5 Recommendations For Your Business

Lynn Reaser, chief economist for Point Loma Nazarene University’s Fermanian Business & Economic Institute, made five recommendations for local business to consider in 2018:

  1. Study tax changes — Take a careful look at all the elements of the tax code changes. Yes, you may have to get your tax attorney, but take a look to understand what it means to you, your customers, and your suppliers.
  2. Enhance cybersecurity — Beef up your cybersecurity. There is a high chance that if you have not already been attacked, you will be, and the costs can be very high.
  3. Explore foreign trade opportunities — Look into the export market. Yes, it’s a lot of hassle, but it could be very beneficial in the long run.
  4. Take care of your employees — Further, particularly in this tight job market where everybody is going to be competing for your best employees, take care of your staffs. Make sure they are challenged and they are happy. They are your key asset.
  5. Invest in your business — And finally, this is the year to invest in your business. Never has there been a better time. Interest rates will still be pretty low. The after-tax rate of return on investment is high. You have immediate benefits from expansion of any capital equipment. Investing in your business is critical to boosting productivity and remaining competitive in this very technology-driven marketplace.

— Dr. Lynn Reaser, chief economist of Point Loma Nazarene University’s Fermanian Business & Economic Institute, gave her economic forecast for 2018 as the keynote address of the San Diego Business Journal’s annual Economic Forecast event. Here are excerpts from her forecast and how she answered questions from the moderator and audience. The excerpts have been edited for clarity and brevity.

Global Outlook

Looking at some of the big trend picture elements that will affect the outlook for San Diego, I think there are three international trends that you should be aware of that will be impacting us.

First, for the first time in a decade, we are seeing a synchronized global expansion. All of the countries around the world, both developing and developed, are expanding at the same time.

The second force to keep in mind is that oil prices, which have been on a wild ride up and down, now seem to be stabilizing in a range of about the high 50s or low 60s. If they get too high, we will see U.S. shale producers, who are now the new swing producers in the world, step up their production and bring those prices down. So we are kind of in a period of, I think, relative stability.

The third element that will be impacting us all relates to the value of the dollar. It soared in 2015, and in 2016 it really hurt U.S. exporters. It came down last year.

In 2018 we may see about a 4 percent increase as the U.S. continues to actually lead the world economy, but it should still leave our exports relatively competitive.

U.S. Economic Outlook

Here in the U.S., individuals also will benefit greatly from a reduction in their income tax rates as well as a doubling of the standard deduction.

As a result we’re looking for better growth in our economy in 2018. We’re looking for real gross domestic product, GDP, to rise about 2.8 percent. So it will be more like a 3 percent economy this year than a 2 percent economy, and things will generally remain significantly stronger.

There won’t be a lot of inflationary pressure because most of the impact of the tax cut will go to increasing productivity, increasing our capacity through higher business capital spending. As a result inflation is likely to settle down to around 2 percent, which will be pretty close to the Federal Reserve’s overall target.

The Trump administration will be dominating the majority of members at the Federal Reserve Board. So what does this mean for interest rates? I think pretty much more of the same, an approach to gradually increase interest rates, but it is likely to be at a somewhat faster clip than we’ve seen in the last three years. We’re looking now for about four rate hikes, quarter-point increments, maybe about one each quarter, maybe only three.

We had a 19-percent surge in the S&P 500 last year. The markets keep reaching record highs. I think at this point, yes, we could see a minor pull-back. But generally I think equities will continue to rise this year, perhaps around 6 percent.

California Picture

It should be a good year for California. We have a lot of forces in our favor. We Many Forces Driving Local Growth

FORECAST: Tax Reform, Low Interest Rates Fuel Capital

Dr. Lynn Reaser, chief economist of Point Loma Nazarene University’s Fermanian Business & Economic Institute, gave her economic forecast for 2018 as the keynote address of the San Diego Business Journal’s annual Economic Forecast event. Here are excerpts from her forecast and how she answered questions from the moderator and audience. The excerpts have been edited for clarity and brevity.

Global Outlook

Looking at some of the big trend picture elements that will affect the outlook for San Diego, I think there are three international trends that you should be aware of that will be impacting us.

