Economic Data and Interest Rate Forecast February 2018 (Data through February 14, 2018)
Monthly highlights Nonfarm Payroll off to solid start in 2018 Year over year wage growth jumps Manufacturing sector off to a good start Auto sales start the year at the same pace as 2017 Retail Sales off on the wrong foot Tax reform bill will be boost to business spending but weak impact on consumers
2014 2015 2016 2017 2013 8 7 6 5 4 3 2-1 01-2 -3-4 -5-6 -7 Real GDP A solid year 2005 200620072008 2009 201020112012 Percent 2001 200220032004
Jan-18 130 120 110 100 90 80 70 60 50 40 30 20 Retail Sales & Confidence Consumers still in the game CONCCONF MOM Index RSTA YOY 14 12 10 8 6 4 2 0-2 -4-6 -8-10 Jan-06 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-05
22 21 20 19 18 17 16 15 14 13 12 11 10 9 Total Vehicle Sales A solid start to 2018 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-07 Aug-08 Feb-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Feb-99 Aug-99 Feb-00 Aug-00 Units in millions annualized
Consumers continue to spend at solid pace 4 th quarter GDP 2.6% but was 3.6% without drag of businesses inventories and trade balance. Year over year Retail Sales drop to 3.6% on weak January number but data highly questionable Year over year Retail Sales average 5.4% for last four months of 2017 strongest growth rate since 2011 Auto sales for 2017, 17.2 million; January 17.2 annualized Consumer Confidence remains at lofty levels Tax bill unlikely to do much for consumers directly Jobs and confidence should continue to support growth in consumer sector
Nonfarm Payrolls -800-700 -600-500 -400-300 -200-100 0 100 200 300 400 500 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17-800 -700-600 -500-400 -300-200 -100 0 100 200 300 400 500
Payroll Growth Solid growth to start the year January payrolls up 200m; gains spread across multiple sectors Unemployment Rate steady at 4.1% Average monthly gain for 2017 171k vs. 183k for 2016 Year over year hourly wage jumps from 2.6% to 2.9% Not a trend yet With tax reform passing, job growth should remain strong on business spending through first half of 2018
Strong second half comeback in California jobs Pre recession Low (2009 Current High (2006) 2011) NFP Payrolls 15,440 13,845 16,980 Construction 945 545 840 Manufacturing 1495 1230 1302 Trade/Transp 2920 2600 3037 Bus & Prof 2270 2030 2577 Government 2525 2360 2594 Leisure/Hosp 1580 1484 1985 Educ/Health 1992 2050 2650 Source BLS December
Job Highlights for California 1 st half of 2017 63k jobs added; 2 nd half of 2017, 272k Payrolls up 53k in December and 342k for 2017, in line with the prior three years Unemployment rate falls to 4.3% the lowest rate on record Tax bill good for tech area and producers of business goods and services Lack of workers a growing issue but higher wages a positive consequence Trump trade policies still a threat to California
Nevada Large sectors High (2006) Low (2009 2011) Current Nonfarm 1,300 1,110 1,365 Payrolls Construction 146 47 92 Travel/leisure 340 302 351 Trade/Transp. 233 204 249 Bus. & 162 133 191 Professional Government 162 146 166 Source BLS December data
Nevada payrolls steady Nonfarm Payrolls up 7k in December Payrolls +33k for 2017 consistent since 2011 Unemployment Rate steady 5.0% Outlook still positive for slow and steady growth Tax cut could provide slight lift to leisure spending Biggest risk Trump on trade and foreign travel
Jan-17 Housing Starts (December) Units (thousands) 2200 2000 1800 1600 1400 1200 1000 800 600 400 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
1300 1200 1100 1000 900 800 700 600 500 400 Housing Starts (December) (A solid year for builders) Units (thousands) Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17
Home Sales (December) Typical December retreat in sales New Homes (thousands) 1250 1050 850 650 450 250 Jan-06 Jan-07 New Existing Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Existing Homes (millions) 7.25 6.75 6.25 5.75 5.25 4.75 4.25 3.75
