It’s the Stupid Economy

by Mark Schniepp
December 2017

Well the title should actually read: “It’s the Economy Stupid.” I hope that got your attention because you’re gonna want to read this final feel good edition of the newsletter for 2017.

If you will recall, that was the old campaign slogan of Bill Clinton in 1992. And it’s still true today because it’s the answer to the question of why American households feel so optimistic about their economic futures. Except this time, conditions are stellar rather than lackluster as they were for much of 1992, prompting the regime change from Bush to Clinton.

Despite record numbers of retail closures this year, horrific fires, hurricanes, Kim Jong Un and an ugly World Series game 7 (for the Dodgers), the consumer confidence index rose another 3.3 points in November to the highest monthly reading in a generation, or since December 2000. Americans view their current and future job prospects very favorably; ditto their income growth and their spending levels. Consumers have been the strongest and most consistent source of growth in the current economic expansion.

The increase in household wealth has been stunning as wages are rising and stock and house prices have surged.

Last week’s Gallup U.S. Economic Confidence Index rose sharply, at more than twice the rate as the average weekly gain observed over the past year. Like the Consumer Confidence Index, the Gallup pole measures American sentiment regarding both current and future economic conditions. The Gallup current condition component of the index rose to its highest level since Gallup began tracking economic confidence in 2008.

The confidence indices are now at some of the highest levels ever recorded. Why? Because economic growth is accelerating, everyone has a job, incomes are rising, homes are selling, and the new Star Wars movie is about to be released.

Speaking strictly in terms of the economy, 2017 has been a good year and perhaps the best year during this up phase in the economic cycle, which began in July of 2009.

We are now in year 8 of the economic expansion and by next summer, we will be in year 9. Economic expansions rarely go for 9 years but this one is clearly headed that way. We have no indications at this time that the economy is vulnerable. And fortunately, there are no bubbles, except for Bitcoin.

The economic expansion continues to power forward. Recent economic data have exceeded expectations and in some cases by a wide margin. Along with strong confidence in the economy, the unemployment rate is the lowest since 2001 and October existing home sales rose to their highest level since 2007.

Furthermore, third quarter 2017 gross domestic product growth was revised higher, from 3.0 percent to 3.3 percent. The nation is now growing at the fastest pace since 2014. We are likely to see approximately 2.7 percent growth in the current quarter of 2017 with consumer spending leading the charge. Remember, hundreds of thousands of vehicles need to be replaced in Texas and Florida. And tens of thousands of homes need major repair.

The likelihood of recession over the next six months is now at the lowest level since the risk of recession index was invented, back in 1996. If there is a chance that the economy will change over the next six months, it’s likely going to be faster growth because of impending tax cuts, fire and hurricane rebuilds, infrastructure spending, and a rising stock market which is already at record levels.

The Senate Finance Committee passed its tax reform plan. The full Senate will now consider the bill. The potential for tax reform is a further contributing factor for high consumer confidence and record stock valuations.

OK, Conditions Appear Safe for Now but What are the Seeds for the Next Recession?

A myriad of conditions can produce a recession, but the ones that we can identify in the current environment are these:

  • Overly tight monetary policy
  • A supply shock
  • Another financial crisis

The Federal Reserve is expected to hike interest rates in December and several times in 2018. Despite low inflation of 1.3 percent in the core consumer price index, the Fed will decide that GDP growth is strong enough to boost the short-term federal funds rate to 3 percent by 2020 from 1.25 percent today.

Long-term rates that affect mortgages are likely to stay low if inflation remains contained, which we expect to be the case for a while.

So while the fed is trying to tighten monetary policy, their prescription for raising (normalizing) interest rates is very conservative and cannot be interpreted as “overly” in any sense of the word.

A supply shock is just that, a jolt to the domestic or world economy that is a shock, or unanticipated. We can’t predict one and it’s unlikely to happen. We do see that geopolitical risks are rising especially between North Korea and the U.S., so we are watching this with particular interest. But we can’t otherwise predict a random event.

