Tuesday, February 21, 2017

Lehigh Valley's 2017 Economic Outlook

Dr. Kamran Afshar, Chamber Chief Economist, The Chamber's Finance Committee

Twenty-sixteen was a great year for people looking for work. Nationwide 2 million new payroll jobs were created during the first 11 months of the year, for a total of 15 million new jobs over the last 6 years. Lehigh Valley, however, was not that lucky. The total number of payroll jobs dropped by 3,000 in the Greater Lehigh Valley area, which also includes Carbon and Warren counties. This is despite the fact that layoffs are exceptionally low and the labor market is tight. To add to the puzzlement, all of this is happening when employers are telling us that they want to hire more people. There appears to be a large gap between the needs of the local employers and the skills and expertise of the remaining labor pool in the Valley. 

Twenty-sixteen was also a great year if you were selling a property. The number of residential units sold in the Valley rose by a healthy 7% over last year’s level, while the average sales price of local residences gained a modest 2% over its previous year. However, considering that the 30-year fixed mortgage rate in 2016 averaged at 3.65%, housing affordability was still pretty reasonable.

The headline grabber for 2016, however, was the jump in stock prices. The DJIA rose by 13% in 2016. Most of the increase came after the election in November. Of course, it should be added that DJIA rose by 107%. It more than doubled between December 2008 and October 2016, just before the election. The average price of gasoline in 2016, despite its recent increase, was lower than 2015. On average, we paid $2.15 for a gallon of gas in 2016, well below the $2.42 that we paid in 2015, and significantly cheaper than its $3.36 average price in 2014. For the first three months of last year, price of gasoline averaged at $1.89, something that we will not see again anytime soon!

And of course, the major economic event of 2016 was Donald Trump’s election. As much as can be discerned from the president’s campaign promises, two major economic policies will be in the lead: a trillion-dollar infra-structure plan, and a sizable reduction in corporate taxes. Both policies, should they become law, would be beneficial to the corporations, particularly for those involved in the construction industry. The 1,500 points jump in the DJIA after the election clearly reflected those expectations. The infra-structure plan, however, will significantly increase the federal budget. The accompanying huge tax cuts will reduce revenues, thus a major spike in deficits is unavoidable, at least at the beginning. This is also reflected in the market as both the short and long term interest rates vaulted by significant amounts right after the election. This data indicates that the market anticipates most of these policies to take effect. Based on that, the market expects a period of higher growth as well as higher government expenditures and borrowing.

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