from compliance functions to customer-facing capabilities. This will drive down expenses and improve profitability.
The industry outlook has driven up bank equity prices, but technology innovation and non-bank entrants favor ongoing consolidation among community banks in Maryland. Financial technology companies are disintermediating banks with digital capabilities serving customers solely online and without a bank charter. To sustain a competitive advantage and protect against cyberthreats, banks must invest in talent and technology, which requires size and scale.
Cybersecurity
Gina Abate, CEO, Edwards Performance Solutions; and chairperson, Cybersecurity Association of Maryland
Here in the Corridor, much like across the U.S., cyberdamages will continue to increase in 2018 — as will the use of automation and expanded workforce to protect against them. More frequent business breaches means that more local businesses will suffer financial and reputation damages. This is one 2018 list on which you don’t want to be.
The cybersecurity industry has a severe workforce shortage with 45% of organizations nationally struggling with cybersecurity headcount, according to Jon Oltski, an analyst at Massachusetts-based Enterprise Strategy Group. Locally, public and private education and training has expanded and adapted to meet some of this need.
Some companies are taking a “new collar” approach of hiring employees without a traditional four-year degree, but with strong analytical skills and inquisitive natures to learn how to do cybersecurity work on the job. And we’re seeing the expansion of apprenticeships into the information technology and cybersecurity arena. This “greening” and inexperience of the workforce may lower average starting salaries in the cybersecurity industry.
The workforce shortage is also directly fueling the adoption of automated solutions to perform not only work well-suited for computers, but also to replace some work that a human could (and perhaps should) perform. Interesting advances are occurring in the areas of artificial intelligence, threat intelligence and blockchain technologies. Locally, this means greater sales and jobs for cybercompanies selling automated solutions.
Our local ecosystem has rich assets to meet the expanding threats and damages of cyber adversaries, including a skilled workforce and hundreds of cybersecurity providers here in Maryland to help ensure the cybersecurity of our state’s businesses, as well as local, state and federal agencies.
Legislative
Scott Dorsey, chairman, Maryland Business for Responsive Government
“Workplace interference.”
It’s the phrase that has predominated the lexicon in recent years as the business community contemplates and laments the actions of the Maryland Legislature. The election year of 2018 will be no exception, as the General Assembly wedges many of its key priorities squarely in the middle of the employer-employee relationship.
The effects of these legislative priorities are expansive and often have consequences far beyond the stated objectives of the delegates and senators who enact them. For every benefit, unfortunately, there is a job-stifling cost.
The paid sick leave bill is at the top of this list. Last year, Gov. Larry Hogan vetoed House Bill 1 because he understood that the bill would hurt the very people it purported to help, because jobs would necessarily be eliminated. But the Democratically-controlled legislature, with its veto-proof super majority, is poised to overturn his veto near the start of the 2018 Legislative Session. Ideally, the legislature will vote to sustain the veto, having heard from thousands of employers that this is a very bad bill. We hope that they will pause this year — unlike last year — to consider and deliberate over the governor’s alternative sick-leave bill that would gradually enact the new rules. Last year, the governor’s moderated bill didn’t even receive a hearing.
Other workplace interference examples include an expected bill to increase the minimum wage to $15 (which multi-non-partisan bodies, such as the federal Congressional Budget Office, have determined to be a job killer), as well as a prescriptive scheduling bill. You read that correctly: The legislature wants to be involved in how employers schedule their employees.
We expect these bills to be on the docket, and will look to the business community to educate their legislators about the very damaging aspects of these bills.
Manufacturing
Mike Galiazzo, president, Regional Manufacturing Institute of Maryland
The forecast for manufacturing in Maryland, including the Corridor, can be described in a word: fantastic.
Pro-business policies and attitudes from the Hogan administration have fueled optimism and investments, which are leading to growth in sales and hiring. Hogan’s More Jobs for Marylanders Act has resulted in more than 450 new jobs in the pipeline, according to manufacturers who signed up for tax incentives for hiring. A new 2.0 version of the act is on the agenda for Annapolis during the upcoming session, and that makes the outlook for job growth in manufacturing even brighter for 2018.
On that note, the Regional Manufacturing Institute of Maryland (RMI) recently surveyed our statewide council of 100 manufacturers, who were asked to describe business sales. Ninety-seven percent of the 83 respondents indicated that business sales were good, very good or extremely good. That is a significant fact that speaks even more directly to more growth in 2018.
Technology is dramatically influencing manufacturing growth. Last year, I spoke about the 4th Industrial Revolution (also known as Industry 4.0) and how advanced technologies are disrupting business processes. The rate and scale of technology in manufacturing are ever-increasing. The bottom line is that we are experiencing what we’re calling a Techtonic Shift (yes with an “h”). Technology is increasing productivity and profits, while creating significantly higher paying jobs in manufacturing.
