2016 year in review | ctar residential market update | stephen slifer
Post on 28-Jan-2018
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TheBoomisBack!
StephenSliferNumberNomicswww.NumberNomics.com
TheHighlights1. WhyhasGDPgrowthbeensoslow?
2. HowcanwespeedupGDPgrowth?
3. WhatimpactwillTrump’spolicieshave?
4. WhatistheoutlookforGDP,inflaIonin2017/18?
5. HowwillallofthisaffecttheFed?
6. NorecessionunIl2020attheearliest.
WhyHasGDPGrowthSlowed?
EconomicSpeedLimit
GrowthinLaborForce+ProducIvity
EconomicSpeedLimit
LaborForce+ProducIvity=SpeedLimit1990’s
1.5%+2.0%=3.5%
EconomicSpeedLimit
LaborForce+ProducIvity=SpeedLimit1990’s
1.5%+2.0%=3.5%
20160.8%+1.0%=1.8%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%Jan19
90
Jan19
91
Jan19
92
Jan19
93
Jan19
94
Jan19
95
Jan19
96
Jan19
97
Jan19
98
Jan19
99
Jan20
00
Jan20
01
Jan20
02
Jan20
03
Jan20
04
Jan20
05
Jan20
06
Jan20
07
Jan20
08
Jan20
09
Jan20
10
Jan20
11
Jan20
12
Jan20
13
Jan20
14
Jan20
15
Jan20
16
LaborForce
Inthe1990’sthelaborforcegrewbyabout1.5%.Todayisgrowingby0.8%.Why?ThebabyboomersarereIring.
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2000-Q1 2002-Q1 2004-Q1 2006-Q1 2008-Q1 2010-Q1 2012-Q1 2014-Q1 2016-Q1
NonfarmProducIvity--3yr.
4
Inthe1990’stheproducIvitygrewbyabout2.0%.Todayisbarelygrowing.Notclearwhysoslow.Longer-term1.0%?
EconomicSpeedLimit
LaborForce+ProducIvity=SpeedLimit1990’s
1.5%+2.0%=3.5%
20160.8%+1.0%=1.8%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
NonresidenIalInvest.
Year-over-year
NonresidenIalInvestment
ProducIvitygrowthisdeterminedlargelybypaceofinvestmentspending.
WhyAreFirmsSoReluctanttoSpend?
3
WhyAreFirmsSoReluctanttoSpend?
1. Corporatetaxrateis35%.Restoftheworld=23%.Firmsareshicingtheirheadquartersoverseas.
3
WhyAreFirmsSoReluctanttoSpend?
2. Firmsaretaxedtwiceoncorporateearnings–onceoverseasandagaininU.S.ifearningsrepatriated.
Thus,corporateearningsarelockedoverseas. EsImatesrangefrom$2.5-4.0trillion.
3
WhyAreFirmsSoReluctanttoSpend?
3. Crushingregulatoryburden.Federalregisterismorethan80,000pages.
3
WhyAreFirmsSoReluctanttoSpend?
4. DysfuncIonalhealthcaresystem.
Notenoughyoung,healthypeoplehavesignedup.PremiumsskyrockeIng.
Insurancecompaniesdroppingout.Unprofitable.
Businessesmorethan50employeesmustoffer.
3
WhyAreFirmsSoReluctanttoSpend?
5. Unsustainablefiscalpolicy.
Treasurydebtoutstandingisfartoohigh.
3
WhyAreFirmsSoReluctanttoSpend?
1. Corporatetaxrateis35%.2. Unabletorepatriateoverseasearnings.3. Crushingregulatoryburden.4. DysfuncIonalhealthcaresystem.5. Unsustainablefiscalpolicy.
3
TheyAllRequireAcIonByOurPolicyMakersinWashington
toSolve
3
HowWillTrump’sElecIonImpacttheEconomy?
3
WhyAreFirmsSoReluctanttoSpend?
1. Corporatetaxrateis35%.Restoftheworld=23%.
TrumpsoluIon:Lowercorporatetaxrateto15%.
3
WhyAreFirmsSoReluctanttoSpend?
2. Firmsaretaxedtwiceoncorporateearnings–onceoverseasandagaininU.S.ifearningsrepatriated.
TrumpsoluIon: Repatriateprofitsearnedoverseasata10%rate. WillbringthosefundsbacktotheU.S.
3
WhyAreFirmsSoReluctanttoSpend?
