Anticipation: This best describes the US business climate as executives and entrepreneurs alike wait for policy changes – on various fronts – that President-elect Donald Trump will attempt to make after he takes office on January 20. Healthcare, infrastructure investment, international trade agreements, immigration, job creation and more are key issues Trump is targeting for change. In the following economic forecasts, leaders from various industry sectors do their best to predict what the new year and the new Trump Administration will mean for business. Coupled with a New Jersey gubernatorial election in November, one thing is certain: 2017 will be a transition year.
By James W. Hughes, Distinguished Professor and Dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University
As New Jersey enters January 2017, the national economic expansion will be 91 months old – seven years and seven months in length. It is now the fourth longest expansion in history and, in March 2017, it will become the third longest. Despite this longevity, it’s not ready to die of old age. Potential policy shifts by the new administration in Washington, DC do add some uncertainties to the economic world, but these will have a much greater impact starting in 2018.
Consequently, the national expansion should continue apace during 2017, maintaining the employment-growth momentum of the past six years. However, the modest job-growth slowdown that became evident in 2016 will continue in 2017, not because of economic weakness, but because of labor constraints. Job openings, a metric maintained by the US Bureau of Labor Statistics, are at record high levels nationally: over 5-million unfilled job openings per month over the past two years. This suggests that companies are unable to find workers with the skills that are required by the unfilled jobs. New Jersey will face similar labor force constraints on employment increases in 2017.
New Jersey lost 240,700 private-sector jobs during the Great Recession and its lingering aftermath, but it has since regained close to 300,000 jobs. So, as 2017 unfolds, the state had almost 3.5 million private-sector jobs – a record high total almost 60,000 jobs greater than the pre-recession peak (3.43 million). New Jersey will continue to set new record employment highs as 2017 advances.
The economic areas that will drive New Jersey’s employment growth in 2017 are led by the trade, transportation and utilities sector. New Jersey is the third largest warehouse-fulfillment-distribution center in the nation. The state’s unique geographic position and the continuing growth of e-commerce and omnichannel retailing underpin the continuing strength of this sector.
Professional and business services comprise the most important sector for the state’s office markets. The higher-paying professional, scientific and technical services subsector should continue to register employment gains in 2017. However, the lower-paying administrative support subsector will continue to demonstrate weakness, as lower-cost state competitors have been successfully luring New Jersey employers. Overall, the state’s office markets should continue to improve following a period where the suburban office footprint experienced sustained contraction. Suburban office ecosystems are now finally being reconfigured to satisfy 21st-century economic imperatives. There have been a number of successful transformations of obsolete 20th-century suburban product into next-generation 21st-century economic assets. This should continue through 2017 and beyond.
Overall, the current post-Great Recession (2010-2017) expansion in New Jersey has been far stronger than its immediate predecessor – the pre-Great Recession (2002-2008) expansion. In fact, the monthly employment gains (3,800 private-sector jobs) of the current expansion have been double the monthly gains (1,900 private-sector jobs) of the earlier one. This momentum should continue deep into 2017 as the ninth year of expansion commences (July 2017).
By Richard Jackson, President, NJ Energy Coalition
The presidential election results cast considerable uncertainty onto the 2017 energy picture. Little doubt energy regulation and prices will eventually be impacted, but timing and quantifying the economic impacts will depend on how quickly and aggressively the new administration implements positions proposed during the campaign. Nonetheless, we cite below a number of key projections being made by the US Energy Information Administration.
Domestic electricity production is forecast to rise by 0.5 percent over 2016. Natural gas and coal are forecast to power 33 percent and 31 percent of electricity, respectively. Nuclear generation will be 19 percent. Non-hydropower renewables (i.e., wind and solar) will generate 9 percent, while hydro will contribute 6 percent. The average US retail residential electricity price is forecast to be 12.9 cents per kilowatt hour, a 3 percent increase over 2016.
