Presented at NYSBCA's 64th Annual Convention

Transcription

1 Economic Outlook Charlie Dougherty, Vice President & Economist October 13, 2018 Economic Growth Expected to Accelerate in 2018 After a slow start, real GDP rebounded strongly in the second quarter. We expect the economy to continue to expand and grow nearly 3 percent for the year U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change GDP - CAGR: 4. GDP - Yr/Yr Percent Change: 2.9% Economic Outlook 2 1

2 Employment Situation: Employment Growth Strong 600 U.S. Nonfarm Employment Change Change in Employment, In Thousands Hiring has had a strong start to the year, continuing the steak of 90+ months of positive gains ,000 Monthly Change: 134K 12-Month Average Change: 211K -1, ,000-1,200 Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook 3 Employment Situation: Employment Growth Broadening U.S. Employment by Industry Year-over-Year Percent Change of 3-M Moving Average Total Nonfarm Aug-2018 Payrolls are expanding across most major industries with recent strength outside of service-oriented industries where the bulk of job creation has taken place this expansion. Trade, Transport & Utilities Educ. & Health Prof. & Business Svcs. Leisure & Hospitality Manufacturing Financial Construction Other Services Information Mining and Logging More Number of Employees Less - 1 Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook 4 2

3 Employment Situation: Tightening Labor Market 11% Unemployment v. Labor Force Participation 16 Years and Over, Seasonally Adjusted % The unemployment rate has fallen considerably over the course of the recovery. Strong employment growth has also helped counter the downward pressure on labor force participation from an aging population. 9% 7% Unemployment Rate: 3.7% (Left Axis) Labor Force Participation Rate: 62.7% (Right Axis) % 6 59% Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook 5 Workers Earnings Drift Upward Average Hourly Earnings vs. Atlanta Fed Wage Growth Tracker; 3-MMA of YoY % Chg. Wage growth has picked up modestly but remains a missing piece to the recovery thus far. Earnings have been limited by lower-skilled workers entering the workforce and Baby Boomers beginning to retire. 1% Atlanta Fed Wage Growth Tracker: 3. Average Hourly Earnings (Prod. & Supervisory): 2.7% Average Hourly Earnings (Total Private): 2.7% % Source: U.S. Department of Labor, Federal Reserve Bank of Atlanta and Wells Fargo Securities Economic Outlook 6 3

4 Employment Costs Rising 4. Employment Cost Index - All Workers Year-over-Year Percent Change The flip side is employment compensation is also rising and making labor more expensive Total Compensation: Source: U.S. Department of Labor, Federal Reserve Bank of Atlanta and Wells Fargo Securities Economic Outlook 7 Consumer Spending & Income Growth Real PCE vs. Real Disposable Income Year-over-Year Percent Change Stronger employment and wage growth has boosted incomes and supported consumer spending Real PCE: 3. Real Disposable Income: 2.9% Economic Outlook 8 4

5 Consumer Price Inflation Consumer Price Index Year-over-Year Percent Change CPI: 2. Core CPI: 2. Inflationary pressures have increased recently and are now at the Fed s 2 percent benchmark Economic Outlook 9 Prices Generally Rising Across the Board Higher energy prices have kept headline CPI trending upward. Prices for housing and transportation have also seen steady rises, while medical costs have declined. Core CPI Excludes More Volatile Measures Service Price Inflation 8 Food and Energy CPI Year-Over-Year Percent Change Energy: 10. (Left Axis) 2 U.S. CPI - Services Year-over-Year Percent Change 6 Food: 1. (Right Axis) Transportation: 6. Shelter: 3. Medical Care: Source: U.S. Department of Commerce, Freddie Mac and Wells Fargo Securities Economic Outlook 10 5

