The economic indicators are strong. Will fear and uncertainty be the stumbling block?
As 2017 dawned, Utah’s industries were hopeful for, but in some cases also a little wary of, what the new year would bring. Now, as another new year begins, industry experts weigh in on how performance compared with expectations for last year and what looks to be in store for 2018.
January’s change in presidential administration and the rumors of policy changes that would follow kept many in the manufacturing industry on their toes. Todd Bingham, president and CEO of the Utah Manufacturers Association, says the sector was “cautiously optimistic” going into 2017, and primarily concerned about regulatory shake-ups disrupting the practiced flow of the industry.
“There are kind of three things that have an impact on capital: fear, uncertainty and doubt. In the manufacturing industry, when the regulations tend to be a moving target and they change frequently, that puts fear and doubt into companies and they don’t put capital [into manufacturing]. Just having a regulatory atmosphere that is consistent and doesn’t change is a huge help to manufacturers,” Bingham says.
And the year did bring some regulations that were less favorable to the industry, he says, but Pres. Donald Trump’s focus on strengthening the manufacturing industry as a whole has brought new attention to the sector. “The president has been very visible about manufacturing. Our national organization has met with him in the White House probably a dozen times over this last year. Which is a great thing for the 36,000 facilities across the country to have a voice with the president and be able to express concerns and what we need,” he says.
Looking to 2018, Bingham says one of the top items of concern is tax reform. Some policies could help the manufacturing industry, while others could hurt it, he says. Also on the industry’s radar is healthcare reform. “There are obviously ongoing expenses and concerns in relation to the [Affordable Care Act] and we would love to see some changes in that that would be beneficial to companies across the country,” he says.
“In the manufacturing industry, when the regulations tend to be a moving target and they change frequently, that puts fear and doubt into companies and they don’t put capital [into manufacturing]. Just having a regulatory atmosphere that is consistent and doesn’t change is a huge help to manufacturers.” – Todd Bingham, Utah Manufacturers Association
Still one of Utah’s top industries, agriculture tends to be more dependent on weather and other conditions than politics, says John Hilton, Utah state statistician for the United States Department of Agriculture’s National Agriculture Statistics Service. “We didn’t really see anything different with the change of administration, just because we’re not a regulatory industry, ” he says. “Nothing’s super positive for next year, but it’s not super negative. It’s a status quo kind of thing.”
But what goes on in the White House does affect what happens on the farm, at least when it comes to selling crops and livestock. Trump’s vows to renegotiate the North American Free Trade Agreement, for example, could have a significant effect on the industry.
“There’s definitely some fear that we’re going to lose some trade agreements that have been beneficial to agriculture. More and more of our commodities are exported, and anytime we lose a trade agreement or it gets negotiated, it’s not so good for us. In the agricultural sector, that’s a blow to absorb. At this point, it’s kind of wait and see, but nothing’s really come up,” he says. “Agriculture in general is just wanting to make sure whatever agreement is finalized, it has some fair agreements in place for agriculture, because Mexico and Canada are two of our biggest exporters.”
“There’s definitely some fear that we’re going to lose some trade agreements that have been beneficial to agriculture. More and more of our commodities are exported, and anytime we lose a trade agreement or it gets negotiated, it’s not so good for us. In the agricultural sector, that’s a blow to absorb. At this point, it’s kind of wait and see, but nothing’s really come up.” – John Hilton, United States Department of Agriculture’s National Agriculture Statistics Service
Around the state, you don’t have to look very far to see new construction projects rising. Slade Opheikens, president and CEO of R&O Construction, says there’s plenty of work to go around—a little too much, actually. Between a growing labor shortage and material prices rising, it can be tough to get all the projects done as fast and cheaply as customers want, he says.
“Everybody is busy. In many cases, subcontractors are too busy and have taken on more work than they can handle due to a limited number of workers. This increases the risk of subcontractor default similar to what we experienced in 2007 and 2008,” he says. “Many material and labor prices are rising at a faster than normal rate. Our new challenge is helping our clients find a way to meet their project budgets based on proformas that may have been put together one to two years ago and providing a realistic schedule based on current manpower.”
The reasons behind the rise in material prices includes a tariff that expired in January for wood from Canada that made prices jump, as well as good, old-fashioned supply and demand, he says. Natural disasters like fires in California and flooding in Texas haven’t helped, either. And as far as labor’s concerned, just about anyone who wants a job in construction can get one, says Opheikens.
“We’re spending a lot of time helping owners find a budget that pencils for them,” he adds. “That’s probably the hardest part, as we budget for a client, to help their budget work. And then they want it to start next week, or next month, but because of material prices and labor, that’s not going to happen.”
Opheikens says he doesn’t think the current rate of growth in the construction industry is sustainable; he expects some slow-down but doesn’t anticipate a huge drop-off like during the economic downturn. And as far as the current glut of work, he says there are worse problems to have.
“It’s a very good problem to have. I guess if we’re going to have problems we’d rather have too much to do than going back to when we were all chasing the same project that had some potential,” he says. “Everybody’s confidence is up. We just hope everybody’s still being a little cautious about what they have on their plates and in their backlogs.”