US natural gas production is forecast to rise to slightly over 80 Bcf/d (billion cubic feet per day). Increased domestic drilling and ongoing pipeline infrastructure build-outs will aide in production increases. Growing domestic demand, coupled with rising pipeline exports to Mexico, and increased exports of LNG, is expected to push gas spot prices at Henry Hub to $3.27/ MMBtu (one million British Thermal Units).
US crude oil production is forecast to average 8.8 million b/d (barrels per day). National retail gasoline and diesel prices are forecast to be $2.30/gal and $2.70/gal, respectively. With near normal temperatures forecast for this winter, the average heating oil price is expected to rise to $2.62/gal.
Regarding New Jersey, the state’s energy industry has been transformed less by government regulation than by its proximity to low-cost natural gas. New technology to inexpensively produce shale gas in Western Pennsylvania has led to a dramatic reduction in the price of natural gas in the Mid-Atlantic region. The impact of lower natural gas prices cannot be overstated – they are having a profound impact on the state’s economy. This will likely continue in 2017.
Lower natural gas prices will also continue to have a significant impact on the state’s electric industry. Several new gas-fired power plants were completed in 2016, with an additional one under construction. This new capacity should reduce electricity congestion costs in Northern New Jersey. With these cleaner, lower-cost gas plants added to its fleet, PSE&G announced it will be closing its last remaining coal plants in New Jersey this year.
Nuclear power is critical to New Jersey, providing nearly 50 percent of the state’s energy and 97 percent of the state’s carbon-free power. Plant operators across the country have cautioned that profits are being squeezed by lower-cost competing fuels. Several plants have closed and others have warned they may have to do so as well. This year, we expect more discussion on the need for a pricing mechanism to compensate for the environmental benefits of nuclear.
Additional advancements in New Jersey’s energy markets will result from increasing initiatives in three areas – energy efficiency, renewables and the electrification of the transportation sector.
New Jersey’s electric consumption has been stable or declining. This is being driven by efficient appliances and more stringent building codes. In 2017, energy efficiency will be promoted as the most effective way for the state to meet its EPA clean power targets. Energy efficiency initiatives have more impact and are less expensive to implement than renewables, electric storage or investing in reducing emissions from New Jersey businesses. This may require decoupling – changing the traditional regulatory model whereby utility profits are tied to customers’ energy use.
Renewable energy has grown dramatically in the state – both in large public projects and in rooftop private solar. Absent an abrupt reduction in federal subsidies, and as the cost of solar equipment continues to drop, we likely will see continued growth here. As solar becomes a larger part of the energy mix, policy makers in 2017 will need to address how – and who – should pay for maintaining the energy grid, and how large a subsidy for solar (and potentially, wind) the state can afford.
We also expect increased emphasis on electrifying the state’s transportation sector; not only more electric car sales, but also greater investment in electric vehicle charging infrastructure as well as electrification of fleet vehicles.
By Alfred J. Titone, New Jersey District Director, US Small Business Administration
With the 2016 presidential election behind us, what can small businesses expect in 2017?
While it is never easy to predict, experts tell us that GDP will be on a 2 percent pace in 2017, up from the 1.5 percent growth that we saw in 2016.
Certainly, the incoming administration has floated some interesting ideas like a tax cut for businesses, investing in infrastructure and the possibility of easing some regulations that may benefit small business owners down the road.
Of course, much of this is speculation and contingent on the President-Elect and Congress agreeing to put an economic plan in place. This plan will help build on the growth that has taken place over the last four years and will most certainly play a role in the future of the economy.
SBA NJ Loan Approvals Flat in 2016
At the US Small Business Administration (SBA), we continue to measure loan output. It’s the barometer that shows us how the small business economy is doing here in New Jersey. Through the analysis of our loan portfolio, we saw a slight 1 percent increase in loan approvals to New Jersey small business owners, and about a 1.75 percent decrease in the dollar amount. A total of 1,754 loans for $805 million went to small businesses in 2016, compared to the 1,733 loans for $822 million they received in 2015. It was the second best year on record, and the second consecutive year that our network of lenders approved over $800 million in SBA loans throughout the state.
