The Economic Outlook Will the real economy please stand up? March 2019 Christopher Thornberg, PhD Founding Partner, Beacon Economics Director, UCR SoBA Center for Economic Forecasting and Development Beacon Economics beaconecon.com
A Market Tantrum Beacon Economics
Real Estate Uncertainties Beacon Economics
A look back NBER says U.S. recession began December 2007 Mon Dec 1, 12:20 pm ET WASHINGTON (Reuters) The U.S. economy slipped into recession in December 2007, the National Bureau of Economic Research's business cycle dating committee announced on Monday. Beacon Economics
Current Headlines Miserabilism Beacon Economics 5
Will the Real Economy Please Stand Up? Why so glum? 2018 Growth: 3.2% with.75% fiscal stimulus after-burner Labor markets, consumer spending, business investment, wages, exports, energy, debt levels still all on steady sustainable paths Interest rates still low, inflation still constrained 2019: back to a steady pace of 2 to 2.5% growth Still a low chance of recession in next 24 months 2018 2019 2020 2021 2022 2023 WSJ Next Recession Poll 0.0% 20.0% 40.0% 60.0% It isn t the when, it s the why Beacon Economics 6
Will the Real Economy Please Stand Up? Brakes and Imbalances Labor shortages impacting employers Local Housing Shortages Recent market volatility / rising long term rates An overly aggressive Fed, flat yield curve Sharp growth in government deficits The federal government shutdown Global trade / security worries Political Dysfunction Little effort to deal with underinvestment in infrastructure, rising wealth inequality, healthcare cost inflation, pension and entitlement issues, etc etc etc The great disconnect between economic realities and political discourse Beacon Economics 7
2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 2017Q1 2018Q1 GDP: 2018 2.9% Year over Year 4 3 2 1 0-1 -2-3 -4 Real GDP Growth (yoy) 2016 2017 2018 GDP Growth 1.6 2.2 2.9 Consumption 1.85 1.73 1.81 Goods 0.77 0.78 0.80 Services 1.08 0.95 1.01 Fixed investment 0.29 0.81 0.91 Structures -0.16 0.13 0.15 Equipment -0.09 0.35 0.44 IPP 0.31 0.20 0.33 Residential 0.23 0.13-0.01 Inventories -0.53 0.00 0.12 Trade -0.3-0.31-0.22 Exports -0.01 0.36 0.47 Imports -0.28-0.67-0.69 Government 0.25-0.01 0.26 Federal 0.03 0.05 0.17 State and local 0.22-0.06 0.09 Beacon Economics
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 Jan-96 Jul-97 Jan-99 Jul-00 Jan-02 Jul-03 Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12 Jan-14 Jul-15 Jan-17 Jul-18 % Growth Rate Consumer Spending 6.0 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0 Real Consumer Spending Growth (Y-o-Y) 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Personal Savings Rate Source: FRED Beacon Economics 9
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:Q1 1980-01-01 1981-12-01 1983-11-01 1985-10-01 1987-09-01 1989-08-01 1991-07-01 1993-06-01 1995-05-01 1997-04-01 1999-03-01 2001-02-01 2003-01-01 2004-12-01 2006-11-01 2008-10-01 2010-09-01 2012-08-01 2014-07-01 2016-06-01 Consumer Debt Loads 1.20 1.15 1.10 1.05 1.00 0.95 Household Debt / DPI Ratio 14.0 13.0 12.0 11.0 10.0 Financial Obligations Ratio 0.90 0.85 0.80 0.75 9.0 8.0 7.0 0.70 Beacon Economics 10
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:Q1 Jan-95 Aug-96 Mar-98 Oct-99 May-01 Dec-02 Jul-04 Feb-06 Sep-07 Apr-09 Nov-10 Jun-12 Jan-14 Aug-15 Mar-17 Oct-18 An Auto Problem? 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Consumer Debt Delinquencies (90 day +) 19.0 17.0 15.0 13.0 11.0 9.0 7.0 Auto / Light Truck Sales AUTO CC Beacon Economics 11
