The 2018 Economy What you should know, higher prices trade tensions, and the expanding economy September 11, 2018 Mark Schniepp Director 1
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 (11-14-17) (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
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
thousands of jobs 6,500 Job Openings / U.S. June 2003 -- June 2018 6,000 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
expansion we are here expansion recession recovery months 125 100 Economic Expansions in Months / U.S. 1945 to Now 120 105 91 110 75 58 73 50 37 45 39 36 25 24 0 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
January 31, 2018 February 18, 2018 6
index 2010 = 100 155 Index of Leading Indicators / U.S. July 2008 -- July 2018 145 135 125 115 105 95 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, 2016 -- September 10, 2018 25,750 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
index 1985=100 130 120 110 100 90 80 70 Consumer Confidence / The Conference Board August 2009 -- August 2018 current conditions expected conditions Highest reading since 2000 60 50 40 30 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
percent change 5 Real Gross Domestic Product Growth 2014 Q4-2019 Q2 we are here 4 3 2 1 0 2014 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 2012 -- July 2018 35 30 25 20 15 10 5 0 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 9
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 2013 -- July 2018 2.0 1.5 1.0 0.5 Core Inflation Federal Funds Rate 0.0 Jan-13 Feb-14 Mar-15 Apr-16 May-17 Jun-18 10
percent yield 3.1 10 year U.S. Treasury Bond Yield December 10, 2016 -- September 10, 2018 2.9 2.7 2.5 2.3 2.1 1.9 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
as a percent of personal income Household Debt / U.S. 1982 Q2 -- 2018 Q2 13.0 12.5 12.0 11.5 11.0 10.5 10.0 9.5 1982Q2 1988Q2 1994Q2 2000Q2 2006Q2 2012 Q2 2018 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 182 12
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
billions of dollars, SA 260 240 International Trade / U.S. January 2006 -- July 2018 Imports 220 200 180 160 140 Exports 120 100 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
thousands of jobs 600 400 200 Jobs Created / California 2009-2018 390 424 476 426 326 151 333 357 0-200 -400-155 -600-800 -1,000-861 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 jobs 78,000 Employment in Software Development / California July 2011 -- July 2018 74,000 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
millions of visitors 19 Attendance at Disneyland / Anaheim 1999 -- 2017 18 17 16 15 14 13 12 11 18.3 million 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Adult Single Ticket Price / Disneyland dollars 1985-2018 120 110 $ 117 100 90 $ 135 80 70 60 quadrupled 50 40 30 20 10 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 16
Lowest rate ever rate 9% 7% Unemployment Rate / San Francisco Metro Area 1983 -- 2018 Lowest rate ever 5% 3% 1% 1983 1988 1993 1998 2003 2008 2013 2018 17
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 1998-2018 200 175 150 125 100 75 50 25 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 18
October 2017 California Fires in 2017 Northern California and Ventura County Fire Homes Commercial Damaged Tubbs Nuns Pocket Cascade Atlas Redwood Sulphur Thomas 4,655 639 3 203 445 314 134 777 94 32 0 1 17 5 2 183 310 172 2 2 120 42 8 280 Totals 7,170 334 936 19
2018 Fires Santa Barbara and Northern California incident Homes Commercial Damaged Montecito Debris Slide Car Fire Ranch Fire River Fire Delta 12 7 1,077 157 146 2 21 22 123 118 0 294 277 na na na Totals 1,509 281 571 Grand Totals 8,679 618 1,507 billions of dollars 21 Investment in New C&I Structures / California 1998 -- 2018 18 15 12 9 6 3 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 20
billions of dollars 1.6 Investment in New Hotels / California 1991 -- 2018 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 Investment in New C&I Structures / California Amusement Parking Hospitals Other 42% 2018 20% Office 10% Industrial Hotels 8% 20% Retail 21
