Diane Swonk’s Economic Outlook Inspires 3 Wealth-Building Ideas

Topic:  • By Michael Episcope • April 5, 2017 Views

Diane Swonk at Origin Investments' 2017 Review

Two weeks ago, Chicago Federal Reserve President Charles Evans told Fox News “the economy is on a pretty good course right now.” But recent market dips beg the obvious: Are these healthy ups-and-downs or is the economy unraveling? And what does it mean for high net worth investors focused on preserving and building wealth?

Economist Diane Swonk, who has been a consultant to both political parties, took a long view of the economy at Origin Investment’s recent annual investor meeting. We made it through lackluster growth and “hit a turning point last year,” she said. But that has left us with counterintuitive clues about investment opportunities right now, she explained.

The most striking clue is in plain sight. “My best economic indicator out there is how good is the service behind the counter?” Swonk said. It’s clear to her that the economy has reached a turning point because she’s more likely to encounter a retail clerk who’s new at the job, still learning to work the register. (Watch the video below.)

“The fact that we’re finally starting to train people again, that’s hopeful,” she said. But though this indicates the labor pool is growing, it also has a downside. While we finally “broke out of our 2% rut on wage growth…unfortunately, a lot of people are marginalized. We’d like to re-engage them,” Swonk pointed out.

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Bureau of Labor Statistics shows that employment is rising for sectors tied to commercial real estate, such as construction, professional and business services and health care. Yet long-term unemployment still remains near its lowest levels in decades.

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“How many people can you employ? Our population is zero growth right now, and in the labor force half of all growth has come from immigrants,” Swonk noted. New policies that restrict immigration to create jobs may have the opposite effect.

So how will this economy impact high net worth investors? Swonk discussed three points that offer us valuable insight.

1. Find diverse paths to growth.

“Labor force growth plus productivity growth equals GDP growth,” Swonk said. “To keep things going, we need a lot of productivity growth now.” So far that hasn’t happened. The latest productivity report shows only a 0.2 percent increase for 2016 due to higher labor costs.

The Trump bump in equity markets will make it a challenge for employers to meet the returns of private equity. Fortune magazine notes that the S&P 500 is trading at 25 times earnings. To beat private investor targets, stocks will need to nearly double the 4 percent growth pace President Trump is promising.

Meanwhile, bonds no longer provide true diversification. Even as the Economist’s Wall Street blog notes that European bankers are skeptical about Trump’s “America first” policy, yields on the 10-year Treasury note remain near 2.6 percent. That gives commercial real estate investments more potential for risk-adjusted returns.

2. Find markets with staying power.

Houston’s economy is emerging stronger from its oil price shock. Matt Ozee, who heads Origin’s Texas acquisitions, believes industry cost cutting has made oil fields as profitable as when prices were at their peak.

“It gets to this issue of how much they’ve increased efficiencies in these shale fields,” Swonk confirmed. “You will see some jobs come from this as well. Particularly we’re already seeing it in steel. You’re going to see it in trucking, in rail. They’re very connected to the oil industry.”

In Chicago, Origin’s home base, the market “has diversified immensely,” Swonk says. We believe Chicago’s educated workforce has made industry more productive and commercial real estate more desirable across the city.

3. Find sources of added value.

Chicago’s strong commercial real estate market is challenging for investors, yet Origin continues to make great deals, selling one development last year at nearly double the purchase price.

Good real estate managers make commercial real estate more productive with improvements that solve existing tenants’ problems or meet the needs of new prospects. It’s a strategy that complements business growth and should benefit private investors in any economy.

Posted By

Michael Episcope

Michael Episcope formed Origin Investments in 2007, along with Co-CEO David Scherer. He has more than 25 years of investment and risk management experience.