1995-01-01 1996-04-01 1997-07-01 1998-10-01 2000-01-01 2001-04-01 2002-07-01 2003-10-01 2005-01-01 2006-04-01 2007-07-01 2008-10-01 2010-01-01 2011-04-01 2012-07-01 2013-10-01 2015-01-01 2016-04-01 2017-07-01 2018-10-01 Industrial Production 10.0 8.0 6.0 4.0 2.0 0.0-2.0-4.0-6.0-8.0-10.0 Industrial Production YoY Growth Total index 3.8 Major market groups Final Products 1.6 Consumer goods 0 Business equipment 3.8 Nonindustrial supplies 1.9 Construction 5.3 Materials 6.3 Major industry groups Manufacturing 2.9 Mining 15.3 Utilities -5.6 Source: Board of Governors Fed Reserve, BEA Beacon Economics 12
Source: US EIA Beacon Economics 13 2019-01-28 2018-01-28 2017-01-28 0.00 2016-01-28 0 2015-01-28 20.00 2014-01-28 2000 2013-01-28 4000 2012-01-28 6000 2011-01-28 8000 2010-01-28 10000 2009-01-28 140.00 2008-01-28 US Crude Oil Production (TB/D) 2007-01-28 12000 2006-01-28 160.00 2005-01-28 14000 2004-01-28 1983-01-07 1985-01-07 1987-01-07 1989-01-07 1991-01-07 1993-01-07 1995-01-07 1997-01-07 1999-01-07 2001-01-07 2003-01-07 2005-01-07 2007-01-07 2009-01-07 2011-01-07 2013-01-07 2015-01-07 2017-01-07 2019-01-07 Oil Production / Prices WTI Oil Prices ($/B) 120.00 100.00 80.00 60.00 40.00
2002-01-01 2003-01-01 2004-01-01 2005-01-01 2006-01-01 2007-01-01 2008-01-01 2009-01-01 2010-01-01 2011-01-01 2012-01-01 2013-01-01 2014-01-01 2015-01-01 2016-01-01 2017-01-01 2018-01-01 Exports 2000 1800 1600 1400 1200 1000 800 600 400 Exports of goods, Real Country Exports Gr 17-18 Imports Gr 17-18 Total 1529.7 8.5% 2335.8 9.0% China 111.2-4.7% 493.5 7.0% Canada 276.4 6.6% 294.7 7.4% Mexico 245.6 10.0% 319.4 10.5% Japan 68.2 11.3% 130.2 4.5% Germany 53.3 9.7% 115.6 8.0% Korea, South 50.7 15.8% 67.8 3.7% United Kingdom 60.7 17.9% 55.5 14.7% France 33.4 8.1% 48.1 8.3% India 29.8 27.9% 50.5 12.2% Italy 21.3 27.5% 49.8 11.2% Taiwan 27.2 16.2% 41.6 6.7% Netherlands 45.2 17.1% 22.1 39.0% Source: Board of Governors Fed Reserve, BEA Beacon Economics 14
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 1995Q1 1996Q2 1997Q3 1998Q4 2000Q1 2001Q2 2002Q3 2003Q4 2005Q1 2006Q2 2007Q3 2008Q4 2010Q1 2011Q2 2012Q3 2013Q4 2015Q1 2016Q2 2017Q3 Twin Deficits 0-10000 -20000-30000 -40000-50000 -60000-70000 Trade Deficit 400 200 0-200 -400-600 -800-1000 -1200-1400 -1600 Net federal government saving Source: BEA Beacon Economics 15
Beacon Economics 16
The China Syndrome $200,000 $100,000 $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 United States Goods Trade with China (Millions) *As of October 2018 Value US Exports to China as % of GDP: 0.75% Exports Imports Balance Exports ($, Billions) Share Imports ($, Billions) Total 1,389 2,122 Share China 102.5 7.4% 447.0 21.1% Value China Exports to US as % of GDP: 4.0% Canada 251.5 18.1% 269.2 12.7% Mexico 222.6 16.0% 289.7 13.7% Japan 61.38 4.4% 117.6 5.5% UK 54.76 3.9% 50.2 2.4% Germany 48.31 3.5% 104.8 4.9% S. Korea 46.38 3.3% 61.5 2.9% Netherlands 40.76 2.9% 19.5 0.9% Brazil 33.29 2.4% 26.4 1.2% Hong Kong 31.51 2.3% 5.6 0.3% France 30.3 2.2% 43.7 2.1% Singapore 27.69 2.0% 23.3 1.1% Source: US Census, Wiser Beacon Economics 17
Year over Year % Growth Exchange Rate U.S / China Comparisons 20 Industrial Production Growth 7.2 Yuan to Dollar 15 10 5 0-5 -10 7.0 6.8 6.6 6.4 6.2 6.0 5.8 China US Source: National Bureau of Statistics of China, Board of Gov. Fed. Reserve Beacon Economics 18
Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17 Jan-18 Sep-18 Jan-01 Dec-01 Nov-02 Oct-03 Sep-04 Aug-05 Jul-06 Jun-07 May-08 Apr-09 Mar-10 Feb-11 Jan-12 Dec-12 Nov-13 Oct-14 Sep-15 Aug-16 Jul-17 Jun-18 Labor Markets 350.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0 Change Non Farm Payrolls (Smoothed) 10 9 8 7 6 5 4 3 2 1 0 Unemployment and Job Openings 4.8% 3.8% -50.0 Job Opening Rate Unemployment Rate Source: BLS, JOLTS Beacon Economics 19
