THE ECONOMY IN 2019: TERRIFIC, TURBULENT OR TEPID? Presented by: Elliot F. Eisenberg, Ph.D. President: GraphsandLaughs, LLC November 15, 2018 Golden Valley, MN
The Economy is Solid! GDP = C+I+G+(X-M)
The Stock Market Is (or Was) Doing Well Despite numerous stressors it holds up
Households Are Re-leveraging Mortgage debt remains slightly below the 2008 peak. Total debt is 5% higher
Conference Board Consumer Confidence is High At the best level since December 2000!
Republicans are Much Happier than Democrats The political gap is very large
Small Business Confidence is Super Strong Spectacular rise since election. Near 9/18 all-time high of 108.8!
Hotel Occupancy Rates are Excellent! Occupancy is superb as is the ADR and the RevPAR
Las Vegas Attendance Is good The gamblers are generally back along with the conventioneers
Cruise-Passenger Growth is Rising Globally
Boat Purchases are Up Nicely Near cyclical highs of the last two recessions
Let s Buy an RV! Sales are now higher than ever
US Light Vehicle Sales are Solid But, no records will be set
Housing Improvements & Repairs Keep Rising Homes are aging, rates are low, home equity is good, and a lack of inventory
Single-Family and Multifamily Starts A Slow Recovery Lack of lots, rising rates, high prices, SF remains near recessionary lows
Let s Buy a Horse
Annual Y-o-Y Percent Change in PCE A solid growth rate of 2.75%
Drilling Activity is High But Flat Rising prices should help but are a lack of pipelines hurting investment?
Corporate Profits are Way Up At an all-time record
ISM Manufacturing Numbers are Strong Manufacturing is less important than in decades past. Has it peaked?
ISM Non-Manufacturing Numbers are Very Good Service sector is doing remarkably well
Look at Capital Goods Orders! Very Strong Growth Minus defense and aircraft
Tax Cuts Are Going to Supercharge the Economy But, only in the short run
Deficit Will Explode And then continue deteriorating
$50 Billion in Trade Tariffs Will Hurt GDP Mildly The impact will rise over time, but is not huge
$250 Billion Trade War Hurts GDP The impact will rise over time, and is now quite small
The Dollar Is Surprisingly Strong At highest level since in January 2017. This is a big surprise! Strong Stronger Weak
GDP Growth Will Slow Impact of Trump tax cuts and spending increases will fade through 2019
GDP Can t Grow Fast! Very weak population growth and labor productivity growth
Best of All, No Recession Any Time Soon! Yield Curve Inversion Test: 1-Year Treasury Yield 10-Year Treasury Yield
Labor Markets: They re Tight, Very Tight
Historical Job Growth Y-o-Y Total employment growth is spectacular. But, we will run out of workers
STEADY Labor Market Improvement: Involuntary Separation Long Term Trends: 1967-2017 Initial claims below 300K for 190straight weeks!
Tighter Labor Market than Perceived? For Sure! There are 1.22 jobs per unemployed person!
Quits, No matter How Measured Are Superb Are above their pre-recession level. At 2.4% (in blue) or 3.6 million (in red)
Labor Quality is Biggest Problem Increasingly hard to find good candidates
Wage Growth is Weak, But...
Y-o-Y Percent Change in Hourly Earnings Despite a very low unemployment rate, wages are only now meaningfully rising
Changes in Median Wage Growth Looks OK! Looks only at those continuously full-time employed
Changes in Median Wage Growth Looks Good! of those continuously full-time employed
Labor Productivity Growth Remains Dismal Barely any improvement since mid-2010
Less Unionized Labor Reduces Bargaining Power The number of strikes is way down
Rise in the Gig Economy These workers have less bargaining power, and thus wage growth is slower.
Business Formation is Very Tepid New firms are not appearing as much as they should
As a Nation Ages Inflation Weakens Japan is the nation with the oldest population
Inflation? It s Coming
CPI: Inflationary Pressures are Rising Modestly Pressures are very slowly building
Core PCE Price Index Surprisingly late in the business cycle, but inflation is here!
Gap Between Potential GDP and Real GDP is Gone! Nice news, but note that the blue line fell! Now inflation may rise!
