Citywide Banks hosted its 2017 Economic Forecast forum this week in Denver for nearly 500 senior executives from companies across the Front Range. The 18th annual event featured presentations by Dr. David Jones and Rick Pederson. The event included commentary on how the expected federal policy shifts and other trends may impact Colorado businesses.

Jones is a nationally recognized economist and author who serves as President/CEO of Denver-based DMJ Advisors, and an Executive Professor of Economics at the Lutgert College of Business, Florida Gulf Coast University. Pederson is a principal at Bow River Capital Partners and The Pauls Corporation, and a board member at Citywide Banks, Westcore Mutual Funds, ALPS ETF Trust, Principal Real Estate Income Fund, National Western Stock Show Association, and History Colorado.

The full audio podcast is available by clicking on the links below:

(podcast) Opening remarks by Marty Schmitz, Chairman of Citywide Banks

(podcast) Presentation by Dr. David Jones

(podcast) Presentation by Rick Pederson

(podcast) Questions & Answers Segment

 

ECONOMIC GROWTH

Both presenters forecasted positive growth for the Colorado and the U.S. economy through 2018, followed by a downturn in 2019. Jones expects a 3% increase of GDP in 2017 and possibly up another percentage point in 2018. Pederson predicted slower growth at 2.7% to 2.9% during this year.


IMPACT OF TRUMP ADMINISTRATION

While both speakers see national and local growth related to the new administration, they warn of concerns with Trump’s ability to “stay focused” in order to make good on promises. They also agree that the trend away from globalization, especially for trade, may cause hiccups both domestically and internationally. Pederson feels these “global issues will hold us back” and make it tough for Trump to attain the 4% growth he wants to achieve. 

Pro-Business But Trouble Denting the Deficit
Jones sees Trump’s leadership as “pro-business in spirit” stemming from his plans to reduce regulatory restrictions like Dodd-Frank which has limited business lending. Further, Jones feels tax reform is key to Trump’s success and would “love it if he can bring [corporate taxes] down to around 15%” from the current high of 35%. However, he warns that lower corporate taxes, predicted spending on infrastructure, and necessary spending on entitlements like social security, will make it hard for Trump to lower the deficit as promised. Trump may be forced to back down on his adversity to raising the retirement age if he wants to impact the deficit which is not in “crisis level yet, but shouldn’t go any higher.” 

Tense Trade Situation
Jones’ big worry with Trump economics is that "this trade story may become a difficult one.” He feels “trade is very, very delicate” due to unforeseen repercussions of Trumps’ unpredictable rhetoric about other countries. For instance, the value of Mexico’s peso recently dropped due to his exchanges which made Mexico more competitive globally in terms of their exports.

For Pederson, he’s concerned where interest and inflation rates go if we get into an “all out trade war” resulting in price increases. He also predicts that a border adjustment tax might have negative unintended consequences and that the lack of globalization may cause a back lash since Americans rely on the benefits they’ve enjoyed from freer trade. Further, he feels repatriated funds from foreign tax rates are a good idea supporting domestic and local business investment if positive in spirit. He acknowledged that while Trump might have the right idea on policies, that his personality may impact the outcomes. 

Recipes for 2019 Recession
Both Jones and Pederson foresee a recession during Trump’s presidency, by 2019. Jones is worried if Trump gets his 3 – 4% growth and higher inflation, the interest rate in 2019 might be too high and cause a recession close to the next election.

Pederson predicts the same 2019 timing, but relates the recession to the inflation expected over the next couple of years and “having a republican in office,” since coincidentally, the last nine of ten economic slumps fell during GOP presidencies. However, in order for a recession to fully take place, Pederson says housing prices must fall along with a spike in oil prices, both of which have some potential for happening. 