1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 Sep-02 Jul-03 May-04 Mar-05 Jan-06 Nov-06 Sep-07 Jul-08 May-09 Mar-10 Jan-11 Nov-11 Sep-12 Jul-13 May-14 Mar-15 Jan-16 Nov-16 Sep-17 Jul-18 Consequences 5 Real Wage Gains for Continuously Employed FT Workers $45,000 Real Median Income- Males 4 $40,000 3 $35,000 2 $30,000 1 0 $25,000-1 $20,000 $15,000 Median Average Source: Atlanta Fed Wage Tracker, Census Beacon Economics 20
Quality of Life Life Expectancy 78 76 74 72 70 68 66 64 62 1973 2018 Infant Mortality 2.0% 1.6% 1.2% 0.8% 0.4% 0.0% 1973 2018 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Total Crime Rate in the U. S. 4.15 % 1973 2016 2.85 % 40% 35% 30% 25% 20% 15% 10% 5% 0% % of Population With College Diploma or Higher 1973 2017 Beacon Economics 21
Quality of Life Source: Countryeconomy.com. Statista. Beacon Economics 22
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Which Inequality? 0.65 0.60 0.55 0.50 0.45 0.40 0.35 0.30 Gini Coefficients Based on Market Income Based on Income After Transfers and Taxes Real Average Net Worth by Bracket 1989 2001 2016 < 25 $(1) $0 $(12) 0% 0% 0% 25 49.9 $43 $60 $45 3% 3% 2% 50 74.9 $166 $227 $204 12% 11% 7% 75 89.9 $422 $612 $659 18% 17% 14% 90 100 $2,317 $3,748 $5,336 67% 70% 77% Top 1% $10,407 $17,772 $26,645 30% 33% 39% Beacon Economics
Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 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 Jan-18 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 Workforce Growth 3 2.5 2 1.5 1 0.5 0-0.5 US Labor Force Growth (Smoothed) 25 20 15 10 5 0 2017 Population by Age (Millions) -1 Source: BLS Beacon Economics 24
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 A Demographic Collapse US Population Forecast 0-24 25-64 65+ Current 104.5 169.4 49.2 2016-26 0.9 4.7 17.8 2026-36 2.0 6.2 11.9 2036-46 2.3 9.4 4.8 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 New Estimates: Debt and Deficit 95.0 90.0 85.0 80.0 75.0 70.0 65.0 60.0 Total 5.3 20.3 34.5 Deficit Net Debt % GDP Source: DOF, ACS Beacon Economics 25
The Cure for Secular Stagnation Beacon Economics 26
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 Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 May-10 Apr-11 Mar-12 Feb-13 Jan-14 Dec-14 Nov-15 Oct-16 Sep-17 Aug-18 % Growth Housing Markets: Slightly Slowing 7500 7000 Home Sales 20 15 Median Price YoY Growth 6500 6000 5500 5000 4500 4000 3500 3000 10 5 0-5 -10-15 -20 Source: FRED Beacon Economics 27
Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Does this look the same? 6500.0 Then 11.0 6500.0 Now 11.0 6000.0 5500.0 5000.0 4500.0 4000.0 3500.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 6000.0 5500.0 5000.0 4500.0 4000.0 3500.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Sales SAAR Months Supply Sales SAAR Months Supply Beacon Economics
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 Jan-19 Builder Confidence and Market Stability 12.0 Months Supply Existing Homes (NAR) 10.0 8.0 6.0 4.0 2.0 0.0 Source: Wells Fargo Beacon Economics 29
Jan-90 Nov-91 Sep-93 Jul-95 May-97 Mar-99 Jan-01 Nov-02 Sep-04 Jul-06 May-08 Mar-10 Jan-12 Nov-13 Sep-15 Jul-17 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 Pace of Construction 2400 2200 2000 1800 1600 1400 1200 1000 800 600 400 Housing Starts SAAR 3.5 3 2.5 2 1.5 1 0.5 0 Housing Starts per New Household Beacon Economics 30
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 Q3-16 Q2-18 Q1-85 Q1-87 Q1-89 Q1-91 Q1-93 Q1-95 Q1-97 Q1-99 Q1-01 Q1-03 Q1-05 Q1-07 Q1-09 Q1-11 Q1-13 Q1-15 Q1-17 Vacancy Rates 6.0% 5.5% 5.0% 4.5% 4.0% Vacant Units 70 69 68 67 66 Ownership Rates 3.5% 65 3.0% 64 2.5% 63 62 For Sale / Rent Held Off Market Beacon Economics
