The Boring Economy

by Mark Schniepp
August 2017

Ho Hum

A year ago I made the assessment that the economy was boring, growing at a lackluster pace but growing steadily nonetheless and generating higher asset values, more jobs, more spending and rising confidence by consumers in the U.S. economy.

Just recently, Moody’s economist Mark Zandi picked up on this idea and wrote about it in his monthly U.S. Macroeconomic Outlook at economy.com, noting:

It’s almost boring. Regardless of what’s happening around the globe—and a lot seems to be happening—the U.S. economy continues to plug away. The U.S. economic expansion is 8 years old and counting, and growth remains remarkably stable.

No Surprises

The stability of the economy and the lack of any drama has made monitoring the economy a boring task. The boring economy is why the stock market continues to set new records, seemingly every month. Stock markets hate surprises typically created by chaotic events in the U.S. or World economies. They like steady growth, little inflation, low unemployment and modest wage pressures, exactly what we have now.

 

Yes, the economy is both stable and boring. There is no drama. No inflation, no runaway interest rates or even rising interest rates, no scarcity of job openings or new hirings, no consumer meltdowns, no financial crises, no bubbles (that we can detect), and gasoline prices that have remained relatively constant for the last 2 years………

There is a disruption in the retail sector, which was the subject of the July newsletter. But nevertheless, despite retailer closings all over the country, there is no diminishment of economic growth and no threat of recession. The index of leading indicators continues to rise month after month. The risk of recession fell to its lowest level ever in April and it remains low today.

GDP growth came in at 2.6 percent for the 2nd quarter of 2017. That’s neither too hot nor too cold. The unemployment rate is now at 4.4 percent, indicative of an economy in which everyone who wants a job can get one. Inflation is running at less than 2.0 percent again, even the core rate.

Internationally, European growth has improved and even the Chinese economy has rebounded. Furthermore, we haven’t heard about Greece in some time.

There’s just not much to get worried about or for me to warn you about. It’s just plain boring out there. So continue to enjoy your full time job, your rising salary, your summer vacation, your new car, your new or remodeled home and your new IPHONE 8, due out this fall.

 

Our next conference is scheduled for September 7, 2017 in Westlake, California. We are presenting the 2017 Ventura and Los Angeles County Entrepreneurial Economic Outlook. The venue is the Hyatt Westlake. The time is 7:30 AM to 10:45 AM. Please click on this link for further information:

www.forecastconference.info

 

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

The 2017 Retail Fallout

by Mark Schniepp
July 2017

Stores are Closing in Mass

Macy’s closed 68 stores this year. An estimated 4,000 employees have been impacted. Another 34 stores are planned to close in the next 4 years. At the end of this month, JC Penny will begin to close 138 stores, and liquidation sales are underway at many of these stores now on the chopping block.

Sears and Kmart are closing 72 more stores after already announcing that more than 180 stores will close. Most of the closures will occur in September. The total Sears store count will fall to about 1,200, from nearly 2,100 five years ago. Very few closures will affect California and there are none in Southern California.

Here are other stores on the list of closures that have either occurred or will occur this year:


Company Stores Closing this Year
Abercrombie & Fitch 60
Guess 60
Crocs 160
The Limited 250
Wet Seal 170
American Apparel 110
Michael Kors 125
Payless Shoes 400
RadioShack 550
hhgregg 88
GameStop 150
Staples 70
CVS 70
Bebe 180

Approximately 49 million square feet of retail space has closed year to date. Should this pace persist by the end of the year, total reductions could reach 147,000,000 square feet, which would be an all time record high.

 

 

Closer to home, we’ve seen a number of retail fatalities in California. The Gap, JC Penny, Kitson’s, Sears, 9 Walmarts, 19 final store closings of Sports Authority, and 30 Payless shoes stores will shutter this year in Southern California alone. Macy’s has already closed stores in Sacramento, Los Angeles, Irvine, Simi Valley, and Santa Barbara.

And speaking of Santa Barbara, there have been a spate of recent retail and restaurant closures on State Street, resulting in the highest level of downtown retail vacancy since the mid 1990s, according to the Radius Group.

What is Driving Retail Liquidation?

There are too many stores and too many shopping malls. The U.S. has more retail space per person than Canada, Australia, the UK, France, China and Germany.

