Slow Growth May Be Here to Stay, GDP Limping Along
Today, we are going to take a look at the commercial real estate market from a 40,000-foot perspective. It will actually be a macro look at the broader economy, and then we will draw some conclusions about the economy’s potential impact on commercial real estate.
The economy, as measured by the growth in gross domestic product, has been limping along at a rate of growth significantly below where it should be following a recession, let alone the Great Recession. If you are a frequent reader of Concrete Thoughts, you know that I believe that actual private-sector job growth is the key to the health of the underlying fundamentals of commercial real estate. Private-sector job growth is dependent, to a large degree, on the growth of the broader economy, and this growth is measured best by GDP growth.
Our elected officials, on the federal, state and local level, appear to stick their heads in the sand when it comes to facing the stark economic realty we are living in. Republicans want to cut spending, and Democrats want to keep expanding government. Both sides are out to lunch. GDP is growing very slowing, and, given that it could continue to do so for decades, both sides of the aisle will be disappointed. Lower tax revenue will provide less money to allow Republicans to achieve balance budgets and will hinder Democrats’ goal of continued social spending.
Since World War II, average GDP growth, through 2000, has been about 3.5 percent. Even before the Great Recession occurred, developed economies were seeing tax revenue sliding and social expenditures rising, while government debt was growing wildly. U.S. growth, since 2000, has only been about 2.4 percent.
It is important to note that growth is dependent upon the size of the working-age population and gains in their productivity. Unfortunately, for those who believe growth will bail the U.S. out, both of these metrics show signs of dramatic reductions.
To the extent growth slows, it is likely to lead to a greater wealth inequality while limiting the ability of the government to continue to fund ballooning entitlement programs. The birth rate is down, as is net immigration, both of which are stressing the system (note to Bill de Blasio and his “tale of two cities”).
In previous decades, our economy has benefited significantly from what most economists deem “one-time” developments. Advances in global trade, financial innovations (like consumer credit), social safety nets, reduced discrimination (allowing women to flow into the job market) and a boost in the quality of education have all provided rocket fuel to GDP growth. Today, it is difficult to see such a one-time influence on the economy. Even recent technological advances have had only marginal impacts.
If another big boost does not evolve, our stationary state could devolve into a declining state. As Adam Smith wrote in 1776 in The Wealth of Nations, “It is in the progressive state, while a society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the laboring poor, of the great body of the people, seems to be the happiest and the most comfortable. It is hard in the stationary, and miserable in the declining state.”
Faced with stagnation, reform is essential. Economic honesty is needed to admit that promises made by shortsighted politicians can no longer be kept. Current policy makers appear to be praying that a massive economic expansion will develop. They hold onto this fantasy, because the reality is too bleak to come to terms with.
Our working-age population is not growing, and productivity increases have been well below trend. Private-sector and public-sector spending on research and development has been cut dramatically, which will, no doubt, impact growth through lack of innovation in the future. GDP growth from 2012 through 2032 is projected to be just 1.9 percent. And even this meager number could prove to be overly optimistic due to headwinds. Burdensome debt levels will exacerbate income inequality, as the bottom 99 percent will be unable to fully participate in this slower-growth environment.
The dilemma here becomes more challenging when we see how the entire world is aging, exerting downward pressure on global growth. Foreign emerging and developing markets are aging, which eliminates demand for our goods and services.
As for our ageing population, today we have 13 percent of our population over 65 years of age. By 2023, this percentage will rise to 20 percent.
So what is the answer? Taxes must rise, and spending must be cut. Think Simpson-Bowles. Social Security benefits must kick in at a later age. Medicaid and Social Security must be means-tested, so we don’t subsidize folks who don’t need it. Immigration must be reformed to encourage wealthier and more highly skilled workers to apply for citizenship. This will also increase the group of folks in our economy who are of working age. And education must be made competitive on a global basis.
To the extent policy makers pull their heads out of the sand, our economy, and therefore our commercial real estate fundamentals, will receive the boost it needs to create jobs and get growth back to where it should be. Unfortunately, it is very hard to be optimistic given what has been coming out of Washington these days. If slow growth becomes the norm, our entire industry will need to adjust to the new normal based upon the number of jobs that commercial real estate will need to accommodate.