What you should know, higher prices trade tensions, and the expanding economy September 11, 2018 Mark Schniepp Director

Transcription

1 The 2018 Economy What you should know, higher prices trade tensions, and the expanding economy September 11, 2018 Mark Schniepp Director 1

2 The annual update Why are you here? (1) I m here for the update workshops later today, but I need my morning coffee now (2) I want to hear about interest rates (3) I want to hear about the outlook for California (4) When is the next recession? (5) I m here for the networking and cocktail hour, I couldn t sleep and I have nothing to do for the next hour Last year ( ) (1) Disruptive forces: Robots, AVs (2) U.S. Economy and Trumponomics (3) Tax reform (4) State of the California economy (5) Cannabis outlook for California (6) The general economic outlook 2

3 Also this year.... (1) What you should know about today s economy ---- tough trade talk and tariffs (2) Building in California, and (3) The challenges that all builders now face: construction pressures (4) The 2019 outlook What you should know the U.S. unemployment rate fell to 3.9% in August, the lowest since 2000 wages are rising more steadily now business is still hiring 9+ years into the economic expansion And there are more jobs openings now than ever If the expansion can last another year, it will be the longest ever 3

4 thousands of jobs 6,500 Job Openings / U.S. June June ,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 Jun-03 Feb-05 Oct-06 Jun-08 Feb-10 Oct-11 Jun-13 Feb-15 Oct-16 Jun-18 The real meaning of a tight labor market (1) It s extraordinarily difficult to hire (2) Anyone that wants a job can get a job (3) And that includes, for the most part, a position in your career field and full time (4) Wages and salaries are rising more sharply (5) If you are at all dissatisfied with your current job, now is the time to make a change. Opportunities have never been better 4

5 expansion we are here expansion recession recovery months Economic Expansions in Months / U.S to Now Oct 45 - Nov 46 Oct 49 - Jul 53 May 54 - Aug 57 Apr 58 - Apr 60 Feb 61 - Dec 69 Nov 70 - Nov 73 Mar 75 - Jan 80 Dec 82 - Jul 90 Mar 91 - Nov 01 - Jul 09 - Mar 01 Dec 07 Sep 18 5

6 January 31, 2018 February 18,

7 index 2010 = Index of Leading Indicators / U.S. July July Jul-08 Oct-09 Jan-11 Apr-12 Jul-13 Oct-14 Jan-16 Apr-17 Jul-18 index 26,750 Dow Jones Industrial Average September 11, September 10, ,750 24,750 23,750 22,750 21,750 20,750 19,750 18,750 17,750 Sep-16 Dec-16 Feb-17 May-17 Aug-17 Oct-17 Jan-18 Apr-18 Jun-18 Sep-18 7

8 index 1985= Consumer Confidence / The Conference Board August August 2018 current conditions expected conditions Highest reading since Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Extremes you should know Stock market near all time record high Wealth of HHs at all time record high Positive sentiment of workers and households near all time record highs Unemployment rates lowest in a generation GDP growth above trend 4.2% GDP growth in 2 nd Quarter the 3 rd Q is tracking at 3.7% fourth quarter likely around 3 percent 8

9 percent change 5 Real Gross Domestic Product Growth 2014 Q Q2 we are here Q4 2015Q3 2016Q2 2017Q1 2017Q4 2018Q3 2019Q2 Probability of Recession / U.S. the probability that the U.S. economy will be in recession in 6 months % likelihood July July Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 9

10 Recession The odds that the U.S. will be in recession in the next 6 months remain very low Recessions normally occur when imbalances develop And no clear imbalances are forming... Right now, there is NO immediate threat of recession The stock market is at all time high, supporting consumers, businesses and investors percent 2.5 Federal Funds Rate and Core Inflation January July Core Inflation Federal Funds Rate 0.0 Jan-13 Feb-14 Mar-15 Apr-16 May-17 Jun-18 10

11 percent yield year U.S. Treasury Bond Yield December 10, September 10, Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 May-18 Jul-18 Sep-18 The Goldilocks Economy Inflation still low Interest rates still historically low Labor market at full employment GDP growth just right No chance of recession Despite spending surge by consumers, households use of credit is still cautious 11