Another financial crisis is also very unlikely because of regulations put in place since the last financial crisis. Banks are quite healthy today. Nevertheless, international incidents including defaults by entire countries (like Greece or Spain) might always occur, especially in the very slow growth environment of Europe. We don’t see this as a major risk, nor even a minor one. The European economy is actually strengthening, as is much of the rest of the world.

At this writing (December 2017), it appears that we will avert recession for another year. So plan accordingly.


The new 2018 Edition of the New Development in California report will be ready for purchase in December. Look for the release of Volume II soon.

Order Last Year's Report View Sample Report

The report documents the principal new non-residential and residential building projects under construction or in the pipeline all over California. This is a must report for all construction and building material contractors, and anyone that needs to understand the new development environment by region in California.

 

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 Proposed Tax Reform of 2017: How Will it Impact You?

by Mark Schniepp
November 3, 2017

Key Elements of the New Tax Reform Plan

So as of November 3, here are the key components of the House Ways and Means Committee’s tax reform proposal, before any further revisionist intervention from the full House or Senate:

The maximum corporate tax rate would be cut from 35 to 20 percent. Many business expenses would no longer be deductible, except expenses on R&D, low income housing, and some other miscellaneous expenses. Depreciable asset expenses can be deducted entirely.

There are 3 proposed tax brackets for individuals: 12, 25 and 35 percent instead of the seven that now exist.

The AMT (alternative minimum tax) would be eliminated. The standard deduction for middle class families would be doubled.

The estate tax would be gradually reduced and entirely repealed in 6 years.

The inherited wealth exemption would double from $5.5 million to $11 million.

Tax credits for children will increase from $1,000 to $1,600.

Itemized deductions would be eliminated, except for charitable expenses and the mortgage interest deduction which would be capped for newly purchased homes up to $500K.

Also property tax deductions would be retained but only up to a maximum of $10,000.

State and local taxes would no longer be deductible.

There would be no changes to pre-tax 401(k) contributions.

There is a new 25 percent tax rate for sole proprietorships, partnerships, and S corporations that currently pay taxes at the individual rate of their owners. These type of businesses represent about 95 percent of all businesses in the U.S. and produce most of the corporate tax revenue for the U.S. government.

How Will this Impact You?

If you own a home in coastal California and you’ve purchased it in the last 4 years or so, your property taxes are likely in excess of $10,000 annually. So you will not receive the full benefit of the property tax deduction. However, the standard deduction roughly doubles from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples.

If you are a business owner, you are very likely to see a smaller tax obligation. And if a large part of your business expenditure is for research and development of the business, or equipment, software or the purchase of a building, then your tax liability will go even lower because those expenditures will be deductible on top of the low 20 percent maximum rate.

Do We Need Tax Reform?

The hieroglyphical tax code that we all have to navigate through each year to determine both our personal and our business’ tax obligation is constantly changing and seemingly growing more complex. For anyone that has filed a tax return beyond the standard 1040 form, their answer is a very likely yes. We desperately need tax code simplification.

Does the economy need a tax cut? Well, growth has remained strong even as the administration and the Republican-led Congress have struggled to enact economic programs. And despite all the campaign rhetoric about jobs and businesses going overseas because of high corporate taxes, the economy has remained ruggedly resilient, the unemployment rate is the lowest in 17 years, real wages are rising, and GDP growth is accelerating.

Tax reform is always welcome, but do we need a tax cut to stimulate economic growth? No, not right now.

Conclusion

For me, any tax reform that is an actual reduction in my taxes is a good thing. I would much rather control the expenditure of my own income than I trust the federal or state government to do. So any tax cut is welcomed, providing it actually does reduce my taxes.

As Californians, some of us will face a higher tax bill due to the fact that we won’t be able to deduct all our property tax payments. This is especially true if you purchased a home recently in the Bay Area, or coastal Southern California. Moreover, the state income tax payment is non-deductible and California income taxes are higher than anywhere else.