Rents have also become alarmingly expensive for retailers. CBRE reports that rents have moved up faster than the growth of retail sales, and the rising level of rents cannot often be justified by tenants.

The Baby Boom generation is buying a lot less “stuff” these days, opting more for experiential purchases such as education and travel. And the Millennial generation doesn’t seem to want a bunch of stuff either, other than phones, food, and craft beer. Since Millennials are not buying many homes, they are not having to furnish those homes with carpets, refrigerators, lawn mowers, or new furniture.

But the biggest factor is the widespread and pervasive migration to online stores for many goods, even clothing.

Despite the view that shoppers prefer to try on clothing in physical stores, apparel and accessories are expected this year to overtake computers and consumer electronics as the largest e-commerce category as a percentage of total online sales, according to research firm eMarketer.

And though total online sales account for only 9 percent of total retail sales in the U.S, the growth of online purchasing is rising geometrically.

You can purchase just about anything online and just about everything from Amazon. The Amazon stock price has soared over the past year and is up 40 percent year-to-date over the first 6 months of 2016.

What’s Ahead for Retail?

The Internet and the growth of the online retail experience continues to evolve as one of the most disruptive forces in today’s economy.

The transition from the current retail environment to a steady state retail economy where rising rents for retail space do not exceed the growth in retail sales is ahead of us. This transition could span years however. Furthermore, to the extent that online shopping for goods and services becomes more mainstream among consumers (as it threatens to be), more store closures are likely until the supply of stores is compatible with the demand for stores.

Sales in stores still comprise 90+ percent of all retail sales. Consequently, making the retail experience more compelling will be the challenge to retailers.


The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

Rising Home Prices: Is Another Bubble in the Making?

by Mark Schniepp
June 2017

Summer 2017

We are now seeing record high selling prices for homes in many markets of California and the nation.

The sky high home values that seemed unbelievable back in 2007 have now been eclipsed in many of the larger markets of the state. The markets in the Bay Area now boast the highest values and record fast sell times.

Demand Conditions

  • Employment is strong throughout the state. In all coastal counties, the unemployment rate is now at the full employment level, meaning that job opportunities are relatively abundant and wages are rising.
  • The average rate for a 30-year fixed mortgage was 3.83% this week — significantly below the 5% to 6% range during the 2005 to 2007 “bubble” years.
  • In fear of facing higher interest rates because of overt statements by the Federal Reserve to push rates higher in a measured fashion, demand for mortgages has increased.
  • Because consumer confidence in March was at its highest level since 2000, people in general are feeling very confident about their employment prospects, their future income prospects, and the stability of the economy right now.
  • The financial market composite indices are at or near all time record highs. Households owning financial assets are feeling more wealthy today than during the previous 10 years.

 

Despite the fact that the Millennials aren’t buying many homes today, demand is still strong for housing because of the strength of the economy. Furthermore, pent up demand, ultimately due to rising incomes of Millennials, will drive new housing formation higher over the next 5 years and this will lead to continued demand growth.

Supply Conditions

  • California’s nonpartisan Legislative Analyst’s Office estimates millions of additional homes would had to have been built between 1980 and 2010 to have stopped the state’s home prices from growing far faster than the nation as a whole.
  • Though construction is on the rise, it still remains far below even the insufficient levels of the past few decades.
  • Some owners also can’t sell because they purchased or refinanced during the bubble and still owe more than their houses are worth.
  • Others refinanced in recent years when fixed rates were closer to 3% and don’t want to lose that rate.
  • But many owners don’t want to sell because they will reset their property tax base on a new home. This could double, triple or even quadruple their annual tax obligation.
  • For-sale inventories of housing are at record low levels and the lack of available supply is materially constraining sales.

Furthermore, following the housing bust of 2007-2008, investors purchased homes en masse and turned them into rentals, taking thousands of homes off the market. Those homes largely remain as rentals today.

Credit Conditions

An expansion of credit is absent. People who have the income and/or the cash are actually purchasing the homes. Credit conditions today are nothing like they were in 2006. FICO scores count and so does documentable income. Furthermore, unless you obtain an usually higher mortgage rate loan through an FHA approved lender, you need a sufficient amount of cash as a down payment.

Conclusion

In the current market, rising prices are the result of demand and supply conditions, and not because of easy credit or speculative conditions.

