Approaching a New Year with the Same Challenges

Approaching the end of the fourth quarter, many begin to look forward to a new year and wonder what it will bring. Unfortunately, for the last several years, the United States has struggled with many of the same issues year after year. Issues such as international competitiveness, putting people back to work and addressing the federal budget are often talked about during elections, but policymakers have not adequately addressed these challenges. Consequently, many of the same issues continue to cause problems over and over again. This is the reality that businesses and households alike are dealing with and it is restraining growth. As a commercial real estate analyst, it’s clear that the negative impact on the broader economy is weighing on local markets as well.
 
Just last month, the inability of policymakers to employ any kind of strategy or long-term budgeting lead to a 16 day partial shutdown of the federal government. Even more threatening to the nation’s economic health, the possibility of a U.S. default was raised. The purpose of this column is not to rehash what happened last month or remind people that national policymakers have been less than ideal stewards, or even leaders for that matter. However, it should be noted that their inability to perform their jobs well (collectively speaking) is having an impact on the national and local economies.
 
Concerns of Senior Executives
It is clear that by September, executives began to anticipate an ugly budget fight. In September, McKinsey & Co. released their “Economic Conditions Snapshot.” In the report, North American executives considered domestic political conflict as the second greatest threat to growth, behind geopolitical conflict. This was during a time when it was unclear whether or not the U.S. would undertake military action in the Syrian conflict.
 
The concerns of senior executives were also captured in the Business Roundtable’s Q3, 2013 CEO Survey. In that survey CEO’s indicated they were growing more pessimistic about growth during the coming six months. Anticipating a less optimistic picture, fewer chief executives expected a pick-up in demand for their products and indicated less willingness to increase capital expenditures during the coming months. All of this was before the government shutdown. Just the prospect of such an occurrence was enough to impact sentiment among business leaders!
 
Outside of the boardroom, consumers were also growing more pessimistic. According to the University of Michigan’s survey of consumer confidence, sentiment began deteriorating in August and reached its lowest point in two years by November.
 
Local Impact
On a local level, we are not immune to the effects of trouble on the national level. From where I sit, broader market indicators continue to improve. However, the rate of improvement for one key commercial real estate indicator began slowing in the local office market after the first quarter and continued to slow through the third quarter. That indicator (net absorption) measures space leased vs. space vacated and is a good measure of growth.  While some of the sluggishness can be explained by examining structural changes (particularly in office markets), this does not account for all of the softening.
 
Similarly, growth in the local industrial market, while consistent and steady has not been accelerating. This tells me that the cautious executive sentiment reflected in the two surveys previously mentioned is also shared by local business leaders.
 
Unnecessary Headwinds
How much of an impact shenanigans in Washington have on the broader economy is frequently examined and debated. Even still, it is safe to say that things could be a lot better if policymakers in Washington were more effective.
 
Unfortunately, the resolution to the most recent drama was short-term. By December 13, a budget conference committee is expected to agree to a path moving forward. By January 15, a continuing resolution which allowed the federal government to reopen will expire. Last, but certainly not least consequential, the debt ceiling will need to be addressed by February 7.
 
The anticipation of coming budget fights will create unnecessary headwinds going into an important time of year for the economy. Unfortunately the last resolution followed a similar pattern of deferring big decisions and then revisiting them soon after. We should all hope that coming budget talks yield results that will allow for an extended period of calm from Washington. If they are able to deliver in that respect, then 2014 could have some good upside potential.