EXPERTS DISCUSS TAXES, INFLATION, EMPLOYMENT & MORE
February 23, 2018
This month, Citywide Banks hosted its 2018 Economic Forecast forum in Denver for more than 400 senior executives from companies across the Front Range. The 19th annual event featured presentations by Nancy Tengler of Heartland Financial USA, Inc. and Rick Pederson of Bow River Capital Partners. The event included commentary on global, national and local economic trends and opportunities that lie ahead for Colorado businesses. A full video replay of the speakers is available below.
Tengler is CIO at Heartland Financial USA, Inc., parent company of Citywide Banks. She oversees $1.5 billion in client assets and leads the company’s financial planning initiative. Tengler is an author and regular contributor to CNBC and Fox News. Pederson is a principal and CIO at Bow River Capital Partners. He is also on the boards of Westcore Mutual Funds, ALSP ETF Trust, Principal Real Estate Income Fund, Boettcher Foundation, and History Colorado. Pederson is also a member of the Advisory Board of Citywide Banks.
Both presenters forecasted sustained positive growth for Colorado and the U.S. economy for 2018. Tengler expects continued consumer confidence with increased capital expenditures for U.S. corporations. She also emphasized the strength of the global economy, specifically Europe and Japan’s economic improvements. Pederson anticipates strong growth in Colorado this year followed by some turbulence for the national economy and a potential correction by mid-2019. He predicts 3% growth for the U.S. economy. Both presenters discussed the recent stock market disruption with Tengler stressing investors should focus on a long-term view. Tengler feels the current markets are valued at a healthy level. She is still “bullish” for the near-term although she predicts it may be a little “choppier” on a forward-looking basis.
IMPACT OF TAX REFORM & DE-REGULATION
Tengler and Pederson both spoke on the impact of the recent tax reform and declining regulations that drove the markets last year and will have an ongoing impact on corporate America.
Tengler predicts that tax reform should contribute $10 to the S&P 500 earnings per share and noted that in 2018 tax reform has already driven stock prices. She remarked that large U.S. corporations are passing tax cuts along to their employees, customers and shareholders. Companies such as Apple, AT&T, Fed-Ex and others have already increased bonuses, dividends, wage hikes, cap-ex and M&A activity with more announcements to come. She noted that small business CEO’s are also optimistic and overall de-regulation will continue to benefit the performance of corporate America. Tengler emphasized that while we are seeing evidence of the impact of tax reform on corporations, the majority of tax reform will go to the individual. “Contrary to public perception, individual tax cuts are larger than corporate tax cuts in 2018.”
Pederson predicts 2018 will be a good year because of basic fundamentals, including tax reform and the $63 billion spending package introduced by the Democrats. He agrees that deregulation will continue to boost growth as it removes uncertainty for businesses and will increase cap-ex spending.
Tengler commented on low productivity numbers across the globe. She believes productivity has to improve for growth to sustain. “You need improving productivity to pay higher wages,” Tengler remarked. She also mentioned that tax reform provided a bit of a reprieve because of accelerated corporate profit margins with companies that have been paying higher wages but believes this is a factor to watch.
Pederson and Tengler both discussed Colorado’s position as one of the top 10 fastest growing economies but noted that the rising cost of living and inflation may slow growth in the state over the next few years. Both see 2018 as a strong year for Colorado and the Denver Metro Area.
From 2006-2015, the Metro Denver area saw growth of 60,000 new residents per year. Half of those were Millennials. In the last two years, the growth has slowed just a bit, noted Pederson, due to our inflation rate, which is nearly double the national average, and expensive commodities such as rent, groceries and medical care.
JOBS IN COLORADO
Peterson noted that Denver is #7 for job growth today and has been outpaced by Orlando, San Antonio, Seattle and Las Vegas and Riverside, CA. He mentioned that Denver is actually closer to the national average for job growth but remains strong. He also added that the Northern Colorado market has strengthened in its job growth.
Peterson feels that the housing bubble will not burst in Denver in the short-term. He talked about a 7% year-over-year increase in housing but noted that supply is still very limited. The median housing price in Denver is $460,000 and $600,000 in Boulder, which is well above the national average. Apartments are overbuilt in his opinion but there continues to be strong demand in the rental market. He believes the condo market may strengthen in Denver over the next few years as construction defect laws have softened and insurance over construction defect laws has become more affordable. He predicts it will be 2 to 3 years before we see significant condo conversations underway.
Peterson believes there is still good demand for retail, contrary to other reports. “Retail is not dead in Denver or anywhere else, and frankly may be the most balanced product-types here.” He mentioned that we currently have a 6% vacancy rate for retail properties in the Metro Area with 600,000 SF of construction built last year. One-third of this retail space was filled by grocery, one-third dedicated to eating and drinking establishments and one-third went to general merchandise and other service.
The 5 million square-feet of new office space being built over the next 18 months will not go to net new users. Instead it will be occupied by relocating IT/telecom companies and collaborative office spaces. He noted that we may see an increase in the 15% current vacancy rate for office, as we may be getting slightly overbuilt.
Peterson sees a lot of demand for industrial space and urban warehouses for electronics, logistics and food and beverage companies. We added 5 million SF in ’16 and ’17 with another 5 million predicted to come online in 2018.
THE NEXT RECESSION
Both Tengler and Pederson foresee a recession or correction to the market in 2019 or 2020 based on historical trends. Pederson predicts we could see a long period of very slow growth beginning over the next 30 months but noted that Denver is a strong city and will continue to prosper in 2018. Tengler agreed that many economic opportunities lie ahead for Colorado businesses this year.