How long can the boom last?

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From Ryan Severino
JLL Chief Economist

I had the distinct pleasure of presenting the economic overview at the recent NAIOP/SIOR Mid-Year Roundup. Here is a recap.

I wasn’t pandering to the audience when I said that Boston is one of the hottest cities in the US. Don’t underestimate this. It’s well documented. It has what I call “gateway status,” and remains the eighth largest metro economy despite the rise of southern metros like Atlanta, Dallas, and DC. You are deep in the growth industries of the future like education, healthcare and technology. Value the rich ecosystem here.

 

Our nation’s economy is still going strong. This is the second longest economic expansion on record with 107 consecutive months of growth. The run is rivaled only by that of 1991-2001. US GDP growth will approach the high water mark during the current expansion of 2.9 percent (from 2015) in my opinion, based on a combination of factors like deregulation, tax cuts and spending packages from Congress.

Business sentiment correlates directly with this economic growth. But don’t get carried away. I had some fun taking the pulse of the somewhat giddy crowd on some key questions. When I asked how long can the current expansion last, the consensus was that it will push into next year. I concur, and predict that we will surpass the record of 120 months by the middle of next year.

Why not? The labor market remains strong. However the current pace of job gains is unsustainable. The latest job numbers show that we have 6.6 million unfilled jobs in the US. That number is growing faster than we can fill the slots. We have more open jobs than there are those that are unemployed. Hence we’re literally running out of labor. There’s a war for talent out there.

What will the Feds do with interest rates to keep the economy in check? I expect that they’ll raise rates in June, and again by the end of this year. Then take a “wait and see” position into next year. If the current trajectory continues I predict that they’ll raise rates again in 2019. When I asked the crowd my second poll question “Is the Fed raising rates too quickly?” the sense was that the pace is about right.

I feel that sustained rate increases will ultimately be bad for growth. There is an undeniable relationship between rate increases and the slowing of economic growth – higher rates tend to produce slower economic growth. But the risk to raising rates too slowly is worse. The Fed is walking a tightrope between raising rates too quickly and too slowly.

Reasonably, it is difficult to predict the economy beyond five years. If you could we’d all be partying in Hawaii right now. Watch the warning signs particularly from the labor market and job growth.

I don’t think that the current political picture will have a drag on the economy. It’s impossible to predict where this administration is going. The one key wild card and risk remains trade policy. A true trade war could undo the benefits of fiscal stimulus.

I am often asked about where we are in the cycle (or what inning we are in). The hour is relatively late, but recession is not imminent. Beware the typical warning signs of a recession. Pay attention to the yield curve – when it inverts it often signals a recession is coming. And the labor market often shows signs of trouble before GDP does. The good times are currently rolling, but they won’t last forever. Better to be prepared than complacent.

For more information, please feel free to contact me with any questions you may have.

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