HOUSING MARKET 

Pederson says housing is “one of the bright spots in the economy” locally and nationally. He says nothing predicts consumer behavior better than the value of housing. So, he predicted elevated housing values will cause consumer spending to rise about 3%. Multi-family construction is expected to slow down approximately 8%. Denver has “enough luxury apartment housing” but will see growth in single family housing – up 11% versus 2016 – with single family attached housing like townhomes and condos growing above single family attached due to price point, which is key in Denver where our greatest weakness is unaffordable housing cost. For instance, rents are 30% more expensive than in Austin. Pederson predicts this pricing issue could slow down the growth of our economy slightly over next few years. He sees commercial and office construction slowing down in 2017 due to factors such as continued conversion of retail spending to online versus brick and mortar. Commercial development in Denver will be focused on “hot” areas like LoDo and Union Station but not in mid-town where older building and vacancies from former energy sector occupants prevail.


JOBS & WAGES

At number 14 in the nation for job growth, Pederson says Denver is part of a strong “second tier” nationally. In January, jobs growth was “off the charts,” so he expects 2017 to be a good year for hiring in Colorado, especially in sectors like healthcare, education and state government. As a result, we should expect a relatively low unemployment rate for the next couple of years as we usher out baby boomers and  get rid of certain types of jobs skills. Jones commented that since Trump’s economic stimulus comes when we have nearly full employment, wage earners can expect a sharp increase. But he warns this is “not so fun for business owners” who might profit less and be forced to raise prices.


OTHER AREAS TO WATCH

Interest Rate Hikes
Jones expects a “tug of war between the Fed and Trump economics.” He feels Janet Yellen’s strategy of “cheap credit can be overdone” and predicts three to four rate hikes during 2017 with additional increases in 2018. Pederson thinks rates will go up later in the year once unemployment is a non-issue and predicted wage increases have been implemented.

Rising Inflation
Both economists predict inflation, which Pederson says is “overdue” and should land around 2.8%. He also warns that potential trade wars could impact rate of inflation.

Investment Markets 
Jones provided the disclaimer that he is not an investment expert but reveals his top investment choices for 2017. First, is the financial sector due to less regulatory restrictions. Next would be the one he’s “been preaching about forever” – the energy sector. He expects Trump's policies to help stimulate fossil fuel investment. Third and fourth on his list are tech and construction, the latter related to spending on infrastructure.

On the other hand, Pederson suggests a completely different investment approach is underway. He says the days of investing in sectors is over, and instead “we’ll get to more complex investment over the next 3 – 4 years” like hedge funds and alternative beta strategies. He points to the complexity of these strategies and predicts more investors will likely move from passive to active investment management. He predicts higher risks and lower returns – a third to half lower – than the past few years due to movement to a more mature business cycle where wage growth squeezes corporate profits. 

Business Spending Bump 
Pederson says to expect an increase in business spending in 2017, where we should go from flat to 4%, “which is huge.” The increase will likely be attributed to a rise in capital expenditures in the energy sector – a sector that impacts every other in the local and national economies.

Jones also believes in the importance of the energy sector, especially in the potential “upside” to Trump’s decreased regulatory restrictions in fossil fuel since he believes we’ll be reliant on them as a nation for at least the next couple of decades.

Smarter Energy Sector
Oil and gas prices have hit the “sweet spot” of $50 per barrel according to Pederson. He expects it will linger close to this level despite high demand due to more efficient production technologies. The focus on data in the sector has paid off and will allow it to thrive.

Geopolitical Threats
Jones says he’s “alarmed more now than ever with geo-political risks” in locations like the Baltics states, China, Iran, and the Middle East. 

Pederson says there are a number of things driving the economy but also “a number of things in the world that are holding us back – Europe is on its back and China is still slowing.”

The full audio podcast is available by clicking on the links below:

(podcast) Opening remarks by Marty Schmitz, Chairman of Citywide Banks

(podcast) Presentation by Dr. David Jones

(podcast) Presentation by Rick Pederson

(podcast) Questions & Answers Segment