There is also a shift in the talent needed. Our future workforce depends on today’s STEAM (Science, Technology, Engineering, Art and Manufacturing) students, as it’s become ever more apparent that the arts play a major role in a region’s economic success. That’s one prediction we can count on being accurate.
The Market
Rob Carpenter, president and CEO, Baltimore-Washington Financial Advisors
On the road of life, is it better to be a tortoise than a hare? Real Gross Domestic Product growth picked up to better than a 3% pace during the second and third quarters of 2017, and with solid momentum going into the fourth quarter, we feel confident about our call for 2.7% growth in 2018. While it is comforting to see this improvement, just about any additional good news today is greeted with an unusual amount of trepidation.
The past three business expansions lasted an average of only 94 months, a benchmark the current expansion surpassed six months ago. Expansions do not die of old age; they tend to be killed off by policy missteps or exogenous shocks. Recessions typically occur due to a buildup of excesses within the economy and then an event leads consumers, businesses and policymakers to suddenly become more risk averse.
But the unusually slow pace of this economic recovery has left the economy in pretty good shape. There are few visible excesses present today. Inflation and interest rates remain low, consumers do not strike us as overleveraged, corporate balance sheets are in good shape and profits are improving now that global growth is reviving and commodity prices have rebounded. Housing, with the exception of some apartment markets, and commercial real estate are in relative balance.
Finally, fiscal policy appears set to become more expansionary. Given this policy mix, our forecast of 2.7% real GDP growth in 2018 and 2.5% in 2019 seems appropriate. The lack of negatives is rather remarkable for this stage of the business cycle, but is no reason for complacency. The one persistent theme of the past decade is that interest rates have remained near generation lows, setting off a search for yield by investors and dramatically lowering borrowing costs for households and businesses.
Retail
Cailey Locklair Tolle, president, Maryland Retailers Association
There was a positive feeling in the retail industry at the end of 2017. The Maryland Retailers Association presented a holiday forecast with the National Retail Federation that estimated the average consumer would spend about $1,000 each, and we’ve received optimistic early returns.
Not surprisingly, during the past two years, nationally more holiday sales occurred online than in brick-and-mortar stores; but while the industry has seen an uptick in sales and employment during the holidays, local sales have been a little flat. That’s due, in part, to consumers preferring to spend money on experiences, rather than just goods.
But brick-and-mortar isn’t dying, despite the various news reports about the closings or consolidation of about 3,500 stores; those retailers could be selling the same products as many other retailers, including discounters like T.J. Maxx and, of course, Amazon.
A cooling off of online sales may be happening, too. That’s because consumers want to see and touch products. Even Amazon is building brick-and-mortar locations. But what’s odd is that Amazon is creating an app that prevents consumers from comparing prices — though the corporation is getting a huge tax incentive from the state to build its expansive distribution centers, which are taking out the small retailers. It doesn’t make sense.
The jobs created by mom ’n pop type employers stabilize neighborhoods; together, via direct and indirect employment, they equate to the state’s largest private sector employer that pays lots of taxes.
I’m optimistic about 2018, but know that artificial intelligence is an issue. Estimates are that about 25% of all jobs, including many in retail, will be gone in about 20 years. We’re about to see massive changes in our economy, and policymakers must be cognizant of this issue as more burdens are placed on employers. Maybe other jobs will come along to replace those we lose, though none of us know what they will be.
Small Business
Mike O’Halloran, state director, National Federation for Independent Business
As we look forward to the 2018 legislative session, the National Federation of Independent Business (NFIB) will be keeping its eye on a few crucial policy initiatives. As everyone knows, small business is the backbone of our economy. According to the Small Business Administration, more than half of Maryland’s workforce is employed at small businesses. That means that legislative action doesn’t just impact the owners of small businesses, it has a direct impact on hard-working Marylanders as well.
While Maryland’s unemployment numbers are at 3.8%; below the national average of 4.1%, its imperative that our state elected officials do everything they can to continue to incentivize employers to do what they do best: create jobs for workers seeking employment opportunity.
There’s been a lot of talk about implementing mandatory paid leave in Maryland, and it is imperative that voters understand that doing so would have a negative impact on the state’s employment market. NFIB has been closely monitoring this issue and will continue to advocate for keeping harmful regulations out of the private sector to that our economy can continue thriving.
NFIB’s Small Business Optimism Index neared an all-time high this past month with gains in Expected Better Business Conditions, Sales Expectations and Job Creation, but employers still find it hard to find qualified employees. Recent efforts by the state’s Department of Labor, Licensing, and Regulation encouraging workforce training and apprenticeships help mitigate this issue.
