Analysis. Answers Economic Forecast & Industry Outlook, 2017-18 Robert A. Kleinhenz, Ph.D. Economist & Executive Director of Research Beacon Economics, LLC CBO Symposium November 17, 2017 Beacon Economics, LLC
Outline U.S. Economy California Economy Regional Outlook Real Estate/Construction Conclusion/Looking Ahead
Heard in the Headlines US Labor Market Slowing Sign of Recession? California in a Housing Crisis Policy Debate du Jour in DC Health Care Tax Reform Immigration Policy Trade Policy
U.S. Economy
Vital Signs of the US Economy Labor Market Conditions Inflation Rate GDP Growth Rate
Full Employment, Slower Job Growth 18% 16% 14% 12% 10% 8% 6% 4% 2% Unemployment Rate 2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 Yr-To-Yr % Change in Jobs 2.1 1.9 1.7 1.5 0.6 U-3 U-6 0.4 2014 2015 2016 2017
Plenty of Job Openings, Not Enough Workers 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% JOLT Job Openings Rate Sector Level (000s) Change (%) Sep-16 Sep-17 Sep-16 Sep-17 Total 5,666 6,093 3.8 4.0 Professional 1,125 1,193 5.3 5.4 Health Care 978 1,074 4.9 5.2 Hospitality 724 757 4.4 4.6 Logistics 202 246 3.5 4.2 Financial activities 339 339 3.9 3.8 Retail trade 633 616 3.8 3.7 Wholesale trade 169 222 2.8 3.6 Mining 18 24 2.6 3.3 Manufacturing 326 425 2.6 3.3 Information 87 94 3 3.3 Construction 237 196 3.4 2.8 Education 108 98 2.9 2.6 Government 533 530 2.3 2.3
Labor Force Growth Constrained 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% Labor Force Growth 67% 66% 65% 64% 63% 62% 61% 60% LF Participation Rate
Inflation Historically Low But Rising 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5 Kyser Center for Economic Research
Two Views of GDP 4 3 2 1 0-1 -2-3 Gross Domestic Product YTY % Change Contributions to Change in GDP Sector 2015 2016 2017* Consumer 2.5 1.9 1.9 Investment 0.9-0.3 0.5 Net exports -0.7-0.2-0.2 Government 0.2 0.1 0.0 Total GDP % Chg. 2.9 1.5 2.2 *2017 YTD: Q1-17 through Q3-17
Macro-Economy at a Glance Sector CONSUMERS BUS. INVESTMENT GOVERNMENT NET TRADE Outlook Steady solid growth Acceleration, energy drag over Flat Imports & Exports up, Imports larger SUMMARY Domestic Spending Up
Consumer Spending: Flywheel of Economy 6% 4% 2% 0% -2% -4% -6% -8% Real Consumer Spending by Type (Y-o-Y Growth to September) 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% Consumer Savings Rate Services Goods
Business Spending Up 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% 2014 2015 2016 2017 Fixed Investment Structures Equipment Intellectual Property
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f 2026f 2027f Budget Deficit as % of GDP 26% 24% 22% 20% 18% 16% 14% 12% Receipts Outlays 10%
International Trade $ Millions (Yr.=2009) 3,010 Ex-Goods Ex-Svcs Im-All Deficit 2,510-608 2,010 1,510 1,010 510-713 -395 10 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Economic Policy
Fiscal Policy Trump Administration/Republican Leadership Tax Cuts Investment in Infrastructure Challenging the Status Quo in Trade Immigration Reform Repealing ACA (Obamacare) MAKING CHANGE HAPPEN NOT AS EASY AS EXPECTED!
Monetary Policy Rock-bottom federal funds rate 2008-2016 Adjusting to labor market, inflation, GDP Market rates less tied to FFR than before Yield curve dynamics FFR increases push up short end Balance sheet activities Markets keep long end low
Financial Markets 24,000 20,000 DJIA, SA 8% 7% Fed Funds Rate 30 Year Mort 10 Year Yield 16,000 12,000 6% 5% 4% 8,000 4,000 3% 2% 1% 0 0%
U.S. Outlook Continued US Growth in 2018: 2%+ Domestic Spending Intact Oil Prices: Steady Inflation: Low, But Rising Financial Markets: Rates Up, Equities Frothy Policy Uncertainty
California Economy
CA: Fact vs. Fiction CLAIMS Business Climate: POOR Regulatory Burden: BAD Taxes: HIGH REALITY? You decide...