6 Interest Rates The Fed recently hiked rates at their September meeting and are expected to do the same thing in December, bringing the fed funds rate closer to a more normal level and flattening the yield curve. Monetary Policy Interest Rates 7. Federal Funds Target Rate Upper Bound, Percent Wells Fargo Rates Through Federal Funds: Q Q Q Source: U.S. Department of Commerce, Freddie Mac and Wells Fargo Securities Economic Outlook 11 Federal Fiscal Policy Outlook Key Tax Law Changes Individual Tax Code Changes Bill slashes marginal tax rates across the board Limits state & local income and property tax deductions to $10,000 Pass-throughs would be allowed to deduct up to 20 percent of income Doubles the standard deduction and the child tax credit Caps mortgage interest deduction at $750K Doubles the estate tax exemption Keeps the Alternative Minimum Tax (AMT) but lifts the threshold to $500K Maintains several deductions including medical expenses, student loans and private activity bonds (PABs) Repeals Obamacare individual mandate Individual cuts expire on December 31, 2025 Business Tax Code Changes Permanently reduces the corporate tax rate to 21% from the current 3 federal rate starting in 2018 Corporate AMT repealed Business interest expense deductions are capped at 30 percent of EBITDA for 4 years and 30 percent of EBIT thereafter The bill allows for full and immediate expensing of business capital investments. This provision expires in five years. Ends the current worldwide corporate tax system by switching to a territorial system. Existing profits held abroad are taxed at 15.5 percent for cash and cash equivalents and 8 percent for reinvested foreign earnings. Economic Outlook 12 6

7 Tax Reform: Housing Market Impact Tax reform stands to have one of the biggest impact on New York and Connecticut, given the state s high home values and property taxes. Mortgage Deduction SALT Impact Percent of Total State ZIP Codes Median Sales Price Between $750,000 and $1.5 million California $25,000 State and Local Tax (SALT) Deductions by State 5 Hawaii New York District of Columbia Massachusetts $20,000 4 Washington New Jersey Rhode Island Connecticut $15,000 3 Maryland Virginia Colorado South Carolina $10,000 2 Florida Nevada Maine Minnesota $5,000 1 Texas Nebraska Illinois 1 1 $0 Average SALT Deduction ($, Left) Percent Using SALT Deductions (%, Right) NY CT CA NJ DC MA MN MD OR IL RI VT WI ME VA PA NE OH IA NH Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook 13 Federal Fiscal Policy Outlook $350 $300 Increase in BCA Budget Caps Billions of USD Defense Spending Nondefense Spending $350 $300 $250 $250 The budget deal reached in February provides additional fiscal stimulus to the U.S. economy $200 $150 $100 $200 $150 $100 $50 $50 $0 FY 2014/2015 FY 2016/2017 FY 2018/2019 $0 Source: Congressional Budget Office and Wells Fargo Securities Economic Outlook 14 7

8 Government Spending The Tax Cuts and Jobs Act, budget deal and mandatory spending have the deficit on track to breach $1 trillion while the economy is still in an expansion. Federal Deficit 2 Real Federal Government Purchases Bars = CAGR Line = Yr/Yr Percent Change 2 $400 U.S. Federal Budget Balance Billions of Dollars $400 2 Federal Spending CAGR: 3.7% Federal Spending Yr/Yr: 2. 2 $200 $0 $200 $ $200 -$ $400 -$400 -$600 -$600 -$800 -$800 -$1,000 -$1, $1,200 -$1,200 -$1,400 -$1, $1,600 Federal Budget Balance: FY -$665.8B -$1,600 WF : FY -$1050.0B -$1,800 -$1, Economic Outlook 15 Government Spending As economic growth has broadened across industries and geographies, state tax receipts have improved and led to a more positive outlook on spending. State Tax Receipts State & Local Purchases Total State Property Tax Receipts Year-over-Year Percent Change, 4 Quarter Moving Average State Tax Revenue: 7. State & Local Property Taxes: 4.7% Real State & Local Government Purchases Bars = CAGR Line = Yr/Yr Percent Change State and Local Government Purchases-CAGR: 1. State and Local Government Purchases-Yr/Yr: 0.7% Economic Outlook 16 8

