The Economic Outlook. Christopher Thornberg, PhD Founding Partner, Beacon Economics Director, UCR SoBA Center for Economic Forecasting and Development

Transcription

1 The Economic Outlook Prosperity in the Age of Pessimism August 2018 Christopher Thornberg, PhD Founding Partner, Director, UCR SoBA Center for Economic Forecasting and Development beaconecon.com

2 The Good: Strong Growth Trends It isn t when it s why Meet the new economy, same as the old economy Economy on a steady path since global commodity bust Labor markets, business investment, wages, exports, energy, housing all on good trends 2018 better: good momentum with fiscal stimulus after-burner Still a low chance of recession in next 24 months Length of Expansions (Months) WSJ Next Recession Poll March 1991(I) June 2009 (II) February 1961 (I) November 1982 (IV) June 1938 (II) November 2001 (IV) March 1975 (I) March 1933 (I) October 1949 (IV) % 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 2

3 The Bad and Ugly Brakes and Imbalances Labor shortages impacting employers Recent market froth / volatility / rising long term rates Aggressive Fed: rising rates, flattening yield curves Sharp growth in government deficits Global trade / security worries Politics going in the wrong direction Little effort to deal with underinvestment in infrastructure, rising wealth and income inequality, healthcare cost inflation, pension and entitlement issues, etc etc etc The great disconnect between economic realities and political discourse 3

4 GDP Growth: Almost back to 3% Real GDP Growth Y-o-Y Avg Avg Q1 Q2 GDP Final Demand Consumption Goods Services Fixed Invest Structures Equipment Intellectual Residential Inventories Net exports Exports Imports Government National defense State and local

5 Industrial activity 10.0% Industrial Production Share Y-o-Y Gr Total IP % 6.0% 4.0% Manufacturing Mining Utilities % 0.0% -2.0% -4.0% -6.0% Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Index Growth Computer Fabricated metal Motor vehicles Machinery Food, beverage Chemicals Aerospace Plastics Petroleum Prod

6 The New Energy Boom US Oil Production (MBD) 140 US Drilling Activity (Production Index) /6/84 1/6/87 1/6/90 1/6/93 1/6/96 1/6/99 1/6/02 1/6/05 1/6/08 1/6/11 1/6/14 1/6/ Jan-02 Feb-03 Mar-04 Apr-05 May-06 Jun-07 Jul-08 Aug-09 Sep-10 Oct-11 Nov-12 Dec-13 Jan-15 Feb-16 Mar-17 6

7 Rising Prices? 120 Oil Prices (WTI)

8 Domestic Energy Glut Energy Consumption / Real GDP Indexes Petroleum Electricity US Utilities Capacity Utilization

9 Exports US Real Exports 2004Q1 Q4 Q3 Q2 2007Q1 Q4 Q3 Q2 2010Q1 Q4 Q3 Q2 2013Q1 Q4 Q3 Q2 2016Q1 Q4 Q3 Nominal Trade Flows 2018 Y-o-Y Gr Q1 $Bil Exports % Industrial supplies % Travel % Consumer goods % Automotive % Petroleum % Foods, feeds % Charges for IP % Civilian aircraft % Transport % Computers % 9

10 Global Growth IMF Global Forecast: 3.9% China United States EU East Asia Latin America World $US Broad Index (real) Jan-98 May-99 Sep-00 Jan-02 May-03 Sep-04 Jan-06 May-07 Sep-08 Jan-10 May-11 Sep-12 Jan-14 May-15 Sep-16 Jan-18 10

11 Trade Trends US Trade Balance (nominal $Mil) Jan-93 Sep-94 May-96 Jan-98 Sep-99 May-01 Jan-03 Sep-04 May-06 Jan-08 Sep-09 May-11 Jan-13 Sep-14 May-16 Jan Share of GDP Jan-75 Jan-78 Jan-81 Jan-84 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14 Jan-17 Net National Savings Net Exports Linear (Net National Savings) Linear (Net Exports ) 11

12 Tariffs: 25% steel, 10% aluminum Exports Imports Goods $1,547 $2,381 Services $797 $534 Trade (Billions) Iron & steel mill products $18.1 $16.0 Bauxite & aluminum $10.3 $ PPI: Steel and Steel Products Jan-02 Feb-03 Mar-04 Apr-05 May-06 Jun-07 Jul-08 Aug-09 Sep-10 Oct-11 Nov-12 Dec-13 Jan-15 Feb-16 Mar-17 US Metal Industry: <100,000 Production Workers 12

