When it comes to the economy in 2017, Grand Valley State University’s Paul Isely largely expects business as usual. However, the associate dean and professor of economics at the Seidman College of Business notes that rising wage pressures on businesses may start pulling the economy into a recession in 2018. While he expects the economy to remain robust, Isely told MiBiz he worries what the incoming presidential administration’s trade and immigration policies could do to businesses in West Michigan in 2017 and beyond.
What top trends are you tracking going into next year?
We have a couple political things. Certainly, any amount of a trade war, trade restrictions or immigration restrictions would disproportionately affect West Michigan in a negative way. The other political thing that seems to be lined up is some rollback on regulation. To the extent that regulation might be stretched too far, that might be a good thing for growth. I think for me, (another) is going to be how we see changes in wages really start to affect (businesses) in the first half of the year. I’m already having businesses tell me that their employment growth projections for next year are below what they were for this year. That’s the first time they told me that at this time of year. Part of that is the increase in compensation costs.
Can you elaborate more on the effects of wage pressure, particularly as companies struggle to find talent?
Wages are certainly going to continue to grow, and grow faster than productivity. There’s constraints there in getting people trained into jobs, and getting people experienced in jobs isn’t going to keep up with what’s happening. You’re paying much faster than inflation for the same skill level. That’s going to accelerate into next year and particularly in areas that are in higher competition.
How does that translate into hiring?
When I talk to the firms here in West Michigan, they’re really looking at a substantially lower growth rate for employment next year compared to this year. They’re not seeing a drop off in sales. They’re seeing a drop off in employment, which means employees have gotten expensive enough that you’re going to start substituting capital — a machine, a computer, a robot — so that you have to use fewer workers.
We’ve talked for the last couple years about how the economic recovery is getting long in the tooth. Are there any indications that 2017 could yield some sort of downturn?
Right now, the thing that seems like it’s going to pull us back is going to be wages, and it hasn’t accelerated enough yet to do that. Having said that, as we head into 2018, between the beginning of 2018 and the end of 2019, the probability for a recession will continue to increase and really start to get higher. I would really be surprised if something happened this year, unless it was induced by a substantial political shock, which I don’t think will happen but is possible. Or, a substantial commodity shock, which I don’t think is going to happen, but it could.
Do you have any insight into the commodities market moving into 2017?
Again, this is the political question. To some extent, the strength of the U.S. dollar is helping our perception of the cost of commodities because it’s disguising some of the strength that’s there in commodities. We’re not seeing the increases in prices. They’re being offset by the increases in the dollar that we’re purchasing them with. As we look at the energy sector, we’re going to see an elevated trading band compared to last year, but not severely elevated. There’s nothing in the current modeling that would suggest greater than $60 (per barrel of oil) for anything more than short stretches. When we look at metals and things like that, at this point we’re looking at sales growth well within what we’ve seen these last few years. Right now, at the pace that we’re seeing, I think for some of the base metals we may start to see some firmness.
What’s your take on how Trump’s administration is shaping up?
Right now, short run, it’s going to be bad for business because of the level of uncertainty people have. People are really worried about what things will get changed and how things will get changed. When people are worried, they cut back on investment and hold back on how they’re deploying their capital. The long run, that starts to be an issue of some of the possible permutations of tax changes, some of the regulatory changes they’re talking about. Some of those types of changes would be good for business. The harshness of the trade issues and some of the choices to try and maintain jobs, which may not be efficient here in the U.S., could lead to less growth. I don’t know which of those effects are bigger yet because I don’t know which one he’s going to push harder.