We wanted to change things up a bit this year in our economic forecast issue. Typically, we have our staff talk to a few economists and put together a summary story that tries to give a sense of the economy’s direction. But the reality is, putting those interviews into one long narrative can be burdensome to write and, frankly, tough to read. To shake things up this year, our newsroom brainstormed a list of key questions that we thought business people should know the answers to in order to do business better in 2016. Then we went out and found 13 experts to give their opinions and lend their expertise to help forecast the answers to those questions. Forecasting the future is never a certainty but I have no doubt that our experts’ answers will provide you a few guideposts to help you navigate what could be a bumpy 2016.

– Chris Conetzkey, editor of the Business Record

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Threats

Leader forecast

Survey responses

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1. Iowa’s unemployment rate has been dropping. Will that trend continue, and if so, what would the impact be?

Iowa enjoyed a significantly lower unemployment rate than the nation before the Great Recession, during it and through last year. The average for 2015 will likely be close to 3.7 percent, which is the same rate the state had in both 2006 and 2007. A low unemployment rate is generally a good indicator of statewide or regional economic health. It sends a signal to people interested in choosing Iowa for a career that employment possibilities may be stronger than in states or regions with higher rates.

The statewide average can give a false impression of economic health, though. Iowa’s average rate is low, but there are many areas of Iowa with much higher unemployment. Most of Iowa’s metropolitan counties, those with a central city with a population greater than 50,000, enjoy close to state average unemployment rates. But many of our micropolitan areas (with a central city of 10,000 to 50,000 residents) have, on average, much higher unemployment rates than the state averages. For the first 11 months of 2015, 15 counties had significantly higher unemployment rate averages than their peers (one standard deviation above the state rate). Two of these counties were metropolitan counties, seven of them were micropolitan counties, and the rest were smaller.  

An important key to maintaining, if not improving, the state’s overall unemployment rate is improving conditions in those county outliers, especially in the micropolitan counties. Whether that will in fact happen is uncertain. Several of the counties, like Lee County, benefited from significant levels of construction over the past year. Once those projects are finished, unemployment will rise. And others suffer from declining employment demand, which leads inevitably to population decline.

On the other hand, several of Iowa’s counties have very low unemployment rates, which suggests it might be difficult to find skilled and even semiskilled labor. Those counties often have trouble either retaining or attracting workers in the 25-to-44 age range, as that demographic continues to migrate to the state’s metropolitan counties.

Overall, Iowa’s unemployment rate should remain stable to slightly declining through the next year. Persistent employment growth coupled with unemployment decline is evident in the Des Moines-West Des Moines, Ames and Iowa City metropolitan areas most especially. Continued growth in those areas should help the state maintain its enviably low unemployment situation.

David Swenson
Associate scientist, department of economics, Iowa State University

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2. What do you expect for retail sales/consumer spending in 2016? How will the trend change, if at all, by the end of the year?

Key factors influencing retail sales prospects in Iowa include population and income growth, competitive shifts, inflation and consumer confidence.

Iowa’s statewide population growth rate is slow and predictable, averaging half a percent annually since 2010. Long-standing urbanization trends will favor sales growth in metropolitan areas, which are capturing all of Iowa’s net population growth and will likely capture most population-driven retail growth as well.

Localized population losses will continue to challenge rural area retailers. Opportunities for sales fueled by personal income growth are more widespread. Through the third quarter of 2015, real per capita nonfarm income in Iowa was on pace to exceed 3 percent growth over 2014. Nonfarm average weekly wages grew by 2.9 percent in the first and second quarters of 2015.

Competition among retailers across and outside Iowa will yield both winners and losers.  Recent trends foretell continued consolidation of trade into metro areas beyond that explained by population shifts. Iowa’s metros, while containing 59 percent of the state’s population, captured 69 percent of taxable retail sales in 2015.

E-commerce poses competitive opportunities as well as threats to Iowa’s retailers in metro and nonmetro areas alike. Still below 6 percent of retail sales nationally, e-commerce is nonetheless changing the competitive retail landscape. The retail segment that includes electronic shopping firms has doubled its share of U.S. retail sales between 2000 and 2013. Iowa, with about 87 percent of expected employment in that segment, appears to be lagging in this area.