CA & US at Full Employment 16% 14% 12% 10% 8% 6% 4% 2% 0% Unemployment Rate, Seasonally Adjusted CA: 5.1% US: 4.1%
2017 Job Growth Slower than Past Years 4% YTY % change in nonfarm jobs, seasonally adjusted US: +1.2% CA: +1.7% 2% 0% -2% -4% -6% -8%
Gross State Product: YTY % Changes CA Among Fastest Growing States
The Big Slowdown 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% State and National Job Growth California United States Region Jul-17 15-16 16-17 Inland Empire 1,440,600 3.3% 2.9% Fresno 342,100 3.1% 2.4% San Francisco 1,118,800 4.1% 2.4% East Bay 1,159,100 3.2% 2.2% Sacramento 968,200 3.5% 1.8% San Diego 1,442,900 2.6% 1.8% San Jose 1,092,700 3.3% 1.8% Los Angeles 4,448,400 2.7% 1.5% Kern 257,400-1.9% 0.7% Orange 1,592,700 2.3% 0.8%
Millions California Taxable Sales (+4.1% YTY in Q2-17) $180 $160 $140 $120 $100 $80 $60 $40 $20 $0
CA State Budget-LAO Nov 17 LAO Revenue Estimates (November 2017) Dollars in Millions 2016-17 2017-18 2018-19 Personal Income Tax $ 83,012 $ 90,912 $ 95,800 Sales and Use Tax $ 24,869 $ 25,285 $ 26,214 Corporation Tax $ 10,002 $ 10,620 $ 10,965 Total $ 117,883 $ 126,817 $ 132,979 Percentage Change 2016-17 2017-18 2018-19 Personal Income Tax 5.3% 9.5% 5.4% Sales and Use Tax -0.1% 1.7% 3.7% Corporation Tax -4.7% 6.2% 3.2% Total 3.2% 7.6% 4.9%
Revenue Growth Through 2022 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% % Change General Fund 6.7% 6.7% 4.7% 4.5% 5.0% 2017-18 2018-19 2019-20 2020-21 2021-22
CA Economic Picture CA outpacing US/many states in economic and job growth Now at full-employment, job gains harder to get Housing Affordability is a near term problem and Constraint on Economy in long run Fed/State policies: can be game changers
Regional Economic Performance
So Cal Metro Areas Vary in % Job Gains Oxnard-Thousand Oaks-Ventura MSA Riverside-San Bernardino-Ontario MSA Bakersfield MSA Fresno MSA San Francisco MD San Jose-Sunnyvale-Santa Clara MSA Stockton-Lodi MSA Sacramento--Roseville-Arden-Arcade San Diego-Carlsbad MSA Oakland-Hayward-Berkeley MD Los Angeles-Long Beach-Glendale MD Santa Rosa MSA Anaheim-Santa Ana-Irvine Metro Div Year-to-Year % Change (Sept-17) 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%
LA, IE, and SD have Largest Absolute Gains MSA YTY Change Jobs (Seasonally Adjusted) Los Angeles-Long Beach-Glendale MD 49,600 Riverside-San Bernardino-Ontario MSA 38,700 San Diego-Carlsbad MSA 18,300 San Francisco MD 15,600 San Jose-Sunnyvale-Santa Clara MSA 14,700 Oakland-Hayward-Berkeley MD 13,900 Sacramento--Roseville--Arden-Arcade MSA 12,500 Oxnard-Thousand Oaks-Ventura MSA 9,200 Bakersfield MSA 6,200 Fresno MSA 5,200
Prof, Sci, Tech Employment 1,300 1,250 1,200 1,150 1,100 1,050 1,000 950 900 Prof, Sci, Tech Employment in CA (Thousands)
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 San Pedro Ports to See Record Year Aug 17 YTD % Total: +7.9% Inbound Loaded: +8.7% Outbound Loaded: +2.2% 11.8 13.1 14.2 15.8 15.7 14.3 11.8 14.1 14.0 14.1 14.6 15.2 15.4 15.6
Transportation/Warehouse Employment 550 530 510 490 470 450 430 410 390 370 350 Transportation/Warehouse Employment in CA (Thousands)
Wholesale Trade Employment 760 740 720 700 680 660 640 620 600 580 Wholesale Trade Employment in CA (Thousands)
Manufacturing Employment 1,500 1,450 1,400 1,350 1,300 1,250 1,200 1,150 1,100 Manufacturing Employment in CA (Thousands)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 and Manufacturing Output Rising 160 140 Value of Production (2009=100) IE LA/OC US 120 100 80 60 40 Source: U.S. BEA
Financial Activities Employment 880 860 840 820 800 780 760 740 720 700 Financial Activities Employment in CA (Thousands)
Retail Trade Employment 1,750 Retail Trade Employment in CA (Thousands) 1,700 1,650 1,600 1,550 1,500 1,450 1,400
Leisure & Hospitality Employment 1,900 1,700 1,500 1,300 1,100 900 700 500 L & H Employment in CA (Thousands)
Healthcare & Social Services Employment 2,300 2,200 2,100 2,000 1,900 1,800 1,700 1,600 1,500 Healthcare & Social Services Employment in CA (Thousands)