Also, the home mortgage deduction on new purchases will be capped for many new home owners in the higher housing cost areas of the state. This includes Santa Barbara and Goleta, coastal Ventura and Oxnard, the Conejo Valley, most of LA and Orange County, and coastal San Luis Obispo County. A reduced mortgage rate deduction will impact the decision to buy a home in California, so fewer home sales next year are likely. Realtors are naturally against this.

If you already own your home, you’re not going to be affected by the limits on the mortgage deduction. If your household income is above $250,000, then the elimination of the state income tax deduction will hurt you, but as an offset, you’re likely to benefit from the business tax reforms.

The Tax Foundation in Washington D.C. has evaluated the plan and according to them, households from the full range of incomes would benefit with at least a modest tax reduction.

Critics say this plan will hurt the poor. This is nonsense simply because the poor do not pay any state or federal income taxes. The bottom 35 percent of Americans will not get any extra benefits, because they already have a $0 federal tax liability.

Might this plan increase the deficit? Yes, it likely will. But I see the deficit as it’s own issue which does not have to be addressed when discussing tax reform. Why? Because there is always expenditure reform which many people erroneously assume is unreformable. The Senate must consider expenditure reform if they hope to pass tax reform with a 51 vote majority. Otherwise, the plan is dead.


Upcoming Presentation:

Santa Barbara Executive Roundtable
“Anticipating and Bracing for the Next Recession…”
Panel discussion with Mark Schniepp, Brian Johnson, Keith Berry, and Justin Anderson
November 9, 2017
University Club, Santa Barbara, 8 AM

 

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.

Irma and Harvey and Their Effect on the Economy

by Mark Schniepp
October 2017

First Half GDP Growth

Second quarter real GDP rose 3.1% at an annual rate, up from 1.2% in the first quarter. That’s a decent economic growth rate for the U.S. at this stage in the expansion, but not a great one. The third quarter of 2017 is now in the books. How did the economy do and what does that mean for the final quarter of the year?

We can’t forget that Irma and Harvey struck in the third quarter of the year. They destroyed nearly 1 million cars and damaged over 200,000 homes in Texas, and nearly every home in the Florida Keys. More than 20,000 homes were completely destroyed by both hurricanes.

Damage Valuation

The carnage is still being assessed and will change with more information, but at the end of September, the latest estimates for the cost of Hurricane Harvey’s damage range from $65 billion to $190 billion. In the event the actual cost falls on the higher end of that range, it could become the most expensive disaster in the history of the U.S.

Meanwhile, Hurricane Irma damage could end up costing between $50 billion and $100 billion. Irma was the bigger storm but the property damage due to flooding was much greater with Harvey.

The storm and floods have interrupted 20% to 40% of U.S. refining capacity. The damage to refineries was serious and caused gasoline inventories to sharply decline, affecting gasoline prices. Consequently, the Department of Energy released 5 million barrels of oil from the Strategic Petroleum Reserve to bolster supply.

Despite all the carnage and tragedy, the hurricanes hardly affected consumer optimism; the assessment of present economic conditions hiccupped in September, while expectations of future business conditions moved higher. Consumers still believe jobs are plentiful and they expect their incomes to increase over the next 6 months. Their buying plans have slightly declined for homes and cars but have increased for major appliances.

It does appear that Harvey impacted new home sales in August because that metric was off 3.4 percent during the month. We know that the September numbers will be more negative when they come in next week. However, new home sales have slackened elsewhere as well and not just in Texas and Florida. So the hurricanes are only partially responsible for tepid U.S. home sales.

Spending during August was also affected slightly, with less retail sales of general merchandise and less consumption of utilities (because of power outages). Nearly 6.9 million homes were left without power in Florida, Georgia, North Carolina, South Carolina and Alabama.

The damage and closure of Gulf located refineries notably pushed gasoline prices higher following Harvey in Texas. However, average U.S. prices are now falling precipitously again. In California, the price spike was much less significant.