13 13

14 The China Syndrome Value US Exports to China as % of GDP: 0.75% Value China Exports to US as % of GDP: 4.0% Demands reduce its trade surplus with the U.S. by $200 billion over two years would not challenge U.S. actions taken in intellectual property disputes stop subsidizing high-tech sectors identified in its Made in China 2025 plan cut tariffs on all products in non-critical sectors to levels at or below U.S. duties demanded that China not target U.S. farmers and agricultural products demanded that China not retaliate against U.S. restrictions on Chinese investments ease a process for approving U.S. investments 14

15 Consumer Spending / By Type Real Consumer Spending- YoY Gr Jan-00 Feb-01 Mar-02 Apr-03 May-04 Jun-05 Jul-06 Aug-07 Sep-08 Oct-09 Nov-10 Dec-11 Jan-13 Feb-14 Mar-15 Apr-16 May Auto Sales SAAR to June

16 Savings Problems? Not so fast Personal Savings Rate (Share DPI) Q1 Jan-00 Feb-01 Mar-02 Apr-03 May-04 Jun-05 Jul-06 Aug-07 Sep-08 Oct-09 Nov-10 Dec-11 Jan-13 Feb-14 Mar-15 Apr-16 May % 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Personal Savings Rate (Share DPI) Q2 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 2017Q1 2018Q1 16

17 No Debt Overhang Household Debt / DPI Ratio 03:Q1 03:Q4 04:Q3 05:Q2 06:Q1 06:Q4 07:Q3 08:Q2 09:Q1 09:Q4 10:Q3 11:Q2 12:Q1 12:Q4 13:Q3 14:Q2 15:Q1 15:Q4 16:Q3 17:Q2 18:Q :Q1 Share Debt: Transition to 30 Day (NY Fed) 04:Q1 05:Q1 06:Q1 07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1 13:Q1 14:Q1 15:Q1 16:Q1 17:Q1 AUTO CC MORTGAGE STUDENT LOAN 18:Q1 17

18 Housing Markets: Steady Existing Homes Sales Jan-99 Mar-00 May-01 Jul-02 Sep-03 Nov-04 Jan-06 Mar-07 May-08 Jul-09 Sep-10 Nov-11 Jan-13 Mar-14 May-15 Jul-16 Sep Months Supply Homes For Sale (NAR) Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 18

19 Housing Markets: Steady 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% US Home Price Growth (CS) WA-Seattle 13.3% 13.6% MN-Minneapolis 5.8% 6.4% NV-Las Vegas 6.9% 12.6% NC-Charlotte 5.9% 6.0% CA-San Francisco 6.0% 10.9% OR-Portland 8.8% 5.9% CO-Denver 7.9% 8.5% GA-Atlanta 5.5% 5.6% CA-Los Angeles 5.6% 7.7% TX-Dallas 7.8% 5.6% CA-San Diego 6.6% 7.3% OH-Cleveland 4.0% 5.1% AZ-Phoenix 5.7% 7.3% FL-Miami 5.2% 5.0% MI-Detroit 7.6% 7.1% NY-New York 4.1% 4.2% MA-Boston 6.0% 7.0% IL-Chicago 3.1% 3.3% -15.0% Jan-88 Sep-89 May-91 Jan-93 Sep-94 May-96 Jan-98 Sep-99 May-01 Jan-03 Sep-04 May-06 Jan-08 Sep-09 May-11 Jan-13 Sep-14 May-16 Jan-18 FL-Tampa 7.1% 6.6% DC-Washington 2.8% 3.1% National-US 5.8% 6.4% 19

20 Rising Rates? Mortgage Rates US Housing Buy In Ratio % % 60.0% % 50.0% % % 35.0% % Jan-93 Aug-94 Mar-96 Oct-97 May-99 Dec-00 Jul-02 Feb-04 Sep-05 Apr-07 Nov-08 Jun-10 Jan-12 Aug-13 Mar-15 Oct-16 20

