DesignIntelligence caught up with Bob Hughes, Senior Research Fellow with the American Institute for Economic Research and DesignIntelligence Economics Fellow, to talk about the state of the global and the U.S. economies. Bob talked about what to watch for in 2018, the characteristics of an economic bubble, and potential disruptions, threats and opportunities for the economy. And he talked about the perspectives that leaders of A/E/C firms need to take as they plan for the future.
DesignIntelligence: What is your take on the state of the global and U.S. economies in 2018?
Bob Hughes: Overall, the U.S. economy and the global economy are in good shape and ticking up. Consumer price inflation is generally low and steady, particularly in developing economies, and has been decelerating across a lot of the emerging markets. We’re also seeing a pickup in global exports, which is a very good sign. Global trade took a sharp hit during the global recession so it’s good to see that rebounding.
In most countries, unemployment rates have been falling which will help to sustain growth. Equity markets across the globe have seen strong performances. Bond yields are generally low, which is good for funding capital-intensive investment projects.
DI: What are some potential threats and opportunities you see for 2018?
BH: I have four key things that I feel are most important right now. First is policy, particularly monetary policy. In the U.S., the Federal Reserve is embarking on a series of interest rate increases. These increases have been moving at a slow pace by historical standards, and they are expected to continue given the current economic growth. The Fed is also reducing its holding of securities on its balance sheet. This will be a slow and gradual way to reduce the Fed’s balance sheet. In general, monetary conditions are tightening, but at a slow pace here in the U.S.
Within the policy realm is also fiscal policy. We have new tax cut legislation that has just been passed. Tax cuts are generally stimulative, but there is a downside of potentially increasing the federal deficit.
We must also keep an eye on asset prices. Rapidly rising asset prices may be a sign of overheating in the economy. If asset prices and consumer prices are rising too quickly, the result could be a triggering of more aggressive monetary policy. The labor market is another area to watch. The cost of wages has been growing very slowly, but as the labor market tightens, pressure on wages rises. Our unemployment rate has dropped to 4.1 percent, which is a multi-decade low. With growth prospects still looking good, it will be important to see if labor markets continue to tighten, if there’s enough labor supply and whether wage price pressures build up in the economy.
And finally, we need to watch commodity prices. Energy and industrial metal prices have seen some significant gains. Price pressures in these two commodities in particular are very consistent with a pickup in both domestic and global growth. We’re seeing signs of an economy that’s been in expansion mode for quite some time and growth rates are picking up, possibly leading to overheating of the economy. These are the risks worth watching.
DI: If I’m the leader of an A/E/C firm, what should I be looking at in the economy?
BH: Watch the details of money, credit and prices. Look for excessive risk taking in equity markets and local land prices. Think about the business cycle. When first coming out of the bottom of a cycle, it’s relatively lower risk to be taking on new projects since there’s probably pent-up demand, but as an expansion occurs, particularly a long one, it becomes much more important to prepare for the eventual top of the expansion. We usually don’t know when that’s coming but we can watch for warning signs. So if there’s advice to give it’s this: When everyone else is feeling pretty good, that’s when we should be more cautious. At this point, it’s good to watch for potential changes in financing conditions, or prices starting to rise too quickly. That’s when we need to be a little more conservative.
DI: Are there any other questions we should have asked you about what’s around the corner for us in 2018?
BH: It’s always a matter of staying on top of the latest data, the latest news, looking for signs of changes in conditions or policy. One of the important non-data issues is the dysfunction in Washington and the seeming inability to pass any legislation easily and in a bipartisan fashion. A very important issue is the federal financial position (i.e., the debt of the U.S.). It’s easy to put an issue like that on the back burner. Congress keeps kicking the can down the road. But the level of federal debt raises a lot of concern.
Bob Hughes is a Senior Research Fellow with the American Institute for Economic Research and DesignIntelligence Economics Fellow.
Photos by Alessio Lin, Thaddaeus Lim and Jacek Dylag on Unsplash.