9 Business Investment 3 Real Business Fixed Investment Bars = CAGR Line = Yr/Yr Percent Change Business fixed investment growth should be bolstered by tax reform, an area that has lagged outside of the tech and energy sector Non-Res Fixed Invest - CAGR: 8. Non-Res Fixed Invest - Yr/Yr Percent Change: Economic Outlook 17 Manufacturing Activity 65 ISM Manufacturing Index & Real GDP Index, 3-Month Moving Average, Year-over-Year Percent Change Underlying manufacturing activity continues to look strong, supporting the case for solid economic momentum ISM Manufacturing Index: 59.7 (Left Axis) Real GDP, Year-over-Year Percent Change: 3. (Right Axis) Source: Institute for Supply Management and Wells Fargo Securities Economic Outlook 18 9

10 Small Business Optimism Small business optimism spiked following the presidential election. Business owners have become much less worried about the regulatory environment, however finding qualified labor remains a top concern. Small Business Optimism Small Business Concerns 110 NFIB Small Business Optimism Overall Index 1986 = Small Business Important Problems Single Most Important Problem Facing Firms, SA 3-MMA Regulations: 13.7% Taxes: 16. Labor Quality: Small Business Optimism: Source: National Federation of Independent Business (NFIB) and Wells Fargo Securities Economic Outlook 19 Major Regulatory Changes Major New Regulatory Changes Number of Rules Reviewed By the OIRA per Year, 2018 as of 9/ The Trump Administration has significantly reduced the pace of significant new regulations impacting businesses Clinton Bush Obama Trump Source: Office of Information and Regulatory Affairs and Wells Fargo Securities Economic Outlook 20 10

11 Global Growth Global growth continues to be solid. Although many central banks have started to hike rates, monetary policy remains accommodative, which should keep the global expansion intact. Global Growth The Dollar 7. Real Global GDP Growth Year-over-Year Percent Change, PPP Weights Trade Weighted Dollar Major Currency Index, 1973 = Trade Weighted Dollar: Period Average WF Source: International Monetary Fund, Federal Reserve Board and Wells Fargo Securities Economic Outlook 21 Trade Trade tensions continue to escalate. China appears to have more to lose if a full-blown trade war were to develop, but such an event would not be costless for the United States U.S.-China Export Exposure U.S. Industry Exposure 2 Bilateral Export Exposure Percent Percent of Total Exports (2017) Percent of Value Add (2016) Exports by Industry China Share of Exports vs. Exports Share of Gross Output, 2016 Exports to China/Total Exports Exports Share of Gross Output U.S. China Ag. & Other Primary Products Aerospace Products/Parts Motor Vehicles Products/Parts Chemicals Source: International Monetary Fund, OECD, United Nations, U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 22 11

12 Real Estate & Housing Household Formation 8 8 U.S. Homeowners vs. Renters Percent; Annual Change in Occupied Units, In Thousands Renters: K (Right Axis) Homeowners: 1,109.3K Right Axis) Homeownership: 64. (Left Axis) 3,750 3,000 Household formation has improved over the past few years but generally remains below prior decades. Still, the homeownership rate appears to be reversing course ,250 1, , Economic Outlook 24 12