3. Crushingregulatoryburden.Federalregisterismorethan80,000pages.
TrumpsoluIon: Eliminateallunnecessary,needlesslycomplex,and overlappingregulaIons. IfproposeanewregulaIon,musteliminate2
exisIngones.
3
WhyAreFirmsSoReluctanttoSpend?
4. DysfuncIonalhealthcaresystem.
TrumpsoluIon:Offerhealthsavingsaccounts.OfferhighdeducIblehealthinsuranceplans.
3
WhyAreFirmsSoReluctanttoSpend?
5. Unsustainablefiscalpolicy.
TrumpsoluIon:Cutindividualandcorporateincometaxes.Repatriateoverseasearnings.Groweconomyat4%pace.Taxrevenueswillrisesharply.Deficitwillshrink.Simpson/Bowles-2010,HouseRepub.--2016
3
EconomicSpeedLimit
LaborForce+ProducIvity=SpeedLimit1990’s
1.5%+2.0%=3.5%
20160.8%+1.0%=1.8%
EconomicSpeedLimit
LaborForce+ProducIvity=SpeedLimit1990’s
1.5%+2.0%=3.5%
20200.8%+2.0%=2.8%
WhatAbout2017-2018?
ConsumpIon60%
Government15.0%
Trade10.0%
Investment15%
GDPComponents
50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
90.0
95.0
100.0
Jan20
07
Apr2
007
Jul200
7Oct2007
Jan20
08
Apr2
008
Jul200
8Oct2008
Jan20
09
Apr2
009
Jul200
9Oct2009
Jan20
10
Apr2
010
Jul201
0Oct2010
Jan20
11
Apr2
011
Jul201
1Oct2011
Jan20
12
Apr2
012
Jul201
2Oct2012
Jan20
13
Apr2
013
Jul201
3Oct2013
Jan20
14
Apr2
014
Jul201
4Oct2014
Jan20
15
Apr2
015
Jul201
5Oct2015
Jan20
16
Apr2
016
Jul201
6Oct2016
ConsumerSenIment
Recession
ConsumerconfidenceisatitshighestlevelsinceJanuary2004.
600
800
1000
1200
1400
1600
1800
2000
2200 S&P500
Thestockmarketisatarecordhighlevel.
14.50
15.00
15.50
16.00
16.50
17.00
17.50
18.00
18.50
FinancialObligaIonsRaIo
Trend
ConsumerdebtinrelaIontoincomeisthelowestithasbeensincethe1980’s.Wecanpickupthepaceofspendingifwechoosetodoso.
3.0
4.0
5.0
6.0
7.0
8.0Jan-00
Jul-0
0
Jan-01
Jul-0
1
Jan-02
Jul-0
2
Jan-03
Jul-0
3
Jan-04
Jul-0
4
Jan-05
Jul-0
5
Jan-06
Jul-0
6
Jan-07
Jul-0
7
Jan-08
Jul-0
8
Jan-09
Jul-0
9
Jan-10
Jul-1
0
Jan-11
Jul-1
1
Jan-12
Jul-1
2
Jan-13
Jul-1
3
Jan-14
Jul-1
4
Jan-15
Jul-1
5
Jan-16
Jul-1
6
30-yearMortgageRate
At4.2%30-yearmortgageratesaresIllverylow.
-9.0%
-7.0%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
-6.0%
-1.0%
4.0%
9.0%
14.0%
Apr2
011
Jun2011
Aug2011
Oct2011
Dec20
11
Feb2012
Apr2
012
Jun2012
Aug2012
Oct2012
Dec20
12
Feb2013
Apr2
013
Jun2013
Aug2013
Oct2013
Dec20
13
Feb2014
Apr2
014
Jun2014
Aug2014
Oct2014
Dec20
14
Feb2015
Apr2
015
Jun2015
Aug2015
Oct2015
Dec20
15
Feb2016
Apr2
016
Jun2016
Aug2016
Oct2016
Dec20
16
ConsumerLoans(%)ConsumerLoans(L)Year-over-year(R)
Consumerloansbecomingmoreeasilyaoainable.Haverisen8.5%inthepastyear.
-900
-700
-500
-300
-100
100
300
500
Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16
PrivateEmployment
PayrollEmploy.3-mo.average
Employmentclimbingby170thousandpermonth.Generatesincomewhichenablesustokeepspending.