Federal Reserve Behavior Rates Will Rise. But, How Fast?
Taller Fed Chair, Higher Rates?
Federal Reserve Behavior Most optimistic scenario Fed funds is currently 2.125% 12/31/18: 2.375% 10-yr Treasury @ 3.25% 12/31/19: 3.125% 10-yr Treasury @ 3.65% 12/31/20: 2.875% 10-yr Treasury @ 3.45% Balance sheet keeps shrinking.
Real Estate? It s Improving but In Fits and Starts!
Architectural Billing Index is Solid Is a 9 to 12 month leading indicator of CRE. It is generally holding above 50.
Non-Residential Real Estate is Fine This measures nonresidential building projects in the planning phase and is generally a 12 month leading economic indicator
Construction Confidence is Clearly Positive But, slightly less optimistic
National Backlog Index is Rising Construction activity under contract but not yet completed
Nonresidential Construction Activity is Solid FMI s NRCI is a 6 month leading economic indicator. Surveys non-res, non-civil const activity.
Commercial Construction Index Looks Fine USG + Chamber quarterly index of contractor sentiment
Chemical Production & Activity is OK The CAB is a good leading economic Indicator (8 months at peaks, 4 months at troughs)
Residential Fixed Investment Stalls Non-residential is up 12%, public is down 5% and residential is down 18% from peak
Construction Activity is Solid but Flat Non-Residential, Residential, Non-Building
Construction Costs are Rising Engineering and Construction Cost Index for large projects. 50 is neutral. Leading indicator for wage and material inflation specific to construction & engineering. The Headline Cost Index has been above 50 for 23straight months!
Private Construction Activity is Generally OK Education, office and lodging spending is up
Healthcare Construction Has Been Rising Public healthcare construction peaked out in 2012. It is flat of late
These Construction Groups Vary Communication, amusement & recreation spending flattens out
Mall Vacancy Rates are High and Rising Malls need electronics, Tesla showrooms, restaurants, etc Not big box stores. Malls are attracting gyms and grocery stores. Big changes are afoot
Office Vacancy Rates Continue Rising Albeit Slowly Little to no spec building due to the high stable vacancy rate. Somewhat stagnant.
E-Commerce is Getting Large E-commerce is now 13% of all retail sales. Think warehouses!!!!
E-Commerce Needs Warehouses Because E-commerce sales are up 15% annually.
Apartment Vacancy Rates Rental vacancy rates have stopped falling, at least for now
Number of Multifamily Units Under Construction It is finally starting to decline
Apartment Vacancy Rates The multifamily party is winding down. S > D. Rent growth should continue slowing. 12 quarters in a row below 50
Commercial Real Estate is Fine
What About Things Here?
Population Growth by State 1950 to Present The west grows fastest!
Agriculture Prices are in a Real Bear Market 2018 farm income will be lousy. NAFTA and trade fears make it worse
US Farm Income is Very Weak At its lowest level since 2009
Corn Prices are in a Long Bear Market Corn prices have flat-lined at a level first reached in a decade ago.
Hog Prices are Weak At prices first seen in 2002
Milk Prices are Very Weak of Late This is at ten year lows
Cattle Prices are Down Cattle prices are weak
Pot Prices Keep Falling Canadian production should push it lower
Things Are Good Everywhere
The Future Looks Good Too!
The Minneapolis-St Paul MSA Economy It is in excellent shape!
State of Minnesota Real GDP Minnesota has raised its game since the Great Recession
Unemployment Rates in Minnesota MSAs All are below 3%! That is nuts. Rates are lower than in housing boom, about as good as in 1999
Non-Farm Payroll Growth Around Minnesota Until recently all were doing well. Since 2018, Rochester has struggled
Labor Force Growth Rates Around Minnesota All are now below 1% growth with Rochester s rate shrinking
Per Capita Personal Income in Minnesota MSAs St. Cloud and Rochester are catching up to MSP in percentage terms
ANY QUESTIONS? Elliot F. Eisenberg, Ph.D. Cell: 202.306.2731 elliot@graphsandlaughs.net www.econ70.com Do you want to get my daily 70 word economics email? Please give me your business card or text bowtie to 22828 ThankYOUallveryverymuch! @ECON70