A Goldilocks economy? Experts disagree on whether 2017 landscape will be hot or cold

By Alyssa Hurst

Editor’s note: Interviews for this story were conducted before the results of the 2016 election were known.

2016 has been a year of disagreements. It has often seemed like no one could quite work out their differences and get along — least of all Hillary Clinton and Donald Trump, who together produced one of the most bizarre and polarizing presidential election campaigns in recent memory. And, when it comes to the 2017 economic outlook, economists are no exception. With a handful of uncertainties looming, economists’ predictions for 2017 land all over the map. What’s a business leader to do?

The opinions

While some economists see a strong year ahead, others, like chairman and CEO of Sage Policy Group, Inc. Anirban Basu, say the U.S. is likely to find itself in a recession by the end of 2017 or early in 2018. “The seeds of the next downturn are presently being sown,” says Basu. Those seeds include a rise in key asset prices, which has seen assets valued more highly than economic and business fundamentals suggest they should be, he says. In addition, Basu points to volatility in the global economy as a significant weakness, and says there are excesses in commercial real estate that economic and demographic fundamentals don’t support. Fortunately, if we do find ourselves in the midst of another recession, Basu predicts it will be a significantly smaller adjustment than the 2007 eruption of the housing bubble.

And, while other economists don’t foresee a full recession in our immediate future, they do share some of Basu’s general worry for the coming year. Terry Clower, director of the Center for Regional Analysis at George Mason University, says we seem to be in a bit of a rut economically. “We’ve reached this slow but steady, consistent drab,” he says. “Some of the new words I’m hearing are ones that are a little more concerning, like fragile. What fragility emphasizes is that yes, we are growing, but one or two bad events could drop us back into recession very easily.”

Charles Steindel, who served as senior vice president at the Federal Reserve Bank of New York, and as the chief economist at the New Jersey Department of the Treasury, shares Clower’s feeling of uneasiness. “I think there’s a great deal of uncertainty right now, but I’m a little more on the downside,” he says. “What’s happening is, although we’ve generated a lot of jobs, we are not generating a lot of output or income in this expansion.” But despite their trepidation, neither Clower nor Steindel are worried about an immediate threat of recession, and in fact, both see some potential for growth depending on how some uncertainties shake out.

Then there’s Mark Zandi, chief economist at Moody’s Analytics. The way Zandi sees it, the next recession is likely several years away, and 2017 is shaping up to be a great year for businesses in particular. “I think the economy is performing well, and its prospects, at least over the next year or two, are good,” he says. “We are creating lots of jobs, the economy is closing in on full employment, wage growth is picking up, there’s a record number of open job positions and layoffs are at record lows. There’s nothing there to suggest that the economy is going to enter recession anytime soon.”

The election

We’ve felt the effects of the presidential campaign for more than a year now. Business leaders and consumers alike spent months transfixed by polls predicting the election’s eventual outcome, but according to the economists, the results don’t hold as many economic implications as many think. “People are putting a little bit too much weight on that. Whether it’s Johnson or Stein or Trump or Clinton, it’s not clear to me how much difference it’s going to make,” says Basu.

You don’t have to look too far back in history to see how some presidential elections have impacted the economy though, says Steindel. Ronald Reagan, Bill Clinton and even Barack Obama are notable examples. And, even with a Republican-controlled House and Senate, it’s unclear whether president-elect Donald Trump will be able to end the gridlock that has paralyzed Congress for years.

While the actual results might not be significant, the impact of months of preoccupation with the election may prove to be. “Businesses are more sensitive to events and anything that might seemingly go wrong, like a Brexit or the election,” says Zandi. “They seem to be more gun-shy.”

A troubling global economy

Outside of the U.S., prospects are gloomy, says Steindel. “Europe remains pretty mired. Britain, which is an important economy, is in complete confusion because of Brexit and what that’s going to mean,” he says. With a weak global economy and a strong dollar, U.S. exports shrank by 5 percent last year, says Basu. Clower says he expects the strain on our industrial output to continue into 2017 as well, with Europe showing no sign of a turnaround.

But, Zandi says, the impacts of Brexit are of little concern to the U.S. in 2017. “I don’t think Brexit is an issue — at least not for us; at least not next year,” he says.

Outside of Europe, Basu says other countries haven’t been able to live up to their potential: “Global economies that we expected to take off during this period in economic history simply are not. The most prominent examples of this are Brazil, Russia, South Africa and Turkey.” For a variety of reasons, says Basu, these economies haven’t generated the expected explosive growth we predicted.

This is the case for China as well, say Zandi and Basu. Though China continues to grow, that growth is less rapid than expected, and Zandi says the country will likely still experience problems as it transitions its economy and financial system. “It translates into falling energy prices, falling U.S. exports … and a lot of investment capital flowing into the U.S.,” says Basu.

The wildcards

One of the reasons economists like Basu, Clower and Steindel see so much uncertainty when it comes to 2017’s economic outlook is the number of unknowns the U.S. currently faces. These wildcards could hold the key to celebrating several more years of economic recovery, or they could plunge the country into another recession.