$1.70
$2.20
$2.70
$3.20
$3.70
$4.20
GasolinePrices
Gasolinepricesareexpectedtoremainlowthroughoutthisyearatabout$2.25pergallon.
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
ConsumpIonspendingYear-over-Year
ConsumpIonSpending(%)
Asaresultexpectconsumerspendingtobeabout2.4%in2017and2018.
WhatAboutHousing?
3,300
3,800
4,300
4,800
5,300
Jan20
08
Apr2
008
Jul200
8Oct2008
Jan20
09
Apr2
009
Jul200
9Oct2009
Jan20
10
Apr2
010
Jul201
0Oct2010
Jan20
11
Apr2
011
Jul201
1Oct2011
Jan20
12
Apr2
012
Jul201
2Oct2012
Jan20
13
Apr2
013
Jul201
3Oct2013
Jan20
14
Apr2
014
Jul201
4Oct2014
Jan20
15
Apr2
015
Jul201
5Oct2015
Jan20
16
Apr2
016
Jul201
6Oct2016
ExisIngHomeSales
Homesalesarethefastesttheyhavebeenthusfarinthecycle.
3.5
4.5
5.5
6.5
7.5
8.5
9.5
10.5
11.5
12.5Jan20
07
May2007
Sep2007
Jan20
08
May2008
Sep2008
Jan20
09
May2009
Sep2009
Jan20
10
May2010
Sep2010
Jan20
11
May2011
Sep2011
Jan20
12
May2012
Sep2012
Jan20
13
May2013
Sep2013
Jan20
14
May2014
Sep2014
Jan20
15
May2015
Sep2015
Jan20
16
May2016
Sep2016
ExisIngHomes--Inventory
Homesaleswouldbeevenfasterifitwerenotforanextremeshortageofhomesforsale.
145.0
155.0
165.0
175.0
185.0
195.0
205.0
215.0
Aug2009
Nov2009
Feb2010
May2010
Aug2010
Nov2010
Feb2011
May2011
Aug2011
Nov2011
Feb2012
May2012
Aug2012
Nov2012
Feb2013
May2013
Aug2013
Nov2013
Feb2014
May2014
Aug2014
Nov2014
Feb2015
May2015
Aug2015
Nov2015
Feb2016
May2016
Aug2016
Nov2016
HousingAffordability--ExisIng
Evenwithmortgageratesat4.2%housingremainsaffordablebecauseconsumerincomeisrising.Consumerstodayhave57%moreincomethannecessarytopurchaseamedian-pricedhome.In2007thecomparablenumberwas15%.
4.5
5.5
6.5
7.5
8.5
9.5
10.5
1980:Q1 1985:Q1 1990:Q1 1995:Q1 2000:Q1 2005:Q1 2010:Q1 2015-Q1
RentalVacancyRate
ThereisanacuteshortageofrentalproperIesavailable.Thevacancyrateforrentalunitsisthelowestithasbeenin30years!
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%Jan20
07
Apr2
007
Jul200
7Oct2007
Jan20
08
Apr2
008
Jul200
8Oct2008
Jan20
09
Apr2
009
Jul200
9Oct2009
Jan20
10
Apr2
010
Jul201
0Oct2010
Jan20
11
Apr2
011
Jul201
1Oct2011
Jan20
12
Apr2
012
Jul201
2Oct2012
Jan20
13
Apr2
013
Jul201
3Oct2013
Jan20
14
Apr2
014
Jul201
4Oct2014
Jan20
15
Apr2
015
Jul201
5Oct2015
Jan20
16
Apr2
016
Jul201
6Oct2016
Shelter--Rent
TheshortageofavailablerentalproperIesispushinguprents.
525
725
925
1125
1325
1525
1725
1925
HousingStarts
Trend
HousingStarts(Projected)
BuildersaretryingtostepupthepaceofproducIonbutcannotfindenoughskilledworkers.ShouldconInuetoclimbtoperhaps1.4millionbytheendof2017.
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Jan20
08
Apr2
008
Jul200
8Oct2008
Jan20
09
Apr2
009
Jul200
9Oct2009
Jan20
10
Apr2
010
Jul201
0Oct2010
Jan20
11
Apr2
011
Jul201
1Oct2011
Jan20
12
Apr2
012
Jul201
2Oct2012
Jan20
13
Apr2
013
Jul201
3Oct2013
Jan20
14
Apr2
014
Jul201
4Oct2014
Jan20
15
Apr2
015
Jul201
5Oct2015
Jan20
16
Apr2
016
Jul201
6Oct2016
Car&TruckSalesInaddiIontohomes,carandtrucksalesaresteamy.Thisisabigdeal.HousesandcarsarethetwobiggestIcketitemsintheconsumer’sbudget.
