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Adjusting to Economic Terrain in 2017

Colorado’s economy is booming. The state’s unemployment rate was 3.2% in November with the Denver metro area at 2.9%. High-country resorts anticipate a successful season as skiers flock to slopes, but businesses recognize risks associated with weather. Skiers accept risks when they negotiate terrain with higher moguls, deeper powder or steeper slopes than expected.

Risks rise for everyone when likely shifts in economic and financial policies send erratic signals about economic terrain ahead. 2016 marked the 50th anniversary of Frank Sinatra’s Grammy-Award-Winning performance for the song, “It Was A Very Good Year.” And so it was. Let’s check conditions as 2017 begins.

  • Employment and earnings. Labor markets are tightening with the national unemployment rate at 4.7% in December, well below 9.6% the U.S. Bureau of Labor Statistics (BLS) reported for 2010. Some businesses are already reporting labor shortages. Job opportunities are at their highest level in seven years, and discouraged workers – those not looking for work because they feel they won’t find a job – dropped 13% last year. Private employment rose to 122 million, up 1.9% in 2016 and 5.2% above its pre-recession high. Moreover, average weekly earnings of production and nonsupervisory workers increased 3%. Rising income boosted real consumer spending by 3%. With consumer confidence at its highest level in more than 10 years, look for more advances, but at slower rates, this year.
  • Construction. Construction spending is now at it highest level since 2007, up almost 77% since 2011 as private residential building rose more than 90% in the last six years. Housing starts leveled off in 2016, as single-unit structures lagged behind multi-unit building. Forecasts show slight gains for 2017, with house prices rising at a slower pace.
  • Financial markets. The run-up in stock prices added to household wealth and increased values of retirement funds. The S&P 500 Stock Price Index, for example, rose 17% last year; it’s up more than 100% since 2009. Stock prices jumped on post-election expectations of lower business taxes and higher profits. That upswing leveled off quickly as the reality of specifying and implementing tax laws took hold. Financial markets are sending mixed signals, however. Bond investors took a hit last year over concerns about higher interest rates driving bond prices down. The Federal Reserve raised the federal funds rate in December, suggesting further increases ahead. Rising mortgage interest rates, along with an uptick in rates for loans on new cars, will push up costs for borrowers. Greater volatility and higher risks seem inescapable this year.

Presidential elections generate enthusiasm about future jobs. It’s tough terrain, however, because the chart shows a 40-year downtrend in manufacturing jobs, with a loss of 6 million production workers covering six presidents. Will that reverse quickly? No. A large upswing in the next few years, at little or no cost, doesn’t conform to reality.

Unspecified changes to U.S. trade policies are looming. Restricting trade with major partners, Mexico and China for example, will have negative impacts on U.S. consumers and businesses. Proposed spending on infrastructure (roads and bridges) and revisions to business regulations seem positive but unclear. In short, rising uncertainty has filled the economic terrain with moguls. Negotiating through them requires skill as strains develop in markets.

The 1969 Rolling Stones song, “You Can’t Always Get What You Want,” captures economic and financial prospects for 2017. It’s risky business ahead as President Trump takes office.

by Dr. Paul J. Kozlowski*

*Dr. Paul Kozlowski is professor emeritus of business economics and finance at the University of Toledo, and past-president of the Mid-Continent Regional Science Association. He has served as an advisor to business and government organizations for over thirty-five years, and his articles have appeared in a variety of economic publications and books. He holds a Ph.D. in economics from the University of Connecticut and lives in Denver.

Image courtesy of cooldesign at FreeDigitalPhotos.net

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