Austere supply conditions, combined with solid demand for housing, are the root cause of current price inflation in housing. Consequently, we don’t see any bubble forming in home prices. That said, if and when the economy softens, it is likely that housing prices will not decline that much.


The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

 

Trumponomics and the First 100 Days

by Mark Schniepp
May 2017

While there has been Zero on Congressional Legislation, there is no Evidence of any Economic Struggle

There were a myriad of campaign promises including tax cuts, repeal of the ACA, infrastructure spending, defense spending, regulatory relief, and beefed up borders. Some border beefing has occurred, and a flurry of executive orders have prevailed, some successful and some not.

A serious review of our trading conditions with China and our immediate neighbors was also on the agenda during the road to the presidency.

These are most of the hallmarks of Trumponomics. How have these pledges faired in terms of the economy?

The pledges seem to have been invigorating. The U.S. economy is performing remarkably well, and its near-term prospects remain stable with virtually no chance of slowing. Real GDP growth is tracking above 2% in the current quarter, above the growth rate that has prevailed throughout the nearly eight-year expansion. Furthermore, economic growth has upside potential this year and next when you consider current stock market valuations which are near all time record highs.

 

Job growth also remains consistently strong, with the economy enjoying the longest period of consecutive monthly job gains in history. And at close to 175,000 per month, the current pace of underlying job growth is more than double the pace needed to absorb the increase in the working-age population. The job market thus continues to tighten.

The lack of any legislative policies passed by Congress to date during the Trump presidency is having little if any impact on Wall Street or Main Street.

Americans on Main Street appear complacent, if not euphoric. Consumer confidence has been surging since the November election and is currently at the highest level since 2000. This means that optimism among the lion’s share of U.S. households is at its highest point in a generation.

What has Happened in the First 100 days and Does that Matter?

Many people believe the first 100 days is an important benchmark because great presidents have scored many victories in their first 100 days. But because the economy shows nothing but strength so far this year, it does not appear to care.

The President talks, Sean Spicer talks, CNN talks, and Fox News talks. Businesses and consumers clearly understand that the gears of Trumponomic policies are turning and that any legislation in the current environment moves slowly, especially with the high degree of political divisiveness in America today.

Currently, tax policy, the border wall (or fence), the identification of infrastructure projects, and regulatory reform are all being discussed during the first 100 days on the national stage.

The Washington Free Beacon, April 20, 2017

Through a series of executive orders, Trump has rolled back or delayed the onset of regulations
costing billions of dollars in federal funds to enforce.

In fact, last week’s announcement of the proposed tax calls for a material reduction of tax brackets and a substantial increase in the standard deduction. Estate taxes and the alternative minimum tax would be repealed. Corporate tax rates would be reduced from 35 to 15 percent.

More than 50 infrastructure projects have been identified. Details about how the U.S.–Mexican border would be fortified are now being weighed in on by experts and the personnel at the border.

The tough trade talk about China has cooled. Relations with China have suddenly improved, especially in the wake of new tensions between the U.S. and North Korea. For now, this has been a lift to Wall Street.

The tough talks about renegotiating NAFTA have moved to the draft plan stage. An executive action may be signed soon to withdraw the U.S. from the North American Trade Agreement and impose finished wood product tariffs on Canada. The markets have shown little to no reaction regarding the plan.

New York Times, April 26, 2017

The first 100 days seems to be of symbolic importance to the media and talking heads on TV, but not to businesses or consumers. Trumponomic planning appears to be in full swing, and agents of the economy are convinced that this is enough for now.

So while legislative victories have been zero, the economy is moving full steam ahead towards a higher rate of growth in 2017.

 

 


 

Next Conference: Understanding Market Disruptors
The Business Environment is Changing. Be Prepared.

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Skirball Cultural Center
7:30 AM to 10:45 AM
June 1, 2017

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The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

Economic Confidence and Your Plans for the Rest of the Year

by Mark Schniepp
April 2017

Consumer Confidence Jumped Sharply in March

This was a biggie. Confidence SOARED in March. We are now at the highest reading of consumer confidence in the economy since 2000. The highest in 17 long years.

The continued strength in consumer sentiment has been due to optimistic views on three critical components: (1) higher incomes and wealth, (2) more favorable job prospects, and (3) low inflation expectations.

