The Economic Outlook For the Nation and the State Where are we in the Economic Cycle? January 14, 2015 Mark Schniepp Director. and what does that mean for 2015? Where are interest rates going?... the stock market? What about the national economy? -- is it tiring out? Where does California fit in? -- is the state keeping up? What can we expect by the end of 2015?
Major stories for 2015 Oil and gasoline prices tumble Interest rates at record lows? Inflation less than 2 percent? But what about all the stimulus a few yrs back? Why we are in an economic expansion Where is the growth in California, and what about.. the drought? Why housing remains a problem the New Normal Definition: a previously unfamiliar or atypical situation that has become standard, usual, or expected Slower growth in the economy How conditions are now as good as they get... So stop whining.
December 18, 2014 at the GWU website the New Normal Definition: a previously unfamiliar or atypical situation that has become standard, usual, or expected Slower growth in the economy How conditions are now is as good as it gets... So stop whining.! Low interest rates are here to stay! Strengthening dollar! A fickle housing market! change
Social & Economic Changes! We are seeing gradual change more frequently and it s redefining normal..! Due to Global influences - Manufacturing going abroad - Shift in oil production - Geopolitical risks! But mostly as a result of - Technology and Demographics - The aging baby boomer generation, and Generation Y now becoming more economically relevant Social & Economic Changes! Who was Kathleen Casey?! 76 million for the next 19 years....! Grew up in the 50s and 60s and was a prominent socio-economic force in America! Explosion of school construction in 50s! Toys: Barbie, GI Joe! Social changes of the 60s and 70s! the Drug Culture and Rock Music explosion of the 60s! Civil rights movement and the Environmental movement! Boomers were the spendthrift consumers
Social & Economic Changes! Housing booms of the 70s and 80s! Personal computer boom of the 80s and 90s! They invented! the internet in the 90s, which ultimately led to a 3,000 point advance in the Nasdaq and the tech bust in 2001! Viagra in 1998! The housing bubble in 2004 2007! The technology boom of the new milenium and insatiable demand for electronics and gadgets! Boomers are now growing old births in thousands 4,500 4,000 3,500 wwii generation swing generation Births in the United States 1925-2013 baby boom? generation X generation Y or "millenials" 3,000 2,500 2,000 1925 1933 1941 1949 1957 1965 1973 1981 1989 1997 2005 2013
December 2014 articles online The Baby Boom Population 1945 to 2060 Now aged 50 to 68 U.S. Census Bureau / Purple bars estimated; green bars projected
in thousands 140,000 130,000 Population by Age / U.S. 2012-2035 65 & over 120,000 110,000 45 to 64 years old 100,000 90,000 25 to 44 years old 80,000 2012 2015 2020 2025 2030 2035 What do Boomer s want They don t want to hear themselves called senior citizens, or old They don t want to stop working 74 percent of boomers say they ll never retire Entrepreneurial endeavors A home without parents, kids, or grandkids 83 percent said they don t want to share their home Exercise, and looking good doing it spandex biking gear and yoga pants that don t make them look ridiculous Extreme sports (river rafting, paragliding, skydiving)
What do Boomer s want Travel and recreation tailored to the over 50 crowd Experiencial vacations Biking, hiking, cruise ships, exotic classes Senior friendly communities, (close to transportation, stores and services) But not a traditional retirement community Music and concerts Smart technologies, especially re: healthcare Hip and knee replacements Social media Robots, drones, other gadgets dollars per barrel West Texas Intermediate Crude Oil Price: Daily January 2014 -- January 13, 2015 106 98 90 82 74 66 58 50 $108 $46 42 Jan-14 Mar-14 May-14 Jun-14 Aug-14 Oct-14 Nov-14 Jan-15
dollars per gallon 4.70 4.40 4.10 Regular Grade Gasoline Price / California January 12, 2009 -- January 12, 2015 January 12, 2015: $ 2.59 3.80 3.50 May 18, 2009 3.20 2.90 2.60 2.30 2.00 2009 2009 2010 2011 2012 2013 2014 thousands of barrels per day 10,000 9,000 8,000 7,000 Crude Oil Production / U.S. November 1969 - November 2014 Texas North Dakota Alaska California Oklahoma 6,000 5,000 4,000 Nov-69 May-77 Nov-84 May-92 Nov-99 May-07 Nov-14
