RSM economist upbeat on mid-market

Keynote speaker Joseph Brusuelas, chief economist of RSM US LLP, kicked off the CBJ Mid-Year Economic Review at the Coralville Marriott on June 28. PHOTO EMILY BETTRIDGE


By Dave DeWitte

Economist Joseph Brusuelas likes what he sees on the economic road ahead, although he cautions against hopes for quick stimulus from a unified Republican-led government.

“There are some really good things to say about the U.S. economy at this point,” RSM US LLP’s chief economist said after reciting a list of positive signs during the keynote speech at the CBJ’s 2017 Mid-Year Economic Forecast on June 28.

After a slow and uneven economic recovery from the Great Recession which began in 2008, he said the economy is expected to grow about 2.5 percent in the second quarter after first-quarter growth of 1.2 percent, and he believes that the GDP growth forecast of 1.9 percent for 2017 is achievable. He said manufacturing output, defense spending, ag commodity prices and housing starts are making gains, and the odds of a recession are a slim 15 percent.


Mid-market soaring

Mr. Brusuelas is especially upbeat about the prospects for mid-market companies with $10 million to $1 billion in annual revenue, which RSM surveys regularly because they make up the majority of its clients. RSM’s proprietary U.S. Middle Market Business Index reached a high for the current business recovery cycle of 132.1 in the second quarter, and Mr. Brusuelas said RSM’s survey shows that mid-market companies are projecting higher employment, wages and earnings in the next six months.

“There’s no reason we will not see an expansion across the middle market of the economy,” he told attendees at the event, presented by Bankers Trust.

Mr. Brusuelas colored his generally favorable outlook with some bright orange caution signs. He warned of “profound disruption in the retail industry” caused by the growth of e-commerce sales, which is having secondary effects in the real estate sector that will ripple out into the real estate market through the remainder of the current business cycle and into the next.

“We’ve now started a 10-12 year structural adjustment in commercial real estate,” he said. “This will force commercial (owners) to reimagine how they use the space in their properties.”

Automotive inventories are bloated, Mr. Brusuelas said, cautioning of impending production cutbacks that will affect industry suppliers.


Not a total rosy picture

Even some of the positives about the strong economy – such as the low unemployment rate – will have negative implications on economic growth, Mr. Brusuelas said. With unemployment at 4.3 percent, he said businesses face the tightest labor market in a generation. For every vacant position, he said there are now 1.3 job-seekers looking for work. That compares to more than seven job-seekers for every opening at the peak of the recession in 2009.

“One of the challenges facing middle market firms is that it’s going to be difficult to find skilled and semi-skilled workers and workers with public-facing skills,” Mr. Brusuelas said “It’s been a long time since we had to address this. Right now, we just do not have enough people with the right skills to fill the existing jobs.”

The skills shortage will be so severe, he said, that it will “create bottlenecks in the economy, where companies simply are not going to be able to meet demand because they do not have enough employees to produce the product or service,” and customers will substitute other suppliers or products.

Stock markets have reacted bullishly to the results of the November 2016 general election which left Republicans in control of the White House, Senate and House of Representatives. Mr. Brusuelas said economic analysts expected the results to produce lower taxes, easing of regulation and infrastructure spending that would all combine to provide economic stimulus.

With the exception of some regulatory easing, Mr. Brusuelas said there’s been little to show for it, and won’t be until next year due mainly timing and sequence of actions needed to bring about the changes.

Tax reform “is dying on the vine,” he said, adding that the border tax proposal from U.S. Rep. Paul Ryan is “the only game in town,” and that no other proposals are forthcoming from the White House or the Senate.

“This is a fairly radical shift in policy that essentially declares the corporate income tax debt and what it substitutes is a value added tax with border adjustments,” he said. But even if Congress gets behind it, it probably won’t pass until late 2018, possibly after the congressional elections, he said. That’s because certain aspects of the Affordable Care Act would first have to be repealed. That would have to be followed by a reconciliation of the 2017 budget, and passage of a new federal budget.

Mr. Brusuelas said it’s also likely the proposal will encounter resistance from sectors such as retailing, which imports garments and footwear from other countries, and automakers, which relies on imported components and vehicles.

“For health care, tax and infrastructure reform, you need to look past this year,” he said.

“New oil and natural gas pipelines in the Midwest provide the energy backbone for the new economy,” he added. “Natural gas will be the bridge fuel over the next 30 to 50 years that will take us to the next generation of clean energy sources.”

Although President Trump campaigned to restore jobs in the coal industry, Mr. Brusuelas had little encouragement to offer an audience member who wanted to know how manufacturers would benefit from the “trickle down” of a coal industry resurgence.

“Unfortunately, political authority in Washington chose to make a big deal about something they could not do,” he said. “Coal now has just been supplanted by natural gas and now it will have other pressures from solar and wind energy.”

He said manufacturers will receive a greater trickle effect from the energy economy converting to natural gas than from a revival of coal.

Mr. Brusuelas also had little encouragement for those who believe a border tax will bring back manufacturing jobs from China, and suggested President Trump’s remarks on bringing back factory jobs lost to other countries don’t square with empirical facts. He said 85 percent of the factory jobs were lost to technology, not offshoring, and China’s economy has begun to de-industrialize.

“You can’t bring back jobs from a country that is getting rid of those jobs,” he said.

If a border tax is imposed, Mr. Brusuelas said it could add manufacturing jobs, but not the kind of low-skilled jobs many people associate with manufacturing. He said manufacturing jobs that come back to the United States will be in highly automated manufacturing centers staffed by highly educated professionals.

“You will see technology like you’ve never seen before,” he said.


New economy evolving

Mr. Brusuela’s remarks were all in the context of the economic recovery from the deep recession of 2008, which he said has been slower and more unevenly distributed than any previous recovery. He said entire areas of the country and industries have seen sluggish growth, and the kind of 5-6 percent growth common during growth cycles of the economy in the last half of the 20th century has been confined to a dozen large metro areas with strong tech-based economies.

For the rest of the country, Mr. Brusuelas said annual economic growth has ranged from none to 2 percent.

Iowa and the Midwest will see more economic growth than most of the country in 2018 because ag commodity prices are recovering from the two-year downturn that began in mid-2014, he said, and ag exports “are exploding.”

Mr. Brusuelas closed by saying that technology is the economy’s future, not the enemy, and that accommodating the uneducated will not be a successful economic strategy.

“How long should we continue to organize the economy around people who didn’t pay attention in school?” he asked, adding, “Don’t kill the goose that lays the golden egg.”

The way forward “is not a bridge to the past, but to take advantage of where we have competitive advantages, and to create incentives for people to pursue careers in those areas.”