And of course, the stock market is at or near record highs and home prices have rebounded sharply and have eclipsed the previous real estate bubble peaks of 2006 in many U.S. markets

Certainly enough, we are in a full employment economy, wages are now rising more than 3 percent year over year, and inflation remains well under 3 percent.

The Labor Market appears to be in the best condition in a generation: the unemployment rate fell to 4.5 percent and 98,000 more jobs were created in March.

And I’m going to get comments from all the naysayers who point to the U-6 unemployment rate or the labor force participation rate and pessimistically but erroneously site the high rate of discouraged workers in the economy because as they will claim: job prospects are not that great.

This is bull.

While SOME people cannot find employment in their IDEAL job, or their career job, it’s partly because time and/or technology has passed them by. We no longer manufacture or mine certain products anymore. And technology has eliminated many positions, even skilled ones.

When we think of the discouraged worker, what comes to mind is the image of a 56 year old man with obsolete skills who used to make $120,000 in 2007 and now is employed part time at a $65,000 salary or, has dropped completely out of the labor force.

But this vision or anything like it is unsupported by real data.

 

The 55 and over age group in the labor force happens to be the ONLY age group that has actually increased their workforce participation rate since 2007. This age group is more employed than ever, since records have been kept.

It’s the millennial generation that is having the more difficult time obtaining employment, and this is only true if they have not adequately prepared with a college degree or a skill that is needed in today’s workforce.

There are millions of job openings right now that are unfilled. The unemployment rate is full, wages are rising, and consumers are generally quite optimistic about their economic prospects over the next 6 months.

Your Plan for the Rest of 2017

Because you are fully employed, your income is rising, and you feel so confident about the economy, you need to plan the rest of your year out accordingly:

Travel. The exchange rate is just too favorable to pass up this opportunity. Asia, Mexico, or Europe. They’re cheap. Choose today and go.

Ask your employer for a raise. Skilled labor is in short supply. If you have any skills, you’ll be considered nearly indispensable and given a raise. If not, you’ll be fired. Here’s where you find out. Good luck.

Buy a car. Dealer incentives are everywhere. And gas is cheap. Pull the trigger. You deserve an upgrade. Check the deals at Costco first.

Rebalance you portfolio. The equity markets are at or close to all time highs. If you haven’t made any changes to your portfolio in the last year or 18 months, your asset allocation has likely changed so it deserves some new attention. Investors who periodically rebalance their portfolios get better returns than those who don’t.


Next Conference: Understanding Market Disruptors
The Business Environment is Changing. Be Prepared.

In June we are presenting the first annual 2017 Entrepreneur Economic Forecast Conference for Los Angeles.
Skirball Cultural Center
7:30 AM to 10:45 AM
June 1, 2017

Get Event Info Register Now Sponsor This Event

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

Some Indicators Worth Mentioning

by Mark Schniepp
March 2017

Job Openings

The latest information on job openings outstanding in the U.S. economy indicates that the labor market remains very tight with high job availability. Regionally, job openings are the highest in the western states, and lowest in the northeast. Job openings in the STEM fields take twice as long to fill, due to a dearth of candidates meeting these qualifications.

Consumer Confidence

The Conference Board Consumer Confidence Index jumped another 3 points in February to 114.8, the highest level since July 2001. Confidence has strengthened considerably, building on its sharp gains in November and December.
Consumers are optimistic about their present and future conditions pertaining to the economy. They like their prospects for employment, income, and spending. Certainly enough, the unemployment rate remains low, wages are rising, the stock market is near record levels, and inflation and interest rates remain low.

Retail sales jumped in January, with strong growth for sporting goods, hobby stores, electronics and appliances.

Oil Prices

Oil prices are falling again. Over the last week, prices have tumbled about 5 dollars per barrel, the largest drop in 4 months. This will ultimately translate into lower gasoline prices which have recently spiked up to an average price of $3.01 in California. Despite OPEC’s effort to restrict crude oil supply in the world, U.S. inventories are rising and drilling activity remains optimistic.

Existing Home Sales

In January, sales rebounded over 3 percent, reflecting rising demand for homes in the nation. Sales in California rose two percent in January and have increased 5 percent since January 2016. The market for existing homes remains extraordinarily tight. The average number of months of supply continues to decline, to just 3.7 months. Normal is between 5 and 6. Consequently, home prices continue to rise. Nationwide, the median selling value rose 7.1 percent year over year in January. In California, the median price has risen 4.8 percent.