Why are gasoline prices collapsing? (1) U.S. oil production has sharply increased Domestic oil refiners import less foreign oil (2) World oil demand has softened and demand growth in 2015 is weaker than expected (3) The U.S. dollar has strengthened The value of oil relative to the dollar has weakened (4) Cheaper gasoline standards in winter months (5) No hurricanes and refinery shutdowns 0.84 0.82 0.80 0.78 0.76 0.74 0.72 0.70 0.68 U.S. Dollar to Euro Exchange Rate value of the dollar to the euro January 2009 - January 2015 0.66 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
dollars per barrel 110 West Texas Intermediate Crude Oil Price: Monthly December 2011 - December 2015 100 90 80 70 60 50 40 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Source: U.S. Energy Information Administration The Economic Evidence! The recovery is now long over;! Most of the economic indicators including employment are at unprecedented levels! Growth has accelerated! Consumer spending, Hiring, Investment spending..! Confidence in the economy has been fully restored! U.S. businesses are especially upbeat, consistent with an economy that is expanding well above its potential! The 10 year Treasury Bond yield closed yesterday at 1.89 percent, third lowest level in 214 years..!
Long Term U.S. Treasury Yield 1800-2014 Below 2% only twice in the past 2014 years! December 1940 1.9 % July 2012 1.5 % http://www.businessinsider.com/us-treasury-yields-at-historic-lows-2014-11 More Evidence! World economic events are troubling including the international economic environment...! But investors are discounting the turmoil! The stock market is just off it s all time record level! The California economy is out-performing most of the rest of the nation, and the Bay Area economy is out-performing most of the world! The California Drought.... is less discussed these days because of recent rains...
California s Drought inches 40 Annual Rainfall / California 2001-2014 35 30 25 20 6.7 inches 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
California Average Temperature 1900-2014 http://www.washingtonpost.com/blogs/capitalweather-gang/wp/2014/08/13/california-on-pathto-warmest-year-on-record-by-far/ http://droughtmonitor.unl.edu
Status of the Drought in California as of October 14, 2014 http://www.washingtonpost.com/blogs/capitalweather-gang/wp/2014/08/13/california-on-pathto-warmest-year-on-record-by-far/ 65 percent of the state now in exceptional drought status Most severe classification Status of the Drought in California as of December 31, 2014 http://droughtmonitor.unl.edu/home/ StateDroughtMonitor.aspx?CA 35 percent of the state now in exceptional drought status Warmest calendar year on record in California Most severe classification
Ventura County Star, July 7, 2014, page 3A The California Drought! 3 full years of drought: 2012, 2013, 2014! 2014 was the warmest year on record ( since 1895)! Both extraordinary hot & dry weather! Lack of precipitation combined with heat accelerates the evaporation of moisture from the ground, and water from reservoirs! Impacts farming and inland farming counties! Formal Economic impact to date:! $2.2 billion, mostly in San Joaquin Valley! 17,100 farm jobs
billions of dollars 50 Total Value of Agriculture / California 1993-2013 45 40 35 30 25 20 15 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 thousands of workers 415 Farm Employment / California 1994-2014 1994 (through - 2014 September) 405 395 385 375 365 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
The Economic Cycle - - - - - - - - - - - - - Where are we? and, why that s of interest to you Quiz: The economic expansion (a) is clearly obvious to me now (b) is not entirely obvious but the growth in my business is back to normal or nearly so (c) is not an expansion for me (d) is a big lie (e) shut up
6.0 expansion Business Cycle we are here expansion 3.0 recession recovery 0.0 1 4 7 10 13 16 19 22 25 28 31 34 percent SAAR 5.0 Real Gross Domestic Product Growth / U.S. 2009 Q4-2014 Q4 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0 2009Q4 2010Q4 2011Q4 2012 Q4 2013 Q4 2014 Q4
percent 14 12 10 8 Corporate Profits as Percent of GDP / U.S. 1972 Q3-2014 Q3 Current corporate profit growth is consistent with an economy in the mid stages of an expansion 6 4 2 0 1972Q3 1977Q4 1983Q1 1988Q2 1993Q3 1998Q4 2004Q1 2009Q2 2014 Q3 Why are Corporate Profits Important? They drive corporate earnings which are responsible for higher stock prices Higher stock prices translate into higher levels of consumer satisfaction Profits are a leading indicator of economic growth, directly correlated with job growth Profits may be tiring, but job growth shows no signs of slowing down
