Analysts say regional economy will ‘have legs’
Executive points to cost of manufacturing, standard of living, tax breaks to help region compete globally.
PNC’s top regional executive expects West Michigan to match the U.S. economic gains projected for 2018.
Sean Welsh, PNC regional president, West Michigan, said in 2018 the region will continue to benefit from the current nine-year U.S. economic expansion, low unemployment and low inflation.
“When we talk to our different clients and friends throughout the community, there seems to be a consistent broad success people are achieving,” he said, noting the bank has clients ranging from local florists and home-based sole proprietorships all the way up to large publicly traded corporations.
“There are a lot of positives underpinning the economy that makes us believe it’s going on for a while.”
Stuart Hoffman, PNC’s senior economic advisor, issued a forecast Jan. 2 citing six reasons he believes the U.S. economy “has legs” in 2018:
1. Stable oil prices. At the time of Hoffman’s analysis, gas prices averaged $2.60 a gallon, “quite tame compared to June 2008, when prices soared over $4 a gallon,” he said.
2. Low inflation — below the Fed’s 2 percent target — and rising slowly to 2 percent over the next two years.
3. Only very gradual Federal Reserve interest rate hikes and balance-sheet shrinkage. PNC forecasts a trio of quarter-percentage-point hikes in June, September and December 2018.
4. Synchronized global economic growth, “the strongest we’ve seen in over a decade,” Hoffman noted.
5. Financially strong consumers and businesses — “companies’ balance sheets are quite healthy, and consumer debt is low relative to income,” he added.
6. Fiscal stimulus from corporate and individual tax cuts taking effect next year.
“We expect faster economic growth and the unemployment rate to fall to under 4 percent next year,” he said. “Indeed, for the next couple of years, the U.S. economy has a lot more going for it than not.”
Local strengths, challenges
Welsh said, in West Michigan, the affordable housing crunch and talent gap continue to be challenges.
But he said the region’s strengths include competitive cost of living, low cost of materials, a network of public-private collaborations, workforce development initiatives such as Talent 2025 — where he sits on the board — and an established supply chain.
“When you look at West Michigan, you have world-class advanced manufacturing companies that are shipping products around the globe: aircraft parts, automotive, consumer products,” he said. “Our cost of manufacturing, workforce and ingenuity of some employees here allows us to participate in the global economy. ... We’re in a really good position from that standpoint.
“I think the confidence in the business owners I speak to is higher than it was prior. People are getting more confident to invest in their businesses. I do think we’ll see growth in West Michigan in 2018. I don’t think it will be high growth, but moderate, sustainable growth throughout the year.”
The U.S. Bureau of Labor Statistics’ December jobs report showed the U.S. economy added 148,000 jobs in December, below the expected 190,000 and a net downward revision of 9,000 jobs for the previous two months.
In 2018, PNC forecasts another small slowdown to near 140,000 jobs per month in 2018, down from an average of 171,000 per month in 2017 and 187,000 per month in 2016.
PNC said the slowdown will be due to a lack of qualified workers rather than softer demand for qualified employees.
In December, goods-producing industries added 55,000 jobs, with manufacturing employment up 25,000 and construction employment up 30,000. Private service-providing industries added 91,000 jobs in December. Jobs declined in retail trade by 20,000 as brick-and-mortar stores continued to pare workers (this was before the store closings announced by Macy’s and Sears/Kmart).
The labor force participation rate held steady at 62.7 percent in December and remains well below its pre-recession level.
The unemployment rate remained at 4.1 percent in December for the third month; this is the lowest unemployment rate since December 2000.
Year-over-year growth in wages remained a disappointingly low 2.5 percent in December, PNC said, but Hoffman expects wage gains to pick up to nearly 3 percent as the labor market continues to tighten this year and some of the corporate tax cut gets passed along to workers.
Welsh said the tax bill already has spurred some large companies to raise wages, which could help draw talent from outside the region. The Business Journal previously reported PNC, Fifth Third Bank and AT&T issued wage hikes and bonuses following passage of the tax bill.
“The fact it was passed brings clarity, which is oftentimes a big obstacle any size business might have. They want to know what the policy will be so they know how to run their business,” he said, noting he has not heard of smaller businesses universally raising wages as a result of the new tax breaks.
“But I do think the tax relief will help them significantly,” he said. “I do think small businesses definitely benefited from the plan.”
Expect more volatility in 2018 than in 2017, PNC analysts said.
As of Jan. 2, the S&P 500 was up 17 percent from the start of 2017.
“Investors haven’t had a reason to get nervous this year,” said Bill Stone, PNC wealth management chief investment strategist. “We’ve gone much longer than normal without even a 5 percent decline in the stock market.”
He said that’s because low 10-year Treasury bond yields have supported stock-buying, global economic growth has tamped down market swings, and corporate earnings — which go hand-in-hand with stock prices — are up nearly 10 percent.
But a low-volatility year typically doesn’t repeat itself the next year, Stone cautioned.
“It makes a good argument that we should expect more volatility in 2018,” he said. “But a very large downturn in the market doesn’t seem likely anytime soon, given the low risk of recession in our view.”