 

Who Loses and Who Wins

An estimated $20 to $30 billion in economic losses are the immediate impacts resulting from business interruptions, such as idle hotels, closed stores, shutdown refineries, workplaces closed and people unable to go to work, Disneyland, SeaWorld, and Universal Studios—all closed. Spending was therefore curtailed on energy, home buying, car buying, and tourism. There is an estimated 50% to 70% loss of Florida’s citrus crop, valued at $1 billion. The estimate for third quarter GDP is predicted to be ½ percent lower because of the hurricanes. So perhaps a rate of between 1.8% and 2.3% is anticipated.

But we fully expect that total economic activity linked to rebuilding and replacement spending will compensate for any short-term economic losses. Already, Congress has allocated more than $15.3 billion in hurricane relief funds to the more than 1 million applicants for federal aid so far.

This means the economy, as a whole, will not only be okay, but will likely see a surge in GDP growth during the first half of 2018. Stay tuned for more updates in future newsletters.

 

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.

California Housing Update / The Housing Crisis

by Mark Schniepp
September 2017

The current environment for housing in California is being routinely referred to as a crisis. Many consider it a bubble and anticipate the possibility of another crash.

For California, the “housing crisis” is a direct consequence of the state’s economic boom. And 30 years of resistance to housing development has resulted in an onerous environment for the creation of new housing today. California has always been a desirable place to live and over the decades has gone through periodic spasms of high housing costs. However, a booming economy and the lack of construction of homes and apartments have conspired to produce the current housing crisis.

The Heart of the Problem

The economic recovery and expansion have not occurred without consequences.

The technology revolution, epicentered in California and in particular the Bay Area,

has resulted in the creation of thousands of higher paying jobs. The record levels of foreign and domestic visitors vacationing in California has also pushed job creation in the visitor serving industries to all time record levels. The aging of the baby boomers and the Affordable Care Act are responsible for pushing employment in healthcare jobs to all time record levels.

The tech boom, the visitor boom, the healthcare boom, and the professional services boom have employed every California resident that wants a job and encouraged an estimated 512,000 net migrants into the state from 2011 to 2016.

The strong demand for and consequent creation of millions of new jobs since 2010 has encouraged extensive office development in San Francisco, Los Angeles, Orange County, and Santa Clara Counties.

But these counties have failed to build a commensurate amount of housing, for new workers and new in-migrating populations.

Cities have built high tech research parks and innovation campuses but have failed to build housing. Consequently, a major imbalance has resulted and this imbalance has manifested in sharply rising home prices and apartment rents since 2011.

The high cost of housing is principally a failure to build.

 

Proposition 13

And then there is Proposition 13 which caps property taxes, discouraging owners to sell their properties and face a major tax reset. And in recent years with property values escalating to all time record highs in the state, the disincentive to sell is too great so there is far less for-sale inventory of existing homes that would typically provide for a lot more inventory.

Furthermore, cities receive very little in property taxes from homes whose value has not reset in the last 10 or 20 years. Consequently, this fiscal disincentive which grows larger over time gives communities little reason to permit more housing, especially when the neighbors already oppose it for all the usual reasons.

Supply Limitations

Cities and Counties use zoning, environmental laws and procedural laws to oppose, discourage, and/or deny residential projects deemed too large or out of character.

There are also growth restrictions put in place by voter referendums that directly or indirectly limit housing development. Examples of these are density and height restrictions, or an actual limit on housing unit development.

Cities that deny housing are a principal and direct cause of the housing crisis.

The lack of housing supply, together with the demand for housing encouraged by a strong economy and record creation of jobs and income, has created a political environment where prospects for a state housing intervention appear more likely than ever.

Housing Elements

Since 1969, California has required that all local governments (cities and counties) adequately plan to meet the housing needs of everyone in the community. California’s local governments meet this requirement by adopting housing plans as part of their “general plan.” The law mandating that housing be included as an element of each jurisdiction’s general plan is known as “housing-element law.”