thousands of jobs 3,000 Jobs Created / US 2000-2014 2,000 1,000 0-1,000-2,000-3,000-4,000 Since September 2010: 10 million jobs 2000 2002 2004 2006 2008 2010 2012 2014 percent 10 Unemployment Rate / US seasonally adjusted December 2009 - December 2014 9 8 7 5.6% 6 5 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
thousands of jobs 300 Non-farm Job Growth / US monthly average 2009 Q4-2016 Q4 200 100 0-100 -200 2009 Q4 2010 Q4 2011 Q4 2012 Q4 2013 Q4 2014 Q4 2015Q4 2016Q4 index 18,250 18,000 17,750 Dow Jones Industrial Average March 13, 2014 - January 13, 2015 The index is currently near an all time record level 17,500 17,250 17,000 16,750 16,500 16,250 16,000 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Nov-14 Dec-14 Jan-15
Half of Americans Participate in Stock Market CNN Money online http://money.cnn.com/2013/05/09/investing/american-stock-ownership/ index October 2001=100 120 Rasmussen Consumer Confidence Index January 2009 - January 12, 2015 110 100 90 80 70 60 50 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
440 430 420 410 400 390 380 370 Real Retail Sales / U.S. billions of 2014 dollars, SAAR November 2007 - November 2014 60 months of expansion In retail spending 360 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 18 17 16 15 14 13 12 11 New Auto and Light Truck Sales / U.S. millions of vehicles (SAAR) December 2009 - December 2014 Toyota Camry Honda Accord Honda Civic Nissan Altima 10 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
percent 8.0 Business Expenditure in Equipment and Software / as % of GDP 1983 Q1-2014 Q3 7.0 6.0 5.0 4.0 3.0 1983Q1 1987Q3 1992Q1 1996Q3 2001Q1 2005Q3 2010Q1 2014 Q3 Value of Exports / U.S. billions of dollars November 2006 - November 2014 200 190 180 170 160 150 140 130 120 110 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14
percent 4 U.S. Consumer Price Inflation December 2008 - December 2014 3 2 1 0-1 -2 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 8 7 6 5 4 3 2 1 Real GDP Growth by World Region percent 2014-2016 2014 estimated 2015 forecast 2016 forecast 0 US Eurozone Latin America China World
The U.S. Economy Expanding No longer a recovery,.... nearing the top Nearly all cylinders firing... 7 of 8 Jobs Spending Business Investment on equipment, software Exports Even the government sector has stabilized The U.S. Economy Expanding And finally: Housing.. the sector that remains troubled, impervious to the Fed s interest rate seductions I m not impressed housing the FED
percent 4.6 4.5 4.4 Fixed Mortgage Rates / Southern California weekly: October 2, 2013 - January 7, 2015 traditional conforming 4.3 4.2 4.1 4.0 Jumbo 3.9 3.8 3.7 Oct-13 Dec-13 Mar-14 May-14 Aug-14 Oct-14 Jan-15 1.4 1.2 Housing Starts / U.S. millions of units, SAAR November 2007 - November 2014 Housing starts slowly regaining momentum 1.0 0.8 0.6 0.4 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14
millions of sales, SAAR Existing Home Sales / U.S. November 2010 - November 2014 5.4 5.2 5.0 4.8 relapse 4.6 4.4 4.2 4.0 3.8 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Quiz: What happened to the Demand for housing? (a) We are demanding housing It s called rental housing (b) We like having our 20-something kids live at our house (c) We like living with our parents (d) We re not sure if we want to buy
percent 6.0 Apartment Vacancy Rates / California 2014 Q3 5.5 5.0 4.5 4.0 3.5 3.0 2.5 East Bay Sacramento Ventura Santa Clara San Diego Orange S.F. L.A Riverside thousands of units permitted 60 New Multi Family Units Permitted / California 2002-2014 50 40 30 20 10 0 02 04 06 08 10 12 14
The weakness in Housing....... comes from the weakness in housing formation. which is demographically driven, for the most part A stronger economy, historically low interest rates, and lower prices --- have not been enough Furthermore, there are new reasons for the lack of household formation.... millions of people 9.8 Population - Ages 18 to 34 / California 1985-2020 9.6 9.4 9.2 9.0 8.8 8.6 8.4 8.2 8.0 1985 1990 1995 2000 2005 2010 2015 2020
Generation Y --- Reluctance to Buy? Share of 18 to 34 year olds that own homes Home ownership lowest in 25 years 18 to 34 year olds living with their parents.
