By Nathan Moeder, Principal, London Group Realty Advisors
Global economic conditions suggest one compelling reality that may very well play out as the most significant economic story of 2015: The US is likely to be on its own this year. Moreover, we are likely to have to flex our own economic muscles to continue our prosperity cycle. We cannot expect much, if any, economic bolstering from the rest of the globe this year.
Here is my summary of the factors that can impact (or even rock) our world this year:
• While the globe has mostly completed its recovery from the “great recession of 2009-2010, by the end of last year winners and losers were emerging. There is a real risk of Europe entering another recession, China’s growth is slowing and cheap oil is hurting various nations. International investors are buying up US securities and the dollar is gaining against the Euro. This is good for US interest rates but not as great for exports as they are becoming more expensive and nations are not in a consumption mode.
• In stark contrast, coming off of a strong 2014, the US is undoubtedly poised to achieve a great year of growth. We may very well now be at a sort of “inflection point” where our economic health is dependent only on us – the strength of our own consumer demand, coupled with our ability to create new ideas, make new products and grow domestically.
• Unemployment is currently down to 5.6%., and inflation for the 2014 was only 1.3%. These growth dynamics are not sustainable. They mostly reflect an economy that continues to improve. Given the global headwinds, the real strength of the US will be tested this year.
If unemployment further decreases to under 5.0% by year end and the vacancy rate in employment space drops to 10% or lower (the national office vacancy rate currently is hovering at 14%), we are likely to see the commercial construction industry make a serious comeback. If things play out that way, these high paying and multiplier producing jobs and expenditures will ripple through the economy and create demand from within the US borders. This phenomenon would also likely spark some level of inflation for goods and services, which is a main goal of the Fed.
But we are not there yet. We need a tighter labor market and lower commercial vacancies (nationally). The Fed recognizes this unique position of the US economy and is strategically monitoring “opportunistic inflation”. By keeping interest rates low, job growth could continue and as it approaches the 5.0% level (considered “full” employment), wages and salaries will increase as a result of a tighter labor market. While the Fed can impact the discount rate the banks pay to borrow money, they are monitoring these factors and certainly will jump at this opportunity to accelerate inflation. It’s a balancing act between labor markets (growth) and interest rates. Realistically, the Fed has some time to increase rates slowly, especially given the problems in Europe and the glut of oil on the market, which combine to push inflation lower.
However, interest rates will increase at some point. They have to. The US is the preferred economy, a perch which is well strengthened by the present global circumstances. Capital is flooding to the US (particularly to US bonds).
This will not last forever. Someday there will be another downturn in the business cycle. So the Fed needs to replenish its tool box and raise interest rates so that it can lower them again the next time it needs to. Unfortunately, it is not possible to have negative interest rates.
Our coming year is expected to be another strong one for US economic performance. As we do flex those economic muscles, we might very well be dubbing it the “Year of America” at least from an economic perspective.