Inflation and consumer sentiment, both dictated by national economic conditions, also factor into retail prospects. Consumer confidence has recovered to levels not seen since before the Great Recession. 

Expectations for inflation are low. The annual inflation rate has remained below 2 percent since 2012, and Federal Reserve actions to increase interest rates should lessen inflationary pressures from a growing economy.  

Still, inflation in housing, medical care or transportation costs could siphon some household spending away from retail goods and services. Iowa’s nominal taxable retail sales grew by 3 percent and 4.7 percent during the last two fiscal years.  

Short of drastic changes in the U.S. economy, statewide retail sales growth in 2016 should continue at a similar pace.

Liesl Eathington
Assistant scientist, Iowa Community Indicators Program, Iowa State University

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3. What do you anticipate the capital spending outlook to be in Iowa and the United States? 

Capital spending has slowed considerably over the past couple of years and looks to be off to a slow start in 2016. Spending on agricultural and mining equipment has fallen during the last couple of years, reflecting years of lower commodity prices. Global demand has also weakened, reflecting both slower economic growth overseas and the impact of the stronger dollar. Spending on construction equipment is faring only slightly better due to a glut of used equipment.

The strongest areas of growth for capital spending continue to be in information technology equipment, communications gear, software and medical equipment, but even here spending has slowed considerably.

Capital spending tends to follow trends in manufacturing output with a bit of a lag. Last year, industrial production barely increased at all, and capacity utilization remains below its long-term norm. Cutbacks in energy-related investment account for most of the weakness in capital spending, with the bulk of the reduction in spending coming in oil and gas exploration and coal mining.

Investment in alternative energy projects and large power plants has also cooled off, reflecting lowered expectations for long-term economic growth. With spending off to a weak start, we should see at least a brief reprieve around the middle of this year, if oil prices find a bottom by then. Capital spending will likely tail off again later in the year, however, as the presidential election approaches and uncertainty increases.

Construction activity should gain momentum in 2016 and 2017. There is a great deal of commercial work in the pipeline, with office, industrial and retail construction all expected to post at least modest gains. Residential development is also increasing, and the passage of the highway bill should pave the way for more highway and road building.

We are looking for low to middle single-digit gains in equipment spending, however, as growth in construction will be offset by further cutbacks in energy exploration. Demand for agricultural and mining equipment will not revive in a major way until the global economy regains momentum and commodity prices recover. Unfortunately, we do not see that happening in 2016.

Mark Vitner
Senior economist and managing director, Wells Fargo Securities LLC

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4. What are your predictions for how the housing market will fare in 2016 — nationally and in Iowa?

Housing is going to be strong in 2016. 

Based on the number of homes sold in 2015, 12,932 versus 11,185 in the 2006 peak, we can safely say that the housing recovery is behind us in Central Iowa and we have entered the expansion phase. 

Employment, the biggest driver of housing, is strong, with a 2.9 percent November unemployment rate. Although the Federal Reserve’s overnight lending interest rate is expected by most to rise, mortgage interest rates have yet to follow suit. 

At Coldwell Banker Mid-America Group, we tend to keep our eye on housing affordability, which measures housing based on three key factors: median price, median household income and interest rates. 

Today, affordability remains high due to low interest rates and strong median salaries in Central Iowa. Based on the affordability numbers we saw at the height of the market in 2006, the housing market still has ample room to grow. For affordability to return to those 2006 levels, interest rates would need to double, the median price would have to increase nearly 25 percent, and wages would have to remain stagnant. 

The strongest limiting factor that housing will see in Central Iowa this year will be supply. Home buyers are challenged to find homes that suit their needs. High demand and limited supply will continue to drive prices upward in 2016. 

Those considering a move would be well-served to consider putting their home up for sale.

Nationally, the National Association of Realtors and Fannie Mae expect new construction to be strong, and it should be locally as well, but not as strong as it will be nationally. This is due to higher lot prices, material costs and a skilled labor shortage here in Central Iowa.