Fee Reduction Extended Through 2017
For the past four years, the SBA has focused on providing smaller loans to entrepreneurs. By offering small business owners no fees on loans of $150,000 or less, the SBA has helped to get more capital to communities where it could make a real difference, especially to our underserved communities, who use these small dollar loans more frequently. The program has impacted the average loan amount. In 2016, the average SBA loan in New Jersey was $459,000, significantly lower than 2015’s average of $473,000.
SBA at Work
US Organic Group Corp, a small manufacturer of an anti-itch balm and other organic body and baby oils, is a great example of how a small loan from the SBA can make a difference. The firm’s owner, Leonard Moon, and his partner went from making the product out of Moon’s home to their current manufacturing facility in Passaic. At the time they were seeking a loan, they only had $10,000 in sales, but knew with the right financing they could grow their business. The challenge was finding a lender to invest in their company. With a $10,000 SBA microloan and a $50,000 SBA Community Advantage loan from the Regional Business Assistance Corporation, the company was able to use the proceeds from the loans to purchase inventory to kick start the business. Today, the company employs seven workers at its location, where it formulates, packages and ships its organic product line to its customers throughout the US, China, Japan, Korea, Mexico and Taiwan.
Stay the Course
For the NJSBA, we expect to see more of the same. Our plan is to continue aggressively reaching out to the small business community and giving entrepreneurs greater access to capital, contracting opportunities and business counseling and training programs. This, with the new administration’s plans to continue to grow our economy, could make 2017 another good year for small business.
John E. McWeeney, Jr., President and CEO, New Jersey Bankers Association
I’ve been in the banking industry for 38 years, and the level and pace of change has never been greater. Powerful forces are at play that will change the face of the banking industry forever. These forces will spark innovation at banks of all sizes that will benefit customers.
First and foremost are the changing demographics and their impact on customer banking preferences. The Millennial generation is now the largest demographic segment, and they bank differently than previous generations. The new demographics, along with the influx of capital into financial technology firms (FinTech), have created a whole new set of competitors and delivery models that compete with banks for both consumer and business customers. This trend first started with products like residential mortgages, but now it’s prevalent for business lending as well. FinTech offers speed and simplicity for business lending while banks offer deeper and more personal relationships with more attractive pricing. Both have their merits and one size doesn’t fit all. Banks are quickly adapting their business models to either compete or partner with FinTech firms. Ultimately, the marketplace will decide, but borrowers will be the clear winners.
As the banking industry continues to evolve, our banks remain resilient by adapting to serve their customers and ensuring a return to shareholders. The latest FDIC data as of June 30, 2016, reflected a total of 139 FDIC insured institutions that operate in New Jersey, with 89 of them being headquartered in the state. That’s down from 168 and 111, respectively, from just five years ago. While the industry continues to consolidate, the surviving institutions are stronger and better positioned to meet the borrowing needs of business customers. As of June 30, 2016, the 89 New Jersey headquartered institutions had total loans and leases of $96.1 billion, with the largest category being commercial real estate loans of $31.9 billion and multifamily residential loans being the fastest growing segment with a 22 percent year-over-year increase. Commercial and industrial loans also increased, with an 8.9 percent increase from the prior year. At the end of June 2016, New Jersey headquartered banks held $102 billion in deposits and $16 billion in capital on their balance sheets, so they’re in a strong positon to lend. While the same data is not readily available for larger out-of-state headquartered institutions, all indications point to them experiencing similar levels of commercial real estate and commercial and industrial lending.