Empowering employees to advance their skills and further their education are exactly the types of policy ideas that keep economies strong and ensure success for everyone in the work sector. NFIB looks forward to working with lawmakers on both sides of the aisle this upcoming year to ensure their focus is where it should be: the small business community.
Technology
George Davis, CEO, Maryland Technology Development Corp.
The state of Maryland boasts a strong track record of technological development, due largely to a vital educational pipeline and formidable government agency footprint. Our world-class universities ensure a steady stream of innovation and research as well as a high pedigree of human capital, and the business-friendly Hogan administration in Annapolis promises to help transition these ideas and talent pool into the commercial world.
We expect 2018 to see crossovers play out between our traditionally strong life sciences industries and our burgeoning cyber and advanced computing and data sciences scene. A continued focus on this intersection will ensure Maryland continues to lead the country in information technology, and technology (in general) — which generates more than $39.55 billion in economic activity for our state.
By setting a goal to continue to develop, build and leverage a strong pipeline of great technology-based innovation companies in 2018, we will continue to establish the anchor necessary for Maryland to reach pre-eminence in cyber and advanced data sciences.
Additionally, we will continue to see major growth in the life sciences industry, including capital and talent. (Maryland now ranks as the sixth market in the U.S. in bioscience.) This growth will be driven as more ideas move from lab to market. We strive to aggressively foster university research startups into high-growth, leading companies like MedImmune, Harpoon Medical and Personal Genome Diagnostics.
With Maryland’s well-oiled STEM funnel, increased collaboration across sectors and an ongoing dedication by state actors to early-stage development, we can reasonably expect to see an increased flow of much-needed venture capital and highly-skilled talent. Our state has a strong infrastructure of support set up to foster innovation; the only limit to our potential as a leading innovation economy state is our own imagination.
Transportation
Paul Comfort, transportation consultant, The Trapeze Group
Most prognosticators would agree that public transportation holds the promise of more innovation in the coming years than almost any other arena, other than medicine. In the last year, we’ve seen the implementation of autonomous (driverless) buses in open traffic in Las Vegas, which will also happen in places like Gainesville, Fla. Google’s Waymo, Uber and Intel’s Mobileye are testing self-driving (or autonomous) cars, which could become the new model for sedan or taxi service in the near future, with their low cost (no labor) rivaling public transit fares.
Microtransit companies, car sharing (private shared cars, like the ZIP car), crowd-sourced transportation services (VIA/Bridj, pop-up mass transit style services), Hyperloop (tube-based, high speed transport) and Mobility as a Service (MaaS, with monthly subscription or a là carte payment for all public and private transportation/mobility options in a region) are all on the verge of becoming “tipping point” technologies that alter the landscape for traditional public transportation.
The old model, where public transit agencies’ buses and rail services have a monopoly on public mobility, is fast becoming an anachronism. Large employers who need park and ride services for their employees have begun looking for lower-cost models, such as privately operated autonomous shuttles; could this be a cost-effective option for locations such as the National Security Agency’s sprawling campus and associated business parks?
Dallas and other U.S. cities will begin testing MaaS models in 2018 that will include Lyft, private shuttles, bike share and more as part of their smartphone app-based electronic trip planning and fare paying solution. Transit options in Central Maryland must take heed and stay at the forefront of these innovations.
Venture Capital
Rick Kohr, CEO, Evergreen Capital
2018 has the makings for a strong year for venture capital.
With a robust merger and acquisition market, liquidity in the public capital markets, corporate cash and continuing earnings growth in many sectors, the next two years should turn in strong performance for venture capital. With two weeks left in 2017 [as this forecast was written], capital invested was more than $44 billion, up almost 18% from the $37 billion invested in 2016.
For the mid-Atlantic, even though the area saw 1,266 deals funded year-to-date in 2017, this is down from the 1,367 deals funded in 2016. Total capital invested to date in 2017 reached $9 billion, which exceeds the $8.9 billion invested in 2016.
For our region, one of the highlights in 2017 was the opening of AllegisCyber, an affiliate of Allegis Capital, a Silicon Valley venture capital firm that is collocated with DataTribe, which is located in Maple Lawn. DataTribe applies an investment element to its model by providing seed financing of up to $1.5 million to its cohort companies. Both firms have announced plans to expand their investments into Maryland-based cybercompanies in the coming year.
The biggest highlight, however, came late in the year, with the sale of Harpoon Medical, of Baltimore, to Edwards Lifesciences. The completion of the deal had the company’s local investors, such as Maryland Venture Fund, TEDCO, UM Ventures, Epidarex Capital and the Abell Foundation, enjoying an impressive exit. In addition to the acquisition of RedOwl Analytics, by ForcePoint (a unit of Raytheon company), these liquidity events will spur reinvestment into local startups that are important to the fabric of our ecosystem.