12 as a percent of personal income Household Debt / U.S Q Q Q2 1988Q2 1994Q2 2000Q2 2006Q Q Q2 Quiz: Your Household Debt (a) I have no debt! (b) mortgage only, or mortgage and car (c) mortgage, car, and a small credit card balance (d) most of the above, and student loans.. (e) all of the above, plus payments on my RV, Boat, vacation time share, and Cessna

13 Trade Agenda Protectionist Wave of tariffs, on $110 billion in imports First China and then Canada, the EU, everyone else Now China again: 25 percent manufactured goods Necessary to counter theft of intellectual property China has retaliated with 25% tariffs on chemicals Mexico was threatened but a new NAFTA agreement has been negotiated Washing machines, solar panels, steel, aluminum, tractors, chemicals, paper, motors, and other machinery Tariffs: How Significant? Tariffs affect: 4.5 percent of all trade with Canada 1.5 percent of all trade with the EU 1.1 percent of all trade with Mexico 12 percent of all trade with China No tariffs on services; no retaliatory tariffs on U.S. services exported Financial, technical and IT, professional In total, tariffed imports account for only 4 percent of total U.S. imports 13

14 billions of dollars, SA International Trade / U.S. January July 2018 Imports Exports Jan-06 Feb-08 Mar-10 Apr-12 May-14 Jun-16 Jul-18 California Another big year for jobs -- Higher paying technology sector Unemployment rate now stands at 4.2 % Building boom in urban centers -- Office buildings, hotels, retail centers Some more housing this year More building of every kind 14

15 thousands of jobs Jobs Created / California , jobs 78,000 Employment in Software Development / California July July ,000 70,000 66,000 62,000 58,000 54,000 50,000 46,000 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 15

16 millions of visitors 19 Attendance at Disneyland / Anaheim million Adult Single Ticket Price / Disneyland dollars $ $ quadrupled

17 Lowest rate ever rate 9% 7% Unemployment Rate / San Francisco Metro Area Lowest rate ever 5% 3% 1%

18 Construction Pressures labor market boom fires High speed rail Madera, Fresno, San Joaquin Counties 2,101 construction workers Millennials are getting tired of living with their parents population in general continues to grow immigration policy thousands of units permitted 225 New Housing Production / California

19 October 2017 California Fires in 2017 Northern California and Ventura County Fire Homes Commercial Damaged Tubbs Nuns Pocket Cascade Atlas Redwood Sulphur Thomas 4, Totals 7,

20 2018 Fires Santa Barbara and Northern California incident Homes Commercial Damaged Montecito Debris Slide Car Fire Ranch Fire River Fire Delta , na na na Totals 1, Grand Totals 8, ,507 billions of dollars 21 Investment in New C&I Structures / California

21 billions of dollars 1.6 Investment in New Hotels / California Investment in New C&I Structures / California Amusement Parking Hospitals Other 42% % Office 10% Industrial Hotels 8% 20% Retail 21

22 billions of dollars 2.0 Investment in New Parking Structures California billions of dollars 14 All Commercial and Residential Building Los Angeles County

23 millions of dollars 800 New Commercial & Industrial Investment San Francisco County thousands of jobs 950 Construction Employment / California

24 percent Unemployment Rate for Construction Workers / U.S percent Wage Inflation / Construction Workers California %

25 Principal Components of New Building Construction Cost Cement Lumber Steel skilled labor 65 % June 14,

26 index 600 Steel Producer Price Index Source: BLS percent Steel Price / percent change in price % 22 %

27 index 300 Concrete Producer Price Index Source: BLS index 500 Copper Producer Price Index Source: BLS 27

28 Copper Price /percent change in price percent % 13 % Structural Panel Lumber Price dollars per thousand square feet July July Jul-98 Jul-02 Jul-06 Jul-10 Jul-14 Jul-18 Source: Random Lengths Company 28

29 percent Panel Lumber Price / percent change % 18 % Source: Random Lengths Framing Lumber Price dollars per thousand board feet July July Jul-98 Jul-02 Jul-06 Jul-10 Jul-14 Jul-18 Source: Random Lengths Company 29

30 index Framing Lumber Price / percent change % 19 % Source: Random Lengths percent 12 Total Construction Costs / Percent Change California Schools 6 4 California Non-Residential