Robert Burns
President, Coldwell Banker Mid-America Group

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5. Wells Fargo & Co. analysts say that the energy, mining, agriculture and export sectors have slowed so much they could be classified as in recession. How will that affect the economy and businesses in Iowa?

Whether parts of Iowa’s economy are in a recession depends on where you sit. While financial services, insurance, manufacturing, education and renewable energy remain strong, it is clear that agriculture — especially crop production —  faces serious headwinds of continuing low prices and increasing crop input costs. Widespread use of U.S. Department of Agriculture crop and revenue insurance and a billion dollars of 2015 countercyclical farm program payments provided much needed income, and near record yields left more to sell.  

But the lack of profits is forcing many farmers to burn through capital. Continuing low crop prices could increase the stress on farmers as well as on their lenders and those who provide supplies and equipment. 

When Iowa agriculture catches a cold, the symptoms can be felt throughout Iowa’s economy and society. Only time will tell if 2016 is a replay of 1981, presaging a more serious economic dislocation leaving farmers and lenders to face unpleasant choices.

Farmers and businesses with their eyes on the future have steps they can take to reduce input costs, conserve cash and cut expenses. New analytical tools are available to help farmers and landowners identify the acres unprofitable to farm, and USDA conservation programs like the continuous-sign-up Conservation Reserve Program are available to pay to retire those acres and improve the environment.

If agriculture continues to face economic challenges, it is only logical for farmland values —  and rental rates — to face continuing downward pressure. Given the broad and increasing number of older Iowans who count on farm rental income, the implications of declining land values could be significant. 

While it may seem too soon to draw lessons from an unfolding economic situation, crop and income diversification, including maintaining livestock operations like beef cows, can make any farm more resilient.

It may be time for Iowa landowners to reconsider the value of using crop share leases to share the risk between landowners and farm tenants — a once-common tool that has fallen out of favor.

Neil Hamilton
Opperman Distinguished Professor, director of Agricultural Law Center, Drake University

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6. Where do you see the most critical worker shortage that will affect a specific industry or the Iowa economy? How can Iowa best address it?

Iowa Workforce Development hears every day from employers a consistent message: The most critical worker shortage affecting all industries in Iowa is the skills labor gap. Iowa faces a shortage of employees to fill middle-skills jobs despite having an abundance of low-skills workers. Fifty-five percent of jobs require middle skills while only 32 percent of workers have those skills. For instance, half of Iowa’s STEM (science, technology, engineering and mathematics)  jobs require middle skills that require workers who are tech-savvy with the ability to adapt to changing software and hardware demands.

An additional challenge in coming years in industries such as education, utilities, transportation, warehousing, wholesale trade and public administration is the retirement of a significant number of employees without an identified source of replacement workers.

Iowa Workforce Development is actively involved with key stakeholders to better align workforce services and to improve communication and coordination between employers and educational institutions. This will drive education to better address business needs both now and in the future to ensure a workforce with the appropriate set of technical and soft skills for emerging industries.

Apprenticeship programs provide potential employees with a combination of classroom learning and on-the-job experience that is business-driven. Home Base Iowa can help recruit veterans to Iowa who already possess many of the skills employers need, while providing veterans with many incentives in moving to a state that highly values their commitment and sacrifice while on active duty.

Beth Townsend
Director, Iowa Workforce Development

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7. Now that the interest rate increase will happen gradually, how will Iowa’s economy be affected?

The Federal Reserve expects approximately four rate increases in 2016; however, we believe the more reasonable pace is two to three increases during the year. Either way, this is a very gradual pace, resulting in an end-of-year federal funds rate between 0.75 and 1.25 percent, well below historical averages of 3 to 3.5 percent and unlikely to impact longer-term rates. The bottom line is a minimal impact to the Iowa economy directly from the Fed rate increase.

One of the few positively impacted industries will be financial services, which, at 21 percent of Iowa’s gross domestic product in 2014, is the state’s largest economic sector. Banks will benefit most from the rate increase through an almost immediate boost to net interest margins as loan rates increase faster than deposit rates.