The most expensive areas in the state continue to be San Francisco, San Mateo, and Santa Clara Counties. The lowest priced area is Kern County on a price per square foot basis.

Passengers at SFO and LAX

Total passenger enplanements and deplanements are at all time record levels at both San Francisco International and Los Angeles International Airports. Ditto John Wayne, Sacramento International and Lindbergh Field.

Passenger airline traffic jumped 8 percent in 2016 at LAX, the fastest rate of growth since 2004. More than 25 percent of all LAX passengers are international.
The travel industry has experienced a series of renaissance years during this economic expansion. Both vacation and business travel is soaring in California. Transient lodging occupancy is at its highest level ever recorded.

A strengthening U.S. dollar is likely to push international travel to record levels this year, with principal destinations being Europe, Mexico, and Asia. So start planning early.

 


 

Upcoming Conference

Later this month we will be speaking at the Santa Clarita Valley Economic Development Corporation’s annual Economic Forecast, where we will present our outlook for California and the Santa Clarita Valley.
March 30, 2017
Hyatt Valencia
1:30 pm to 5:00 pm

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The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

The Trump Rally: Is it Fake or Real?

by Mark Schniepp
February, 2017

All Market Indices at Record Highs

The markets continue to set new record highs, week after week. This all started the day after the presidential election last November. The upward surge has been labeled the Trump Rally. The rally in stock prices essentially doubled the returns on the S&P and Dow Jones industrial averages for calendar 2016, and those returns keep rising through the first 40 days in 2017.

 

 

Are we setting ourselves up for a major correction in valuations or is this rally real and warranted by fundamentals?

The fundamentals would largely be the anticipation of lower taxes and regulatory reforms promised by Trump. The 3 month rally is being driven by the enthusiasm for the president’s agenda which is expected to accelerate GDP growth and stock market earnings growth. Or is it? Alternatively, it could simply be that the market appreciates how the economy is performing right now.

All major economic indicators are rising: manufacturing and industrial production, car sales, home sales, new housing starts, and personal income. Employment is at or very close to the full employment level. Consumer confidence is currently peaking at the highest levels recorded since 2004.

Already to date, FactSet[1] has reported that 67 percent of S&P 500 companies have turned in better-than-expected earnings per share in recent reports. These fundamentals are more convincing than the anticipation of Trump policies which have the potential to produce more growth. However, the promise and the subsequent delivery of corporate tax cuts will boost earnings per share significantly when they become effective.

Offsets

Restrictions on trade and restrictions on immigration represent offsets because they could potentially produce negative effects on economic growth. To what extent there will be restrictions imposed on say China and/or Mexico is both unknown and unlikely.

Furthermore, higher interest rates act as a brake on economic growth and the Fed has stated that three more rate hikes are likely in both 2017 and 2018. While it is true that interest rates still remain historically low, higher rates are likely to impact investment decisions at least at the margin. And investment decisions include the purchase of homes, office buildings, vehicles, and business equipment.

Correction

Certainly a pull-back or even a stock market correction to the current bull market would not be extraordinary. But since they can’t be predicted, why worry? A pull-back allows the market to consolidate before moving to higher highs. There have been a number of corrections over the last 8 years and all have ultimately led to higher stock valuations.

What would cause it? Typically an event creates some sort of panicked selling. Today, it could be a series of missed expectations on earnings, negative news out of Europe or China, or a political event that lends new uncertainty to the markets.

Corrections occur during expansionary phases, typically when the economy is upbeat, like now. Remember, the stock market is a leading indicator of growth and if the market gets too ahead of itself, it must self-correct to align with the economy and reasonable expectations. We may see some of that in the months ahead.

But for now, some people believe that the rally has only just begun…

——————-
[1]
https://en.wikipedia.org/wiki/FactSet


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March 30, 2017
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The 2017 California Economic Outlook: Clear and sunny for now, but resource limitations are a growing probability…

by Mark Schniepp
January 2017

Happy New Year

The financial markets finished the year with double digit returns for calendar 2017 and the Dow Jones Industrial Average barely missed hitting the 20,000 mark on Tuesday, December 27. Currently (January 4th), it is only about 32 points from its all time record high.