California’s housing-element law acknowledges that, in order for the private market to adequately address the housing needs and demand of Californians, local governments must adopt plans and regulatory systems that provide opportunities for (and do not unduly constrain), housing development. Consequently, housing policy in California rests largely on the effective implementation of local general plans and, in particular, local housing elements.

However, providing opportunities under the housing element law and actually approving and permitting housing units are not the same. Getting the homes built is largely ignored by most jurisdictions in California today. Why? Because there is no real penalty for denying housing, even if there is adequate zoning for it.

The myriad of association of government agencies in California help to develop a RHNA for each county and city to follow for their zoning of housing. RHNA stands for Regional Housing Needs Allocation.

RHNA is supposed to enable cities and counties to anticipate their growth so that their quality of life is enhanced. And this includes producing a fair share of regional housing to accommodate anticipated growth.

However, too frequently, cities and counties use their planning processes as complex and complicated systems that confuse and frustrate prospective developers who must navigated through a labyrinth of requirements. It is often a highly discretionary process that effectively obstructs housing and therefore anticipated growth.

The most recently completed RHNA planning period is January 1, 2006 to June 30, 2014 for most Southern California counties. For this time period, housing estimates were developed based on population, employment and household growth projections. In Southern California, a total of 821,000 housing units were allocated. Only 404,500—less than half—were built. In the Bay Area, 215,000 housing units were planned for. Only 116,000 were built.

For the 2014 to 2021 planning period, the RHNA allocation for Southern California is 412,000 housing units, of which 180,000 are in Los Angeles County and 19,000 are in Ventura County. Permitted housing in L.A. County is currently on a pace that could meet the RHNA allocation. However, Ventura County is way behind.

Bills in Sacramento to Help Resolve the Housing Crisis

The general notion prevailing today is that the state needs to do more to penalize cities and counties that are blocking development before agreeing to spend more dollars subsidizing projects.

There is currently one law on the books from 1982, the Housing accountability act, which requires cities to approve housing projects if they meet 3 fundamental criteria. Cities often interpret the criteria with discretion, and projects are downsized or denied. Predictably, there has been a spate of lawsuits over the years between developers and cities arguing whether the criteria have been met.

There are now three more bills in Sacramento looking to move forward this Fall:

SB35 Affordable Housing: streamlining the approval process

This bill essentially forces housing recalcitrant cities to eliminate impediments to new housing development and accept a streamlined entitlement process from HCD for approving new housing developments.

HCD is the California Department of Housing and Community Development that promotes policies and programs to expand affordable housing.

SB 3 The Affordable Housing Bond Act of 2018

This effort would place a $3 billion bond for low-income apartment housing on the November 2018 ballot.

AB 1505 Inclusionary Housing

This potential law would require that any new development of rental housing include a certain percentage of affordable rental units.

Rent Control Initiatives by Tenant Coalitions

Momentum is now building again for the implementation of rent control to cap rental rates on housing in California. Currently about 15 cities have some form of rent control, including San Francisco, Oakland, and Los Angeles.

A bill has also been submitted in the California Assembly to repeal a 1995 state law—the Costa-Hawkins Rental Housing Act—that limits the scope of local rent control laws. AB 1506 seeks to eliminate rent control exemptions for duplexes, condos, and single family homes to enable rents to be capped on newer housing stock built after 1995.

And in the November 2016 election, rent and eviction control ordinances passed in Richmond and Mountain View.

Rent control was strengthened in Berkeley, Oakland, and East Palo Alto.

Voters passed Measure U1 in Berkeley, which increases the business license tax on landlords with five or more residential units. The tax increased from 1.1 percent to 2.9 percent of gross receipts. The tax may not be passed onto tenants.

In East Palo Alto, this same business license tax is 1.5 percent of the gross receipts of landlords.

Rent control was defeated in Burlingame and San Mateo and Alameda. But a rent review and stabilization ordinance was passed by voters in Alameda.

The Santa Barbara City council considered it in March 2017 but rejected pursuing it as a policy and will consider issues associated with rental mediations and inspections.

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 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.

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.

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

Get Event Info 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.