Insurers, on the other hand, rely both on underwriting and investment income, neither of which will be impacted by Fed rate increases. Upward pressure on long-term interest rates will ultimately help support insurers’ net investment income, but we are likely a year or more away from this type of positive longer-term interest rate momentum.

The more important impacts to the Iowa economy will result from other national macroeconomic forces. Manufacturing, agriculture and trade are all facing significant challenges in the intermediate term.

Manufacturing, at 18 percent of Iowa’s GDP, has recently benefited from cheaper input costs and stable weekly manufacturing hours. But new orders are down, and profits are under pressure. 

Agriculture is a similar story of cheaper input prices and end product pricing pressure. Ag increased steadily from 3 percent of Iowa’s GDP in 2000 to more than 8 percent in 2014, but global commodity prices have plunged, possibly resulting in a trend reversal. In addition, the costs to finance annual production are a significant input for both manufacturing and agriculture. Those costs will increase as rates rise, adding yet another headwind. Last, trade as a whole has been challenged primarily due to the stronger dollar. This may stabilize in 2016 but is unlikely to improve.

Traditionally, Iowa’s economy has been somewhat cushioned against adverse national economic challenges, a strong positive for our state. However, four of the eight Iowa Leading Indicators have declined significantly since 2014, three are stable, and only one is positive. This suggests we could see slight economic deterioration over the next 12 to 24 months for reasons that go well beyond rate increases.
 
The views expressed are as of the date of the article, are for informational purposes only, not meant as investment advice, and are subject to change. Miles Capital does not guarantee the accuracy or completeness of any statements contained in this material and is not obligated to provide updates.

Gregory Boal
CEO and chief investment officer, Miles Capital Inc.

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8. Some businesses report that worker shortages have started to add pressure for higher wages. What is your experience, and what do you anticipate?
 
From our perspective here at the Greater Des Moines Partnership, competitive wages are an important piece of the puzzle for what businesses need to do in order to attract talented employees. Other elements also enhance the overall talent recruitment package.

Here in Central Iowa, we have a growing economy that is creating a need for more talent. That, coupled with a low unemployment rate, means that we are in a job seeker’s market. That is healthy for the economy as it invites more people to the table, and it makes Greater Des Moines an attractive place to work for the people who already live here and people who are seeking a great place to start or continue their career.

As the economy grows and as there’s a need for more talent, our region has put a strong focus on quality-of-life factors that go beyond how much money an employee makes. Ultimately, businesses and communities need both competitive wages and competitive quality-of-life packages and options. I think we are ahead of the game here because of how we have invested as a community in making Greater Des Moines a great place to live.

We have the quality of life that many metros are trying to catch up to. Our workplaces offer amenities that go beyond a salary. Our employers are being more thoughtful and creative in what they are offering in terms of quality of place. 

Amenities such as innovative and attractive workspaces, wellness services, continuing education opportunities and flex time for volunteering opportunities are game-changers. As a region, we have always valued our work-life balance, and our community and its employers will continue to do so.

We would not be receiving all of the accolades we have gotten as a community without a dedicated effort to make this an attractive place to pursue a career and a life. Let’s keep innovating. To maintain our competitive advantages, we must continue enhancing existing and creating new amenities that make us a community and employers of choice.

Mary Bontrager
Executive vice president of workforce development/education, Greater Des Moines Partnership

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9. In what areas of commercial lending do you expect the most growth in 2016?

There seems to be an obvious demand for commercial real estate projects, but for The PrivateBank and Trust Co. as we operate in the Iowa-Nebraska market, I would expect to see continued commercial lending opportunities to support acquisition financing.

For those baby boomers who do not have the opportunity to transition their companies to the next generation as an exit or retirement strategy, we anticipate increased activity from private equity firms that have a lot of liquidity to deploy to be a viable option for business owners looking to sell. 

For these same owners, given the right set of circumstances, selling their companies to their employees through an employee stock ownership plan is also a very compelling option as they look to keep Iowa-based companies in Iowa. 

These owners have a strong sense of pride in their communities and loyalty to the employees who have helped them succeed.

There continues to be a lot of cash on the balance sheets of Iowa-based companies, which limits traditional working capital and capital expenditure financing opportunities.