Bond prices appear to have stabilized for the moment, hovering around 2.5 percent for the 10 year Treasury and fixed mortgage rates are at 4.2 percent. The price of crude oil (and therefore gasoline) also appears stable at this writing.

We’ve reached the full employment level in the labor force, consumers are feeling very good today and about the coming year, and conditions for business expansion remain favorable. Depending on how fast the new Trump administration and Congress act, economic growth could attain its highest level of the current cycle in 2017.

Changes to Expect

The president elect will inherit an economy that is fundamentally strong. With very few layoffs and with record numbers of open job positions, it would take a severe shock to derail the current economy.

Significant changes in policy may be forthcoming, such as tax law, public spending on defense and homeland security, trade and immigration policy, and regulation.

We expect the Trump administration to implement an expansionary fiscal policy of deficit-financed tax cuts and greater government spending this year. So expect higher deficits.

The tax cuts will affect both corporations and households and are expected to be sizeable.

Higher stock prices are a clear plus for growth, through the wealth effect on consumer spending. Since the election and the run-up of stock prices, households holding stock are now worth about $1 trillion more. To the extent the market does not falter, that should produce more spending which will increase the rate of economic growth this year and next.

With bond rates rising, so are the myriad of interest rates. Higher rates of interest and inflation are in the base case scenario for 2017. That means that changes in these rates will not surprise the financial markets so no meltdown is expected.

The California Economy in 2017

You can expect an economy that looks much like it did in 2016 but with more jobs openings, more pressure to raise salaries and hourly rates of pay, and technology sectors that remain vibrant. This is because the world economy is growing faster again and there is rising demand for technology services and microprocessors.

Job creation is likely to be lower, simply because we are already running at full employment, so recruitment of workers will be difficult and more expensive.

The retail industry should have a banner year. Rates of retail real estate utilization are already low and sales remain moderate to strong depending on the region. With record levels of population, employment, and income, greater levels of spending on goods and services is inevitable.

The visitor industry is not expected to slow much despite the strengthening U.S. dollar. Some slowing has been noticed in a few areas of the State, including Santa Barbara. However, more domestic demand for California vacations will occur in 2017, and much of this will offset the reduction in foreign visitors who are now finding California (and the rest of the U.S.) too expensive.

If immigration laws are tightened and undocumented workers are deported, then the state’s agricultural, construction, and hospitality sectors will experience labor shortages. This will prompt higher wages and salaries and higher rates of inflation in California.

Technology industries are running strong and this is a principal reason that California has outpaced the nation in economic growth. Despite Trumpian rhetoric about bringing jobs back from the Pacific Rim to the U.S., there is likely to be more job creation abroad because tech companies cannot hire enough STEM educated workers here.

Housing will be impacted by higher rates throughout the U.S. but disproportionately in California. Why? Because higher mortgage rates drive monthly payments up by more on higher valued homes. And California has a higher share of higher valued homes than elsewhere. Also, less development of new housing in coastal areas will inhibit the growth of supply. If supply growth does not keep up with demand growth, prices rise. Coastal communities, including the Bay Area, are likely to experience fewer existing home sales in 2017 and higher selling prices.

 


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February 2, 2017

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The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

Sharp Moves Upward Since the Election… And What This Means to You

by Mark Schniepp,
December 2016

What’s moving upward?

  • Expectations of growth in 2017
  • The stock market
  • Interest rates
  • Inflation
  • Consumer confidence
  • The dollar

Why?

Irrational exuberance or eager anticipation of a rebounding U.S. economy unshackled from over-burdensome regulations, high corporate taxes and too-timid fiscal policy.

Trump and GOP congressional leaders share goals of cutting taxes and easing regulations, which would boost business investment. Most economists believe tax cuts, especially if not accompanied by spending reductions, would produce a short-term boost to economic growth.

Moreover, when and if it does occur, Trump’s proposals to increase infrastructure spending would lead to a surge in construction employment and income, and additional economic stimulus for all those sectors that support construction.

The forecast for growthStock_Market.xls

Economists marked up their growth forecasts for the U.S. economy as soon as Trump prevailed on November 9. The economy will expand between 2 and 3 percent in 2017—maybe even as high as 4 percent—and 2.5 percent in 2018.