13 Home Sales Existing & New Single-Family Home Sales Both Series in Millions of Units, Seasonally Adjusted Annual Rate New Home Sales: 0.6 Million (Left Axis) SF Existing Home Sales: 4.8M (Right Axis) Low inventories and high prices have restrained sales so far in Demand should continue to be strong and keep activity trending higher Source: National Association of Realtors, U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 25 Lack of Inventory Pushing Prices Higher Although starting to rise, mortgage rates are still relatively cheap. More of an issue is the shortage of inventory pushing up prices, especially in the West where shortfalls are most acute. Home Prices Mortgage Rates S&P CoreLogic Case-Shiller Home Prices Year-over-Year Percent Change, NSA Las Vegas 13.7% Seattle 12.1% San Francisco 10. Denver 8. Phoenix 7. Tampa 6. Los Angeles 6. San Diego 6. Detroit 6. Boston 6. Minneapolis 6. Atlanta 5. Cleveland 5.7% Portland 5. Charlotte 5. Miami 5. Dallas 5. New York City 3. Chicago 3. Washington, D.C. 2.7% C C % July 2018 National HPI Mortgage Payment vs. Mortgage Rate Principal & Interest Payment as a Percent of Income 2 6 Month Moving Average: 17. (Left Axis) Mortgage Payment as Percent of Income: 18. (Left Axis) 30-Yr. Conventional Mortg. Rate: 4.6 (Right Axis) % Source: U.S. Department of Commerce, Freddie Mac and Wells Fargo Securities Economic Outlook 26 13

14 Single-Family Starts Are Gaining Momentum, as Apartments Begin to Moderate Multifamily Starts Multifamily Single-Family Starts Single-Family Housing Starts Millions of Units The housing market is at a key turning point where the momentum will shift more toward single-family construction Economic Outlook 27 Construction Constraints: Higher Costs Tariffs on lumber and steel have pushed up prices, however strong demand has caused building material prices to rise across the board. A shortage of skilled labor is putting upward pressure on overall construction wages. Higher Material Prices Higher Labor Costs Construction, Lumber & Steel Prices Year-over-Year Percent Change, 3-Month Moving Average Softwood Lumber: 15. Steel Mill Products: 14. Construction Materials: Employment Cost Index: Construction Year-Over-Year Percent Change Employment Cost Index: Construction: % 1% Economic Outlook 28 14

15 Nonresidential Construction Spending Nonresidential construction outlays have been strong although appear to be moderating. State and local construction spending has picked up alongside an improvement in tax receipts. Construction Spending State & Local Construction Outlays Private Nonresidential Construction Put-in-Place Year-over-Year Percent Change of a 3-MMA, Seasonally Adjusted (C)=Commercial, (I)=Institutional Transportation 1 1 State and Local Construction Spending Percent Change, 12-Month Moving Average Public Safety (I) 1 Lodging (C) Office (C) 11% 1 Power Nonresidential 1% Institutional Healthcare (I) Commercial Amusement & Rec. (I) Communication 1% Educational (I) Multi-Retail (C) -7% Manufacturing - August 2018 Religious (I) State & Local 12-MMA: 2. (Left Axis) Month-over-Month Percent Change: 0.7% (Right Axis) % - Source: Department of Commerce and Wells Fargo Securities Economic Outlook 29 Regional Outlook 15

16 Year-over-Year Employment Growth: August 2018 The West Coast is growing solidly, led by the gains in the tech sector. The Southeast is also doing well thanks to a relatively low cost of living. Economic Outlook 31 Northeast Employment Growth by MSA Recovering Northeast Employment Growth by Metro 3-Month Moving Averages, August 2018 Expanding Springfield Syracuse 3-Month Annualized Percent Change 1% -1% Burlington Bridgeport Albany Harrisburg New Haven Portland, ME Philadelphia Buffalo New York Pittsburgh Rochester Hartford Providence Allentown Boston Worcester Total Population Less than 900K 4,500K - 900K More Than 4,500K Contracting Decelerating Year-over-Year Percent Change Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook 16