ConsumpIon60%
Government15.0%
Trade10.0%
Investment15%
GDPComponents
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
NonresidenIalInvest.
Year-over-year
NonresidenIalInvestment
Investmentspendinghadbeencruisingalongataboutan8%paceunIloilpricescollapsed.Butsuchspendingdriedupattheendof2014.
$25
$35
$45
$55
$65
$75
$85
$95
$105
$1157/21/2009
10/21/200
1/21/2010
4/21/2010
7/21/2010
10/21/201
1/21/2011
4/21/2011
7/21/2011
10/21/201
1/21/2012
4/21/2012
7/21/2012
10/21/201
1/21/2013
4/21/2013
7/21/2013
10/21/201
1/21/2014
4/21/2014
7/21/2014
10/21/201
1/21/2015
4/21/2015
7/21/2015
10/21/201
1/21/2016
4/21/2016
7/21/2016
10/21/201
CrudeOilSpotPrices
Oilpricesdroppedfrom$107perbarrelinOctober2014to$50perbarrel.
400
600
800
1000
1200
1400
1600
1800
2000
2200
RigCount
Asoilpricesdropped,producersshutdown70%oftheoilrigsinoperaIon,cutspendingonoildrillingequipment,oilexploraIon,andresearch.Bighitoninvestmentspending.Asoilpriceshavereboundedsomedrillersareopeningpreviouslyclosedwells.Dragoninvestmenthasdisappeared.
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
800
1000
1200
1400
1600
1800
2000
2200
2400
2007-Q3
2007-Q4
2008-Q1
2008-Q2
2008-Q3
2008-Q4
2009-Q1
2009-Q2
2009-Q3
2009-Q4
2010-Q1
2010-Q2
2010-Q3
2010-Q4
2011-Q1
2011-Q2
2011-Q3
2011-Q4
2012-Q1
2012-Q2
2012-Q3
2012-Q4
2013-Q1
2013-Q2
2013-Q3
2013-Q4
2014-Q1
2014-Q2
2014-Q3
2014-Q4
2015-Q1
2015-Q2
2015-Q3
2015-Q4
2016-Q1
2016-Q2
2016-Q3
2016-Q4
CorporateProfitsw/oIVAandCCCorporateprofitshavereboundedfollowinganoil-relatedslump.Shouldgrowatadouble-digitpaceIn2017.
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
2007-Q1
2007-Q2
2007-Q3
2007-Q4
2008-Q1
2008-Q2
2008-Q3
2008-Q4
2009-Q1
2009-Q2
2009-Q3
2009-Q4
2010-Q1
2010-Q2
2010-Q3
2010-Q4
2011-Q1
2011-Q2
2011-Q3
2011-Q4
2012-Q1
2012-Q2
2012-Q3
2012-Q4
2013-Q1
2013-Q2
2013-Q3
2013-Q4
2014-Q1
2014-Q2
2014-Q3
2014-Q4
2015-Q1
2015-Q2
2015-Q3
2015-Q4
2016-Q1
2016-Q2
CorporateCash/Assets(%)CorporaIonshaveplentyofliquidassetsreadytoinvest.Theyneedacatalyst.
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
Jan2004 Jan2005 Jan2006 Jan2007 Jan2008 Jan2009 Jan2010 Jan2011 Jan2012 Jan2013 Jan2014 Jan2015 Jan2016 Jan2017
ISMIndex
Thepossibilityofcorporatetaxcuts,repatriaIonofoverseasearningsatafavorabletaxrate,andareducIonintheregulatoryburdenhasboostedconfidenceatmanufacturingfirmstoa2-yearhigh.Confidenceatservicesectorfirmshasalsoclimbed.
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
.NonresidenIalInvestment
Weexpectinvestmentspendingtopickuptoabout2.6%in2017and5.0%in2018.
