Last week I attended a Richmond Real Estate Group event, where the keynote speaker was John Jung, a senior managing director at BB&T Capital Markets, whose presentation was entitled “Making America’s Economy Great Again.”
He told us what we might expect in the early days of the Trump Administration. While his presentation was to a group of real estate professionals, it wasn’t directly about the industry, but more about the economy as whole.
Jung made it clear he wanted to focus on facts and not political opinions. Though a lot of things could improve, his opinion based on the data is that the general economy is in pretty decent shape.
He pointed out that the world GDP growth continues to accelerate even if you go all the way back to the Middle Ages. Jung said there were three major factors driving this:
- The advent of globalism
- The free flow of capital
If you were a smart person with a good idea in a poor, isolated country in the 1700s, there was no way to access capital to do what you wanted to do. Now you arguably have the ability to be successful from anywhere in the world.
Jung also pointed out that, despite all criticisms, the U.S. economy remains the most successful in the history of the world. Why? Among other reasons, the two oceans protecting us, more harbors and navigable rivers than anywhere else in the world, abundant farm land and raw materials, government stability for over 200 years, and the best Navy on the globe since World War II. We also have very reliable transportation systems, a strong education system, as well as a work ethic that is second to none. These remain systemic advantages that are very hard to replicate.
Today, Jung suggested that economy is about 70 percent driven by consumer consumption. Moving forward, to sustain growth, you need to have jobs. The data shows that we have created a lot of jobs over the last eight years, though we certainly can do better. It’s happening now, for example, with Amazon’s announcement that it is adding 100,000 workers. However, job creation of this type may also create job dislocation, for instance Macy’s announcement that it is laying off 10,000 workers and closing 8% of its stores. The challenge for the new administration is creating sustainable, quality jobs.
To keep that up, we have to be an international trading partner of some kind, because our economy has historically depended heavily on trade. Trump has said over and over again that NAFTA is a disaster, but the facts show that North American GDP (includes Canada and Mexico), has increased from 18 percent to 25 percent of the global GDP since NAFTA. Politics aside, we have to decide if we want to be a trading partner with the fastest-growing economies in the world and, if so, how.
On taxes, Jung said our corporate tax rate needs to be dealt with. We have some of the highest corporate tax rates in the world, and our multinational large companies have literally trillions of dollars frozen overseas. If we could figure out how to get that money back into the United States in a tax efficient manner, it could be incredibly valuable in terms of creating jobs and pushing the economy forward more quickly.
The regulatory environment was also discussed. The last eight years have clearly created a more heavily regulated business environment, especially in certain industries, like finance. Jung didn’t say we should completely repeal Dodd-Frank, but he felt that if you look at regulation on a spectrum, it needs to be pushed back toward the middle somewhat to have a real impact on investing and spending in the United States and create more jobs.
Finally, there was discussion about the impact of certain government programs. There are several, from the Affordable Care Act to student lending, that need reform, and you can’t tackle them all immediately. While a contemporary society needs to find a way to provide healthcare for all of its citizens in some manner, everyone can point to how some things about it the ACA are not working economically, and it needs to be changed or possibly repealed and replaced. Everyone’s ears perked up when Jung questioned the long term purpose of Fannie Mae and Freddie Mac and why the government is in the business of providing subsidized mortgages to both individuals and investors. As he pointed out, it’s not 1938 anymore. We have home ownership at a very high level, and there are plenty of other mechanisms for funding commercial real estate, and why it might not be very pleasant to hear in CRE circles, it creates unusual incentives to do things we might not otherwise do if the mortgages weren’t subsidized by the government. Going forward, Trump seems likely to attempt to revamp some of these programs.