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:Q1 99: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 18:Q2 Credit Conditions 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Delinquencies (90 day +) 800 750 700 650 600 550 500 Mortgage Origination by Credit Score MORTGAGE Median 25th percentile 10th percentile Source: CensusORi, NY Fed Beacon Economics 32
20.00 5.50 18.00 0.00 3.00 1978-01-06 2016-01-28 1980-01-06 2016-03-28 1982-01-06 2016-05-28 1984-01-06 2016-07-28 1986-01-06 2016-09-28 1988-01-06 2016-11-28 1990-01-06 2017-01-28 1992-01-06 2017-03-28 1994-01-06 2017-05-28 1996-01-06 2017-07-28 1998-01-06 2017-09-28 2000-01-06 2002-01-06 2017-11-28 2004-01-06 2018-01-28 2006-01-06 2018-03-28 2008-01-06 2018-05-28 2010-01-06 2018-07-28 2012-01-06 2018-09-28 2014-01-06 2018-11-28 2016-01-06 2018-01-06 Rising Rates Mortgage Rates (30 Year Fixed) Mortgage Rates (30 Year Fixed) 16.00 5.00 14.00 12.00 4.50 10.00 8.00 4.00 6.00 4.00 3.50 2.00 Source: Freddie Mac Why higher? Economic Growth Federal Borrowing Strong Equity Market Not Inflation Fed Policy Lack of Capital Beacon Economics 33
Value ($, Millions) Construction Spending National 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 Value of Nonresidential Construction Oct. 2003 to Oct. 2018 Value by Type (Nonresidential) October 2018 Value (Millions) Year over Year % Growth Total 459,733 6.4% Commercial 84,714 0.6% Manufacturing 66,768 3.1% Office 66,436 16.3% Health Care 32,885-0.7% Communication 23,650-5.0% Source: Census Beacon Economics 34
6/1/05 6/1/06 6/1/07 6/1/08 6/1/09 6/1/10 6/1/11 6/1/12 6/1/13 6/1/14 6/1/15 6/1/16 6/1/17 6/1/18 1991-01-01 1992-09-01 1994-05-01 1996-01-01 1997-09-01 1999-05-01 2001-01-01 2002-09-01 2004-05-01 2006-01-01 2007-09-01 2009-05-01 2011-01-01 2012-09-01 2014-05-01 2016-01-01 2017-09-01 National Trends in Real Estate 25.0% 20.0% Bank Debt: Y-o-Y Growth 12 Loan Delinquencies: All Commercial Banks 15.0% 10 10.0% 5.0% 0.0% -5.0% 8 6 4-10.0% -15.0% -20.0% 2 0-25.0% C&I Comm RE Residential Commercial Consumer Source: Real Capital Analytics Beacon Economics 35
2013:04:00 2014:01:00 2014:02:00 2014:03:00 2014:04:00 2015:01:00 2015:02:00 2015:03:00 2015:04:00 2016:01:00 2016:02:00 2016:03:00 2016:04:00 2017:01:00 2017:02:00 2017:03:00 2017:04:00 2018:01:00 2018:02:00 2018:03:00 2018:04:00 Lending Markets? SLOS: Tightening Standards Increasing Demand 50 50 40 40 30 20 10 0-10 -20 30 20 10 0-10 -20-30 Development Multifamiy Development Multifamiy Senior Loan Officer Survey: Net Percent of Respondents saying yes Beacon Economics
National Trends in Real Estate US Capital Trends Oct 2018 Transacti on Volume (Billions) Year over Year % Change Volume Prices Cap Rate Total $42.0-2.0% 6.4% Industrial $12.2 136.0% 6.1% 6.4% Apartme nt $11.9-16.0% 9.6% 5.5% Office $9.6-24.0% 7.3% 6.6% Retail $4.0-32.0% 2.4% 6.5% Hotel $2.3 10.0% 5.4% 8.6% Source: Real Capital Analytics Beacon Economics 37
1996-04-01 1997-11-01 1999-06-01 2001-01-01 2002-08-01 2004-03-01 2005-10-01 2007-05-01 2008-12-01 2010-07-01 2012-02-01 2013-09-01 2015-04-01 2016-11-01 2018-06-01 1981-11-02 1984-11-02 1987-11-02 1990-11-02 1993-11-02 1996-11-02 1999-11-02 2002-11-02 2005-11-02 2008-11-02 2011-11-02 2014-11-02 2017-11-02 Inflation 3.0 Core Inflation 14.0 M2 Growth (Y-o-Y) 2.5 12.0 2.0 10.0 1.5 8.0 1.0 6.0 0.5 4.0 0.0 2.0 0.0 Beacon Economics
1996-01-03 1998-01-03 2000-01-03 2002-01-03 2004-01-03 2006-01-03 2008-01-03 2010-01-03 2012-01-03 2014-01-03 2016-01-03 2018-01-03 Jan-57 Oct-60 Jul-64 Apr-68 Jan-72 Oct-75 Jul-79 Apr-83 Jan-87 Oct-90 Jul-94 Apr-98 Jan-02 Oct-05 Jul-09 Apr-13 Inflation Risks? 15.0% 13.0% 11.0% 9.0% 7.0% 5.0% 3.0% 1.0% -1.0% -3.0% -5.0% Growth in Bank Loans 14.0 12.0 10.0 8.0 6.0 4.0 2.0 Unemployment and Inflation 0.0 Beacon Economics 39