Business owners are still reluctant to make large capital investments or expand in what they continue to perceive to be uncertain times.

Kim Butler Hegedus
Managing director, The PrivateBank and Trust Co.

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10. Will oil prices continue to decline, and if so, what impact will it have on Central Iowa’s economy?

Predicting oil prices is as hard as predicting the Chinese government’s non-market knee-jerk reaction to its stock market crash. Oil prices are down because of many factors: China’s slowdown, ISIS selling oil for cheap prices to finance its operations and a strong U.S. dollar. Oil has little or no “intrinsic value,” making any prediction purely speculative. I’d say there is an equal chance that oil prices can go as high as $70 per barrel and as low as $10 per barrel.

It is not just the level of prices that negatively affects the world markets — consumers and producers can gradually adjust to any level — but the volatility of oil prices. At the same time, record low oil prices are causing severe economic hardship in oil exporting countries like Russia, Saudi Arabia and even Canada. Possible civil unrest in Russia and the Middle East can depress oil prices even further.

What impact would it have on Central Iowa’s economy? The demand for Iowa agricultural equipment and agricultural produce is reduced. While lower prices at gas pumps is good news for Iowa consumers, it is bad news for Iowa farmers. On the one hand, farmers’ costs are lower because of cheaper fuel. On the other hand, the foreign demand for soybeans and corn is depressed, thereby reducing their prices. In 2015, the prices for corn and soybeans were down by half from their record levels in 2014, which depressed farm incomes. 

Moreover, low oil prices also weaken other agriculture-exporting economies like Russia, Ukraine, Brazil and South Africa. 

Their currencies become weaker relative to the U.S. dollar, making their products cheaper for the rest of the world, further depressing Iowa farm incomes.

More affordable oil reduces the demand for biofuels, in turn impacting the demand for corn, sugar cane and other ethanol inputs.

Finally, weak currencies increase tuition bills for international students coming to Iowa, which reduces tuition profits for the University of Iowa and Iowa State University.

Art Durnev
Associate professor of finance, University of Iowa’s Henry B. Tippie College of Business

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11. Do you think the next recession will begin in 2016? If not, when would you predict that another one could be on the way and why? 

The dramatic decline in global equity markets during the first two weeks of 2016 has renewed worries of a coming recession. The fear that has gripped the global markets in 2016 is a direct result of uncertainty surrounding the true speed of economic growth in China.  

While the realization of slower Chinese growth has increased the possibility of a recession beginning in 2016, I think the next U.S. recession will not begin in 2016.

The case against a recession focuses on strong economic fundamentals in the United States. Job creation continues to be strong, wage and consumer price growth are slow, and consumer sentiment is strong. 

Given the market turmoil, it is unlikely that the Federal Reserve will be aggressive in its normalization of capital markets. Instead, interest rate increases will likely be spread out and small.

Some pundits have stated that the economy is overdue for a contraction, since the average expansion since World War II has lasted five years.  

This argument shows a behavioral bias to substitute basic rules of thumb for true analysis.

According to the National Bureau of Economic Research, there have been 11 expansion periods since 1945. Of the 11, the seven expansions that lasted less than five years all occurred prior to 1990.  

Since then we have had expansions of 92 months, 120 months and the current expansion.  

There is no strong evidence that recessions occur on a regular schedule.

The direct sales of U.S. goods in China are very small, so the Chinese slowdown alone will create only a small direct drag on U.S. growth. 

However, the Chinese slowdown will have a larger negative impact on other emerging economies, and that could spread to the United States.  

An illustration of this is the impact on U.S. shale oil production. Prolonged low oil prices will severely hurt the U.S. shale oil producers. The slowdown in production already decreased durable goods orders in 2015.  

The response of U.S. consumers, who account for over 70 percent of U.S. gross domestic product, could also negatively impact U.S. growth. 

The decline in equity prices could cause a negative wealth effect, decreasing consumer confidence and slowing their purchases of goods and services.

The next recession will likely not start in 2016. 

However, the year will be pivotal in laying the groundwork for whether the 2017 economy heads to recession or continues to increase the length of the average expansion.