The state of interest rates presents some questions for Clower, Basu and Steindel, especially as the Federal Reserve struggles with whether to increase rates slowly, or continue to let them hover so close to zero. According to Steindel, these low interest rates were expected to dissipate, but as they haven’t, and inflation hasn’t reached the 2 percent Fed goal, nerves have kicked in. “The Fed has used basically every arrow in its quiver. If we have some sort of shock to the system, what are they going to do?” says Clower. “You can’t predict that by nature, and I don’t think I would try to forecast it.”

What’s more, Clower says the American way of life is changing in ways that might alter our economic landscape. According to Clower, by 2030, 30 percent of the labor force is expected to be contingent labor, or part of the gig economy. With that number on the rise each year, including 2017, Clower asks, “What does that mean about the way we go about seeking employment? The way we live our lives? And how does that affect the housing market?”

Other norms are shifting as well, says Clower. Right now, much of the U.S. economy is structured around homeownership. With an increasing number of people becoming renters by choice, the economic landscape could face a major change. “It’s not going to make 2017 different dramatically, but there are certain fundamentals to our economy that are changing,” he says. “Quite frankly, we are not sure of what it is going to mean as we move from the norm to whatever the norm will be.”

Advice for 2017

With low debt rates, low interest rates, low gas prices and high stock prices, there’s nothing holding back the American consumer when it comes to spending, but this confidence hasn’t made its way into the business world. An increase in capital spending, says Clower, could push the economy in the right direction next year. “What could change the direction is if businesses start releasing some of this pent-up cash they have,” says Clower. “Businesses have trillions of dollars that are just sitting on the sidelines.”

It’s not hard to understand why businesses would rather sit on their cash than spend it. “I think there’s obviously nervousness there from businesses seeing the last [recession],” says Steindel. “I understand why a business running its own affairs, looking at itself, would be cautious.” That cautiousness is okay, says Zandi — to a point. “That’s not a bad thing unless they steal away from their future growth and opportunity, and I think there’s been some of that,” he says.

Whether you choose to believe that the economy is in a fragile state or a strong one, experts like Zandi, Clower and Steindel say increased capital spending is beneficial for both businesses and the economy. “I think it’s time to take advantage of the better economic backdrop … and start investing more aggressively,” says Zandi. “If you’re cautious and not investing and not thinking about what’s next, you’re not going to be able to take advantage, to the same degree, of a better economy.”

Should the economy take a turn for the worse, Basu says there are two factors that could save a business: relationships and retention. During the last recession, bankers and insurers ran for the hills, he says. “Lines of credit disappeared, and businesses that thought they had some flexibility in terms of managing their cash flow had none.” Similarly, many construction firms failed because they lost their bonding and could no longer bid on projects. That’s why Basu says it’s important to shore up relationships with these important advisors now, while times are not yet troubling. “That doesn’t necessarily cost any money. That costs a lunch maybe,” he says.

Just as Basu says it’s important to hold on to important financiers, he also says businesses must take care of their A players if they hope to survive recession. “Every business has a handful of people who are really indispensable. The businesses die without them. Employers have to take care of them,” he says. In an economic landscape that is approaching full employment, this advice is particularly crucial.

We asked local leaders to tell us how they they’re preparing for 2017, and what
their industry is looking out for in the next year.

Daymond JohnDaymond John
President and CEO
The Shark Group

I come from the world of fashion, and retail is changing very dramatically on a daily basis. We look at how we can avoid taking a big inventory position and sell as much as we can through additional outlets — online, social media, membership organizations. … The impact of social media and the internet is important because if you’re dependent solely on a retailer, and they go away, then all of your customers go away. So if you don’t have a direct line to your customer, you’re going to be at the mercy of various different outlets.

Stanley MiddlemanStanley C. Middleman
President and CEO
Freedom Mortgage Corporation

At Freedom Mortgage, we find ourselves to be in a business that, by its very nature, is interest-rate sensitive. We have struggled with projecting interest rates into the future. We believe that our business will continue its successful path of profitability based on tailoring our business to a variety of stressed scenarios, which allows us to move somewhat seamlessly from one market environment to another. Having said this, we expect … improving economic conditions, allowing a slow rise in rates through the year. This growth should be coupled with higher employment, rising wages and improving home values and consumer debt delinquency. Our 2016 has been the best year on record for Freedom Mortgage, and we expect that to continue in 2017.

Helene RaynaudHelene Raynaud
Guidewell Financial Solutions

On the local front, we’ve seen a big push to support entrepreneurs this past year — especially those interested in opening new businesses in underserved neighborhoods. This trend will hopefully continue in the coming year. Given this focus, we think there will be a lot of great initiatives launched in Baltimore to help local residents take advantage of credit-building opportunities and safe loan products. … We have a lot to look forward to in 2017 as we rebuild our brand, broaden our community partner base and expand our services to underserved neighborhoods. It should be a very active year, given that we’re also considering increasing our suite of nonprofit services for consumers.

Michael SpinosaMichael Spinosa
Unleashed Technologies

I’m looking forward to a rejuvenated environment focused on smart spending and driven by key performance indicators. We see signs of stability returning to the market, and this will work favorably for companies like Unleashed Technologies that are focused on meeting tangible goals. Our industry of web-based platforms, applications and websites is facing a very exciting 2017 with the latest launch of platforms that represent capabilities not previously seen in the market. The web … is more of a requirement than ever, and that leaves us extremely optimistic for 2017 and beyond.

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