1974-07-01 1976-12-01 1979-05-01 1981-10-01 1984-03-01 1986-08-01 1989-01-01 1991-06-01 1993-11-01 1996-04-01 1998-09-01 2001-02-01 2003-07-01 2005-12-01 2008-05-01 2010-10-01 2013-03-01 2015-08-01 2018-01-01 1982-01-01 1983-12-01 1985-11-01 1987-10-01 1989-09-01 1991-08-01 1993-07-01 1995-06-01 1997-05-01 1999-04-01 2001-03-01 2003-02-01 2005-01-01 2006-12-01 2008-11-01 2010-10-01 2012-09-01 2014-08-01 2016-07-01 2018-06-01 Federal Reserve Policy 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Federal Funds Rate 5.00 4.00 3.00 2.00 1.00 0.00-1.00 10 Year 3 Month Spread Source: Board of Governors Fed Reserve, Federal Reserve St Louis Beacon Economics 40
Beacon Economics
Source: Business Insider/Census Bureau Beacon Economics 42
California fact versus fiction Beacon Economics 43
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1/1/88 2/1/90 3/1/92 4/1/94 5/1/96 6/1/98 7/1/00 8/1/02 9/1/04 10/1/06 11/1/08 12/1/10 1/1/13 2/1/15 3/1/17 Booms and Busts 10.0% Growth in Real Output 14.0 US Unemployment 8.0% 12.0 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% 10.0 8.0 6.0 4.0 2.0 0.0 United States California CA US Beacon Economics
State Economic Performance Gross State Product Q1 2018 1 Year 5 Year Washington 4.3% 3.7% California 3.5% 3.7% Utah 3.7% 3.4% Colorado 4.5% 3.4% Oregon 3.4% 2.9% Florida 2.3% 2.8% Texas 4.2% 2.8% Idaho 3.2% 2.8% Georgia 2.5% 2.8% Nevada 4.0% 2.7% South Carolina 2.0% 2.5% Arizona 4.2% 2.5% Rk State 5 Year Payroll Employment # Ann Gr Share US 1 Nevada 211.2 3.4% 1.7% 2 Utah 218.3 3.2% 1.7% 3 Florida 1238.2 3.1% 9.8% 4 Oregon 252.1 2.9% 2.0% 5 Idaho 92.1 2.8% 0.7% 6 Colorado 328.7 2.7% 2.6% 7 Washington 413.1 2.7% 3.3% 8 California 2051 2.6% 16.3% 9 Georgia 537.9 2.6% 4.3% 10 South Carolina 237.6 2.4% 1.9% Source: U.S. Bureau of Labor Statistics, U.S Bureau of Economic Analysis Beacon Economics 45
1981:Q1 1982:Q4 1984:Q3 1986:Q2 1988:Q1 1989:Q4 1991:Q3 1993:Q2 1995:Q1 1996:Q4 1998:Q3 2000:Q2 2002:Q1 2003:Q4 2005:Q3 2007:Q2 2009:Q1 2010:Q4 2012:Q3 2014:Q2 2016:Q1 2005:Q1 2006:Q1 2007:Q1 2008:Q1 2009:Q1 2010:Q1 2011:Q1 2012:Q1 2013:Q1 2014:Q1 2015:Q1 2016:Q1 2017:Q1 2018:Q1 California Economic Engine 14.5% California Share National Personal Income 15.0% California Share US GDP 14.0% 14.5% 13.5% 14.0% 13.0% 12.5% 12.0% 13.5% 13.0% 11.5% 12.5% 11.0% 12.0% Beacon Economics 46
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 high-end job growth took place in Silicon Valley, Joel Kotkin, professor of Urban Studies at Chapman University May 18, 2018 Share New FT Employees 2014-2017 2017 Tot Ch < 50k Ch 50-100k Ch 100k+ County Total 12,831.3 8.8% 69.0 417.4 548.1 Coast SC 5,748.9 6.9% 18.6 161.4 193.3 Bay 2,503.5 10.1% -35.4 53.7 212.0 Balance 4,578.9 9.4% 85.8 202.4 142.8 Inland SC 1,608.6 9.4% 33.1 62.5 42.0 North Inland 1,137.0 12.5% 33.6 55.8 37.4 North Coast 575.2 11.9% 10.7 27.6 22.8 Central Coast 721.7 8.9% 0.6 29.7 28.4 Central Valley 536.5 9.6% 7.8 26.9 12.2 Beacon Economics 47
Median Income ($) Households 90000 85000 80000 75000 70000 65000 60000 55000 50000 45000 40000 Median Household Income Income Brackets OC HH Income 2017 Total HH s (000 s) 3-Year Change Share LA IE OC Less Than 50K 296.4 28.6% -5.9-5.5-4.4 50-100K 293.1 28.3% 0.7-0.2-1.1 Inland Empire Orange County Los Angeles California 100K or More 447.8 43.2% 5.1 5.7 5.5 Source: American Community Survey Beacon Economics 48
