Green Industry Poised for Continued Economic Growth in 2017

Green Industry Poised for Continued Economic Growth in 2017

Moana plant yardThe green industry outlook for spring 2017 is a good one. There are very few red flags among current economic indicators to suspect any surprises in economic performance in the first couple of quarters of 2017. Even a potential increase in interest rates by the Federal Open Market Committee (FOMC) will likely have a minimal impact. One of the continuing bright spots in the coming year is the housing market, a prime influencer of derived demand for green industry products and services.

Growth In Housing Sector Means Growth For Ornamental Industry

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Even though housing starts have more than doubled from their recession-inflicted bottom, overall starts are about 1.2 million units currently, about half of pre-recession levels. The first housing forecasts are just now being released, and they range from 1.2 to 1.3 million starts projected for 2017. Demographics and the rate of household formation suggests starts will increase to around 1.5 million by 2018, and this should be a sustainable level of housing.

Residential investment and housing starts are usually the best leading indicator for the green industry economy, so this suggests that green industry sectors will continue to grow in 2017. In fact, a recent econometric forecast of historic personal consumption expenditures on plant sales indicates that, holding all other things constant, the market for ornamental crops will continue to rise through 2019.

As for the commercial real estate sector (where a substantial number of flowers, shrubs, and trees are also sold), the readings of the American Institute of Architecture (AIA) Billings Index (a leading indicator for commercial real estate) over the last year suggest more increases in commercial real estate investment in 2017 (except for the oil sector, which is still recovering from the recent decline in oil prices). Again, it appears the green industry economy is poised for more overall growth in 2017 from both the residential and commercial markets.

Improved Labor Market, Lower Fuel Prices Signs Of A Healthier Economy

There are other key economic indicators that carry us positively into 2017. First, the number of new claims for unemployment insurance benefits is at the lowest level in 40 years (even with a much smaller population back then). The four-week average of new unemployment claims has fallen to 251,000, down from 297,000 a year ago, and down from the peak of 660,000 during the last recession.

There were also 5.5 million job openings in September. This is close to the record high of 5.8 million in April 2016. Job openings have been above 5 million for 20 consecutive months. Also noteworthy is that the number of people quitting jobs is up 12% year-over-year. These are voluntary separations. More job openings, and rising quits, are positive signs for the labor market.

Household debt burdens have declined sharply over the last several years. The household debt service ratio was at 13.2% in 2007, and has fallen to under 10% now. These data suggest aggregate household cash flow has improved.

For consumers, lower gasoline prices are another positive. Gasoline prices are currently around $2.12 per gallon, slightly higher than last year at Thanksgiving, but near the lowest since the recession. There are still problems. For example, not everyone has participated equally in the current expansion. Wealth and income inequality are at record extremes, and there is too much student debt. But there are still many economic reasons to be thankful, going into the new year.

Impact Of President-Elect Trump’s Proposed Economic Policies Still Undetermined

Of course, the thing that has captured much of our attention of late is the election of Donald Trump as our next president. It begs the question as to how this is going to impact our economy. First, in the broadest of terms, the Trump economic plan seems to be:
1. Renegotiate trade deals and/or impose tariffs
2. Stricter enforcement of immigration laws (including deportation of illegal immigrants)
3. Significant infrastructure spending
4. Tax cuts (mostly for high-income earners and corporations)
5. No changes to Social Security and Medicare
6. Deregulation

The appeal of this economic platform for many Trump supporters is obvious: More favorable trade deals or tariffs means less price competition for domestic producers of goods. Less immigration (and deportations) means less labor competition domestically. More government infrastructure spending means more jobs. Small business owners like the sound of deregulation. Lastly, everyone likes tax cuts, even if most of the benefits accrue to high income earners.

Many analysts think there will be fiscal stimuli in 2017 and 2018, with a combination of tax cuts and some increase in infrastructure spending. In general, analysts believe that any changes to trade agreements will take time, and that deportations will not increase significantly. The bottom line for analysts is that the portions of the program that will boost the economy in the short term will be enacted, and the portions that won’t (trade deals, deportations) and changes to the Affordable Care Act (Obamacare) will be delayed.

Members of President-Elect Trump’s team have been talking about a $1 trillion infrastructure plan. However, the infrastructure proposal is about $100+ billion in tax credits to spur private investment in infrastructure. The $1 trillion in infrastructure investment is the projected size of the private investment, not the proposed government spending. This proposal is very modest in terms of a fiscal boost. If this is a privatization scheme, then there might be a modest short-term boost, but the long-term impact will likely be negative.

On trade, there are winners and losers. Everyone who shops at large retailers benefits from lower prices due to imports; however, for people who have lost jobs because of cheaper imported goods, the lower prices do not offset their lower wages (these are the losers). If there are tariffs, everyone will pay more at these stores, and some people might get higher paying jobs in the U.S. There are winners and losers, but the net impact of tariffs on the U.S. economy will probably be negative.

Usually regulations are intended to prevent long-term negative events, so deregulating has a short-term positive impact, even if the regulation is important. An example would be FDA drug approval. If the FDA stopped regulating drugs, there would be snake oil salespeople everywhere. The negative impact of the non-approved treatments would not be realized for some time, and the victims would have no recourse later, since the snake oil salespeople would have moved on. The FDA is not perfect, but these are necessary regulations to protect consumers.

The same is true for banking regulation (as we learned during the great recession). As far as tax cuts are concerned, most of the benefits will probably go to upper-income earners. These are also folks with a propensity to save, so the boost to the economy will be modest.

Of course, these are just projections at this point. The bottom line is that we need to wait for the details, but there will probably be a modest stimulus boost for 2017. This will likely trickle down to the green industry, as well, particularly if there is green infrastructure funding included.