Tom Root
Associate professor, Drake University’s College of Business and Public Administration

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12. How will Iowa and the United States be affected by the market turmoil in China; what do you anticipate for U.S. markets in 2016?

The biggest risk coming from China is a significant economic growth slowdown; the Chinese economy is closely connected to the rest of the world via trade.

The Chinese economy has been moving towards a slower pace of growth for some time and that has consequences for its trading partners. While exports to China only made up 0.8 percent of U.S. GDP in 2014; exports in general have been a growing driver of economic growth not only for the United States, but Iowa too. According to the Business Roundtable, in Iowa, trade-related jobs grew 4.8 times faster than total employment from 2004 to 2013. The degree to which China’s slowdown weighs on the global economy is increasingly important for the United States and Iowa.

In that vein, movements in the dollar also matter more for the U.S. economy. The dollar’s rapid appreciation against a broad range of currencies last year made our exports relatively more expensive. The stronger dollar hit manufacturing hard in 2015.

With the shale oil boom, commodity prices are increasingly relevant for the United States. Agricultural commodities are always on the minds of Iowans. Chinese growth is closely linked to the cycle in broad commodity prices. Investment and infrastructure spending fueled double-digit GDP growth in China and led to a global commodity price boom in the 2000s. Rapidly rising prices of copper, iron ore, oil, corn and soy benefitted a broad range of commodity-producing regions ranging from Chile, Brazil, South Africa, Canada, Australia, and, of course, Iowa. High prices incentivized commodity producers to build up capacity just as China’s demand growth started to slow. Now excess supply is putting downward pressure on prices, hitting producers hard.  A significant share of the over 70 percent drop in oil prices can be explained by excess supply.

Concerns about Chinese growth, currency movements, and commodity prices, in particular the price of oil, may weigh on markets for some time. Uncertainty about how quickly the Federal Reserve will continue to raise rates creates a volatile backdrop for U.S. markets. Stocks have been rising for some time, so multiples remain above their long-term average. Any increase in stock returns will have to come from earnings growth and not from the Federal Reserve’s interest rate policy.

Robin Anderson
Senior economist, Principal Global Investors

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13. How will the economy affect export and import activity in 2016? 

Trade statistics have shown that Iowa has maintained a steady export performance over the past decade. Unlike many other U.S. states, Iowa has been resilient in the face of a shifting U.S. economy. My responsibility as director of U.S. Commercial Service Iowa, International Trade Administration, U.S. Department of Commerce, is to provide export promotion to makers of machinery, technology, chemicals, biotech, value-added foods, aerospace and financial services products. The U.S. Commercial Service is the U.S. government’s global network of trade professionals for connecting U.S. companies to business opportunities worldwide.

Under the National Export Initiative (NEI), some interesting new opportunities have been created. Due to NEI, we have had the International Trade Administration develop the Metro Export Initiative with the Brookings Institution.

Iowa’s already strong export numbers can be maintained through the thoughtful activities of new groups that have spun off from the Metro Export Initiative. Many U.S. cities have had access to such strategic planning programs but have been less effective in translating them into meaningful activities. 

You will begin to see new and growing initiatives; it is these which can expand sales, gain new advantage for our region and also attract investment. Thanks to the exceptional support of the Greater Des Moines Partnership, the Iowa Economic Development Authority’s International Trade Office, Iowa State University Extension and Outreach and the university’s Center for Industrial Research and Service, and other key partners, the products and services Iowa already offers to the world market are getting a greater assist than ever before. The U.S. Commercial Service works with each of these partners and with each Iowa exporter to arrange for market access and development of sales channels overseas toward sales.

Within the U.S. Department of Commerce, two bureaus worked together to create a new training program called ExporTech: U.S. Commercial Service and National Institute of Standards and Training, Manufacturing Extension Partnership. This program came to Iowa in 2013, and it is now actively recruiting companies interested in expanding their technical capabilities and procedures to become successful at exporting. In Iowa, the ExporTech program is produced by Iowa State University Extension and Outreach and CIRAS, through its NIST-MEP staff.

Patricia Cook
Director, U.S. Commercial Service Iowa