21 Credit Markets Still Tight 25.0% 20.0% 15.0% 10.0% Y-o-Y Growth Mortgage Debt Mortgage Origination by Credit Score 5.0% % % -10.0% 04:Q1 04:Q4 05:Q3 06:Q2 07:Q1 07:Q4 08:Q3 09:Q2 10:Q1 10:Q4 11:Q3 12:Q2 13:Q1 13:Q4 14:Q3 15:Q2 16:Q1 16:Q4 17:Q :Q2 00:Q2 01:Q2 02:Q2 03:Q2 04:Q2 05:Q2 06:Q2 07:Q2 08:Q2 09:Q2 10:Q2 11:Q2 12:Q2 13:Q2 14:Q2 15:Q2 16:Q2 17:Q2 Median 25th percentile 10th percentile 21

22 Pace of Construction Sales and Starts Jan-92 Jul-93 Jan-95 Jul-96 Jan-98 Jul-99 Jan-01 Jul-02 Jan-04 Jul-05 Jan-07 Jul-08 Jan-10 Jul-11 Jan-13 Jul-14 Jan-16 Jul-17 SF Starts SF Sales MF Starts Housing Starts per New Household

23 The Single Factor Swing Factor Units by Tenure / Structure Total Households Owner-occ , detached MF Renter-occ , detached MF Ownership 66.9% 63.1% 70.0% 69.0% 68.0% 67.0% 66.0% 65.0% 64.0% 63.0% 62.0% Ownership Rates Q1-85 Q4-86 Q3-88 Q2-90 Q1-92 Q4-93 Q3-95 Q2-97 Q1-99 Q4-00 Q3-02 Q2-04 Q1-06 Q4-07 Q3-09 Q2-11 Q1-13 Q4-14 Q

24 Labor Markets 3500 Net Change Payroll Jobs 2.5 Y-o-Y Growth Non Farm Payrolls

25 Why Slowing Job Growth? 4.5% Job Openings Rate 18.0 US Unemployment Rate 4.0% 3.5% 3.0% 2.5% U6 2.0% 1.5% 1.0% Dec-00 Jan-02 Feb-03 Mar-04 Apr-05 May-06 Jun-07 Jul-08 Aug-09 Sep-10 Oct-11 Nov-12 Dec-13 Jan-15 Feb-16 Mar U3 Jan-94 Jul-95 Jan-97 Jul-98 Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09 Jul-10 Jan-12 Jul-13 Jan-15 Jul-16 Jan-18 25

26 Consequences Real Wage Gains for Continuously Employer Workers 5.0% 4.0% 3.0% 2.0% 1.0% Growth in Average Cost per Employee Hour -1.0 Sep-02 Aug-03 Jul-04 Jun-05 May-06 Apr-07 Mar-08 Feb-09 Jan-10 Dec-10 Nov-11 Oct-12 Sep-13 Aug-14 Jul-15 Jun-16 May-17 Median Average 0.0% 2005Qtr1 2005Qtr4 2006Qtr3 2007Qtr2 2008Qtr1 2008Qtr4 2009Qtr3 2010Qtr2 2011Qtr1 2011Qtr4 2012Qtr3 2013Qtr2 2014Qtr1 2014Qtr4 2015Qtr3 2016Qtr2 2017Qtr1 26

27 Income Stagnation? 120, , ,000 90,000 80,000 70,000 60,000 50,000 Real Mean HH Income Census AGI/HH BEA DPI/HH What is better today? Communications Medical care, Pharmaceuticals Entertainment options Transportation Shopping, Product quality Food quality / variety Access to information Environmental conditions Legal Marijuana What isn t?

28 Inequality? Figure 16. Gini Coefficients, 1979 to 2014 Gini Coefficient (1.0 = highest inequality, 0 = least inequality) Based on Market Income Based on Income Before Transfers and Taxes Based on Income After Transfers and Taxes Based on Income After Transfers but Before Taxes

29 Real Average Net Worth Percen'le < 25 $(1) $0 $(12) 0% 0% 0% $43 $60 $45 3% 3% 2% $166 $227 $204 12% 11% 7% $422 $612 $659 18% 17% 14% $1,418 $2,190 $2,968 37% 37% 38% Top 1% $10,407 $17,772 $26,645 30% 33% 39% 29

