The Mid-Year Economic Forecast. June 20, 2018

Transcription

1 The Mid-Year Economic Forecast June 20, 2018

2 Agenda National Economy: On a Solid Footing Construction & Housing: Still Strong Risks: What Could Go Wrong? 2

3 National Economy On a Solid Footing 3

4 GDP Grew by 2.3% in 2017, Slowed in Q1 The economy grew by 2.3% in 2017, after a weak first quarter. Growth slowed in Q1 to 2.2% after averaging 3.0% over the final three quarters last year on weaker consumer spending. Since the 1990s, Q1 growth has lagged the subsequent three quarters by an average of about 1.2%. For 2018, growth is forecast to be closer to Percent (%) CONTRIBUTIONS TO PERCENT CHANGE IN REA L GDP Personal consumption expenditures Net exports Gross domestic product Gross private domestic investment Government spending 3.0% *Q Q are YoY GDP estimates per Bloomberg Source: PMFA, Bloomberg, Bureau of Economic Analysis (BEA) 4

5 The Current Expansion: Long, but Slow Since the current expansion started in 2009, the economy has grown by about 21% - well below the post-wwii average of 27% before slipping into recession. The current expansion is now the second longest over that period, but growth remains tepid in comparison with an average 46% advance in the other two of comparable duration. Percent (%) 60% 50% 40% 30% 20% 10% 0% CURRENT ECONOM IC EXPANSION REM AINS SUBPAR Number of Quarters 4Q'49 2Q'54 2Q'58 1Q'61 4Q'70 2Q'75 4Q'82 2Q'91 4Q'01 3Q'09 Time periods illustrated commence with the trough of the business cycle. Source: PMFA, BEA 5

6 Unemployment Fell in May to 18-Year Low Job creation surged in May (223,000 new jobs) with upward revisions to prior months tacking on an additional 15,000. That easily exceeded consensus expectations (190,000). On the back of continued strong job creation and exceptionally low layoffs, the unemployment rate fell to 3.8% - its lowest point in over 18 years. Nonfarm Payrolls (thousands) NONFARM PAYROLLS & UNEMPLOYMENT RA TE MONTHLY Nonfarm Payrolls Unemployment Rate Unemployment Expectations Unemployment Rate (%) Unemployment expectations per Bloomberg s median economist estimate Source: PMFA, Bloomberg, Bureau of Labor Statistics (BLS) 6

7 Consumer Confidence Increased in May Consumer confidence has edged higher this year, bolstered by a strong labor market, rising home prices, and the near-term positive effects of tax cuts boosting worker paychecks. Consumers have been quite optimistic in their views on the economy, although consumer spending growth has stalled in the past year. Consumer Confidence CONSUM ER CONFIDENCE& PERSONAL CONSUMPTION Personal Consumption YOY % Change The Conference Board Consumer Confidence Personal Consumption Source: PMFA, BEA, The Conference Board 7

8 Is the Tighter Labor Market a Risk to the Business Outlook? NFIB Small Business Optimism Index has held near its alltime high for 17 consecutive months, while initial jobless claims were at the lowest point in fifty years in mid-april. Employers are not cutting staff, and it s becoming increasingly difficult to find qualified candidates for openings. Thousands BUSINESS OPTIM ISM KEEPS LAYOFFS NEAR M ULTI-DECADE LOW S Recessionary Period U.S. Initial Jobless Claims (LHS) Index Points NFIB Small Business Optimism Index (RHS) Source: PMFA, U.S Employment and Training Administration, National Federation of Independent Business (NFIB) 8

9 Could Increasing Labor Costs be a Catalyst for Rising Inflation? The employment cost index has been creeping upward, but inflation expectations remain well anchored. A persistent tightening in labor market conditions and a acceleration in wage growth would heighten inflation risk and could spur the Fed to take a more aggressive stance in tightening policy. Percent (%) STRONGER WAGE GROW TH PRESENTS A REFLATIONARY RISK Recessionary Period Core PCE (YoY) Employment Cost Index (YoY) Source: PMFA, BEA, BLS 9

10 Headline Inflation Edging Higher Headline inflation has been edging steadily higher since Rising input costs (labor, materials, etc.) are feeding through to higher consumer prices not surprising as the expansion enters its tenth year. Percent (%) INFLATION INDICES - 12-MONTH % CHANGE CPI PPI PCE Source: PMFA, BLS, BEA 10

11 Core Inflation is Expected to Rise Gradually Towards Target Core PCE has picked up in recent months, approaching the Fed target of 2.0%. The Fed recently raised its 2018 inflation forecast to 2.0% and 2.1% for The capital markets are forecasting a similar path. By any number of measures, inflation is on the rise. Percent (%) FED TARGET INFLATION - CORE PCE % CHANGE 3.0 YOY PCE Deflator - Core YOY Annual Fed Estimates Fed Target Inflation Inflation Expectations (As of June 2018 Survey) Source: PMFA, Bureau of Labor Statistics (BLS), Federal * Forward looking Fed estimates are based on an median of Reserve the range of estimates as stated in the June 2018 Fed meeting minutes. 11

