Tutterow: U.S. Economic Recovery Still Has More Room to Run

by Haisten Willis

Roger Tutterow, Kennesaw State University

Even though the current U.S. economic expansion has lasted 20 months longer than the post-World War II average of 58 months between recessions, Kennesaw State University economics professor Roger Tutterow does not expect a recession in 2016.

Tutterow outlined the reasons he expects economic growth to continue for at least the next 12 months during a speech at the InterFace Multifamily Southeast conference at the Westin Buckhead in Atlanta on Thursday, Dec. 3.

“When we think about the economy, from 2007 to 2013 we went through a credit crunch and a correction in housing and commercial real estate almost without precedent in my professional life,” Tutterow said. “We stand here today, and as hard as it is to believe, we are now halfway through the seventh year of this economic recovery. By the book, the recession of 2008-09 ended in June of 2009.”

The current economic expansion has lasted 78 months, but it has been the weakest recovery since World War II, according to the Wall Street Journal, which points out that while there have been highs and lows in individual quarters, overall the economy has failed to break out of its roughly 2 percent growth pattern for more than six years.

“This economic recovery has been timid,” Tutterow acknowledged. “I don’t believe that business cycles end because of old age. We get recessions either because of bad policy, geopolitical shocks, energy shocks, inventory accumulation and asset bubbles. So far, it’s hard to make the case that any of those has reached levels yet that would trigger a recession.”

Manufacturing returns to U.S.
One positive trend Tutterow highlighted is the return of manufacturing jobs to the U.S. Some 60,000 manufacturing jobs were added in the United States in 2014 compared with 12,000 in 2003, according to MarketWatch.

Meanwhile, up to 50,000 jobs were “offshored” in 2014, down from almost 150,000 in 2003. (Offshoring is the practice of moving employees or certain business activities to foreign countries as a way to lower costs and avoid taxes.) This falloff in offshoring is due to rising labor costs in Asia.

“Where are the jobs? Well, they’re coming back,” Tutterow said.

Manufacturing jobs continue to lead the recovery, particularly in oil-rich economies such as North Dakota and Texas. However, the continued decline of oil prices has threatened to erode that growth.

In the past, any time that oil prices dropped, the Middle East cut production. During the current price drop, however, Middle Eastern oil producers have not reduced production. Tutterow said this could be an effort to hamper the rapid growth of the oil production infrastructure in the United States.

Job growth has been fairly robust in 2015. Total nonfarm payroll employment increased by 211,000 in November, according to the Bureau of Labor Statistics, and has averaged 210,000 per month during the first 11 months of 2015. That’s well above the addition of 100,000 new jobs needed monthly to absorb the natural growth of the labor force, say economists.

However, the price of oil continues to decline, hurting energy-rich states. According to Bloomberg, the price of a barrel of Brent Crude oil stood at $35.48 per barrel as of Dec. 11, down from $59.95 a year earlier, and down from more than $107 per barrel in the summer of 2014.

While lower oil prices are a negative for some energy-producing states because it can lead to job cuts due to a drop in demand, consumers are the beneficiaries because falling prices at the gas pump give them more discretionary income.

Future of interest rates
Tutterow said it is time for the Federal Open Market Committee, the Fed policy-making group, to raise the benchmark federal funds rate, a short-term rate that has been hovering at close to zero percent since 2009.

The Fed is widely expected to raise the federal funds rate, possibly by a quarter point, at its next meeting this Wednesday, Dec. 16. That would be the first hike in nearly a decade. Tutterow believes that the federal funds rate should have been raised in September.

“The Federal Reserve will raise short-term rates at its December meeting,” Tutterow predicted during his speech. “The economy is strong enough for us not to have the most accommodative monetary policy in 60 years in place anymore.”

He added that “easing off the accelerator is not the same thing as hitting the brake,” which should help soften any negative effects of higher rates.

Multifamily oversupply is a concern
The key speaker also warned that multifamily development is beginning to get “a little frothy” and predicted that in one year’s time you will hear about the multifamily sector getting ahead of itself.

“Multifamily starts nationwide are higher than they were before the Great Recession,” Tutterow said. “What I’d encourage you to do in any market you’re looking at, if you see multifamily starts within 10 percent of 2004 to 2005 levels, make sure you pull employment numbers and make sure employment gains are in line with that [construction] ramping up.”

Nationally, multifamily starts for properties with at least five units rose to 344,000 in 2014, the highest level since 1998, according to the National Multifamily Housing Council (NMHC). Completions, which have lagged starts by an average of 18 months, increased to 253,500 in 2014, just below their level in 2009.

Meanwhile, renter growth remains at historical highs, reports NMHC. For the fourth time in the last five years, 2014 saw an increase of more than 1 million new renters. From 2005 through 2014, the number of renters increased by more than 8 million, the highest such figure on record, which dates back to the 1960s.

The home ownership rate dipped further in 2014, ending the year at 63.9 percent, the lowest in 20 years.

Tutterow said that millennials, also known as “echo boomers” because they are the children of baby boomers, will absorb the multifamily product that is currently being built. He warned, however, that developers going forward should be wary of how many millennials will be able to afford hip, high-end multifamily product close to the center of major cities.

“While the taste for the product design has changed, you’ve also got to ask how many echo baby boomers have the income to service the higher-end, in-town, mixed-use residential experience,” Tutterow said.

“Offsetting that, I’m also seeing the mixed-use residential experience being built in the suburbs, where the price point may be a little lower. But you have to acknowledge that while preferences for product have changed, that doesn’t necessarily mean the capacity to consume it moves in tandem.”

— Haisten Willis



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