The risk of recession in 2017 was already low, but it’s been reduced even further now.

energy-indexFinancial market rally

The market is celebrating the end of fiscal austerity. Equity investors have been betting that Donald Trump will live up to his campaign promises to boost government spending, cut taxes and lighten up on regulation. Since the election, all the major indices have been hitting record highs. The U.S. market rose last week recording very strong gains a full month after the election. The S&P 500 has soared 5.6 percent since November 8th. Financial and energy stocks have rallied sharply.

Interest rate spike

Rates are increasing because the economy is both doing better today and is expected to accelerate in 2017. The markets were already factoring in an increase in rates by the Federal Reserve Board before the election. Remember that long-term rates do not necessarily rise in reaction to the Federal Reserve moving short-term rates upward, but the expectation that the economy will accelerate in 2017 is readjusting the yield on 10 year U.S. Treasury bond, especially under a Trump presidency where higher growth is anticipated. Rates are still very low by historical standards – and they are not likely to move sharply higher in 2017. The forecast has rates rising to 2.8 percent in 2017 and 3.5 percent in 2018.

Run away inflation?

Year to date, inflation is averaging 1.1 percent nationwide and 1.9 percent in Southern California. The outlook for inflation was already higher for 2017 and 2018, despite which presidential candidate won. Full employment economies and long expansions typically produce strains on existing resources causing their prices to rise. With a greater fiscal stimulus proposed by Trump, the federal deficit is likely to rise and that is pushing interest rates, the dollar, and ultimately inflation even higher.

Recent forecasts have inflation moving to 2.4 percent in 2017 and between 2.7 and 3.3 percent in 2018. This would be the first stretch of sustained inflation above 2 percent since 2011-2012 but I’d hardly consider it runaway inflation.

A leap in consumer confidence

US Monthly Indicators-D.xlsThe Conference Board’s confidence reading for November was the highest in 9 1/2 years. The preliminary December report from the University of Michigan climbed sharply as well, rising to the highest level since December 2006. Consumers expect a positive impact of new economic policies following Donald Trump’s election. Furthermore, consumers feel more secure about the economy today and over the next 6 months then they have in years, largely because the labor market is at full employment, the stock market is at record highs, and incomes are rising.

The dollar gains against the Euro

The dollar has been rising sharply since Trump won the election on November 8, which triggered the meaningful sell-off in U.S. Treasuries in tandem with the soaring value of the dollar.

The speculation is that a Trump presidency will mean wider budget deficits and more inflation.

peso-to-dollarOn December 9, the Euro fell to less than 1.06 in value against the dollar, the lowest level in 14 years. The dollar has rallied against most emerging market currencies and especially the Mexican peso, which has declined 52 percent in value (against our dollar) over the last two years.

The risk of a trade war between the U.S. and China and perhaps between the U.S. and Mexico is another reason for the advancing value of the dollar.

A rising federal deficit?

The deficit is the difference between the federal government’s total spending and total revenues each fiscal year. The annual deficit has been as high as $1.4 trillion in recent years, falling to $587 billion in the fiscal year (2016) that just ended. Trump’s proposed Keynesian policies are likely to widen the deficit in FY 2017 and sharply in FY 2018. While those yelloFederal Deficit.xlsxw bars are only forecasts, if Trumponomics is realized, you can chalk up another indicator that is likely to rise sharply.

What does this all mean to you?

Higher Treasury bond rates will likely translate into higher mortgage rates and higher auto loan rates. However, because the stock market is at record levels, you should feel a lot wealthier. Furthermore, your disposable income is likely to rise with the election promise of lower taxes.

And because the unemployment rate is down to 4.6 percent, you are fully employed and your salary is rising anyway. This makes you feel much more secure about the future. That’s what rising consumer confidence is all about.

And as the dollar continues to strengthen, your summer vacation continues to get cheaper, especially if you’re going to South America, Mexico, Europe, and Malaysia.

So 2016 is ending up to be a great year and 2017 might be an even better one.