Revenue ($, SA, Billions) Sales Tax Revenue 17 16 Total Sales Tax Revenue, Orange County Category Q4-2018 Sales Tax (Millions) Year over Year Change 15 14 13 12 11 10 Total 181.5 2.0% Autos & Transportation 31.1 8.5% Building & Construction 13.5 2.6% Restaurants & Hotels 27.1 2.3% Business & Industry 24.5 1.9% Food & Drugs 7.6 1.2% General Consumer Goods 42.5-1.0% Fuel & Service Stations 12.6-4.6% Source: HDL Beacon Economics 49
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 State NR Construction 8000000 7000000 6000000 5000000 4000000 3000000 2000000 California NR Permits (Nom $) 17-18 16-17 Q3-18 Alts 0.3% 4.5% 3,150,029 Retail 17.8% 14.4% 1,131,900 Office 23.3% -8.5% 691,167 Other -8.3% -1.1% 662,133 Hotel 54.5% 30.0% 517,621 1000000 0 Industrial 10.2% 46.8% 478,486 Garage 13.3% 1.8% 433,022 Beacon Economics
Permit Value ($, Millions) Nonresidential Real Estate Permits 3500 3000 2500 O.C. Nonresidential Permits Property 2017 (Millions) 2018 (Millions) IE LA OC IE LA OC 2000 Hotel $73.8 $89.0 $169.6 $65.3 $213.3 $828.7 1500 1000 500 0 Industrial $917.2 $132.0 $74.0 $945.3 $91.5 $24.3 Office $82.7 $497.6 $81.2 $123.7 $434.7 $257.6 Non Res Alterations Commercial Retail $521.6 $688.1 $213.8 $431.0 $762.3 $194.9 Source: CIRB Beacon Economics 51
Nonresidential Rents & Vacancies Property Type Cost of Rent, Q4-2018 Year over Year Change Los Angeles Inland Empire Orange County Los Angeles Inland Empire Orange County Warehouse $7.8 $5.6 $7.5 3.6% 4.1% 2.2% Office $38.9 $22.9 $34.1 3.2% 1.9% 4.0% Retail $33.4 $23.0 $34.1 2.6% 1.5% 1.2% Flex/R&D $12.8 $8.6 $11.9 2.2% 2.9% 2.0% Property Type Vacancy Rate, Q4-2018 Year over Year Change Los Angeles Inland Empire Orange County Los Angeles Inland Empire Orange County Warehouse 4.7% 8.5% 6.6% 0 pp 2.2 pp 0.4 pp Office 14.5% 16.8% 15.9% -0.1 pp -0.2 pp 0.6 pp Retail 6.6% 9.2% 5.2% 0.4 pp -0.4 pp 0.1 pp Flex/R&D 2.9% 5.1% 4.2% 0.3 pp -0.2 pp -0.1 pp Source: CIRB Beacon Economics 52
Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 May-18 Jan-19 State Job Growth 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% California Non Farm Payroll Growth (yoy) Jan-19 San Francisco 1,167,800 2.2% 3.8% Fresno MSA 360,500 3.2% 3.2% Santa Barbara MSA 187,600 0.6% 2.8% Sacramento 1,014,600 3.3% 2.7% San Jose 1,139,200 1.8% 2.4% Bakersfield MSA 270,100 2.8% 2.3% Inland Empire 1,512,000 4.1% 1.7% San Diego 1,495,300 2.4% 1.5% East Bay 1,187,600 2.1% 1.3% Stockton 242,500 3.8% 1.2% Santa Rosa MSA 209,600 1.8% 1.1% Orange County 1,657,800 2.7% 1.0% Ventura 310,200 1.9% 0.8% Los Angeles 4,529,900 2.0% 0.7% Modesto MSA 179,400 3.8% 0.7% Beacon Economics
Employment (000 s, SA) Employment Comparisons 1700 1650 1600 1550 1500 1450 1400 1350 1300 1250 1200 Orange County Total Nonfarm Industry Jan. 2019 (000 s) 2018-19 % Change CA 2018-19 % Change Total Nonfarm 1,657.8 1.0 1.4 Admin Support 152.6 3.6 2.7 Logistics 29.8 2.7 3.6 Education/Health 227.7 2.6 2.3 Prof, Sci &Tech 130.6 2.2 2.9 Hospitality 225.7 2.1 1.7 Wholesale Trade 80.8 1.3-0.4 Government 162.2 0.6 0.7 Retail Trade 39.8 0.4-0.7 Information 26.8 0.3 1.9 Other Scvs. 50.9 0.1 0.5 Manufacturing 159.2-0.8 1.2 Construction 103.4-1.9 3.4 Financial 78.6-2.8-0.4 Source: California EDD Beacon Economics 54
1976-01-01 1978-01-01 1980-01-01 1982-01-01 1984-01-01 1986-01-01 1988-01-01 1990-01-01 1992-01-01 1994-01-01 1996-01-01 1998-01-01 2000-01-01 2002-01-01 2004-01-01 2006-01-01 2008-01-01 2010-01-01 2012-01-01 2014-01-01 2016-01-01 2018-01-01 California Labor Markets 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 California Unemployment Rate Source: U.S. Census Beacon Economics 55
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 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 California Labor Markets 1.50% Net Migration as a % of Pop 1.6% California Labor Force Growth (LR) 1.30% 1.10% 0.90% 0.70% 0.50% 1.4% 1.2% 1.0% 0.8% 0.30% 0.6% 0.10% 0.4% -0.10% -0.30% -0.50% 0.2% 0.0% Source: U.S. Census Beacon Economics 56
