Crystal Ball 2019 Outlook Q&A: Anirban Basu, Associated Builders & Contractors

BY Sunday, December 23, 2018 05:40pm

More so than many other areas of the country, West Michigan has experienced tremendous growth in 2018, according to Anirban Basu, who serves as the chief economist of the Associated Builders and Contractors, a national trade group. His outlook is less rosy for 2019, which could be a transitional year for the U.S. economy. Meanwhile, he thinks 2020 could be the beginnings of the next economic downturn. 

What’s been pivotal in the major growth of Grand Rapids in 2018?

Anirban Basu COURTESY PHOTO

At the heart is the performance of local real estate. People like this part of the state; it has a very high quality of life. It’s one of the reasons college graduates stay here at much higher rates than other Midwest areas. Also, the economy here has become very much diversified over time. It’s been called the office furniture capital of the world. Over time, it was not particularly well diversified. It’s changed because of a large nonprofit sector, because there still is an office furniture manufacturing component to this economy, because of the larger financial services industry and health care industry. All of these components contribute to shared economic prosperity and a vibrancy of economy. 

Do you think the rate of growth and development will continue in 2019?

Not at the same pace, necessarily. Developers and their financiers have identified underserved markets. Developers have become comfortable with the performance of the economy and realized there was unmet demand. But now a fair amount of that demand has been met. I think at this point of the cycle, people are becoming more concerned about possibly the next downturn and because people are more concerned, the presumption is the pace of investment and projects — including riskier projects, and real estate is often risky — will slow. I think most signals are suggesting 2019 might be a decent year for the U.S. economy. It won’t be a period of as rapid growth as we observed in 2018. 

Aside from a talent shortage, what other challenges does 2019 present?

The talent shortage is first and foremost. But from a macroeconomic perspective, people are probably going to be dealing with more inflation and higher interest rates. It seems like a strange thing to say, because in recent days, interest rates have been falling, but that’s, I think, a short-term phenomenon. One of the distinguishing characteristics of this economy is that inflation prices are building. Manufactured goods are becoming more expensive from China — we’re paying more for things. Ultimately, those inflation pressures translate into higher borrowing costs and that has all kinds of implications for people who owe money, for asset prices and for the broader economy. That’s one of the reasons I’m nervous about 2020 for the broader economy, because I think 2019 will be a transitional year to a much sharper slowdown in 2020 or 2021.

As an economist, what are you planning to watch closely for next year?

As an economist, it’s the inflation data. If one is a more typical observer of the economy, it’s Federal Reserve policy making. There’s been a lot of conversation recently about whether the Federal Reserve will tighten market policy aggressively in 2019. There’s been some comments recently suggesting that it will not, and the markets loved hearing that news, initially. But my very strong feeling is that because inflation pressures will become more apparent, the Federal Reserve will be forced into raising interest rates, perhaps beyond a level that is desirable from their perspective, and that will set the stage for the 2020 downturn. 

What if that doesn’t happen? 

If I’m wrong about that, if for whatever reason, whether (through) low oil prices or falling commodity prices, inflation does not manifest itself in 2019, if inflation doesn’t translate into rapid growth in interest rates in 2019, I could be dead wrong in my forecast, and this recovery could persist into 2020 and beyond. 

Interview conducted and condensed by Sydney Smith.

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