30 A Long View 8.0 Non-Farm Payroll Growth (Year on Year) Aug-64 Mar-66 Oct-67 May-69 Dec-70 Jul-72 Feb-74 Sep-75 Apr-77 Nov-78 Jun-80 Jan-82 Aug-83 Mar-85 Oct-86 May-88 Dec-89 Jul-91 Feb-93 Sep-94 Apr-96 Nov-97 Jun-99 Jan-01 Aug-02 Mar-04 Oct-05 May-07 Dec-08 Jul-10 Feb-12 Sep-13 Apr-15 Nov-16 Jun-18

31 Workforce Growth US Labor Force Growth (Smoothed) US Participation Rate -1.0 Jan-80 Mar-82 May-84 Jul-86 Sep-88 Nov-90 Jan-93 Mar-95 May-97 Jul-99 Sep-01 Nov-03 Jan-06 Mar-08 May-10 Jul-12 Sep-14 Nov Jan-86 Nov-87 Sep-89 Jul-91 May-93 Mar-95 Jan-97 Nov-98 Sep-00 Jul-02 May-04 Mar-06 Jan-08 Nov-09 Sep-11 Jul-13 May-15 Mar-17 31

32 The Boomer Bust 3.0% US Population Y-o-Y Gr Population by Age (Millions) 2.5% 2.0% 1.5% 1.0% % 0.0% -0.5% Jan-75 Jun-77 Nov-79 Apr-82 Sep-84 Feb-87 Jul-89 Dec-91 May-94 Oct-96 Mar-99 Aug-01 Jan-04 Jun-06 Nov-08 Apr-11 Sep-13 Feb-16 - Under 5 years 5 to 9 years 10 to 14 years 15 to 19 years 20 to 24 years 25 to 29 years 30 to 34 years 35 to 39 years 40 to 44 years 45 to 49 years 50 to 54 years 55 to 59 years 60 to 64 years 65 to 69 years 70 to 74 years 75 to 79 years 80 to 84 years 85 years and over 32

33 The Cure for Secular Stagnation 33

34 Consequences Corporate profits Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q % 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% Real Investment Share GDP 1999Q1 Q2 Q3 Q4 2004Q1 Q2 Q3 Q4 2009Q1 Q2 Q3 Q4 2014Q1 Q2 Q3 Q4 Equipment Intellectual property products 34

35 The Cure for Secular Stagnation 35

36 Tax Reform vs Tax Cuts 35% US Corporate Taxes as % Profit $1,000B Net Tax Cuts Relative to Current Law Billions of USD, FY $1,000B 30% 25% $750B $860.8B $750B 20% 15% $500B $500B 10% 5% $250B $264.7B $328.5B $250B 0% 1980I 1982I 1984I 1986I 1988I 1990I 1992I 1994I 1996I 1998I 2000I 2002I 2004I 2006I 2008I 2010I 2012I 2014I 2016I Federal State & Local $0B Individual Taxes Pass-Through Business Taxes Corporate Taxes $0B 36

37 The Looming Social Insurance Crisis Population Growth Projections Medicare Spending Projections Total 321,369 25, % 23, % <18 years 73,635 1, % 2, % 18 to 24 31,214 (478) -1.5% % 25 to 44 84,657 8, % 3, % 45 to 64 84,032 (1,797) -2.1% 3, % 65 years+ 47,830 18, % 13, % 85 years+ 6,304 1, % 4, % Fed M. Spending / Senior 1995 $5, $13, * $43,395 Spending Share Federal Rev % % 2035* 41.0% 37

38 Budget Implications $400 $200 -$200 -$400 CBO:Past and Projected Federal Budget Gap $0 1,800 1,600 1,400 1,200 1,000 New Estimates: Debt and Deficit $600 -$800 -$1,000 -$1,200 -$1,400 -$1, Projection 2018 Projection Deficit Net Debt % GDP 38

