From Great Recession to Great Debate. The previous blogs discussed how the massive wave of government oversight following the Great Recession fueled a Great Debate about how much intervention is too much. We also suggested dismantling the notion that government is always detrimental, and the need to expand the debate beyond “left vs. right” or “big vs. small” to how the power of government can help the U.S. compete globally.
Competing nations have something we lack – a defined strategy. We believe smart and selective government oversight can be part of a Great Revival for the U.S. economy, but not without a comprehensive strategy for competing globally that favors domestic manufacturing and employment. Despite some bumps in the road, the U.S. economy and commercial real estate sector have done amazingly well for the past 40-50 years. Recently, however, other industrialized nations including China, Germany, and Korea, have generated significant economic growth by modifying the U.S. form of capitalism, with the key addition of more government involvement.
Data supports need for change. The U.S. is no longer as dominant as it was in the 20th century, and persistent anti-government backlash, lack of comprehensive strategy, and the success of foreign economies at leveraging government, presents a real threat of falling behind. While it’s easy to make these claims, we realize the importance of using independent data to back up our assertions. To make the case that the U.S. is truly in need of a Great Strategy that leverages rather than cripples government, we took a look back at 40 years of macro-economic data.
A CLOSER LOOK at RELEVANT DATA
Just the facts. Historical macro-economic data shows that the U.S. enjoyed three decades of strong growth before succumbing to the effects of gradual deregulation and the challenges of a mature economy in the first decade of the new century. In fact, the early 2000’s now look like a “lost decade,” with anemic GDP growth of 1.7 percent, following growth above 3.0 percent in the final three decades of the 20th century. The components of GDP also shed light on some of the underlying trends responsible for the recent downturn. Between 1970 and 2009, for example, the economy tilted away from business spending (partly due to jobs moving offshore) and toward personal spending, making the U.S. less balanced and more vulnerable. In the meantime, despite what you may have heard, government spending didn’t run amok, and in fact declined as a percentage of GDP.
The lost decade. Employment data paints an even starker picture, with growth of close to or above 20 percent for the 1970’s-1990’s, followed by a decline into negative territory for the 2000-2009 decade. The unemployment rate climbed sharply, from a healthy 4.0 percent in January of 2000, to an abysmal 9.9 percent in December of 2009. Performance of the stock market also supports the “lost decade” concept, as evidenced by the Dow Jones Industrial Average (DJIA), which enjoyed phenomenal growth of 228.3 percent in the 1980’s and 317.6 percent in the 1990’s, before experiencing an alarming decline to negative 9.3 percent for the 2000-2009 decade. The U.S. dollar also declined in value in the early 2000’s, following three decades of outpacing foreign currencies.
Will the current decade be “lost” or the start of a revival? We are still in the early years of the 2010-2020 decade, and the results are somewhat encouraging, but far from definitive. The economy has shown a modest improvement from 1.7 percent in the previous decade to 2.4 percent so far in the current decade, but remains below the 1970’s-1990’s level of more than 3.0 percent. One cause for concern is business spending, which is down to 13 percent of GDP, compared to 17 percent in the 1970’s. Employment has returned to positive growth, and the unemployment rate has declined from 9.7 percent at the start of the decade to 8.3 percent currently. This is a modest improvement over the 9.9 percent rate at the end of 2009, but remains well above unemployment rates for 1970’s to the 1990’s, which generally ranged between 4.0 and 6.0 percent. The DJIA has also enjoyed a modest recovery, despite severe volatility in August and September of 2011, but returns remain far below growth levels of the 1980’s and 1990’s.
GREAT REVIVAL REQUIRES A GREAT STRATEGY
Great Strategy must balance Government with Private Enterprise. The independent data indicates a recovery is underway, but one that is uncertain, fragile, and in need of all the help it can get. What the U.S. does not need is a radical change or a repeat of attitudes that characterized the “lost decade” of 2000-2009, including the culture of deregulation which allowed private enterprise to overleverage and indulge in risky financial engineering. Of course, installing a “nanny” culture dominated by government oversight isn’t the solution either. What is needed is balance of 50 percent smart and selective government action with 50 percent private enterprise in partnership to execute a clearly defined strategy for competing globally.
CRE will follow the lead of the economy. One of the takeaways from our look back at historical data is the remarkable performance of REIT returns, which even managed to deliver positive growth of 163.7 percent during the down period of 2000-2009. REITs have a history of prospering in down periods, as investors turn away from stocks and bonds, but that doesn’t mean another “lost decade” is in any way desirable. The best thing for both public and private real estate would be sustained economic recovery driven by a comprehensive plan that leverages smart government oversight, favors domestic business investment, and levels the playing field between the U.S. and other industrialized nations. The data shows that if we want to return to the prosperity of the 1970’s, 1980’s, and 1990’s, we need to urgently change the way we leverage government to compete.
Pivotal Year. Our next report in this series will take a closer look at what the independent data tells us about upcoming prospects for CRE. Will CRE remain attractive as an investment?
Dennis P. Yeskey