As we look to 2017, I think it’s reasonable to expect New Jersey banks will maintain a strong appetite to lend, as their best path to revenue growth is to make more loans and benefit from the Federal Reserve’s anticipated increase in interest rates. Potential headwinds could be an overreach of regulatory scrutiny on commercial real estate lending and an economic slowdown, but neither seems likely at this point. In fact, recent developments offer New Jersey banks some reasons to be optimistic about 2017. The combination of a Trump Administration with a Republican controlled House and Senate should lead to a more favorable regulatory environment and a potential federal spend on infrastructure.
The Stock Market
By Bradley Bofford, Managing Partner at Financial Principles, LLC
With one of the most atypical elections in history behind us, investors are especially curious when it comes to stock market expectations for the upcoming year. Potential risks include rising interest rates and inflation, the ripple effect from Brexit, uncertainty surrounding new presidential policies and oil prices. However, we encourage investors to react to fundamental facts rather than emotions when making investment decisions. Everyone should be positioned, based on their own goal-oriented time horizons, in a way that these whipsaw fluctuations in the market can be taken with a grain of salt.
While there has been an overriding pessimistic view of the economy, it is important to point out the positives. Using the most common economic indicator of health in our country, Gross Domestic Product (GDP), it is hard to argue the economy has shown slow growth while climbing out of recession. However, GDP grew at a more respectable 2.9 percent annualized rate in 3rd Qtr 2016. Consumer confidence was at a nine-year high in September. Exports grew by 10 percent, which is the best in nearly three years. Improving jobless claims and wage growth has the Federal Reserve (at press time) on track to raise rates. This can potentially have a negative impact on equities, but is an overall sign of strength in our economy. Add that to the fact most asset classes have performed well, historically, after rate hikes (source: JP Morgan Asset Management). These factors indicate the probability of strong corporate earnings and support the case for a positive market in 2017. Household net worth is higher than it has ever been, yet only half of Americans are invested in the stock market. Never has our population collectively saved so much and received so little in return.
This election year has added an interesting element heading into 2017. Historically, equity markets have tended to perform best under a unified government (President, Senate and House of Representatives under one party), with the S&P 500 returning 14.8 percent annually during those years. Also, over the past 60 years, the first year of a presidency has also tended to be strong, as the S&P 500 has average annual returns of 10.15 percent (Source: Ladenburg Thalmann Asset Management). A lack of details in terms of new policies from President-Elect Donald Trump will be the greatest wildcard at this point. His stance on trade, imposing more tariffs and sharply taxing imports, could also cause volatility in the markets and increase inflation. On the other hand, tax reform and deregulation could stimulate economic growth. This could prompt the Fed to increase rates more quickly.
Nevertheless, with the start of each new year, everyone should take the opportunity to review their investment plan. A proper, tax-efficient asset allocation model consistent with one’s goals, objectives and risk tolerance remains the best strategy. A well put together plan will provide a roadmap to guide through the bumps, avoid the potholes and keep one on track until they reach the eventual destination that is retirement.
By Sarah Adelman, Vice President, New Jersey Association of Health Plans
Let me begin with one big caveat: It is too early to know which elements of the Affordable Care Act will be preserved, what a repeal-and-replace of the ACA would look like, what reform may be in store for Medicare and Medicaid, or how other federally-directed changes will impact New Jersey’s businesses, residents, healthcare systems, or state budget. With that said, here are some things to consider.
New Jersey was expected to pay $5 billion in premium taxes over the first 10 years of the ACA. If the ACA’s premium tax, the looming 40 percent Cadillac excise tax, and other ACA-related taxes are repealed, these fee reductions will yield meaningful premium savings. Yet the underlying costs of medical care continue to be the largest driver of premium increases. Hospital expenditures represent the largest portion of medical costs, while prescription drug costs are growing at the highest rate and may soon surpass in-patient hospital costs.
The movement toward value-based payment arrangements is moving from a goal to a reality. Under traditional fee-for-service payment arrangements, physicians and hospitals were paid based on the volume of services they provide, rather than if a patient’s health improves. Across the nation and in New Jersey, health plans and the federal government have made great strides working with providers to move away from the fee-for-service model to align payments with the quality and value of the care provided, including payment incentives for improved patient outcomes.