New Home Sales (December) Strong year New Homes (thousands) 750 700 650 New 600 550 500 450 400 350 300 250 200 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Home Inventories Record low for existing homes New Homes (thousands) Existing Homes (millions) 700 600 500 New Existing 5.5 5 4.5 4 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-17 400 300 200 100 3.5 3 2.5 2 1.5
California/Nevada y o y median home price December 2016 December 2017 % gain LA County $520,000 $570,000 9.6% San Diego Co $495,000 $540,000 9.1% Orange $667,500 $697,500 4.5% River. $345,000 $365,000 5.8% Bay Area $670,000 $750,000 12.1% Sacramento $302,000 $340,000 8.1% Fresno $245,000 $260,000 12.6% Las Vegas $240,000 $261,000 8.8% Sources: CoreLogic and GLVBR
Housing current state Strong demand and low supply continue to plague existing home sales Median home prices down on month in most areas but up on year; few sales in lower priced homes flatters median Affordability a growing issue in some areas mortgage rates hold the key Housing looks solid longer term with big rental pool Tax bill changes on mortgages mostly inconsequential Major tax bill implication for California is less supply
1/1/2017 9/1/2017 6 5 4 3 2 1 0-1 -2-3 CPI & Core CPI Year over year Core inflation rate steady despite January bump May-98 Jan-99 Sep-99 May-00 Jan-01 Sep-01 May-02 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 11-Sep 5/30/2012 Jan-13 Sep-13 5/1/2014 1/1/2015 9/1/2015 5/1/2016 CPI Core CPI Jan-97 Sep-97 May-96 Jan-95 Sep-95
General outlook still positive into 2018 Stock market stabilizes and confidence of businesses and consumers maintained Job growth should be steady to improved in first half of 2018 but filling jobs will become more problematic Wage gains should become more apparent in 2018 European and Chinese economies performing above expectations Corporate tax cuts should boost business spending in 2018 but individual tax cuts to have little impact on consumers Businesses must drive growth; a fade in second half of 2018 possible
Interest Rate Forecast February 2018
Highlights Stock market turmoil fails to lower bond yields Longer term yields rise as big bond accounts grow less certain on inflation Sharp steepening in yield curve since year end Old Fed raises funds rate and forecasts three increases in 2018 New Federal Reserve Board make up will make rate path less clear Rise in longer term rates could cause Fed to pause Tax reform could impact Fed policy, but inflation is still the key
Yield curve shifts steeper 4 3.5 3 2.5 2 1.5 1 2/12/2108 12/31/2017 7/7/2016 0.5 0 FFunds 3m 6m 12m 2Y 5Y 10Y 30Y
3.5 Interest Rate Forecast D.J. s Economix If Fed stays on course 3 2.5 2 1.5 1 0.5 0 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Fed Funds 2yr T 5yr T 10y T
Interest Rate Forecast D.J. s Economix If Fed slow to act due to inflation and politics 4 3.5 3 2.5 2 1.5 1 0.5 0 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Fed Funds 2yr T 5yr T 10y T
Range of Expectations for Q1 2019 (January 2018 Bloomberg poll 91 economists) Median GDP 2.40% UR 3.80% Core PCE 1.90% Fed Funds Prior format showing ranges no longer published 2.00-2.25% 2-Year 2.57% 10-Year 3.00%
Three Wall Street Scenarios Low rate view Tax reform doesn t deliver for economy; Trump starts trade problems; economy weakens and stock market falls Consensus Tax reform drives business growth; wages higher; moderate rise in rates; global growth accelerates Inflation Case Monetarist case; wages rise more than expected; inflation expectations turn sharply higher; series of liquidations of major bond positions roil bond market
Fed Funds Scenarios (Rate is high end of Fed range) 4 3.5 3 2.5 2 1.5 1 0.5 0 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Rate Path # 1 Rate Path #2 Rate Path #3
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Ten year Note Scenarios Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Rate Path # 1 Rate Path #2 Rate Path #3 Dec-17