First, for the first time in a decade, we are seeing a synchronized global expansion. All of the countries around the world, both developing and developed, are expanding at the same time.

The second force to keep in mind is that oil prices, which have been on a wild ride up and down, now seem to be stabilizing in a range of about the high 50s or low 60s. If they get too high, we will see U.S. shale producers, who are now the new swing producers in the world, step up their production and bring those prices down. So we are kind of in a period of, I think, relative stability.

The third element that will be impacting us all relates to the value of the dollar. It soared in 2015, and in 2016 it really hurt U.S. exporters. It came down last year.

In 2018 we may see about a 4 percent increase as the U.S. continues to actually lead the world economy, but it should still leave our exports relatively competitive.

U.S. Economic Outlook

Here in the U.S., individuals also will benefit greatly from a reduction in their income tax rates as well as a doubling of the standard deduction.

As a result we’re looking for better growth in our economy in 2018. We’re looking for real gross domestic product, GDP, to rise about 2.8 percent. So it will be more like a 3 percent economy this year than a 2 percent economy, and things will generally remain significantly stronger.

There won’t be a lot of inflationary pressure because most of the impact of the tax cut will go to increasing productivity, increasing our capacity through higher business capital spending. As a result inflation is likely to settle down to around 2 percent, which will be pretty close to the Federal Reserve’s overall target.

The Trump administration will be dominating the majority of members at the Federal Reserve Board. So what does this mean for interest rates? I think pretty much more of the same, an approach to gradually increase interest rates, but it is likely to be at a somewhat faster clip than we’ve seen in the last three years. We’re looking now for about four rate hikes, quarter-point increments, maybe about one each quarter, maybe only three.

We had a 19-percent surge in the S&P 500 last year. The markets keep reaching record highs. I think at this point, yes, we could see a minor pull-back. But generally I think equities will continue to rise this year, perhaps around 6 percent.

California Picture

It should be a good year for California. We have a lot of forces in our favor. We remain the tech hub of the world, and as a result we look for a gain of about 335,000 jobs this year, which will actually be slightly more than we created in 2017. You should know that basically every single area of California has now passed its pre-recession high in terms of job levels.

San Diego Forecast

The Navy’s presence will be increasing here.

We will see the benefits of the overall biotech as that field continues to expand. More consumer spending will fuel travel, tourism, and entertainment.

Exports will be growing.

These tax cuts will basically benefit San Diego as well as the rest of the nation.

Now, there are some significant negatives and question marks.

The first negative, of course, is housing costs, and they just continue to be a major constraint.

Finally we have the area where everybody will hear more about from our panel that we’ll be facing skill shortages.

In terms of housing, we will see more building this year. We really dropped back to only about 9,000 units last year as multifamily took a tumble. We need at least 12,000 just to be keeping up with our population growth. Some 14,000 San Diegans are now leaving our region every single year for other states or areas of California.

As a result home prices will continue to rise. After an 8-percent jump last year, prices will probably rise an additional 5 percent.

So in terms of the bottom line, we’re looking for a gain of about 24,000 jobs this year, about the same as we created in 2017.

Capital Expenditures

The missing link of this recovery has been capital spending. Businesses have just been sitting on the sidelines.

Robotics, artificial intelligence, cyber security investment doesn’t maybe yield an immediate rate of return, but it is absolutely critical.

Now is the time to invest to stay ahead of a market which is going to be changing very rapidly.

Projected Wage Growth

In San Diego the increase on average will be close to that 3 percent this year as the job market is tight and unemployment rate is in that low 3-percent area.

NAFTA Update

What would success look like in the NAFTA negotiations? If we actually modernized NAFTA to include the services sector, to increase protection for intellectual property rights but not to increase trade barriers.

We have just started in the past few years to see Mexican companies opening up their supply chains to California firms, and to shut that down in the defense area and other areas would be devastating.

Duration of Expansion?

I think we are not at the end of this expansion yet.

I don’t think we’re in recession territory until maybe 2021. Expansions don’t last forever. But this one still has a ways to go.