39 State Issues Q1 Q4 Q3 Q2 1999Q1 Q4 Q3 Q2 2006Q1 Q4 Q3 Q2 2013Q1 Q4 Q3 27.0% 25.0% 23.0% 21.0% 19.0% 17.0% 15.0% State Pension Funding Ratios (Pew) State Local Finances State FR. Ch. State FR. Ch. State FR. Ch. US Total 65.9% -5.7% Georgia 75.8% -5.1% Indiana 63.0% -1.6% Wisconsin 99.1% 0.7% Wyoming 73.3% 0.2% Alaska 62.7% -4.8% South Dakota 96.9% -7.2% Texas 73.0% -2.6% Arizona 60.4% -2.8% Tennessee 94.1% -1.3% Virginia 72.4% -2.2% Louisiana 59.7% -3.6% New York 90.6% -7.5% Nevada 72.3% -2.9% N Hampshire 58.2% -7.2% Nebraska 88.8% -2.5% Ohio 72.0% -4.4% Mass 57.6% -4.5% North Carolina 88.3% -7.2% West Virginia 71.9% -5.0% Mississippi 57.5% -4.2% Idaho 87.7% -4.1% Oklahoma 71.9% -7.3% S Carolina 53.8% -4.1% Utah 86.0% 0.3% Montana 71.2% -3.3% Rhode Island 53.7% -3.3% Washington 84.0% -3.1% California 69.5% -4.5% Minnesota 53.2% -26.6% Iowa 81.6% -3.4% Alabama 67.2% 0.2% Pennsylvania 52.6% -3.2% Delaware 81.1% -8.2% N Dakota 65.9% -4.5% Hawaii 51.3% -11.1% Oregon 80.5% -11.3% New Mexico 65.4% -5.2% Colorado 46.0% -14.4% Florida 79.4% -7.2% Kansas 65.1% 0.2% Connecticut 41.4% -8.0% Maine 77.3% -5.2% Maryland 64.9% -3.3% Illinois 35.6% -4.5% Arkansas 76.9% -5.5% Vermont 64.3% -3.6% Kentucky 31.4% -6.4% Missouri 76.7% -4.7% Michigan 64.0% 0.3% New Jersey 30.9% -6.5% 39

40 And the Markets?

41 Financial Turmoil with Perspective Year Rates Wilshire Full Cap Price Index

42 Federal Reserve Policy: Normalization? Interest Rates Year FFR Year 3 Month Rate Spread Jan-84 Mar-86 May-88 Jul-90 Sep-92 Nov-94 Jan-97 Mar-99 May-01 Jul-03 Sep-05 Nov-07 Jan-10 Mar-12 May-14 Jul-16 42

43 Inflation Risks? 3.5% Inflation Rate 14.0 Unemployment and Inflation 3.0% % % % % % % Jan-92 Jun-93 Nov-94 Apr-96 Sep-97 Feb-99 Jul-00 Dec-01 May-03 Oct-04 Mar-06 Aug-07 Jan-09 Jun-10 Nov-11 Apr-13 Sep-14 Feb-16 Jul Jan-57 May-60 Sep-63 Jan-67 May-70 Sep-73 Jan-77 May-80 Sep-83 Jan-87 May-90 Sep-93 Jan-97 May-00 Sep-03 Jan-07 May-10 Sep-13 43

44 Inflation Drivers 15.0 Y-o-Y Growth Bank Loans 14.0% M2 Growth (y-o-y) % 10.0% % % 4.0% % %

45 Another Bubble? Shiller P/E Ratio Jan-86 Nov-87 Sep-89 Jul-91 May-93 Mar-95 Jan-97 Nov-98 Sep-00 Jul-02 May-04 Mar-06 Jan-08 Nov-09 Sep-11 Jul-13 May-15 Mar % 120.0% 110.0% 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% Debt to GDP Ratios 1988Q1 1989Q3 1991Q1 1992Q3 1994Q1 1995Q3 1997Q1 1998Q3 2000Q1 2001Q3 2003Q1 2004Q3 2006Q1 2007Q3 2009Q1 2010Q3 2012Q1 2013Q3 2015Q1 2016Q3 Financial Business 45

46 Height of the Chairperson 46

47 Source: Business Insider 47

48 Regional Growth Real Output Growth last 20 Last Far West 2.9% 3.2% 3.1% Rocky Mt 2.8% 2.9% 3.1% Southwest 3.0% 2.7% 2.5% Southeast 1.9% 1.8% 2.0% Great Lakes 1.2% 1.5% 1.8% New England 1.8% 1.2% 1.6% Mideast 1.7% 1.2% 1.3% Plains 1.9% 1.5% 1.0% 48