000s Billions California Agriculture 440 420 400 380 360 340 320 CA Farm Employment $5.0 $4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 CA Agricultural Exports Source: CA EDD Source: WiserTrade
Residential R.E./Construction
Units Sold Median Home Price California Sales and Prices 120,000 100,000 Existing Single Family Residences $600,000 $500,000 80,000 60,000 40,000 20,000 0 $400,000 $300,000 $200,000 $100,000 $0 Sales Median Price
Units Sold Median Price Condo Activity 25,000 20,000 Existing Condo $500,000 $400,000 15,000 10,000 5,000 0 $300,000 $200,000 $100,000 $0 Sales Median Price
California Housing by Metro County/Region/Sector Sep-17 Aug-17 Sep-17 Price Change Sales Change MTM % YTY % MTM % YTY % CA SFH (SAAR) $555,410 $565,330 $516,450-1.8% 7.5% 2.2% 1.7% CA Condo/Townhomes $450,400 $446,760 $415,540 0.8% 8.4% -13.4% -4.2% Los Angeles Metropolitan Area $504,990 $499,970 $463,600 1.0% 8.9% -8.8% -2.5% Inland Empire $343,260 $341,340 $319,380 0.6% 7.5% -13.0% -4.0% S.F. Bay Area $852,230 $856,200 $762,810-0.5% 11.7% -14.2% -4.2% San Diego $605,000 $605,000 $569,000 0.0% 6.3% -16.7% -4.3% Sacramento $347,750 $348,000 $317,500-0.1% 9.5% -10.3% -7.0%
Housing Affordability: % of HHs Affording Median Priced Home State/Region/County Q3-2017 Q3-2016 CA SFH 28% 31% CA Condo/Townhomes 38% 40% Inland Empire 43% 47% Los Angeles Metropolitan Area 30% 34% S.F. Bay Area 23% 27% Sacramento 43% 46% San Diego 26% 28% US 55% 57%
Apartment Rents $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 Metro Rents County Wages Rents Share Ventura $57,789 $1,700 35% Los Angeles $63,236 $1,830 35% Santa Barbara $52,911 $1,526 35% Orange $63,849 $1,827 34% Riverside $45,219 $1,293 34% San Bernardino $45,762 $1,293 34% Inland Empire Los Angeles MD Orange County MD San Diego San Diego $60,887 $1,696 33% San Luis Obispo $44,816 $1,147 31%
State Housing Construction 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Permitted Units Single Family Multi Family New Pop / Permits California 4.1 Tulare 4.0 Ventura 6.8 Los Angeles 4.0 Contra Costa 6.6 Fresno 4.0 Sonoma 6.1 San Mateo 3.4 Alameda 5.9 Kern 3.0 Santa Barbara 5.3 Santa Clara 3.0 San Bernardino 5.0 Orange 2.8 Solano 4.6 Placer 2.1 Riverside 4.5 San Francisco 2.1 San Diego 4.2 Sacramento 0.7
Housing in CA: New NOT Normal Signs of stress: Homeownership rate at lowest in decades Escalating rents Insufficient building despite growing demand How to Address Chronic Housing Problems Less about making housing affordable to households Really about supply: Construction Aligning construction with actual needs
The Future of Our State Country Club California?
Nonresidential R.E./Construction
Non-Residential Real Estate Vacancy Rate (%) by Metro Area in California Office Retail Location Q3-16 Q3-17 Q3-16 Q3-17 Los Angeles (MD) 13.5% 14.0% 6.3% 6.0% Orange County (MD) 16.1% 16.0% 5.4% 5.3% Sacramento 18.6% 18.1% 10.4% 10.5% San Diego 14.9% 15.0% 6.6% 6.2% San Francisco (MD) 9.5% 9.8% 3.3% 3.0% San Jose 17.1% 17.4% 5.6% 5.3%
Nonresidential Construction by Type in California Valuation Indexed: 2000.Q1 = 100 400 350 300 250 200 150 100 50 0 Garage Hotel Indust Office Other Retail
Conclusion
Conclusion/Outlook US & CA growth steady, full-employment, job growth harder to achieve Leading industries: health care, construction, leisure and hospitality, trans/whsg Real Estate: Housing shortage not just affordable housing MORE SUPPLY needed NO Recession without a significant, persistent shock
Thousands And Long Run...Less Migration, More Homegrown Workers 800 700 600 500 400 300 200 100 0-100 -200 CA Population Changes Natural Increase Domestic Migration International Immigration
Thank You! Our Services Economic & Revenue Forecasting To view or download this presentation or for further information, visit: www.beaconecon.com Contact Robert Kleinhenz Robert@BeaconEcon.com 310-571-3399 Regional Intelligence Reports Business & Market Analysis Real Estate Market Analysis Ports & Infrastructure Analysis Economic Impact Analysis Public Policy Analysis