ConsumpIon60%
Government15.0%
Trade10.0%
Investment15%
GDPComponents
Trump’sTradePolicyisDisturbing
Trumpwantsto:
BuildawallbetweenU.S.andMexico.ImposesteeptariffsonsomegoodsfromChinaImposeduIesonanyU.S.firmthatgoesoverseas.PulloutoforrenegoIateNAFTAPulltheplugontheTransPacificPartnership
3
Trump’sTradePolicyisDisturbing
AppearstobedisturbedbylossofU.S.jobsgoingto
ChinaandMexico.
3
ThereisaBeoerWay
3
ThereisaBeoerWay
KeepbusinessesintheU.S.
3
ThereisaBeoerWay
KeepbusinessesintheU.S.
1. Offerthemlowtaxrates.
2. Allowthemtorepatriateearningsatfavorablerate.
3. Offerthemamorerelaxedregulatoryenvironment
3
-800.000
-700.000
-600.000
-500.000
-400.000
-300.000
-200.000
2007q1
2007q3
2008q1
2008q3
2009q1
2009q3
2010q1
2010q3
2011q1
2011q3
2012q1
2012q3
2013q1
2013q3
2014Q1
2014Q3
2015Q1
2015Q3
2016-Q1
2016-Q3
NetExports
Thetradedeficitwidenedearlyin2014and2015andbecameabigdragonGDPgrowth.
5
6
7
8
9
10
11
12
13
14
15
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
China--GDP%
Chinesegrowthhasslowedfromadouble-digitpaceacoupleyearsagoto6.8%lastyearandto6.3%in2016.
90.0
95.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
Jan2001Apr2002Jul2003Oct2004Jan2006Apr2007Jul2008Oct2009Jan2011Apr2012Jul2013Oct2014Jan2016
Trade-weightedValueoftheDollar
AsgrowthinChinaslowed,globalinvestorssoughtdollardenominatedinvestments.Thatcausedthedollartorise22%betweenOctober2014andtheendof2015.
90.0
95.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
Jan2001Apr2002Jul2003Oct2004Jan2006Apr2007Jul2008Oct2009Jan2011Apr2012Jul2013Oct2014Jan2016
Trade-weightedValueoftheDollarMakesU.S.exportsmoreexpensiveforforeignerstobuy.MakesforeigngoodscheaperforAmericanstobuy.Slowergrowthinexports,fastergrowthinimports.Tradedeficitwidens..
90.0
95.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
135.0
Jan2001 Jul2002 Jan2004 Jul2005 Jan2007 Jul2008 Jan2010 Jul2011 Jan2013 Jul2014 Jan2016 Jul2017
Trade-weightedValueoftheDollarGoingforwardthedollarshouldstrengthenfurtherastheeconomygathersmomentumandU.S.interestratesrise.Buttheincreaseshouldbeabout10%in2017vs.22%inearlierrun-up.
-800.000
-700.000
-600.000
-500.000
-400.000
-300.000
-200.0002007q1
2007q3
2008q1
2008q3
2009q1
2009q3
2010q1
2010q3
2011q1
2011q3
2012q1
2012q3
2013q1
2013q3
2014Q1
2014Q3
2015Q1
2015Q3
2016-Q1
2016-Q3
2017-Q1
2017-Q3
2018-Q1
2018-Q3
NetExports
Netexportssubtracted0.4%fromGDPgrowthin2015and2016.Tradeshouldsubtractabout0.2%fromGDPgrowthin2017and2018.
ConsumpIon60%
Government15.0%
Trade10.0%
Investment15%
GDPComponents
-17.0%
-12.0%
-7.0%
-2.0%
3.0%
8.0%
13.0%
FederalGovernment
Year-over-year
FederalGovernmentFederalgovernmentspendingdeclinedin2014-2015aswewounddownthewarsinIraq&Afghanistan.Thatslowdownhasnowended.Governmentspending(defense)shouldriseslightlyinthequartersahead.
GovernmentSpending
TransferPayments
70%
Interest6%Nondefense
8%
Defense16%
Butdefensespendingisonlyabout16%ofallgovernmentspending.Thebulkofsuchspending(70%)ison“enItlements”whichshouldshrink.
ConsumpIon60%
Government15.0%
Trade10.0%
Investment15%
GDPComponents
2017-2018Forecasts 201620172018
GDP 2.0%2.3%2.6%
3
Let’sTalkJobs
-900
-700
-500
-300
-100
100
300
500
Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16
PrivateEmployment
PayrollEmploy.3-mo.average
Employmentclimbingby170thousandpermonth.