49 Regional Trends Unemployment Rates Division 2017 (%) Ch 11 W N Central New England Mountain E N Central S Atlantic Mid Atlantic Pacific E S Central W S Central Total Payroll Employment (SA) Division 2016 % chg Mountain 10, Pacific 6, S Atlantic 27, W S Central 16, E S Central 8, E N Central 21, New England 7, W N Central 10, Mid Atlantic 19,

50 What Drives What? 8 Unemployment and Job Changes 7 Unemployment % -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 5 Year Job Growth 50

51 Population Shifts 0.8% 0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% -0.1% -0.2% -0.3% Net Migration (% of Pop) by region Northeast Region Midwest Region South Region West Region Net Migration by State Florida 1.51% Ohio -0.05% Nevada 1.27% Penn -0.06% Colorado 1.10% Wisconsin -0.08% Oregon 1.08% Michigan -0.08% South Carolina 1.04% New Jersey -0.14% Washington 0.99% Vermont -0.19% Arizona 0.96% W Virginia -0.26% Texas 0.90% New York -0.27% North Dakota 0.79% Mississippi -0.28% Idaho 0.77% Kansas -0.30% Delaware 0.66% Connec'cut -0.32% North Carolina 0.66% Wyoming -0.35% Montana 0.60% New Mexico -0.47% Georgia 0.54% Illinois -0.58% Tennessee 0.53% Alaska -0.73% 51

52 Source: Business Insider/Census Bureau 52

53 AZ Migration AZ-Net Migration 80 CO-Net Migration Thousands Thousands Under to to to to 65 Over Under to to to to 65 Over 65 53

54 Closer to home? 54

55 State Economic Performance Rk State # Ann Gr Share US 1 Nevada % 1.7% 2 Utah % 1.7% 3 Florida % 9.8% 4 Oregon % 2.0% 5 Idaho % 0.7% 6 Colorado % 2.6% 7 Washington % 3.3% 8 California % 16.3% 9 Georgia % 4.3% 10 South Carolina % 1.9% 11 Texas % 10.9% 12 Arizona % 2.2% 13 North Carolina % 3.5% 14 Tennessee % 2.3% 15 Massachusetts % 2.5% Real State Output Index 2005:Q1 2005:Q4 2006:Q3 2007:Q2 2008:Q1 2008:Q4 2009:Q3 2010:Q2 2011:Q1 2011:Q4 2012:Q3 2013:Q2 2014:Q1 2014:Q4 2015:Q3 2016:Q2 2017:Q1 2017:Q4 United States California 55

56 State Incomes California: Change in Employment by Income (F.T.) <35K 35-65K k 100K+ Distribution Household Incomes California Balance US Share Ch Share Ch < 25K 18.5% -3.3% 21.6% -3.1% 25-50K 19.4% -2.4% 22.9% -1.6% K 28.5% -0.5% 30.2% 0.2% K 15.7% 1.3% 13.8% 1.7% 150K-200K 7.9% 1.6% 5.6% 1.2% 200K+ 10.1% 3.3% 6.0% 1.6% 56

57 Myth Busting California's economy recently grew to become the world's fifth-largest economy if it were its own country. Sounds like great news, but that wealth mostly benefits the very rich in the tech sector. "Almost all the income growth and highend job growth took place in Silicon Valley, Joel Kotkin, professor of Urban Studies at Chapman University May 18, 2018 Share New FT Employees K 50-75K 75K-100K 100K+ State 318, , , ,322 Bay 4.4% 9.1% 24.1% 39.4% So Cal 43.1% 27.7% 29.5% 39.4% S Cen Val 19.6% 19.9% 8.8% 7.1% N Cen Val 16.1% 11.8% 12.1% 10.1% Cen Cst 5.3% 6.0% 5.1% 2.2% Other 11.4% 25.5% 20.3% 1.8% 57

58 The Big Slowdown YOY Growth Payrolls Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 US CA Stockton-Lodi MSA 239, % 3.4% 3.4% Fresno MSA 351, % 2.9% 2.9% IE MSA 1,479, % 3.9% 2.9% San Jose MSA 1,118, % 2.9% 2.6% Sacramento MSA 980, % 2.3% 2.0% San Diego MSA 1,470, % 2.5% 1.7% East Bay MD 1,180, % 3.2% 1.7% Ventura MSA 307, % 1.3% 1.6% San Francisco MD 1,130, % 2.8% 1.6% Santa Rosa MSA 208, % 2.5% 1.4% Bakersfield MSA 259, % 0.4% 1.4% 58