17 New York Labor Market New York payrolls continue to expand at a pace slightly slower than the rest of the country, however a broad swath of industries are posting strong gains. Employment Growth Industry New York Nonfarm Employment 3-Month Moving Averages New York Employment Growth By Industry Year-over-Year Percent Change, 3-MMA Total Nonfarm August 2018 Educ. & Health Services Trade, Trans. & Utilities More - - Government Prof. & Bus. Svcs. Leisure and Hospitality Number of Employees Less Financial Activities - - Manufacturing Other Services - United States: 1.7% - Nonfarm: Yr/Yr Pct. Change: 1. QCEW: Yr/Yr Pct. Change: 1.7% Construction Information % 1% Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook 33 New York Housing New York Housing Permits Thousands of Permits, Seasonally Adjusted Annual Rate Single-Family: 12,024 Single-Family, 12-MMA: 11,774 Multifamily, 12-MMA: 27,623 Single-Family Average ( ): 23, New York has seen the most new apartment construction out of any state thanks to rapid new development in NYC Economic Outlook 34 17

18 New York Tax Receipts 3 State Tax Receipts - U.S. vs. New York Year-over-Year Percent Change Steady employment gains and home price appreciation have improved state tax receipts U.S. State Tax Revenue: 7. New York: Economic Outlook 35 Appendix 18

19 q Presented at NYSBCA's 64th Annual Convention U.S. Economic Wells Fargo U.S. Economic Actual Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Actual Real Gross Domestic Product Personal Consumption Business Fixed Investment Equipment Intellectual Property Products Structures Residential Construction Government Purchases Net Exports Inventories Nominal GDP Corporate Profits Before Taxes as of: September 12, C ompound Annual Growth Rate Quarter-over-Quarter 2 Percentage Point Contribution to GDP 3 Year-over-Year Percentage Change Source: IHS Global Insight and Wells Fargo Securities Economic Outlook 37 Economic Outlook Group Publications A Sampling of Our Recent Special, Regional & Industry Commentary Recent Special Commentary Date Title Authors U.S. Macro September-27 Macro Implications Firm Concentration and House & Vaisey September-27 U.S. Corporate Sector Health: Should We Worry? Bryson, Iqbal, House & Vaisey September-18 Consumer Outlook in a Rising Rate Environment Quinlan & Seery September-17 Making Strides: Women-Owned Businesses on the Rise House & Vaisey September-14 A Re-Assessment of Residual Seasonality in GDP Iqbal & Vaisey U.S. Regional To view any of our past research please visit: economics To join any of our research distribution lists please visit: economics September-26 BYU-Washington: Two Ascending Programs Vitner September-21 California Payrolls Picks Up in August Vitner & Dougherty September-21 Texas Payrolls Post Solid Growth in August Vitner & Dougherty September-21 Florida Adds to Payrolls in August Vitner & Dougherty September-20 Minnesota Payrolls Skip a Beat in August Vitner & Dougherty Global Economy August-17 Which Major Economies Have Exposure to EM Economies? Bryson & Vaisey August-16 How Exposed is the U.S. Economy to EM Economies? Bryson & Vaisey August-15 Is Turkey a Canary in the Emerging Market Coal Mine? Bryson & Vaisey August-10 In Japan, Still Waters Merit Attention to Any Ripple Quinlan August-10 U.K. Mid-Year Economic Outlook Bryson & Kinnaman Interest Rates/Credit Market September-26 Is the Fed Funds Rate Now in "Neutral" Territory? Bryson September-12 How Much More Is the Fed Likely to Tighten? Bryson September-12 A New Framework for Estimating the Optimal Policy Interest Rate Bryson, Pugliese & Vaisey August-01 Corporate Loans in a World of Rising Rates Silvia & Vaisey July-25 Household Balance Sheets Remain Solid in Q1 Silvia & Kinnaman Real Estate & Housing September-26 Housing Chartbook: September 2018 Vitner & Dougherty August-09 Housing Remains in the Slow Lane Vitner, Dougherty & Honnold June-29 Housing Chartbook: June 2018 Vitner & Dougherty June-12 Q1 CRE Chart book: Property Prices Vitner, Dougherty, Carmichael & Vaisey May-02 Tax Reform: Regional Real Estate Impact Vitner & Dougherty To view any past research please visit: Economic Outlook 38 19

20 Wells Fargo Securities Economics Group Economic Outlook 39 20