Q1-99 Q3-00 Q1-02 Q3-03 Q1-05 Q3-06 Q1-08 Q3-09 Q1-11 Q3-12 Q1-14 Q3-15 Q1-17 The Housing Exodus 600000 California Home Prices Relative to US 160.0% 500000 400000 300000 200000 100000 0 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Beacon Economics
Q1-95 Q1-96 Q1-97 Q1-98 Q1-99 Q1-00 Q1-01 Q1-02 Q1-03 Q1-04 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 Q1-18 New Housing Supply 45000 40000 35000 30000 25000 20000 15000 New Home Permits How Much Housing Needed? Housing Needed to maintain 2% State Job Growth Method 1 Total 722,022 Per Year 206,674 Current 111,185 Shortfall 100,489 10000 5000 0 Single-family Multi-family Method 2 Total 911,001 Per Year 263,667 Current 111,185 Shortfall 157,482 Source: CIRB Beacon Economics 58
How Much of a Backlog? Units Vacancy Rk 00-17 Gr% Rk 00-17 Ch Texas 10,933 9.4% 28 34% 4 2,776 Florida 9,442 13.2% 6 29% 6 2,139 California 14,177 5.8% 52 16% 21 1,963 N Carolina 4,623 11.1% 17 31% 8 1,099 Georgia 4,282 8.4% 34 30% 9 1,001 Arizona 2,999 13.1% 7 37% 3 810 Washington 3,103 7.3% 44 27% 10 652 New York 8,328 8.1% 39 8% 44 648 Virginia 3,513 7.1% 46 21% 15 609 Colorado 2,385 8.3% 35 32% 7 577 Backlog Avg Growth 291 Avg Vacancy 676 Total 967 High Growth 1,408 Avg Vacancy 676 Total 2,084 Texas Growth 1,849 Avg Vacancy 676 Total 2,525 Beacon Economics
Housing Units/Population California = 2 nd Lowest Housing Unit to Population Ratio Housing Units per Capita (2017) - Top 5 and Bottom 5 States) 0.6 0.5 0.4 0.3 0.2 0.1 0.0 0.56 Maine (1) 0.54 Vermont (2) 0.50 0.49 0.49 North Dakota (3) West Virginia (4) Montana (5) 0.40 0.39 0.38 New Jersey (46) Texas (47) Hawaii (48) 0.36 0.35 California (49) US Average: 0.422 Utah (50) - In 2017, California ranked 49 th (2 nd Lowest) in housing units to population ratio. - The ranking has been unchanged for several years. - But the gap between California and Utah has narrowed. - At current trajectory, California would overtake Utah to becoming the state with the lowest housing units per capita in the next decade. Note: Ranking denoted in parenthesis. Source: American Community Survey, U.S. Census Bureau Beacon Economics
Children Living with Parents by Age Group (Indexed to 2008 Values) The Percentage of Adult Children Living With Their Parents Are Rising Rapidly Percent of Adults by Age Group Living With Parents - California 35% 30% 25% 23% 25% 24% 26% 28% 28% 30% 30% 31% 33% 20% 15% 10% 5% 0% 13% 14% 14% 15% 15% 16% 17% 11% 12% 12% 6% 6% 7% 7% 7% 8% 8% 8% 9% 9% 4% 4% 4% 4% 5% 4% 5% 5% 5% 5% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 25 to 29 years 30 to 34 years 35 to 44 years 45 to 54 years Note: Children include biological, adopted, or step children. Source: Beacon Economics tabulation of data from the 2008-2017 ACS PUMS Beacon Economics
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 Housing = Economic Development 8000 7000 6000 5000 4000 3000 2000 1000 0 Residential Permits LA County 2% Job Growth 90,000 Jobs 1.5 Jobs / HH 60,000 24,400 Single Famile Multi-Family Beacon Economics
(Index at Dec-03 = 100, SA & MA) (%, SA & MA) Labor Force and Unemployment 125 120 115 110 105 100 95 Labor Force 16 14 12 10 8 6 4 2 0 Unemployment Rate Inland Empire Los Angeles Orange County Inland Empire Los Angeles Orange County Source: California EDD Beacon Economics 63
Q1-95 Q1-96 Q1-97 Q1-98 Q1-99 Q1-00 Q1-01 Q1-02 Q1-03 Q1-04 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 Q1-18 Residential Permitting Region Number of Permits 2018 Multi Family Single Family Year over Year Growth Multi Family Single Family 14000 12000 IE Housing Permits Inland Empire 2,842 10,730-13.5% 4.1% San Diego 6,190 3,387 10.5% -14.9% Los Angeles 16,633 5,721 1.1% 2.9% 10000 8000 6000 4000 2000 0 Orange County 4,233 3,968-2.8% -22.9% RV SF SB SF RV MF SBMF Source: CIRB Beacon Economics