Another trend has been toward higher-deductible plans, which have become a popular choice for many employers and individuals because they offer a full-suite of benefits with a lower monthly premium. These plans come with higher out-of-pocket expenses, and would pair well with a Health Savings Account (HSA). HSAs are likely to be a priority in the ACA’s replacement package, and for employers, HSAs can help employees with high-deductible plans to better afford their share of their healthcare costs.
If the ACA is dismantled, one question is whether New Jersey regulators will claw-back rules it adopted to comply with ACA. For instance, the ACA changed insurers ‘rating factors’ for small employer groups, and those rating ban changes created winners and losers in terms of premium costs. Employers could expect another disruption if New Jersey returns to its pre-ACA rating rules. Similarly, the ACA’s Essential Health Benefits requirement made pediatric dental and vision coverage mandatory in individual and small employer plans. New Jersey law did not previously mandate these benefits and could eliminate the requirement if the ACA is repealed.
Finally, New Jersey chose to expand its Medicaid program under the ACA, and now one in five New Jersey residents are enrolled in NJFamilyCare. There has been talk of using block grants to give states flexibility, but significant federal funding will be needed to maintain New Jersey’s expansion. If vulnerable populations lose coverage, hospital charity care and uncompensated care will rise, the cost of which is ultimately shifted to employers and other payors.
However these changes unfold, 2017 is expected to be another period of change in healthcare.
Accounting and Finance
By Ralph Albert Thomas, CGMA, Chief Executive Officer, New Jersey Society of CPAs
Political, regulatory and technology changes on both the local and national levels will continue to be game-changers for small business owners. Here’s a look at some of the changes we know – or think we know – will take place in 2017.
What We Know
Phasing Out the Estate tax: New Jersey’s Estate Tax threshold is $675,000. The full value of any estates worth more than that is taxed. That threshold will increase to $2 million at the start of 2017, and the tax will be eliminated entirely at the start of 2018.
Research conducted by the New Jersey Society of CPAs shows that the state’s estate and inheritance taxes contributes to the flight of thousands of taxpayers and small businesses, who take their tax revenue to other states. Business owners should convene with their CPA or estate attorney to determine how the elimination of the Estate Tax may impact their planning.
New Overtime Rules: Effective Dec. 1, 2016, the US Department of Labor (DOL) amended the requirements for overtime pay. This will dramatically increase the salary thresholds for exemption from overtime pay. DOL estimates that this rule change will directly impact some 4.2 million workers across the US not currently eligible for overtime and may reclassify an additional 8.9 million salaried workers as nonexempt.
Of course, with 21 states and the US Chamber of Commerce having filed legal challenges to the law, and expected opposition from the new presidential administration, this rule could quickly fall into the next category.
What We Don’t Know
Mandatory Paid Sick Leave: The New Jersey assembly passed a bill that would require all companies to provide at least five sick days per year to all of their employees – even part-time workers. If a business already has a sick leave policy, they would have to rewrite already-existing policies to conform to the proposed rules. The senate has yet to vote on the bill (at press-time). This mandate could impact small businesses the most and penalize companies that already have paid time off policies.
Trump’s Proposed Tax Changes: President-Elect Donald Trump plans to simplify the seven federal tax brackets with rates that range from 39.6 percent to 10 percent to three tax brackets that range from 33 percent to 12 percent. He plans to eliminate the Estate Tax and decrease the current corporate tax rate from 35 percent to 15 percent.
With a Republican majority in the House and Senate, these and other proposed tax changes have a good chance of getting passed.
Minimum Wage Increases: The $15 minimum wage is a no-go in New Jersey. At least for now. The governor vetoed a bill that would have gradually raised the state’s current minimum wage of $8.44 to $15 by 2021, but the idea still has strong support in the Legislature.