59 California Labor Markets 1.50% 1.00% 0.50% 0.00% -0.50% Net Migration as a % of Pop Unemployment Rate Jan-90 Aug-91 Mar-93 Oct-94 May-96 Dec-97 Jul-99 Feb-01 Sep-02 Apr-04 Nov-05 Jun-07 Jan-09 Aug-10 Mar-12 Oct-13 May-15 Dec-16 California Los Angeles (MD) Source: U.S. Census 59

60 New Housing Supply How Much Housing Needed? Housing Needed to maintain 2% State Job Growth Residential Permits (SAAR) Method 1 Total 722,022 Per Year 206,674 Current 111,185 Shor_all 100,489 Method 2 Total 911,001 Per Year 263,667 Current 111,185 Shor_all 157, Q1-95 Q2-96 Q3-97 Q4-98 Q1-00 Q2-01 Q3-02 Q4-03 Q1-05 Q2-06 Q3-07 Q4-08 Q1-10 Q2-11 Q3-12 Q4-13 Q1-15 Q2-16 Q3-17 SF MF 60

61 The Upside of Labor Shortages Numbe r (Mil) Median Income 2016 Chang e Unemp 2016 Chang e % Renters Spending >30% of Income on Housing Total , % 5.5% -3.0% No High School , % 8.2% -3.7% High School , % 7.0% -4.0% Some College , % 5.5% -3.4% Bachelor plus , % 3.6% -1.6%

62 The Big Picture Positives: It will be a good year GDP Growth Outlook for 2018: 3% State revenues will look positive Labor markets to remain tight Rising wages to put pressure on profits Exports, business investment continue to pick up Inflation to remain constrained Interest Rates Still Low Debt Levels still safe Negatives: Problems Growing Fed will continue to tighten, yield curve flattening Markets looking frothy Consumer savings: entering dangerous waters Federal deficit will widen sharply Political uncertainty to dominate headlines California housing shortages will constrain growth locally Critical Policy Issues Remain Undiscussed 62

63 The Great Disconnect What we are worried about The Number of Jobs Who pays for Healthcare Tax Levels Income Inequality Funded Govt. Liabilities Business Investment Inflation The Cost of CA Housing What we should be worried about The Number of Workers What are we paying for? Tax Structure Wealth Inequality Unfunded Govt. Liabilities A Lack of Public Investment Slowing Lending The Supply of CA Housing What we are worried about 63

64 What can Beacon do for you? Connect with us. To view again or download this presentation and for further information, go to: Continue the conversation. Contact Dr. Chris Thornberg directly at or Let s discuss your goals and needs. Beacon has 6 Practice Areas covering a range of services and products. Our 6 Practice Areas Housing, Land Use, & Real Estate Advisory Sustainable Growth and Development Economic & Revenue Forecasting Economic, Fiscal and Social Impact Analysis Regional and Sub- Regional Analysis Litigation and Testimony For more information, see Slide 2. 64

65 Portfolio Spotlight Regional and Sub- Regional Analysis Beacon conducts analysis at an international, national, state, county, and city level -- and even down to the zip code, pending data availability. We analyze data on Employment, Industry, Real Estate, and Consumption. Past Clients: City and County of Los Angeles City and County of Riverside East Bay Economic Dev. Agency Impact (Economic, Fiscal, Social) & EB5 Analysis Beacon has evaluated the impact of entities like universities, music festivals, infrastructure projects, and real estate development projects. Beacon has also conducted impact analyses that combine more than one of the above like that of L.A s Olympic bid. Past Clients: University of Southern California Metropolitan Water District LA 2024 Olympic Bid Committee Sustainable Growth & Development Beacon conducts industry and policy analysis on topics like green innovation, tech and workforce development, and industry sector strategies. Beacon has strong in-house expertise around housing policy and economic development support. Past Clients: California Apartment Association Long Beach Downtown Dev. Corp. Santa Cruz Workforce Dev. Board Housing, Land Use, & Real Estate Advisory Economic & revenue forecasting Litigation and testimony 65

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