Median Home Prices ($, Thousands) Residential Real Estate - Cost of Housing 900 Median Home Prices 12000 Orange County Home Sales 800 700 10000 600 500 8000 400 6000 300 200 4000 100 0 2000 0 Inland Empire Los Angeles Orange County Source DataQuick, REIS Beacon Economics 65
The Real OC: Young, Rich, and Smart Years in Home Homeowner Median Income Share of Homeowners Median Age Educational Attainment Less than 5 Years 5 to 9 Years 10 Years or More Less than 5 years $139,000 23.1% 36 5 to 9 years $131,200 14.8% 39 10 years or more $120,000 62.1% 53 All Owners $126,000 100.0% 46 > High School 4.0% 6.8% 7.9% High School 7.3% 8.3% 13.6% Some College 22.4% 25.1% 30.4% Bachelor s 38.1% 33.6% 27.9% Grad/Prof. 28.2% 26.2% 20.4% Source: ACS/PUMS Beacon Economics 66
Number of Permits Issued Residential Real Estate Permits 14000 12000 Orange County Residential Permits Region Number of Permits 2018 Multi Family Single Family Year over Year Growth Multi Family Single Family 10000 8000 6000 4000 2000 Inland Empire 2,842 10,730-13.5% 4.1% San Diego 6,190 3,387 10.5% -14.9% Los Angeles 16,633 5,721 1.1% 2.9% 0 Multifamily Single-family Orange County 4,233 3,968-2.8% -22.9% Source: CIRB Beacon Economics 67
Cost of Rent ($) Residential Real Estate - Cost of Housing Location Rent Q4-18 Vac. Q4-18 1 Year Chg 5 Year Chg Rent Vac. Rent Vac. 2100 1900 1700 Apartment Cost of Rent 1500 LA $ 2,004 3.8% 6.2% 0.3 31.4% 0.6 1300 1100 900 IE $ 1,365 3.1% 4.4% -0.2 24.2% -0.1 700 500 OC $ 1,948 4.0% 3.5% 0.2 19.1% 1.0 Inland Empire Los Angeles Orange County Source DataQuick, REIS Beacon Economics 68
6/1/04 3/1/05 12/1/05 9/1/06 6/1/07 3/1/08 12/1/08 9/1/09 6/1/10 3/1/11 12/1/11 9/1/12 6/1/13 3/1/14 12/1/14 9/1/15 6/1/16 3/1/17 12/1/17 The Upside of Labor Shortages Numbe r (Mil) Median Income Change 2016 13-16 Unemp Change 2016 13-16 Total 20.96 40,005 10.2% 5.5% -3.0% No High School 3.52 21,558 13.1% 8.2% -3.7% High School 4.26 30,231 10.9% 7.0% -4.0% 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Median Wage Growth West VS US Some College 6.14 36,985 3.1% 5.5% -3.4% -0.5-1.0 Bachelor plus 7.03 60,121 9.4% 3.6% -1.6% Beacon Economics 69
Median Rent (% of Income) Don t Just Focus on Affordable Rentals 37 36 35 34 33 32 31 30 29 Median Rent as % of Income 2005 to 2017 Inland Empire Orange County Los Angeles San Diego Share Households > 30% Income Renter 2013 2016 Ch Fresno 54.8% 57.5% 2.7% Los Angeles 57.0% 55.4% -1.6% San Bernardino 54.7% 55.4% 0.7% Riverside 58.8% 54.8% -4.0% San Diego 53.7% 54.7% 1.0% Orange 55.5% 54.1% -1.4% Sacramento 52.9% 52.1% -0.9% Alameda 50.8% 47.2% -3.6% Santa Clara 47.2% 46.2% -1.1% San Francisco 42.8% 36.8% -6.0% Beacon Economics 70
The Big Picture Positives: It will be a good year Negatives: Problems Growing GDP Growth Outlook for 2019: 2%+ Labor shortages will be an issue Labor markets to remain tight Local housing supply tightening Rising wages to put pressure on profits The Inverted Yield Curve? Exports, business investment continue Equity markets behaving oddly to grow Federal deficit widening sharply Inflation to remain constrained Interest Rates Still Low Bank lending still constrained Lending constrained, but commercial Political uncertainty to dominate markets steady headlines Debt Levels still safe Critical Policy Issues Remain OC: more to fear from housing Undiscussed shortages than housing fundamentals Miserabilism warping our sense or reality Beacon Economics 71
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