Citywide Banks hosted its 2014 Economic Forecast forum this week at Wings Over the Rockies Air & Space Museum in Denver. The event featured Dr. David Jones, a nationally recognized financial market expert who serves as President/CEO of Denver-based DMJ Advisors, and Rick Pederson, principal at Denver-based Bow River Capital Partners. The two gave their insights on how global, national, and regional economic trends are likely to impact Colorado businesses in 2014 and beyond. The annual event was attended by over 400 CEOs and executives from Colorado-based companies. Full audio downloads and highlighted excerpts of the presentations are available below.
FULL AUDIO REPLAY DOWNLOADS
Opening Remarks – Marty Schmitz
(Chairman of Citywide Banks)
>> Listen Now (8 minutes)
Presentation – Dr. David Jones
>> Listen Now (26 minutes)
Question & Answer Segment
>> Listen Now (19 minutes)
For the second year in a row, the message from both speakers was one of positive economic recovery and growth for the coming year with a predicted GDP increase in the range of 3.3%. The experts agree that Americans and Coloradans should actually feel an improved sense of growth in 2014 compared to 2013, which was plagued by government road blocks causing uncertainty.
Jones stated that if there were a title for his current economic sentiments it would be, “Growth: How you get it. How you keep it. And where it’s going to take place.”
Pederson noted that “David (Jones) and I were right for the most part in our predictions at last year’s breakfast, but growth could have been better.” And that in 2014 we can expect that “the private and public sector will finally come together to promote real growth.”
AN ENERGIZED ENERGY SECTOR
Jones indicated his strong feelings about the important role the energy sector will play in our nation’s growth over the coming years. He feels energy exports, specifically refined oil products, were in large part responsible for increased growth during the second half of 2013.
Based on the energy phenomenon in North Dakota, he explains that “wages are seven times minimum wage for the entire energy sector. So, if you want a nice middle class source of growth…it’s energy.” He says that thanks to hydraulic fracturing and horizontal drilling, “North Dakota now produces a million barrels of oil a day. And we’re just getting started.” Jones equates the energy boom to the gold rush of the 1800’s, and in his view “it is the model of how this country can reinvent itself and grow at 4% instead of 2%…the difference between a significant increase in jobs, a significant decline in the unemployment rate, and sustained growth.” He hopes that Colorado will be able to overcome the anti-fracking sentiment – provided the right environmental restraints are determined – so our state can join in this area of economic growth.
Pederson agrees with the potential of energy for the country. He said, “the states – like North Dakota and Texas – that are largely energy driven, have been the strongest in the past two to three years.” He noted how the rise in the baby birth rate in these states proves “again how economics give confidence to consumers.” Pederson also credits energy as the driver behind jobs growth in many states.
JOB MARKET RECOVERY – WHAT’S TO COME
Pederson says job loss stemming from the recession “is much of what’s holding us back.” Job growth and the wages that come with the job growth have been missing. Pederson predicts our full recovery from job losses by Q1 of 2015 – meaning a recovery period of over six years (vs. historic averages of around two).
“We’ve recovered all of the high paying jobs and low paying jobs, but it’s that very large middle class sector that hasn’t recovered.” Ironically, Pederson notes that the most job openings are in areas not requiring four-year degrees (such as sales reps, truck drivers, specialized mechanical work). Therefore, “we need to focus efforts on training for those middle wage jobs, which are frankly quite lucrative.”
Locally, Denver is stronger than the national average in job growth. With energy and agriculture as big contributor industries for jobs, the fastest growing city in Colorado is Greeley. In fact, much of the growth near Denver is in the northern sector.
Pederson believes “what’s ahead of us is more skills gap, more retirement – causing the labor participation rate to drop instead of coming back up.” This is problematic with the Fed’s plan to start tightening when unemployment hits seven percent, “because if labor participation rate doesn’t move or continues to fall – the economy gets better with more jobs – that rate drops faster and the Fed is trapped.” Pederson believes “one of the big economic questions for the Fed over the next two years is – do they change their target on unemployment or do they start tightening before they want to?”
HOUSING & REAL ESTATE – AT THE CORE OF OUR RECOVERY
Nationally, and especially locally, we can expect to see another good year in commercial real estate and housing according to Pederson. Below provides a snapshot of his predictions.
- In Denver, we’re currently at 1 million residential units a year. “We really need to be closer to 1.5 million a year and I think you will see that continuing to move up in 2014.” Whether or not sales will follow depends heavily on mortgage rates and interest rates.
- Both “Colorado and national sales fell off the last month when mortgage rates moved up a bit. Continued increases will stall sales,” explains Pederson. He predicts that Millenials and immigrants will be buying houses.
- Pederson also sees a slowing of the housing market in 2015 and 2016. But based on steady recent growth, this future slowing should be fine.
- House prices in Denver have been steadier than national averages, with price increases (currently up 10%) slowing over the next year. With “95% of house prices increasing in the US – this is what will finally bring the country as a whole into the recovery stage.”
- Commercial real estate construction is moving down due to the changing dynamics of business and the work force.
- Cap rates, or what you’re willing to pay for a property, will eventually increase, but not immediately with increased interest rates. Pederson predicts that cap rates won’t move for a couple of years on most product types, including commercial real estate.
- Vacancies in Denver are moving in the right direction. Pederson explains that with “not a lot of new construction, demand increasing, and all product types seeing rents increasing…all in all these factors make it a good time to be in commercial real estate.”
OTHER AREAS TO WATCH IN 2014 & BEYOND
Challenges for The “Fed” Jones feels Janet Yellen, the new Chair of the Fed, or Federal Reserve Board, can expect many challenges ahead. The former Chairman, Ben Bernanke, saved the country from depression during his tenure “by creating new money to the tune of $4.3 trillion versus the normal balance sheet around $850 billion. And now Yellen is charged with bringing the balance sheet back to around $1 trillion without messing up the economy” – no small task, admits Jones.
Interest Rates – The calm before the storm Both speakers noted that we’ve all been expecting inflation to come up and it will happen – but not yet. They predict 2014 will be the last year of low interest rates. According to Pederson, towards the end of 2014 and moving into 2015 and 2016, “we’ll see more inflationary pressure as wage growth results in increased consumer spending.” Further, we can expect slowed growth in 2015 because of “interest rate worry,” but not enough to slip back into recession.
Global Currencies – Will we create a ripple effect? Jones notes that it will be difficult for our country to sell and push up interest rates in the future without affecting the global economy. He says evidence of this already occurred in January when the Fed starting tapering bond buying.
Business Sector Spending – Needs to pick up for continued growth Both speakers noted that our current economic growth could be hindered if the business sector doesn’t start spending the cap ex they’ve been cautiously holding onto. Jones noted that local and national “businesses were cautious in spending and hiring in 2013 due to unknown factors like taxes, healthcare and tight bank regulations.” Pederson added to this sentiment by saying that “small businesses should get on solid footing in 2014 by investing in their businesses and take advantage of the next 24 months of expected economic growth – not something [he] would have said in previous years.”
Looking Ahead The experts agreed that we can look forward to continued recovery and growth in 2014. They mentioned a slowed growth in 2015 and 2016 after the Federal Reserve tightens interest rates for the first time since 2008. All in all, we are headed in the right direction.