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Scant bright spots in 2017 forecasts

ALBUQUERQUE, N.M. — The year 2016 was a dismal one for the New Mexico economy.

Nose-diving oil prices took a toll on nearly every aspect of the state’s financial well-being. Politicians continually touted the growth of nonextractive industries, but the moderate gains were far from enough to bring the state back to its pre-recession levels of wealth and employment.

Certainly, a few bright spots punctured the gloom – the growth of the health care sector, Facebook’s selection of Los Lunas for the site of its new data center and other business expansions in the state – but, for the most part, the state scrambled to provide basic services to its citizens and many small businesses struggled to succeed within that environment.

Will 2017 usher in the good economic news the state so desperately needs? We asked four experts to weigh in on what the business community can expect over the coming year.

Alison Felix

Alison Felix

Alison Felix
Vice president, Denver branch executive
Federal Reserve Bank of Kansas City

Felix said New Mexicans have at least one thing to look forward to in 2017: The oil sector may have finally bottomed out and appears to be on the upswing.

“Activity across the region has accelerated over the past few months and there’s optimism about the coming six months,” Felix said. “Drilling conditions have stabilized, if not improved.”

She said a recent survey showed oil companies were looking for prices to reach $60 a barrel before they would consider significantly increasing drilling activity. With regional prices forecast to be just shy of that by the end of 2017 – about $58 a barrel, according to Felix – it’s possible companies will begin ramping up their operations soon.

Another potential source of optimism: the construction sector, which Felix characterized as “slow to recover” in New Mexico. The sector appears poised to grow as real estate inventory levels begin to dwindle, and customers demand more residences and commercial spaces. She also pointed to tourism and health care services as sectors that have driven growth in recent months and could continue the trend.

Other economic indicators, however, aren’t looking as rosy. Felix pointed out that the state’s unemployment rate is roughly where it was in 1980 and, overall, the state is still struggling to recover from the recession.

In short, while higher oil prices will likely be a boon for the state, Felix said it’s unlikely that the year will contain rapid growth or a solution to all of New Mexico’s financial ills.

“There will be some positive notes, but probably not as many as some would like,” she said.

Jeffrey Mitchell

Jeff Mitchell

Jeff Mitchell
Director
Bureau of Business & Economic Research at the University of New Mexico

Mitchell characterized the forecast for the coming year as “modestly weak” and he predicted that employment declines in rural areas would continue well into the middle of the year. Even when the oil sector moves closer to a full recovery, the effect across the state is likely to be uneven, he said.

“The impact of oil prices is higher in non-metro areas versus metro ones,” said Mitchell. “Metro and rural areas moved in relative sync with one another before the recession, but that no longer appears to be the case.”

This lack of synchronicity accounts for much of the state’s “sideways” growth, according to Mitchell. Modest gains in employment and population in metro areas like Albuquerque are largely offset by losses in more rural areas.

In the coming year, Mitchell is particularly concerned about New Mexico’s health care sector, the largest sector in the state and one of the biggest drivers of its growth. The implementation of the Affordable Care Act led to an increase in Medicaid payments to the state, which in turn led to a 2 percent increase in personal income, according to Mitchell.

But the Trump administration has vowed to dismantle the act and it’s unclear what sort of program might appear in its place.

“Pull the rug out on (the Affordable Care Act) and it’s a big deal, both for the people who have lost their insurance and for the state’s economy,” he said. “It’s going to mean much slower growth for health care and for New Mexico.”

Jim Peach

Jim Peach

Jim Peach
Economist
New Mexico State University

New Mexico’s retail sector is also likely to experience slow growth in 2017, according to Peach.

“I expect it to be more or less flat,” he said.

Peach attributed this to two issues. First, New Mexicans are unlikely to acquire the type of disposable income that would drive rapid growth of the retail industry over the next year. Secondly, New Mexico “isn’t very aggressive” when it comes to collecting sales tax on internet retailers, which Peach said places brick-and-mortar retailers in the state at a disadvantage.

Lawmakers are considering a tax reform package that would include an e-commerce tax, but Peach said it’s unclear as to what will ultimately come out of the Legislature.

If the retail sector is unlikely to drive growth in 2017, what about New Mexico’s burgeoning border economy?

Peach said it will all come down to President Donald Trump, who has proposed several policies that “could be devastating to the border region, particularly Santa Teresa.”

There’s the border wall, of course, as well as a proposed tax on imports. But the biggest problem may be the aura of uncertainty that has begun to permeate the economic interests in the region.

“I’ve studied the border for many years, and it’s clear that uncertainty upsets economic and even cultural relationships across the border,” said Peach. “I don’t see anything for the border region that is good that is likely to come out of these policies.”

Steve Ciepiela

Steve Ciepiela

Steve Ciepiela
President
Charles Stephen & Co.

Volatile. That’s the word Ciepiela used to describe how markets are likely to behave in 2017.

“I’m politically agnostic, but I also think that there has never been anyone in the president’s chair before like Donald Trump,” said Ciepiela. “There’s going to be volatility, particularly in the first year, because there are a lot of unknowns.”

Ciepiela said it’s unclear how that climate will ultimately affect New Mexico businesses. In general, he said, businesses tend to be more cautious in times of uncertainty. Economists say that often translates to fewer equipment and real estate investments when the market is being fickle.

That’s in line with what other financial experts are predicting nationally. The Wall Street Journal’s Economic Forecasting Survey, a poll of more than 60 economists, predicted that the new presidency would boost economic growth, interest rates and inflation. The respondents also expressed concern that businesses would continue to hold off on long-term investments and they seemed particularly worried about the potential for a White House-incited trade war.

As for how he’s telling his clients to invest within a climate of economic uncertainty, Ciepiela said he’s repeating the advice often heard in his industry: Play the long game.

“If you have a long-term view and a diversified portfolio, you’ll be fine,” said Ciepiela.

And for those who watch the news and tend to make investment decisions based on rapidly changing events?

“Put a piece of duct tape in the corner of your TV so you can’t see what the markets are doing,” he said.

As for whether the state will similarly be able to ignore a chaotic present in favor of investing in long-term success, Ciepiela said only time will tell.

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