“Many material and labor prices are rising at a faster than normal rate. Our new challenge is helping our clients find a way to meet their project budgets based on proformas that may have been put together one to two years ago and providing a realistic schedule based on current manpower.” – Slade Opheikens, R&O Construction
Utah’s real estate continues to be a seller’s market, with 2017 setting a new record for most homes sold in a single year, breaking the old record that was set in 2016, says DeAnna Robbins, president of the Utah Association of Realtors. To make things even more competitive for buyers, inventory statewide dropped by about 2,500 homes, or around 17 percent, in 2017, she says, and the homes currently on the market are only enough to last one to three months in normal buying conditions and without any additional homes being listed. To contrast, a normal market has enough inventory for four to six months; the market starts to favor the buyers if there’s enough inventory for seven months or more.
“It’s a good time to buy because interest rates are still low, but it’s a frustrating time for buyers,” she says.
Some of the shortage of inventory comes from people being hesitant to put their homes up for sale because of fears that their house will sell before they’re able to find another place to move into, she says. But there’s also a large influx of people moving into the state, and more and more millennials are trying to become homeowners themselves. Those low interest rates are expected to rise a little in 2018, and while they’ll still be much lower than the interest rates in the days before the economic downturn, Robbins says it can still make things harder for young buyers.
House prices themselves have also risen by more than 10 percent, with the median sales price now coming in at $274,700. In 2007, at the high point of the housing bubble, the median sales price was $225,000. But Robbins says she doesn’t worry about another market crash; conditions this time around are different and the future looks far more stable. Robbins says she expects a 2 percent increase in existing home sales in 2018, as well as a 9 percent rise in new housing.
“That was such a unique situation. Utah, thank heavens, we’ve kind of been in our own little bubble a little bit. We don’t see the swings like some other states. Our average in price is a little more conservative. It’s taken 10 years that we’ve seen that increase. It’s not so dramatic that if we have a little bit of a correction we’ll see a dramatic fall. I would only be worried if there wasn’t such a demand for housing; then I might be concerned. But where there is such a demand, I think it will stabilize a little bit,” she says.
“It’s a good time to buy because interest rates are still low, but it’s a frustrating time for buyers.” – DeAnna Robbins, Utah Association of Realtors
The Dodd-Frank Act was of significant interest and concern for those in the banking industry, particularly since Utah-based Zions Bank was directly affected by it, says Robert Spendlove, senior vice president and the economic and public policy officer for Zions Bank. The act arbitrarily draws a line at $50 billion in assets to determine which banks are “too big to fail,” he says; Zions has $60 billion, but the five biggest banks in the country have well over $1 trillion in assets.
“The struggle with that is the regulation has been so intense that essentially what it did was caused the cost of business to go up significantly for banks. They’ve had to divert funds they were using to essentially return to the community, and redivert those to compliance costs,” he says, noting that he is hopeful regulations will be adjusted in the coming year to ease the strain on banks. “[Zions] is a fraction, a tiny sliver of City Bank or Bank of America, but we’re essentially treated identically.”
The last year has been especially good for the stock market, which rose more than 6,000 points through the course of 2017. Employment is at near-record highs, with a 4.1 percent unemployment rate. While the endlessly lower unemployment rate may seem good, Spendlove notes that a rate lower than 5 percent typically leads to labor shortages. However, wage growth has stagnated—an unusual phenomenon when the principles of supply and demand should mean that wages are growing quickly.
“Wage growth is too low, inflation is too low, and you shouldn’t have this. That’s the mystery. Eventually, the wages are going to pop, inflation is going to pop, and [the Fed’s] fear is we could go from 1.6 percent inflation to 3.6 percent overnight, and the Fed is more worried about very high inflation than they are about a lot of things,” he says. “That’s why they’re raising those interest rates—they’re concerned about an overheated economy, which they’re afraid they’re already seeing in the real estate market and the stock market.”
The Fed raised interest rates slightly at the end of 2017 and has pledged to continue to do so throughout 2018. Spendlove says the Fed views pushing the country into a small recession as being a preferable option to letting the economy balloon and pop again. Although he still thinks the future is bright for the economy, Spendlove also says there’s a natural economic cycle that will likely demand at least a small recession within the next few years.
“Everyone loves to say it’s different this time. Nothing is ever different. We have an economic cycle. We go through expansions and we go through contractions. It’s a valid way for our economy kind of resetting itself. Right now, we’re in the third-longest expansion in the last hundred years, so we’ve been expanding for a long time,” he says. “The question isn’t if we will, it’s when we will. The question is just when is the next recession going to happen, and I think it could happen within the next few years.”
“Wage growth is too low, inflation is too low, and you shouldn’t have this. That’s the mystery. Eventually, the wages are going to pop, inflation is going to pop, and [the Fed’s] fear is we could go from 1.6 percent inflation to 3.6 percent overnight, and the Fed is more worried about very high inflation than they are about a lot of things.” – Robert Spendlove, Zions Bank