31 percent 4 Consumer Price Inflation / California Cannabis and Tax Revenue in California 31

32 Pot Facts to Date in 2018 Cultivation and sale of cannabis legal in California as of January 1, : two new taxes went into effect -- Cultivation tax on harvests that enter the commercial market, $9.25 / oz of flower -- Excise Tax on cannabis products paid by retailer percent on all cannabis products by purchaser Then there is already the sales tax -- at least 7.25 percent everywhere Pot Facts to Date in 2018 Then there are local taxes on retailers and other stages of the supply chain 68,120 commercial growers in state last year 13.5 million pounds of pot produced in 2016 Estimated 15 million in 2017 Price per pound: $1,500 in 2017, but now falling Tax revenue implications: $23 billion in value and $7.5 billion in taxes to State Another $1.5 billion to counties and cities 32

33 Revenue Sources / State of California / Other Regulatory Fees Motor Vehicle Fees Cannabis Taxes: $7.5 billion Highway taxes 7.7 Corporations Tax 12.3 Sales Taxes 38.7 Personal Income billions of dollars Pot Facts to Date in 2018 However, to date, only 4,833 permits have been issued to commercially farm pot -- this represents only 7.1 percent of the estimated number of growers in the state Credit card companies won t do business with dispensaries or growers Growers and retail operations can t open checking accounts at banks Hence, it s a cash business Cash breeds crime 33

34 Cultivation Permits Issued to date Santa Barbara 1,398 Humboldt 908 Mendocino 635 Monterey 432 Trinity 205 Calaveras 195 Riverside 189 Los Angeles 159 Sonoma 112 Sacramento 92 34

35 Cultivation Permits Issued to date Buellton 504 Lompoc 394 Salinas 332 Carpinteria 256 Laytonville 91 Sacramento 92 Willits 89 Desert Hot Springs 85 Pot Revenues in 2018 Expectations of Tax Revenue for California by Governor Brown -- first 6 months: $ 185 million -- first year: $ 630 million But tax revenues for first half of 2018 have fallen way short of expectations $135 million in first 6 months 418 retail permits in 34 Cities LA, SF, Sacramento, Santa Ana, San Diego 35

36 dollars 2,200 Average Cannabis Price per Pound / U.S. $2,137 August September 7, ,900 1,600 $1,108 1,300 1,000 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 cannabisbenchmarks.com percent Effective Tax Rates on Cannabis by State Oregon Alaska Mass Nevada Colorado California Wash 36

37 Local Tax Rates / California CITIES 50 Cities with additional tax rates Los Angeles: 10% gross final sales Oakland: 5% gross receipts Palm Springs: 15% of gross receipts San Diego: 15 % gross receipts Sacramento: 4% gross receipts Santa Barbara: 2 to 6% of gross receipts King City: $30,000 fee per year Effective Tax Rates The effective rate in California is in the range of 35 to 60 percent To date, given the licensing and first half tax numbers, the black market appears to be winning, and expanding The lesson for California is that tax rates are too high 37

38 millions of students 3.0 Total Student Enrollment California Community Colleges 1998 to CC enrollment Nationwide decline, since 2010 Enrollments naturally decline when the economy is strong and unemployment is low When the economy begins to slow, look for a pick-up in enrollment California demographics are not forecast to change much over next 10 years 38

39 millions of people Population Age 18 to 24 / California millions of people Population Age 55+ / California

40 Cracks in the Dike The cracks aren t big enough Housing prices continue surging The response has been a corresponding surge in apartment building Tariffs could slow down export based sectors, but it s unlikely Tensions in middle east, with Russia, with North Korea have moderated Slowdown in 2019 and 2020, but... 40

41 What you can expect in 2019 Slowdown the next 2 years because the stimulus effect from tax cuts starts to fade Continued building in California Continued difficulty recruiting workers Higher inflation and interest rates, wages and commodity prices.... Home price appreciation will slow down Today s Tips for 2019 Think seriously about rebalancing Stock market returns have out performed foreign stocks, bonds, and cash Buy and hold strategy should be reviewed How long can you hold Apple and Amazon? Think about foreign stocks, and bonds Ask for a big raise Or better yet: Get a new job; now is the time 41

42 2018 Economic Update September 11, 2018 Mark Schniepp, Director 42