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How Long Will This Run Last?

“There’s not much to report on [related to the economy]. Everything is pretty stable!” joked Anirban Basu, chairman and CEO of Sage Policy Group and one of the Mid-Atlantic region’s leading economic consultants, to a packed breakfast meeting of the NAIOP DC | MD chapter on Dec. 19.

Anirban Basu, chairman and CEO of Sage Policy Group
Anirban Basu, chairman and CEO of Sage Policy Group

With nearly nine years of economic growth and an economy with momentum we haven’t seen in roughly a decade, it’s safe to say that 2018 will be a good year, but it’s all but impossible to say how long this very good cycle will last.

While the global political climate remains quite perilous, for the first time in a decade the world is enjoying a synchronized global recovery. The global economy is expected to expand by 3.6 percent in 2017, and by 3.7 percent next year – compare this to an expansion of only 3.2 percent in 2016. Leading the pack is China at 6.8 percent, followed by India (6.7), and Emerging and Developing Asia (6.5). Trailing at the end of the pack is Germany (1.6), Spain (1.5), Latin America and the Caribbean (1.2), and Brazil (0.7).

At the same time, global debt has reached all-time high in 2015 at $151 trillion – that is twice the amount as the year 2000 – and global gross debt of the nonfinancial sector now represents about 225 percent of global GDP. With two-thirds of this debt in the private sector, the current low nominal-growth environment is making adjustment difficult, which Basu says sets the stage for a “vicious feedback loop” in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown.

Still, the global economy is improving despite the debt, and in the U.S. that’s largely driven by consumer confidence and surging job creation. Holiday shopping this year has blown through expectations, with better performance than expected at Walmart and even Macy’s, not to mention online retailers. But spending is so high that the U.S. savings rate (savings as percentage of personal disposable income) is only at 3.2 percent – way down from 2012 when it hit upwards of 10 percent.

Seventeen million jobs have been created since the Great Recession, mostly in professional and business services, followed by education and health services. The lowest number of jobs have been created in mining and logging, government and information (media, including radio, newspaper and magazines).

Unemployment is low almost everywhere. Nevada, Utah, Texas, Oregon and Idaho boast the highest growth numbers, with Alaska, Connecticut, South Dakota, Kansas and Wyoming totaling the least growth.

Notably, Basu said that labor is lowest among young American men, thanks to day-long video gaming and what Basu labels an “immersive digital lifestyle.” In a silver lining, he said, research shows those who play video games all day are far happier than those working, and parents are more than willing to serve as economic support.

From October 2014 to October 2017, nonresidential construction has grown by 10.5 percent, led by lodging (61.7 percent growth) and office (41.4). But is the tail wagging the dog? Foreign investment is pouring into the U.S., and particularly into commercial real estate. Between 2014 and 2015, it skyrocketed by 85.1 percent! Of that, New York attracted 45.5 percent, followed by San Francisco, Boston, Washington, D.C., and Dallas.

In closing, Basu said that the global economy remains fragile, but is not weak. Global money will continue to flow into top CRE markets, but along with it, inflationary pressures and interest rates will rise, and that could begin to squeeze asset prices in 2018, triggering negative wealth effects and sentiment in the process.

There are indications of mini-bubbles forming in CRE, particularly in office, lodging and multifamily, and with long-standing structural considerations, including the national debt and pending insolvencies of Medicare and Social Security – the longer-term outlook may be deteriorating even as the short-run improves.

Basu closed by saying that momentum should see us through 2018 (with anticipated tax cuts expected to supercharge the economy next year), but tighter monetary policy combined with a heavy dose of political intrigue could render 2018 different from an asset price perspective. “By this time in 2020, the economy could be in a different place and likely will be,” he said.

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