Chris Kuehl addressed members of CCIM Kansas City on Friday, asking the crowd to heed his warning about recent economic reports.
“We’ve gotten off to a weird start,” he said. “It’s been peculiar from the perspective of economists because we’re looking at the data that’s been coming in for the last few months and had been prepared to say this is going to be a good year.”
But a few indicators are showing mixed messages. But as Kuehl notes, it’s challenging to make statements that apply to the entire country. Parts of the country, for example, are still in recession while others are growing faster than they’ve grown in 20 years.
“Real estate people understand this better than anyone,” he said. “They understand that you can have radically different economic performance from one block to the next. This part of the city is growing, while this part isn’t. That part of the city is expanding at that part isn’t, and they’re 10 feet from each other. How is it possible? It’s always been that way. The economy as a whole is like that as well.”
As manufacturing shifts toward the south, states like Arkansas and Mississippi that struggled with economic development are now booming with carmakers and manufacturers.
Auto makers are thriving in this climate, evidenced by the 17.5 million cars sold last year. But while that slice of the sector is in expansion mode, other parts of the manufacturing world are in recession. Why? Energy, Kuehl explains.
“Two or three years ago if you were in manufacturing, that was the golden thing to do: to be engaged in the energy sector,” he said. “All companies that bet heavily on supplying that sector are now in trouble.”
Why? Read on.
The current oil glut is unprecedented, Keuhl said. We haven’t seen prices this low in a while. But what isn’t unprecedented is the process. This is the 22nd oil glut since the end of the second world war, and for the past three or four decades, the issue was typically solved when oil producers cut off the spigot, stopped producing and waited for the prices to rise again.
But that was back in the day when OPEC controlled more than 30 percent of global oil, as it does today. Now, new competitors like the U.S., Canada and Russia are battling over market share, and are hesitant to cut production for that reason.
“They all know they have to reduce production, so we’re all waiting for someone to make that first move,” Keuhl said. “Some of that will happen this year simply because there are 6 countries that wont be in the oil business by the end of the year.”
But interestingly enough, the entire oil sector is shifting. Keuhl says nothing will change dramatically until either production falls dramatically or consumption rises. While Americans have returned to pre-recession oil consumption levels, Asia consumes only two-thirds of what it once did, while Europe has cut its oil consumption levels by half.
“What will change the conversation around oil is determining what its future is, and whether we’ll continue to be an oil-based economy,” he said. “A lot of that is contingent on cost. Electric cars were doing great when we had $7 per gallon gas. Now it’s like they’re giving away gas, and with that kind of prognosis, why abandon a fossil fuel economy?”
Because of this, electric cars aren’t half as popular as they once were. But Keuhl said he is still waiting to see if we’ve reached the point of peak demand, or if demand will deteriorate or come back to life. If production falls, it’s hard to get going again.
“The trouble with oil today is that it’s very difficult to turn the spigot on and off,” he said. Part of the reason there’s been less production reduction in the Dakotas is that shutting down a fracking operation is a lot more complicated than shutting down a well in Saudi Arabia. Once it’s shut down, it takes months to get it set back up. If that starts happening, then when demand does come back production may not come back as quickly.”
These factors are having an interesting impact on real estate. A few years ago, there was an effort to concentrate real estate, for fear that people would no longer be able to commute long distances.
“The whole idea of having business parks and office parks was going to go away, and suddenly everyone was going to live and work in high rises, and it was important to be close to the bus line,” he said. “Now all of a sudden, people realize it won’t be that way. We can set up a business park in Iowa and it’s close enough to Kansas City that people can commute. So we’re beginning to see a return to that notion that people may want to go back to an area where there is space to move.”
Wages are increasing at 2.5 percent compared to 2 percent over the last several years. However, inflation has remained flat, Keuhl says.
“Economists say we’re not interested in wages so much as propensity to consume,” he says. “I don’t care what you’re paid; It’s what you can do as a consumer. If you’re wages are going up but inflation is going up faster, you’re not consuming anything, you’re falling behind.”
To substantially raise minimum wage creates problems too, Kuehl said. If creates three groups of workers: those that see a wage hike and keep their jobs, those that lose their jobs (usually the younger, less-skilled worker), and those who keep their jobs but who are doing the work of four people.
“The biggest challenge with the minimum wage is it’s a blunt instrument when you’re trying to deal with the real issue, which is how do you get people good jobs?” he said. “The solution is getting people trained for the jobs that are out there. Manufacturing and transportation and construction, all three have seen a tremendous lack of skilled participants.”
For more information on upcoming CCIM Kansas City events, visit the group’s website.