billions of dollars 2.0 Investment in New Parking Structures California 1991 -- 2018 1.6 1.2 0.8 0.4 0.0 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 billions of dollars 14 All Commercial and Residential Building Los Angeles County 1988-2018 12 10 8 6 4 2 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 22
millions of dollars 800 New Commercial & Industrial Investment San Francisco County 1988 -- 2018 700 600 500 400 300 200 100 0 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 thousands of jobs 950 Construction Employment / California 2000 -- 2018 875 800 725 650 575 500 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 23
percent Unemployment Rate for Construction Workers / U.S. 2000 -- 2018 21 18 15 12 9 6 3 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 percent 8 7 6 Wage Inflation / Construction Workers California 1998-2018 6.1% 5 4 3 2 1 0-1 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 24
Principal Components of New Building Construction Cost Cement Lumber Steel skilled labor 65 % June 14, 2018 25
index 600 Steel Producer Price Index 2006 -- 2018 500 400 300 200 2006 2008 2010 2012 2014 2016 2018 Source: BLS percent 60 40 Steel Price / percent change in price 2006 -- 2018 34 % 22 % 20 0-20 -40-60 2006 2008 2010 2012 2014 2016 2018 26
index 300 Concrete Producer Price Index 2006 -- 2018 275 250 225 200 2006 2008 2010 2012 2014 2016 2018 Source: BLS index 500 Copper Producer Price Index 2006 -- 2018 450 400 350 300 250 2006 2008 2010 2012 2014 2016 2018 Source: BLS 27
Copper Price /percent change in price percent 2006 -- 2018 30 20 17 % 13 % 10 0-10 -20-30 2006 2008 2010 2012 2014 2016 2018 600 550 500 450 400 350 300 250 Structural Panel Lumber Price dollars per thousand square feet July 1998 -- July 2018 200 Jul-98 Jul-02 Jul-06 Jul-10 Jul-14 Jul-18 Source: Random Lengths Company 28
percent 30 20 Panel Lumber Price / percent change 2006 -- 2018 27 % 18 % 10 0-10 -20 2006 2008 2010 2012 2014 2016 2018 Source: Random Lengths 600 550 500 450 400 350 300 250 200 Framing Lumber Price dollars per thousand board feet July 1998 -- July 2018 150 Jul-98 Jul-02 Jul-06 Jul-10 Jul-14 Jul-18 Source: Random Lengths Company 29
index 30 20 Framing Lumber Price / percent change 2006 -- 2018 27 % 19 % 10 0-10 -20 2006 2008 2010 2012 2014 2016 2018 Source: Random Lengths percent 12 Total Construction Costs / Percent Change 2006 -- 2018 10 8 California Schools 6 4 California Non-Residential 2 0 2006 2008 2010 2012 2014 2016 2018 30
percent 4 Consumer Price Inflation / California 1960-2010 2004-2018 3 2 1 0 2004 2006 2008 2010 2012 2014 2016 2018 Cannabis and Tax Revenue in California 31
Pot Facts to Date in 2018 Cultivation and sale of cannabis legal in California as of January 1, 2018 1-1-18: 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 -- 15 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
Revenue Sources / State of California / 2018-2019 Other Regulatory Fees Motor Vehicle Fees 8.6 9.4 21.3 Cannabis Taxes: $7.5 billion Highway taxes 7.7 Corporations Tax 12.3 Sales Taxes 38.7 Personal Income 97.2 0 20 40 60 80 100 120 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
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
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
dollars 2,200 Average Cannabis Price per Pound / U.S. $2,137 August 2014 -- September 7, 2018 1,900 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 52 46 Effective Tax Rates on Cannabis by State 2018 45 40 34 28 22 16 17 20.8 24 25 30 31.5 10 Oregon Alaska Mass Nevada Colorado California Wash 36
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
millions of students 3.0 Total Student Enrollment California Community Colleges 1998 to 2018 2.8 2.6 2.4 2.2 2.0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 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
millions of people 4.5 4.4 4.3 4.2 Population Age 18 to 24 / California 2010-2025 4.3 4.2 4.2 4.4 4.1 4.0 3.9 3.9 3.8 3.7 2010 2015 2020 2025 2030 millions of people 12.5 11.5 Population Age 55+ / California 2010-2025 11.4 12.8 10.5 9.5 9.9 8.5 8.4 7.5 2010 2015 2020 2025 39
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
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
2018 Economic Update September 11, 2018 Mark Schniepp, Director 42