percent of all 25 to 34 year olds 16 25 to 34 Year Olds / U.S. living with their parents 1984-2014 15 14 13 12 11 10 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 persons per house 3.03 Average Household Size / California 1990-2014 2.99 2.95 2.91 2.87 2.83 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Why? Jobs have become scarce for 18 to 24 year olds Mortgage credit standards tightened and have not loosened up that much, yet... Student loan debt higher today than ever before - materially impacting FTHB - $1.2 trillion today - more than quadruple the $250 billion in 2004! - interest rates on student loans have doubled - 6 million HHs pay more than $250/month Student Loan Debt / U.S. Source: Federal Reserve Bank
Cost of College vs CPI / U.S Sdfsdf s d sdflsdflad % change in the price of one year of a 4 year college % change in the CPI Source: Bureau of Labor Statistics, National Center for Education Statistics 460 440 420 400 380 360 340 320 Enrollment / California State University System thousands of students 1994-2014 300 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
255 Enrollment / University of California System thousands of students 1994-2014 240 225 210 195 180 165 150 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 480 Median Home Selling Price / California. thousands of dollars November 2009 - November 2014 430 380 330 280 230 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14
The Problem with Housing! Not responding like the rest of the economy! Interest rates are at 214 year lows!! What s different this time around?! Buyers are held back by:! Lack of inventory! Rising prices! Student loan debt! changing preferences from owning to renting! Obtaining credit still an ordeal thehill.com/policy/finance January 7, 2015
Solutions for Housing! lending criteria conditions are set to change materially in 2015! Down payments will not be necessary! Stated income loans may be back! Lower credit scores will be needed! The economy is reaching full employment with accelerating job creation throughout the U.S. over the last 6 months.... pushing into 2015! higher wages and salaries will qualify more potential homeowners What to Expect for the Housing Market / next 12 months Interest rates should move gradually higher However, the expansion continues; 2015 may be the best year of the cycle Housing demand should strengthen and inventory will increase What s a likely scenario for interest rates over the next year or two?
mortgage rate 7.5 Conventional Mortgage Rate / Southern California 1999-2019 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 thousands of units 225 New Residential Units Permitted / California 1999-2019 200 175 150 125 100 75 50 25 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
U.S. Economic Summary The recovery is over. We are now experiencing the expansion phase of the business cycle unemployment rates are falling, and moving toward full employment by the end of 2015 Most economic indicators are rising at rates consistent with a healthy economy The only laggard sector is housing Keep in mind that we are 5+ years on the plus side of the economic cycle.... percent 4.0 Real Gross Domestic Product Growth / U.S. 2001-2017 + 2.2 3.0 2.0 1.0 0.0-1.0-2.0-3.0 + 3.4 2001 2003 2005 2007 2009 2011 2013 2015 2017
When is the Next Recession? Well.... It s too far away to predict with any confidence But statistically, it would occur in 2018 percent 8 Real Gross Domestic Product Growth / U.S. 1975-2019 6 4 2 0-2 9 years 10 years 7 years 9 years -4 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019
the California story thousands of jobs 500 Non-farm Jobs Created / California 2004-2014 339,000 300 100-100 -300-500 -700-900 2004 2006 2008 2010 2012 2014
percent change in non-farm employment 7.0 6.0 5.0 Cumulative Job Growth by Region November 2012 - November 2014 Bay Area 4.0 3.0 Inland Counties 2.0 1.0 Coastal Southern California 0.0 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 thousands of jobs 260 Employment in Computer Systems Design California November 2008 -- November 2014 250 240 230 220 210 200 190 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14