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
UnemploymentRate
FullEmployment
Theunemploymentratenowstandsat4.7%.ButYellensaysthisrateismisleading.Itdoesnotincludepeoplewhoare“underemployed”.
200
400
600
800
1000
1200Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
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
DiscouragedWorkers
Discouragedworkers”arepeoplewhohavebeensearchingforajobforsolongthattheyhavegivenuplooking.HasfallensteadilybutsIllabithigherthanitwasatbeginningofrecession.
4000
5000
6000
7000
8000
9000
10000
PartTime-EconomicReasons
AlsoincludespeoplewhoareworkingpartImebutwouldlikeafullImeposiIon.SteadilydecliningbutsIllsomewhathigherthanitwasatbeginningofrecession.
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0 Broadvs.OfficialUnemploy.Rate
FullEmployment
FullEmployment
Yellensayswearesupposedtobewatchingthebroadunemploymentratewhichincludesallthesepeople.Itisat9.2%;officialrateisat4.7%.
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0 Broadvs.OfficialUnemploy.Rate
FullEmployment
FullEmployment
Iffullemploymentfortheofficialrateis5.0%thenfullemploymentforthebroadmeasureshouldbeabout9.0%.Thebroadmeasureisat9.2%.
2017-2018Forecasts 201620172018
GDP 2.0%2.3%2.6%Unemploy.Rate 4.7%4.5%4.3%
3
WillInflaIonAccelerate?
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0
Broadvs.OfficialUnemploy.Rate
FullEmployment
FullEmployment
Withtheeconomyatfullemploymentfirmscannotfindenoughskilledlabor.FirmsmustofferhigherwagesormoreaoracIvebenefits.Wagesrepresent2/3ofafirm’stotalcost.
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Mar-07
Jul-0
7
Nov-07
Mar-08
Jul-0
8
Nov-08
Mar-09
Jul-0
9
Nov-09
Mar-10
Jul-1
0
Nov-10
Mar-11
Jul-1
1
Nov-11
Mar-12
Jul-1
2
Nov-12
Mar-13
Jul-1
3
Nov-13
Mar-14
Jul-1
4
Nov-14
Mar-15
Jul-1
5
Nov-15
Mar-16
Jul-1
6
Nov-16
HourlyEarnings
Acerrisingata2.0%paceforseveralyears,earningsarenowclimbingata3.0%pace.Butthereisoneotherthingtoconsider–producIvity.
UnitLaborCosts
CompensaIon–ProducIvity=UnitLaborCosts2016 2.3%-0.0%=2.3%
3
UnitLaborCosts
CompensaIon–ProducIvity=UnitLaborCosts2016 2.3%-0.0%=2.3%
2017 3.5%-1.0%=2.5%
3
60
80
100
120
140
160
180
200
220CommodiIes--Energyvs.Nonenergy
Non-energyEnergy
Commoditypricesaretheremaining1/3ofafirm’scosts.Oilpricesaswellascommoditypricesotherthanoil–copper,lead,zinc,gold,silver,beef,fish--fellsteadilyformorethanayear.HelpedpushinflaIonlower.Butnowallcommoditypriceshaveturnedupwards.DownwardbiastotheinflaIonratewilldisappear.
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%Jan20
07
Apr2
007
Jul200
7Oct2007
Jan20
08
Apr2
008
Jul200
8Oct2008
Jan20
09
Apr2
009
Jul200
9Oct2009
Jan20
10
Apr2
010
Jul201
0Oct2010
Jan20
11
Apr2
011
Jul201
1Oct2011
Jan20
12
Apr2
012
Jul201
2Oct2012
Jan20
13
Apr2
013
Jul201
3Oct2013
Jan20
14
Apr2
014
Jul201
4Oct2014
Jan20
15
Apr2
015
Jul201
5Oct2015
Jan20
16
Apr2
016
Jul201
6Oct2016
Shelter--RentTheshortageofavailablehousingispushinguprents.Theyarecurrentlyrisingat3.6%pace.Rentsare1/3oftheenIreCPI.
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%Jan20
07
Apr2
007
Jul200
7Oct2007
Jan20
08
Apr2
008
Jul200
8Oct2008
Jan20
09
Apr2
009
Jul200
9Oct2009
Jan20
10
Apr2
010
Jul201
0Oct2010
Jan20
11
Apr2
011
Jul201
1Oct2011
Jan20
12
Apr2
012
Jul201
2Oct2012
Jan20
13
Apr2
013
Jul201
3Oct2013
Jan20
14
Apr2
014
Jul201
4Oct2014
Jan20
15
Apr2
015
Jul201
5Oct2015
Jan20
16
Apr2
016
Jul201
6Oct2016
Medical
Medicalcostshaveacceleratedfrom2.5%ayearagotoabout4.0%.
