This month I was able to attend several economic discussions of various sizes in local settings to check my own intuitions in terms of what's coming down the pipe. It's interesting to see the convergence and divergence of ideas among various economic minds. I love the if this, then that scenarios that a group of people with differing experiences can bring to the table. Very lively and dynamic. From these discussions, I sensed that, overall, people don't know what to expect and that while the economy feels relatively stable, most people seem to be operating with a split field of vision. They are either operating at hyperspeed or slow crawling for the same purpose, which is to avoid an economic ambush of an unwanted but, at least historically, expected recession. While no one is willing to pinpoint the date and context of the next SHTF event, all will acknowledge risks inherent in our economy. Here are some takeaways.
1.) NFIB #1 SMB problem: Labor costs. How's your retention and recruitment looking? Creativity, space, place, fringe, flexibility are key elements... beyond salary.
2.) CRE sector inventory must not fail to plan for future conversions as new technologies drive changes in behavioral and occupancy patterns.
ExA. Grocery anchored retail has held the bright spot, but do we really need that big box or can we deliver all non-perishables and downsize grocery perishable shelf inventory to drugstore like efficiencies? How will parking requirements adapt to these changes?
ExB. What retail MUST have bricks and mortar? Corporate provisions relating to free shipping and returns for e-commerce are going to again convert consumer behavior and realign bricks and mortar locations in support of the omnichannel experience. Industrial and retail are entangled and inseparable now; one can not seemingly exist without the other. As logistics and final mile solutions evolve, so too will retail and the consumer experience. We have to think of tomorrow today when planning.
ExC. Urban agronomy has evolved, now with the ability to implement 22 growing seasons vs 4 seasons via conventional agricultural methods. Will urban farming be a solution for pollution in urban areas? Delivery technologies will partner with agricultural operations to deliver new access points for food and transit, potentially transforming food deserts.
ExD. Electric cars, multimodal transport, long haul technology, drone technology,and personal transportation trends are all developing and will catalyze new behaviors. A uniformity of standards could be helpful but where is the conversation today? What are the anticipated responses to these technologies and along what timeline?
ExE. When Gen Z, the first all digital generation rises to work, and when Millennials begin to have families, will they desire traditional norms or again defy convention in terms of urban migration to suburbia?
3.) AI. Rapid change is the new normal. The present is the slowest period of change we will ever experience in our lives moving forward; the future will only intensify. Daily learning will be mandatory and no one will remain an expert at anything for long. How does that compare to our current existence? Are most employers and employees at odds or on the same wavelengths? What does it mean to specialize today vs tomorrow? Can ancient human hardware keep up with ever changing technology?
4.) Human Factors. As AI develops, my own prediction is that mental health and human services needs will explode. Humanity struggles when uncertainty prevails and often redirects this anxiety into counterproductive pursuits. AI will catalyze uncertainty again, just as other types of revolutions have. Who/what society will seek is the question; right now, we can't seem to agree on what a positive role or model should look like. Expect greater divisions and conflict until we can find alignment on this piece, but don't fail to recognize opportunities to support this necessity - motivation by hope and purpose.
5.) Fed rates: Looks like the Fed will mitigate their rate hikes to manage inflation cautiously. On that point, I tend to agree with CCIM economist, KC Conway, in terms of real inflation metrics. Regardless of what Fed Gov declares, the word on the street is "ouch" at payment terminals. Real world numbers feel like 5-6% in urban areas and I think that's a key point. From where is Fed Gov extracting transactional data comparisons? Is the Fed out of touch?
Rate Hike Risks: Dr. Michael Walden, of NCSU spoke of the challenge ahead for the Fed/FOMC, who after 4 separate 2018 rate hikes, appears to favor a conservative stance on 2019 hikes to support current momentum. (It seems no one has the appetite for a 1980's style rate hike, and painful fallout, to rapidly clear economic excesses. The amount of debt circulating through the economy makes that unappetizing to say the least.) If, however, some global event triggers rapid economic contraction, the current strategy leaves Federal Reserve with little to no corrective lever to pull and the US with a much harder recovery ahead. Either way, too much too fast or too little to late, consequences will follow.
6.) Amazon HQ2: Raleigh-Durham will remain a contender for Amazon. Employee dispersion will happen quietly, over time. Local tech firms need to get creative to retain and recruit. Expect increasing upward pressure on wage growth as Amazon quietly grows presence outside of Arlington, VA. (Personally, I think Amazon could better compete with a dispersed workforce model by taking advantage of regional talent and technology to retain and acquire necessary skill sets, but that only applies to specific facets of the org. At some point, a core HQ will need to develop a support system in or around Amazon's new Arlington, VA HQ. Lucky for Bezos, great talent is all around him. Lucky for Bezos, great talent is all around him. Alternative considerations:
Unlucky for Bezos and Amazon, and the Triangle (taxpayer) is the recent announcement by Duke University that it could not satisfactorily complete diligence to support the current plan for the Durham-Orange Light Rail project by the fed funding April 30 deadline.
Apple is still eyeing the Triangle (?). No doubt, the widely recognized HQ2 rankings achieved by Raleigh-Durham have improved visibility and prospects in general for the City of Oaks, the Bull City, and Triangle region. Whether RTP will eventually land Apple is TBD, but don't think they aren't watching Amazon's momentum and the import/export dynamics of Triangle talent.
A recent conversation with a Credit Suisse operations lead and transplant from NYC, noted that the major reason for the company's increased presence in the Triangle is the cost of real estate and talent. Both were the primary influential factors.
The $T Q: Does the Triangle have enough of the talent necessary to support what the market demands? And, what will rising wage pressure do to our adolescent startup ecosystem? Currently, Raleigh is riding the talent wave well. While Raleigh is a net importer of Talent, when it does lose, San Francisco, Seattle, and Charlotte benefit according to LinkedIn's Rob Humphrey.
7.) Noteworthy risks to track:
Tariffs. Trade agreements need to be ironed out and soon. China is critical. The "new NAFTA" is done and mostly better than before for the US. Tariff agreements are unlikely before spring.
Government dysfunction 5.0 (and counting). Shutdowns are harming business and consumer confidence. The Green New Deal, while admirable is unrealistic, and would shatter the economy; economist Michael Walden has offered alternative solutions. (BTW look for his new book, North Carolina Beyond the Connected Age.)
By 2023, the interest payment on the debt will double from 7% to 14% of GDP.
Federal Debt vs GDP vs Rate hikes: Two Federal debt ceiling lifts have cycled with little more than a passing glimpse. By 2023, the interest payment on the debt will double from 7% to 14% of GDP. Fed policy and federal government can not ignore the potential impact of both tax increases and interest rate hikes negatively impacting GDP. At that point, we are all going to feel pain as the economic levers at our disposal will be limited. State governments, institutions, private industry, SMB, investors, and families alike need to have a plan given the current Fed Reserve strategy if geopolitics, global, and national events trigger economic drag or contraction. Optimists may remind us that the current Fed policy is derived from complete data and a wholistic approach. Let's hope so.
Mind the 2-10yr Treasury note spread. Is 2020 "R" imminent?
Demographic transitions. As Boomers downgrade spending, will Millennials overcome high (college) debt and finally be able to fill the consumption gap?
Technology. How much does keeping up with the Jones matter?
Workforce development. What talent are we cultivating and how?