12 The Fed Raises and Signals Two More Hikes in 2018 The Fed raised its target short-term rate to a % range last week, while bumping expectations for 2018 up to four hikes (1.0%). Gradual tightening is expected through 2020, which is becoming a key focal point in economic forecasts. Fed Funds Rate (%) MARKET EXPECTATIONS BELOW FED PROJECTIONS Longer 2021 Run Fed Lower/ Upper Range Fed Funds Rate Median Fed Pr ojection Mar ket Implied Source: PMFA, Fed, Bloomberg 12

13 Does the Flattening Yield Curve Signal a Recession? As was the case in the 1990s, the yield curve could remain relatively flat for years without inverting, allowing room for the economy to continue to grow. It is the inversion of the yield curve when short-term rates exceed longterm rates that has typically presaged a decline in stock prices and a recession on the horizon. Percent (%) (%) YIELD CURVE NOT INVERTED YIELD CURVE NOT INVERTED Recessionary Periods 2-10 Treasury Spread Start of Inversion Recessionary Periods 2-10 Treasury Spread Start of Inversion Source: PMFA, Federal Reserve Economic Data (FRED) 13

14 Construction & Housing Still Strong 14

15 U.S. Home Prices, Housing Starts Still Rising Since bottoming in 2012, home prices have been increasing gradually as buyers continue to pay up in a tight housing market. Prices have surpassed their pre-crisis levels, and continue to rise. Housing starts have been on a moderate uptrend in recent years, but pent-up demand still exists. Index (Jan = 100) HOME PRICES AND HOUSING STARTS S&P/Case-Shiller Home Price Index SA U.S. Housing Starts SA Source: PMFA, U.S. Census Bureau, S&P/Case-Shiller Housing Starts (Thousands) 15

16 Home Sales are up, But the Mix is Changing New home sales have increased for six consecutive years, but total home sales are still more than 50% below their 2005 peak. Sales of small homes (under 1,400 square feet) has fallen over 80% since 2003 (21k vs. 118k). High end homes (4,000 square feet or more) are about one-third below their peak (55k vs. 85k). Number of Houses Sold (Thousands) NEW SINGLE-FA M ILY HOUSES SOLD BY SQUA RE 1,400 FEET 1,200 1, Under 1,400 1,400 to 1,799 1,800 to 2,399 2,400 to 2,999 3,000 to 3,999 4,000 or more Source: PMFA, U.S. Census Bureau 16

17 The Bigger the Better? Houses under 1,800 square feet now comprise less than 20% of all new home sales, compared with 36% in At the other end of the scale, sales of larger homes (greater than 3,000 square feet) have nearly doubled from 16% to 30% over that same period. Percentage of Houses Sold (%) NEW SINGLE-FA M ILY HOUSES SOLD BY SQUA RE FEET 100% 80% 60% 40% 20% 0% Under 1,800 1,800 to 2,999 3,000 or more Source: PMFA, U.S. Census Bureau 17

18 Stronger Single Family Housing Starts Expected to Drive Growth Single-family housing starts are forecast to increase by around 5% in 2019 and Multi-family starts are projected to decrease slightly, although the combined total is still projected to rise over the next few years. Housing Starts (Thousands) 1,600 1,400 1,200 1, HOUSING STARTS FORECAST Total Housing Starts Single-Family Multi-Family Source: National Association of Home Builders 18

19 Growth is Expected in Both Residential and Nonresidential Construction Forecasts for residential construction call for solid growth nationally in the coming years, outpacing projected increases in nonresidential construction. Source: U.S. Census, Fails Management Institute (FMI) Forecast 19

20 Commercial Construction Forecasts Look Bright Forecast Nationally, commercial construction growth is also expected to be robust through at least Forecasts for 2018 and 2019 call for broad gains across all commercial construction sectors, with private sector growth most notably office and retail construction leading the way in % Change Nonresidential Total Commercial Total Office Retail & Other Commercial Hotel Industrial Total Institutional Total Health 4 4 Education Religious Public Safety Amusement & Recreation Source: PMFA, American Institute of Architects 20

21 Risks Q1 soft patch wasn t explainable by the Q1 anomaly Economy can t handle Fed rate hikes Slowdown abroad weighs on U.S. economy Domestic political and policy tensions kill confidence Geopolitical risks flare up tariffs? The economy surprises everyone and stalls 21

22 Conclusions Don t sweat the soft patch.it wasn t even all that soft! The overall economy appears to be doing quite well, with consumers no longer having to exclusively shoulder the load. Expect strong labor market conditions and rising inflation to keep the Fed on the path to raising interest rates. The outlook for housing (and construction broadly) still looks positive, although it s possible that the pace of growth may be rolling over in some sub-sectors. Wild cards always exist. This expansion is long, but appears to still have the potential to run potentially becoming the longest in the Post-World War II era. 22

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