May 7, 2018

This piece is presented by the Tony Ratchford Group.

By Tony Ratchford

An email this week asked me if a recession could be brewing and, if so, what will that do to the housing market next year?

I hadn’t thought about the possibility of a recession; it’s the first anyone spoke of it. So a review of history and current economic conditions were in order. I started with the last major tax reform from 1981 and moved into today’s leading indicators.

The tax reform acts of 1981 and 1986 created the longest economic expansion in U.S. history. Within 2 1/2 years of the tax cuts in 1981, the GDP went from a negative 0.2 percent to a positive 4.6 percent and peaked at 7.3 percent  in 1984. We had positive GDP until 2007, with one short and minor decline in 1991. That’s 26 years! The 2017 tax plan has the potential of re-creating the same scenario.

Presently, we have a 3.9 percent unemployment rate, the lowest since 2000. Wages are up 2.6 percent year-over-year, and inflation is 1.9 percent. Households are receiving an increase in cash flow derived from revenue as well as lower taxes. The unemployment rate is so low, and with wages increasing, there are suggestions that many who exited from the workforce over the past decade may return.

In an interesting article in The Wall Street Journal on April 24, Mark Skousen wrote about a recent breakthrough with national income accounting. Gross output is the natural measure of the production section and corresponds to total activity, while GDP corresponds to the final product and is a measure of welfare. This broad-based gross output, currently at 7.5 percent, highlights that business spending is substantially larger than consumption — GDP of 2.6 percent — and is a vital contribution to the heart of the economy. When businesses are profitable, they create income-producing jobs and thus consumer spending. Results from business spending and hiring will lag in time as related to results from personal tax reduction.

The bottom line is the economy has been improving, but the best is yet to come. More people are working, higher wages are coming, and higher household incomes are just now beginning.

The housing world is a direct reflection of the economy. In the Sioux Empire, home sales are up slightly over last year, and home prices are up 7 percent. Planning becomes an even more important issue as consumers look to maximizing their dollars, saving time and having greater peace of mind knowing they are doing the right thing at the right time.

Is it possible to see a 7 percent GDP in the next few years? One can only guess. Today, the data indicates it’s going to be an exciting ride with increased lifestyles for many years to come, especially in the Sioux Empire.

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