(The Legislature failed to pass a measure at the end of 2016 which would have placed the minimum wage issue on the November 2017 ballot. It can still make the ballot if the Legislature pasess a concurrent resolution by a three-fifths majority in both houses by August 7.)
Managing change is not a new challenge, and 2017 will be no different. It’s up to small business owners to ensure their voices are heard so that legislators are aware of the consequences of these and future changes.
Commercial Real Estate
By Michael G. McGuinness, Chief Executive Officer, NAIOP New Jersey
The big question in commercial real estate is, how much hotter can the industrial market get before the inevitable cool down?
In 2016, the industrial sector saw record-setting average asking rates in primary markets, a vacancy rate of 4.6 percent (7 percent a year ago), and a surge in speculative development. The Meadowlands, Port Region, and Turnpike Exits 12, 10, 9 and 8A accounted for 74 percent of leasing activity in the first three quarters.
2016 has been a political year like no other, which makes forecasting 2017 particularly challenging. The hard-won battle in Trenton to secure stable (and dedicated) funding for the Transportation Trust Fund (TTF) should benefit all property types. President-elect Donald Trump has mentioned support for massive investments in rebuilding the nation’s infrastructure as well as large tax cuts, so the prospect for an infusion of federal dollars in New Jersey’s economy is possible, yet uncertain. Trump’s pro-business approach may benefit the industry, since NAIOP shares many of his priority goals for tax reform, job creation, and reduced regulation.
TTF infrastructure investments in the Garden State will support our thriving industrial market (third largest nationally) and ever-growing e-commerce sector. Industrial market fundamentals should remain strong, with New Jersey still considered by many as the best location on the East Coast. The Bayonne Bridge “Raise the Roadway” project should achieve navigational clearance in late 2017 to provide the large Post-Panamax vessels with access to all of the terminals serving the Port of New York & New Jersey, now that the Panama Canal expansion is complete. However, radical changes to trade agreements and federal tax policies affecting imports from abroad could have a dampening effect.
Omnichannel retailing (a seamless shopping experience for consumers integrating web stores, mobile apps and brick-and-mortar stores) has helped to fuel the demand for space, but as stores attempt to meet consumer demand for “just in time” inventory and package pick-up hubs for online purchases, more frequent or “off-peak” truck deliveries will impact local traffic or create off-hour noise issues. As we move to a 24/7 supply chain system, we will need to find ways to overcome these challenges.
Faced with demand that far exceeds supply, and a development process that is still too lengthy and complex, product will become more constrained. This will almost certainly mean that 2017 will be slower for the industrial sector than in recent years. A trend in the office sector is helping to meet industrial demand: the redevelopment (or demolition) of obsolete office spaces to accommodate new industrial uses will continue.
Surprisingly, the office market (fifth largest nationally) had its strongest summer in 13 years and lowest vacancies since 2009. Overall vacancy rate is at 15.5 percent, down from 16.1 percent a year ago. Most new leasing occurred in Class A space as tenants demand quality to meet the demands of a younger workforce. Hudson Waterfront leasing remained strong, but some suburban markets in central and northern New Jersey showed new signs of life as well. Overall, Northern New Jersey saw 2.9 million square feet in leasing activity in the third quarter, its strongest quarter since early 2002. Central Jersey gained momentum in the third quarter, with the Somerset/Route 78 and Princeton submarkets accounting for 60 percent of leasing activity. Average asking rents increased 5.1 percent from the prior year.
Office markets should continue to improve gradually, with the focus on lifestyle amenities and desirable locations, downtowns and “metroburbs” such as Bell Works in Holmdel. With mixed-use growing in popularity, more towns are willing to change their zoning to attract a younger population with the technical skill sets needed in today’s jobs.
As New Jersey faces increased competition regionally, nationally and globally, we must continue to improve our business climate and enact legislative and regulatory policies that support investment and job creation in the Garden State.