 


Upcoming Presentation:

Santa Barbara Rental Property Association
“A New Paradigm: With Trumponomics coming, what should you prepare for in 2017?”
January 19, 2017

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

 

Short Term Rentals: Are They Really Impacting Housing Supply and Neighborhood Safety?

by Mark Schniepp
November 2016

“In addition to causing noise, traffic and trash problems, neighbors say short-term rentals are detrimental to communities, because they reduce the supply of rental housing. Officials say they take away from hotel revenue.”[1]

Cities across the country have begun to prohibit short-term housing rentals. Bans have now been passed in Santa Monica, Anaheim, Manhattan Beach, Redondo Beach, Hermosa Beach, and New York City. A complete ban also goes into effect in the city of Santa Barbara on January 1, 2017.

But to date, little research has been conducted on the necessity of these new laws. Are they justified in view of the myriad of allegations levied at short-term rentals, despite the absence of bona fide evidence?

The Issue

A common belief is that the proliferation of short-term rentals (rentals of less than 30 days), has lead to higher rents and home prices in many communities. When properties are rented through sites like AirBnB or HomeAway.com, they are no longer available to local residents, which limits housing options within communities.

This indictment of short-term rentals is especially heated across coastal California, where available housing is especially limited and therefore especially expensive. But are these claims accurate? Are short-term rentals really raising home prices and rental rates?

strs-worsen-housing-supplyLos Angeles Times, March 11, 2015

The Effect on Housing Supply

We recently completed a study to determine the effect of short-term rentals on the housing supply of Santa Barbara City and County. We surveyed 1,660 local STR owners, with a response rate of 20 percent and a margin for statistical error of plus or minus 3.6 percentage points.

One claim of STR critics was true – a large portion (87 percent) of STR owners rented out their entire homes. It was much less common for people to rent out a spare bedroom or a couch.

However, we did not find that the supply of housing was significantly affected by the incidence of short-term rentals in the City or County of Santa Barbara. This is because (1) compared to the total size of the housing stock, there are very few STRs in Santa Barbara City and County, and (2) very few of these homes are used as STRs full-time.

The second point is especially important. We found that many of these properties are vacation homes, beach houses, second homes, etc. The owners, their offspring, their extended families, or their friends use these houses for part of the year. Consequently, they would not likely be converted to long-term housing for local residents under an STR ban.

Overall, we found that an STR ban across Santa Barbara County would increase the housing supply for local residents by only 0.1%. With this finding, we are confident that an STR ban would not have a meaningful effect on housing prices and rental rates in Santa Barbara City or County.

We would expect this outcome to be indicative of many coastal communities in California, and elsewhere.

The Effect on Neighborhood Safety

It has also been claimed that STRs make neighborhoods more dangerous. The question of safety was originally raised in a report by the Los Angeles Alliance for a New Economy.[2] In the report, the authors write about numerous complaints made to Neighborhood Councils about tourists staying in AirBnB rentals. “These complaints include unfamiliar cars blocking driveways, late night parties on formerly quiet streets, and concerns about child safety in an environment with fewer familiar eyes on the street.”

To address this issue, we collected and analyzed nuisance reports across communities in Santa Barbara County, as well as areas in San Luis Obispo County and Ventura County. We found no statistically significant difference between the nuisance complaint rate for STRs and all homes in cities where data were available.

In summary, the negative allegations aimed at STRs could not be substantiated by the statistical evidence. In the absence of proof, many city councils are making strict and firm decisions to ban STR activity based mostly on innuendo. And in doing so, they are willing to forego all of the revenue benefits associated with the regulated operation of STRs.

You can download our full reports on this subject from the sample research page of our website, here:

http://californiaforecast.com/samples-of-our-research/

We anticipate that STR bans will be proposed in more cities across the nation. Since we completed the Santa Barbara study, we have received requests for similar studies in San Luis Obispo County, Orange County, and as far away as New Orleans. Before taking action, we encourage all municipalities to objectively investigate the effect of STRs on their own communities.

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[1] The Daily Breeze, “Redondo Beach becomes latest South Bay city to crack down on short-term rentals, March 2, 2016, by Megan Barnes.

[2] AirBnB, rising rent, and the housing crisis in Los Angeles, http://www.laane.org/wpcontent/uploads/2015/03/AirBnB-Final.pdf


Upcoming Presentations:

Santa Barbara Executive Roundtable
Changes Ahead in 2017: Renewed Economic Vigor or Collapsing Into Recession…?

Thursday, November 10 , 2016
8:00 am – 10:00 am
University Club
1332 Santa Barbara St.
Santa Barbara, CA
Register Now

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.