Hugh Kelly, PhD, CRE – Fordham University Real Estate Institute
Mary Moore Hamrick, Chief Public Policy Officer – Grant Thornton
As we enter 2020, the current economic and political landscape is ripe for analysis and discussion. Presenting were Dr. Hugh Kelly and Mary Moore Hamrick, after which there was a stimulating question and answer session with the audience.
Kelly opened by discussing the distribution of our population with respect to age. Our current even generational distribution implies that as a whole, age-based demographic imbalances are unlikely to significantly affect the economy in the near future. He went on to describe the much more relevant role of the Federal Reserve in the current health of the economy, particularly its now dovish approach to the federal funds rate. He noted that 2019’s rate reductions served in part to correct the inversion in the yield curve that appeared mid-year, a traditionally bearish indicator on the economy’s overall outlook. These rate reductions complemented the existing fiscal relief of the Tax Cuts and Jobs Act of 2017, and have given a continued lift to the economy as it kept growing in 2019.
Despite this trend, Kelly made it a point to highlight an overall theme for the coming year: deceleration. The effects of the TCJA are slowly diminishing, and the Congressional Budget Office’s economic indicator predictions for the next decade show a return to sub-2% annual GDP growth and a departure from our sub-2% interest rate environment. These factors will clearly dampen economic expansion. However, Kelly believes the overall prospects of our national economy still point toward some degree of modest growth.
As the year progresses, Kelly believes recessionary risks will begin compounding and growing, as shown by recent data published by Comerica Bank. This data showed that by the end of 2020, there will be over a 40% chance of economic contraction. Owing to these growing risks and uncertainty, Kelly ultimately advised the audience to consider a partial reduction in investment exposure for the coming year, quipping that “No one ever went broke taking their profits.”
Complementing the focus on domestic economics, Mary Moore Hamrick spent time examining the U.S. outlook from a public policy perspective. She centered her thoughts on a major reality: 2020 is especially loaded with decisive political events that will have longstanding domestic implications. Between the ratification of the United States-Mexico-Canada Agreement, finalization of a trade détente with China, the impeachment trial, Super Tuesday, and Election Day, numerous potential inflection points will determine the future national landscape.
As she outlined the potential outcomes, the expansion of federal spending and a shift in tax policy drew particular interest from the audience. Regarding the former, Kelly chimed in during the open discussion with a description of the ongoing debate on modern monetary theory, a theory that proposes that there is no real budgetary constraint to federal spending so long as the interest burden can be serviced through additional currency issuance. As such, Kelly suggested that examining federal budgeting as one would their own household is flawed, given the government’s ability to continue expanding its supply of money through the Treasury.
Opening her discussion of potential changes in the national tax code, Moore Hamrick discussed this past year’s slate of healthcare tax repeals, including the “Cadillac” tax on premium employer-provided healthcare plans and the vague Medical Device tax on practice revenues among them. Relating this discussion to the commercial real estate industry, Moore Hamrick described some of the current presidential candidates’ desire to increase the capital gains tax to as high as 37% from its current level of 20% under the TCJA. While this policy decision is yet to be made, it could severely impact the returns for CRE investors in the coming decade. However, Kelly made the key point that, much like the relative failure of Opportunity Zones to attract the level investment that industry experts had predicted, ultimately the majority of investment decisions are not made based on favorable tax treatment.
Throughout the panel, the speakers struck a thoughtful tone, highlighting that the most important type of investment, whether private or public, is one that will deliver immediate return to its stakeholders, rather than offsetting or deferring future liabilities. Furthermore, they extolled to everyone the importance of informed voting, which is a core civic duty. Given the approaching hurdles, the general air of uncertainty is indeed present, but the question of an incoming recession in 2020 is not as binary as it appears.