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
CPIExFood&Energy
CPI--Projected
InflaIonispoisedtoaccelerate–butnotexplode,
2017-2018Forecasts 201620172018
GDP 2.0%2.3%2.6%Unemploy.Rate 4.7%4.5%4.3%InflaIon(CoreCPI) 2.2%2.7%2.7%
3
WhatIstheFedGoingtoDo?
TheFedWillRaiseRatesSlowly
2017-2018Forecasts 201620172018
GDP 2.0%2.3%2.6%Unemploy.Rate 4.7%4.5%4.3%InflaIon(CoreCPI) 2.2%2.7%2.7%FedFundsRate 0.5%1.3%2.0%
0
1
2
3
4
5
6
7
8
9Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
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-19
Jan-20
FedFundsRate--Projected
IftheFedraisesratesslowlyitwilltakeunIlmid-2020forratestobe“neutral”.Howhighis“neutral”?A“neutralrate”shouldbeabout3.0%.
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Jan-61
Jul-6
2Jan-64
Jul-6
5Jan-67
Jul-6
8Jan-70
Jul-7
1Jan-73
Jul-7
4Jan-76
Jul-7
7Jan-79
Jul-8
0Jan-82
Jul-8
3Jan-85
Jul-8
6Jan-88
Jul-8
9Jan-91
Jul-9
2Jan-94
Jul-9
5Jan-97
Jul-9
8Jan-00
Jul-0
1Jan-03
Jul-0
4Jan-06
Jul-0
7Jan-09
Jul-1
0Jan-12
Jul-1
3Jan-15
Jul-1
6
RealFundsRateOverthepast50yearsthefundsratehasaveraged1.0%higherthaninflaIon.Typicallyregardedasa“neutral”realrate.
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0Jan-61
Jul-6
2Jan-64
Jul-6
5Jan-67
Jul-6
8Jan-70
Jul-7
1Jan-73
Jul-7
4Jan-76
Jul-7
7Jan-79
Jul-8
0Jan-82
Jul-8
3Jan-85
Jul-8
6Jan-88
Jul-8
9Jan-91
Jul-9
2Jan-94
Jul-9
5Jan-97
Jul-9
8Jan-00
Jul-0
1Jan-03
Jul-0
4Jan-06
Jul-0
7Jan-09
Jul-1
0Jan-12
Jul-1
3Jan-15
Jul-1
6
RealFundsRate
Ifa“neutral”realfundsrateis1.0%andtheFedhasaninflaIontargetof2.0%,thenaneutralfundsrateshouldbeabout3.0%.
0
1
2
3
4
5
6
7
8
9Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
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-19
Jan-20
FedFundsRate--Projected
ItwilltakeunIlthemiddleof2020forratestoreachthe“neutral”levelof3.0%.
0.0
5.0
10.0
15.0
20.0 FedFundsRate
TheU.S.economyhasnevergoneintorecessionunlessthefundsratehasbeenhigherthan“neutral”.
0
1
2
3
4
5
6
7
8
9Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
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-19
Jan-20
FedFundsRate--Projected
Ifthefundsratedoesnotbecome“neutral”unIlmid-2020,theearliestdateforarecessionis2020.
Thelongestexpansiononrecord
LongrateswillconInuetoriseslowly
2017-2018Forecasts 201620172018
GDP 2.0%2.3%2.6%Unemploy.Rate 4.7%4.5%4.3%InflaIon(CoreCPI) 2.1%2.7%2.7%FedFundsRate 0.5%1.3%2.0%10-yearNote 2.5%2.9%3.4%30-yearMortgage 4.2%4.6%5.1%
3
ImportantTakeaways
1. RaiseEconomicSpeedLimit–1.8%to2.8%
2. Fastergrowthinwages–2.3%to3.5%.
3. Fastergrowthinourstandardofliving.
4. InflaIonacceleratesslightly–2.2%to2.7%.
5. Fedraisesratesveryslowly--0.5%to1.3%
6. Greatenvironmentforstocks.Newhighs.
ItDoesn’tGetMuchBeoer
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