2016's Leftovers May Not Be All Bad
We can all admit 2016 was a strange and sometimes painful year. From the UK voting to leave the EU, to celebrity deaths and a celebrity winning the presidential election, many of us were left not knowing what to think. One constant, especially throughout the third quarter of 2016, was looking forward to the New Year. In our haste to get to January, many of us may not have realized some gifts 2016 left us, particularly in December.
On December 31, 2015 the Dow Jones closed at 17,425. A year later it closed at 19,763. There is a very good chance the Dow will close above 20,000 points one day this week. The U.S. Bureau of Labor Statistics also concluded 156,000 new jobs were created in December while unemployment held at about 4.7%. That same report shows that average hourly wages increased by about 3% over 2016.
So what does this perceived bull market and improved economy mean for 2017? Well, in a word…returns. That answer seems simple and self-explanatory, but there is a lot to think about. Sure investors make more money off of better returns and theoretically that goes back into the economy in a number of different ways, but perhaps more importantly, companies have more money to invest in themselves.
Many companies waited to invest in internal capital projects as they survived the economic recession of 2008/2009 and the period of economic recovery that followed. One of the reasons behind the increased job creation numbers in 2016 was the kick starting of those delayed projects. A variety of economic indicators and the promise of a new administration coming into office would suggest this trend will continue in 2017.
Of course companies have to avoid making reckless decisions and have to keep an eye on their project’s Return on Investment (ROI). Whether a company is making capital investments in an existing facility (through a physical expansion, equipment upgrades and/or large scale hiring) or investing in a new facility, incentives can provide a significant boost to a project’s ROI.
Tax incentives are the most common in economic development deals, ranging from tax credits to tax abatements to employee tax withholding rebates. These incentives can certainly lower your ongoing operational costs, but what about incentives that can impact the bottom line by reducing initial project costs? Some jurisdictions may provide cash grants aimed at offsetting specific project costs, infrastructure upgrades, fast tracking the permitting process and waiving associated fees, land acquisition deals, and recruiting and training a workforce so you can hit the ground running.
Selecting a great site for expanding into a new market or relocating will also boost the project’s ROI. We tell all of our clients that great incentives do not make a bad location good. You still have to have the right workforce in place (both initially and for recruiting additional workers in the future), access to infrastructure and utilities, and operational costs vary greatly from state to state and even between different locations within a state. All of these factors can weigh heavily on both the viability of the project as well as the project’s ROI.
So yes, we all survived 2016, which seemed like a year written from a Hollywood script. Some might look at that script as a comedy and some might see it as a tragedy, but now it is time to proceed headfirst into 2017. With the market continuing to move forward, investors are poised to capitalize, but how individual companies invest in capital projects may be the biggest determining factor on how the 2017 script is written.
Kris Phillips is a co-founder and Principal of Global Growth Advisors LLC, a professional firm that negotiates and maximizes incentives packages for companies investing in the United States.