Approaching the Redline

Transcription

1 Approaching the Redline Dr. Mark G. Dotzour College Station, Texas Redline A set amount of RPMs which your engine can put out before you pretty much blow it up. This is usually where the numbers on your tachometer turn red. -Urban Dictionary

2 The Economy in 2006

3 The Economy in 2009

4 The Economy in 2017 Creates jobs Labor shortage Wage increases Higher inflation Higher interest rates

5 Job Openings in America Looking for Workers Total Job Openings 5,501,000 Construction 148,000 Manufacturing 325,000 Trade, Transportation, Utilities 1,034,000 Professional & Business Services 911,000 Education & Health Care 1,193,000 Leisure & Hospitality 703,000 Government 483,000 Source: Bureau of Labor Statistics BLS release on Feb. 7, 2017

6 The Economy in 2017 I would say at this point, fiscal policy is not obviously needed to provide stimulus to help us get back to full employment. -Janet Yellen, Chair of the Federal Reserve Bank WSJ Dec 16, 2016

7 Key Issues in 2017: Economic Strength Economy still has a lot of energy left Fed wants to raise interest rates making dollar stronger Oil and gas industries are rebounding

8 Key Issues in 2017: Economic Strength New bull market for single-family housing

9 Pew Survey on Housing December, 2016 A solid majority (72%) of renters say they would like to buy a home in the future. Source: Pew Research Center December 15, 2016 In a Recovering Market, Homeownership Rates..

10 Key Issues in 2017: Fiscal Policy Reduced regulation good for many industries Tax reform bullish for jobs, but unlikely to happen Infrastructure spending unlikely to happen either Can t pay for tax cuts or bridges without a border adjustment or getting rid of loopholes

11 Key Issues in 2017: Interest Rates Labor shortage could create wage inflation Stronger US dollar will make all imports cheaper and offset inflation Slower apartment rent growth with reduce inflation pressure 10-Year Treasury and cap rates unlikely to increase very much in 2017

12 Percent U.S. Leading Index of Economic Indicators 4 Lending Index for the U.S Source: Federal Reserve Bank of St. Louis - FRED

13 Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Consumer Confidence Index Source: The Conference Board

14 Change, Thousands of Persons New Jobs Created Each Month 600 All Employees: Total Nonfarm Payrolls Source: Federal Reserve Bank of St. Louis - FRED

15 Percent Civilian Unemployment Rate 12 Civilian Unemployment Rate Jan-50 Sep-59 May-69 Jan-79 Sep-88 May-98 Jan-08 Source: U.S. Dept. of Labor: Bureau of Labor Statistics

16 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Billions of Dollars 1,800 1,600 1,400 Corporate Profits Rebounding Corporate Profits After Tax with Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment 1,200 1, Source: U.S.Dept. of Commerce: Bureau of Economic Analysis

17 Oct-98 Jul-99 Apr-00 Jan-01 Oct-01 Jul-02 Apr-03 Jan-04 Oct-04 Jul-05 Apr-06 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Net % of Respondents Small Business Outlook Planning To Hire People In The Next Three Months 25 Planning to Hire People in the Next Three Months Source: National Federation of Independent Business

18 U.S. Job Creation Sprint will move thousands of jobs back to the US. Soft-Bank will invest $50 billion and create 50,000 jobs. Dec29 Chrysler announced it will invest $1 billion in two existing plants and create 2,000 new jobs. Jan9 Amazon said it will create more than 100,000 full time jobs in the US in the next 18 months. Jan13

19 U.S. Job Creation Taiwanese company Foxxcon is considering building TVs in America under the Sharp brand. WalMart plans to add 100,000 jobs this year. Hyandai will invest an additional $3.1 billion in existing US plants. GM plans to invest $1 billion in US plants.

20 Percent Change from Year Ago Average Hourly Earnings Annual Rate of Change 4.0 Average Hourly Earnings of All Employees: Total Private Source: Federal Reserve Bank of St. Louis/US Bureau of Labor Statistics

21 Inflation Outlook

22 Percent Chg. From Year Ago Inflation Rate: CPI Remains Low Despite Food/Fuel Consumer Price Index for All Urban Consumers: All Items Jan-20 Jul-34 Jan-49 Jul-63 Jan-78 Jul-92 Jan-07 Source: U.S. Dept. of Labor: Bureau of Labor Statistics

23 Percent University of Michigan Inflation Expectations Survey 12 University of Michigan Inflation Expectation Jan-78 May-83 Sep-88 Jan-94 May-99 Sep-04 Jan-10 May-15 Source: Thomson Reuters/University of Michigan

24 What Can Keep Inflation in Check?

25 Jan-75 Feb-81 Mar-87 Apr-93 May-99 Jun-05 Jul-11 Index Mar 1973=100 Trade Weighted U.S. Dollar Trade Weighted U.S. Dollar Index: Major Currencies 60 Source: Board of Governors of the Federal Reserve System

26 Good News in Oil and Gas

27 The Energy War Taking a Toll

28 Energy Wars $65 is a Fair Price OPEC president Mohammed bin Saleh al-sada said a minimum price of $65 a barrel is badly needed at the moment. He cautioned that the security of future supplies is as risk because of the price slump that has squeezed oil producers since Source: Associated Press 5/24/16

29 Middle East Budget Strains The Saudi Binladin Group is the largest construction company in the Persian Gulf region. They have an estimated $30 billion in debt They haven t paid subcontractors and suppliers for months. The Saudi government is delaying payment for completed projects. WSJ 3/26/16

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31 Energy War Tolls Mount Thousands of Indian workers in Saudi Arabia haven t been paid for months, prompting India s government to hand out food to hungry workers. Assisting 10,000 Indian workers who New Delhi says are without a job, pay and food. Some workers for Saudi Oger report they haven t been paid in seven months. Source: WSJ August 1, 2016

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33 American Energy Sector Signs of Life EOG bought properties in the Permian Basin that will yield 1740 premium drilling locations. They are getting the extra buzz by drilling laterals that are twice as long. One well will produce a lot of oil! EOG defines a premium drilling location as one that will offer an after-tax IRR of at least 30% with oil at $40 per barrel. That return could be as high as 60% if oil gets to $50 per barrel.

34 The Investment Climate for Real Estate U.S. college endowments lost 1.9 percent for the year ended June 30, In the prior 12 months, they saw an average gain of 2.4 percent. The 10-year average fell to 5 percent. This is well below the median 7.4 percent return they expect to earn over time. Poor performance was attributed to international equities, energy and natural resources, commodities and hedge funds. Hedge funds were among the worst performers with a 4 percent loss. Source: Bloomberg 1/30/2017

35 The Investment Climate for Real Estate Best performers for endowments: Private equity real estate with 7.1 percent return Private equity investments with 4.5 percent return Fixed income bonds with 3.6 percent return. Source: Bloomberg 1/30/2017