All signs point toward continued positive performance and growth for the local economy – tempered by uncertainty surrounding interest rate increases, inflation, a rising federal deficit and a possible trade war.
That’s the forecast that Kamran Afshar, a local economist, gave during his 2018 economic outlook to an audience at the Lehigh County Bar Association in Allentown on Tuesday afternoon.
The data, based on research derived from his Data Analytics Center at DeSales University, showed an overall positive picture of the local economy.
His report looks at national gross domestic product growth rates, vehicle and home sales, unemployment rates and other factors. Those other factors include the Lehigh Valley business sentiment index, which assesses the local economy via businesses who are members of the Greater Lehigh Valley Chamber of Commerce.
Each year, Afshar and his team collect about 800 to 1,000 surveys from these businesses for the index.
The sentiment index showed businesses in the Lehigh Valley “exploded” with happiness after the election of 2016, then lost some of that happiness, then became happier after the recent Tax Cuts and Jobs Act legislation passed, Afshar said.
However, despite the huge tax break for businesses, many companies in the Valley are still waiting for stronger results and are looking two to three years out, rather than on the immediate benefits of the tax cuts.
NO RECESSION ON HORIZON
“Our economy is really at peak production and operation, with high inflation and high interest rates,” Afshar said.
The Federal Reserve announced three interest rate raises this year, he said.
Some economists think the economy will slow by 2020.
“Right now, there is no indication of a recession coming,” Afshar said.
However, higher interest rates will be coming, he added.
Also, if the U.S. has a trade war with Europe, it would slow economic growth while prices for materials will rise.
HOUSING SALES VOLUME DROPS
Regarding home sales, Afshar said volume is starting to inch down while prices are continuing to go up. According to data from the Greater Lehigh Valley Realtors, sales volume in the Lehigh Valley dropped slightly in the middle of 2017 through February.
“The last time we saw that was right before the recession,” Afshar said. “Right now, it happens from time to time. Sometimes it corrects itself.”
One of the reasons for this is that housing inventory is very low locally, he added.
These local figures include Lehigh, Northampton, Warren and Carbon counties.
The national unemployment rate is at 4 percent, and many economists expect that this year, the unemployment rate will be at 3.8 percent, Afshar said. These figures, from the U.S. Department of Labor, show the total and official seasonally adjusted unemployment rates and reflect a tightening job market, with wages starting to go up. The Valley’s unemployment rate as of February is 4.8 percent.
“Right now, in the Lehigh Valley, if you are looking for any expertise, you will see these people getting multiple [job] offers,” Afshar said.
While many manufacturing companies in the Lehigh Valley are not going full throttle on buying equipment and technology for their facilities, health care is expanding very rapidly, as is the transportation/warehousing industry, Afshar said.
These local figures on the unemployment rate include Lehigh, Northampton, Warren and Carbon counties.
Nationally, when the economy gets close to full employment, one of the factors that looms is inflation.
“We are looking at the potential for higher inflation,” Afshar said. “It’s not that it hasn’t happened before.”
TAXES ON IMPORTS/EXPORTS
The national discussion on tariffs is a factor that influences inflation, Afshar said.
As soon as the U.S. raises its tariffs, other countries do the same thing. One of the problems that arises is how it contributes to the rising cost of materials, such as steel, which then adds to the cost of building expansions for businesses, the manufacturing of vehicles, and other initiatives.
“It never goes anywhere well,” Afshar said. “It was done before in Europe.”
The winner is the one who gets hurt less, he added.
With the potential for the introduction of a federal infrastructure bill, one of the main issues that will affect the economy is how to fund the necessary upgrades and improvements, particularly with $1 trillion added to the national treasury.
“Businesses don’t get involved with building bridges and roads for their health,” Afshar said.
While public/private partnerships sound nice as a funding tool, there has to be a benefit for businesses to take on an investment in infrastructure, he added.
The biggest changes in the economy are coming from retail, locally and nationally, particularly with department stores.
The model of retail will change and is already changing as e-commerce continues its growth spurt.
While Walmart is starting smaller physical stores, none can compete with Amazon and other e-commerce companies, Afshar said.
Most of the projections for retail are that someday 80 percent of retail businesses will be e-commerce, while the remainder will be boutique shops that people would continue to use.
“The future of big box stores is not that great,” Afshar said.