jobs 54,000 Employment in Software Publishing / California November 2008 - November 2014 52,000 50,000 48,000 46,000 44,000 42,000 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 thousands of jobs 2,050 Employment in Healthcare / California seasonally adjusted November 2008 - November 2014 2,000 1,950 1,900 1,850 1,800 1,750 1,700 1,650 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14
80 60 40 20 Job Creation by Industry / California thousands of jobs September November 2013 - September - November 2014 2014 100 scientific, technical, e-services legal, tax prep, payroll prep advertising, PR, marketing engineering, architectural, design management offices administration support jobs waste removal, recycling 0-20 Prof. Services Edu. & Health Const. Leisure Info. Retail Govt. Mfg. Financial Activities 5.4 5.3 5.2 5.1 5.0 4.9 4.8 Office Using Employment / California millions seasonally adjusted of jobs November 2009 - November 2014 4.7 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14
percent.. 17 15 13 Office Vacancy Rate by Region 2014 Q3 15.7 14.0 14.4 13.3 12.2 16.6 11 9 7.5 7 San Francisco Silicon Valley Orange County San Diego County Sacramento County LA County Inland Empire billions of constant 2014 dollars 26 Investment in Non-Residential Building California 1994-2014 24 22 20 18 16 14 12 10 94 96 98 00 02 04 06 08 10 12 14
billions of dollars Value of Exports / California Ports November 2004 - November 2014 15 14 13 12 11 10 9 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12 Nov-14 percent 74 Average Hotel Occupancy Rate / California 2006-2014 72 70 68 66 64 62 60 58 2006 2008 2010 2012 2014
California Budget A strengthening state economy is continuing to push revenues higher Under Prop 98, most of those revenues are dedicated to K 12 schools and community colleges the 2015-16 year is the last full year for Prop 30 revenues - the sales tax rate of 1/4 % expires at end of 2016 Budget appears sound through 2016, but all bets are off thereafter - Prop 30 sunsets at the end of 2018 - recession probability looms.... billions of dollars 120 California General Fund Expenditures FY 2011 - FY 2019 January 2015 110 100 June 2014 90 80 forecast 2011 2012 2013 2014 2015 2016 2017 2018 2019
billions of dollars 10.0 General Fund Surplus / Deficit California General California Fund Deficit FY 2001 - FY 2019 6.0 2.0-2.0-6.0-10.0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Proposition 98 Funding 2007-08 to 2015-15 39 % increase 2015-16 Governor s Budget / January 9, 2015
The 2015 Forecast thousands of jobs 60 Non-farm Job Growth / California monthly average 2009 Q4-2016 Q4 50 40 30 20 10 0-10 -20 2009 Q4 2010 Q4 2011 Q4 2012 Q4 2013 Q4 2014 Q4 2015Q4 2016Q4
percent 13 Unemployment Rate / California 2009 Q4-2016 Q4 12 11 10 9 8 7 6 5 2009 Q4 2010 Q4 2011 Q4 2012 Q4 2013 Q4 2014 Q4 2015Q4 2016Q4 thousands of 2014 dollars per person Real Average Salary per Worker / California 1999-2019 68 66 64 62 60 58 56 54 52 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
thousands of 2014 dollars 59 Real Per Capita Personal Income / California 1999-2019 56 53 50 47 44 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 thousands. of units 105 New Multi-family Units / California 1999-2019 90 75 60 45 30 15 0 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
millions of people 11.6 Population Age 25 to 44 / California 1990-2030 11.4 11.2 11.0 10.8 10.6 10.4 10.2 1990 1995 2000 2005 2010 2015 2020 2025 2030 The outlook generally appears clear no rain clouds
What you can expect in 2015-2016 Another 2 years of economic expansion Perhaps the best years of the cycle No recession in sight More hiring, especially of skilled workers Rising salaries for skilled workers Plan that trip to France, now A clear outlook Economic Outlook 2015 The Nation and California