June 11, 2018

Overheating ?

Mark Schniepp, Director

In the SCAG Economy

“Overheating” What is it ?

Occurs when existing productive capacity is unable to keep pace with aggregate demand. Growth rises above the trend . . . . . . . .

time

growth rate of

produc-tion

output acceleration

trend

“Overheating”

……… and price inflation results . . .

pricelevel

rate of production

AD1AD2

S

x zy

50,000

53,000

56,000

59,000

62,000

65,000

68,000

71,000

1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Real Median Household Income constant 2017 dollars 1987 -- 2017

California

U.S.

-9

-6

-3

0

3

6

9

2002 2004 2006 2008 2010 2012 2014 2016

Real Gross County Product / Inland Empire 2002 -- 2016

percent change

2.7 %

-6

-4

-2

0

2

4

6

2002 2004 2006 2008 2010 2012 2014 2016

Real Gross County Product / LA-Orange Metro 2002 -- 2016

percent change

-6

-4

-2

0

2

4

6

2002 2004 2006 2008 2010 2012 2014 2016

Real Gross County Product / Ventura County 2002 -- 2016

percent change

-6

-4

-2

0

2

4

6

8

10

2002 2004 2006 2008 2010 2012 2014 2016

Real Gross County Product / Imperial County 2002 -- 2016

percent change

0

1

2

3

4

Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18

LA Metro Region Consumer Price Inflation percent

April 2010 -- April 2018

0

1

2

3

4

Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18

LA Metro Region Core Consumer Price Inflation percent April 2010 -- April 2018

3.1

5.5

7.0 7.3

9.8

11.6

2

4

6

8

10

12

Imperial Ventura Orange Riverside San Ber'dino Los Angeles

Median Home Price Appreciation SCAG Counties

2018

percent change

1.7

1.9

2.1

2.3

2.5

2.7

2.9

3.1

Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Apr-18 Jun-18

10 year U.S. Treasury Bond Yield November 6, 2016 -- June 8, 2018

percent yield

Lowest rate ever

2

4

6

8

10

12

14

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Unemployment Rate / Inland Empire thousands of jobs. 1982 - 2018

3.9 %

305

310

315

320

325

330

335

340

345

350

355

1994Q1 1997Q1 2000Q1 2003Q1 2006Q1 2009Q1 2012 Q1 2015 Q1 2018 Q1

Median Weekly Earnings per Worker / U.S. 1993 Q4 -- 2018 Q1

constant dollars / week

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2007 Q3 2009 Q1 2010 Q3 2012 Q1 2013 Q3 2015 Q1 2016 Q3 2018 Q1

Inflation in Wages and Salaries per Worker Los Angeles and Bay Area regions

2007 Q3 -- 2018 Q1

percent change

Bay Area

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2007 Q3 2009 Q1 2010 Q3 2012 Q1 2013 Q3 2015 Q1 2016 Q3 2018 Q1

Inflation in Wages and Salaries per Worker Los Angeles and Bay Area regions

2007 Q3 -- 2018 Q1

percent change

Los Angeles - Orange - Inland Empire

Bay Area

-1

0

1

2

3

4

5

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Average Wage Growth 2007 - 2017

percent

Orange County

Inland Empire

L.A. County

-2

-1

0

1

2

3

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Real Average Wage Growth 2007 - 2017

percent

Orange County

Inland Empire

L.A. County

(1) Inflation remains contained at the U.S. level

(2) . . . but is clearly moving higher regionally

(3) And most of the increase is due to housing

(4) There are other sectors of concern ~

• Construction labor market

• Apartment building downtown

• Office building and office rents, L A County

Is the Economy Overheating?

Is the Economy Overheating?• Housing prices appear to have overheated,

but for fundamental reasons– Lack of inventory and a fully employed economy

• At the current rate of unemployment, the overall labor market should be overheating but is not . . .

– A fully employed economy --> higher labor costs– Wage inflation has been relatively moderate

– Some industry sector wages are rising more sharply than others

-2

0

2

4

6

8

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Average Wage Growth / L.A. County 2007 - 2017

percent

Hotels and RestaurantsProfessional and Technical

Construction

11

12

13

14

15

16

17

18

19

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Attendance at Disneyland / Anaheim 1999 -- 2017

millions of visitors

18.2 million

10

20

30

40

50

60

70

80

90

100

110

120

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Adult Single Ticket Price / Disneyland 1984 - 2018 dollars

90

100

110

120

130

140

150

160

1994 1997 2000 2003 2006 2009 2012 2015 2018

Employment in Computer Design, Data Processing, Scientific & Technical Research

Los Angeles County thousands of jobs

1994 -- 2018

0

4,000

8,000

12,000

16,000

20,000

24,000

28,000

1988 1993 1998 2003 2008 2013 2018

New Apartment Units / Los Angeles County units permitted

1988 - 2018

0

5,000

10,000

15,000

20,000

25,000

2004 2006 2008 2010 2012 2014 2016 2018

Apartment Units Under Construction Central and Downtown Los Angeles

2004 -- 2018

units underway

3.0

3.5

4.0

4.5

5.0

5.5

2005 Q3 2008 Q1 2010 Q3 2013 Q1 2015 Q3 2018 Q1

Apartment Vacancy Rate / Central Los Angeles 2005 Q3 -- 2018 Q1

percent vacant

2

4

6

8

10

12

14

1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

All Commercial and Residential Building Los Angeles County

1988 - 2018

billions of dollars

90

100

110

120

130

140

150

160

1990 1994 1998 2002 2006 2010 2014 2018

Employment in Construction Los Angeles County

thousands of jobs

1990 -- 2018

Who Benefits ?• Working people, working families who are

middle to upper income and need housing • Tech workers• Construction workers in all regions• Skilled workers• Homeowners who are selling

– Because inventory is so scarce

Who Loses ?• Fixed income households

– Face higher prices but incomes are constant

• Families wanting to go to Disneyland• Home buyers

– home prices are at record levels in many cities and counties-- longer term mortgage rates are rising

• Residential Real Estate industry – Higher interest rates and higher housing prices are

likely to reduce transactions

75,000

90,000

105,000

120,000

135,000

150,000

165,000

180,000

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Existing Home Sales / Southern California 1998 - 2018 (January through April)

sales index

June 11, 2018

Overheating ?

Mark Schniepp, Director

In the SCAG Economy

expansion