It’s April but March Madness is still with us! › 95f78ca2101 › 3eea16e9-4... · 2018-04-09 · Title: No Fooling, it’s April but March Madness is still with us! Disclaimer:

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K.C.’s COLUMN: By K.C. Conway, MAI, CRE ACRE Director of Research & Corporate Engagement / CCIM Chief Economist

Column: Version 2018 – Vol 11

Title: No Fooling, it’s April but March Madness is still with us!

Disclaimer: This Column reflects the analysis and opinions of the author(s), but not necessarily those of the faculty and staff of the Culverhouse College of Commerce or the administrative officials of The University of Alabama.

It’s April but March Madness is still with us! Congrats to San Antonio, TX and Columbus, OH for showcasing what is great about their city during the NCAA mens’ and womens’ Final Four Basketball Tournaments. Sister Jean’s prayers took Loyola far, but the Luck of the Irish prevailed for Notre Dame in Columbus, OH. Columbus hosts sports tournaments as well as it does logisitics.

The Q1 economy played like a Masters Golf Champion – best score while using every club in the bag from a “Jobs-Driver” to “Manufacturing and Housing Irons.” And like championship Masters play, the U.S. economy delivered back-to-back-to-back

rounds of better than par GDP Q2-Q4 2017. In the next several weeks, though, we will learn whether the Championship economic performance from Q1 translated to Q1 Championship corporate earnings. The Masters Champion (Pat Reed) took home just shy of $2.0 million for winning the Masters Sunday. The economist in me was interested in the prize money. For those interested, there was a total prize money payout of $11.0 million for the top-50 contestants. Second place took home just over $1.0 million. The 3rd through 10th place golfers took home between $250,000 and $750,000 for a week of golf. And all the prize winners get to keep more of their winnings in 2018 than last year’s Top-50 thanks to lower taxes. Who says it doesn’t pay to play golf - or that Golf plus Tax Reform doesn’t stimulate the economy? I need to take some refresher golf lessons. Maybe I can make at run at the Senior PGA? From ACRE to ACGE (AL Center for Golfing Expertise). Don’t tell ACRE coach Grayson that Q2/Q3 KC’s Columns may have more Golf-nomics than economics.

I waited a week to issue this Column to get safely beyond April 1st and any hint that this content was an April Fool’s spoof. The economic data transitioning from Q1 to Q2 is like nothing we have seen since President Ronald Reagan’s second term after taming inflation, regulation, and retiring the “Misery Index.” Nearly a dozen major economic reports were released over the past 2 weeks spanning GDP, Jobs, Housing, Consumer Spending, Auto Sales, and Construction Spending; and all clearly show the U.S. Economy hitting on all cylinders in Q1 2018. And then came the tariffs talk and threat of a trade war if the tariffs are implemented. All the benefit derived from the Tax Bill potentially unwinds in Q2 and Q3 if a Trade War ensues. And the Southern states will absorb it the hardest with their AG exports, auto manufacturing, e-commerce fulfillment activity, and growing port business shifting trade activity from West Coast to the East and Gulf Coast ports in VA, GA, SC, FL, AL, and TX. Just focus for a

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moment on this shift in port activity and handling of goods from Asia and connect the dots to industrial and warehouse real estate benefitting from this “Remaking of the Supply-Chain.” It is OK to “High-Five” Q1 2018 economic activity (my 7-year old Luke loves to High-Five all that is unrelated to school these days), but Q2 is time to hunker down for even more volatily than experienced since Groundhog Day when all we feared was inflation and the Fed raising interest rates four times in 2018. It is time to start modeling how a trade war impacts your business and your local and state economy. I fear a trade war is upon us, and unfortunately, our president thinks a trade war will be “relatively easy to win.” History tells us otherwise.

Bulls & Bears Scoreboard: Enough of the sports analogies, let’s update the numbers and scoreboard. By a margin of more than 2:1, the Bulls charged ahead the past two weeks. Whether it was final Q4 2017 GDP revisions (upward from 2.5% to 2.9%), Jobs (ADP and LinkedIn tell us in the words of Mark Zandy that

“The job market is rip-roaring.”), Pending Home Sales (up 10.3% in February), Auto Sales (17.5 million annualized units well above the somber expectations of just 12.9 million units), Construction Spending, or ISM Manufacturing (March’s 59.3 reading was just just shy of February’s 14-year high of 60.8), the economic news is Bullish. So how does one square the solid economic data with stock market volatility? Q2 and Q3 volatility and momentum will be determined by the fall out from continued data breaches at the likes of Facebook, Delta and retailers on the heels of Equifax in 2017 - and then whether the announced import tariffs actually implement and instigate a full-blown trade war. This Q1 Bulls & Bears Scoreboard may be the high score for the Bulls in 2018.

Enjoy this Scoreboard and start modeling the impact of a trade war on your business and local economy. If you are engaged in AG, auto manufacturing, trade/transportation, or industrial real estate, a trade war will hurt. Bankers will freak out, and Federal Reserve presidents will speak about it more than Fed Chair Powell said in his March FOMC press conference. Whether the Fed admits it or not, it does do trade policy via its monetary policy. Treasury bond auctions are something to watch. The Bid-to-Cover ratio has been falling dangerously close to a 2:1 ratio over fear of our mounting debt. Does anyone think a trade war will aid the U.S. in Treasury bond sales to those we are imposing tariffs upon and whom we have a trade deficit with?

Number of the Week: This week’s number is 4.1 and highlights the challenge with reliance on the BLS jobs report. The U-3 official unemployment rate of 4.1% represents the 6th consecutive month the U-3 rate has remained unchanged despite – in the words of Mark Zandy – “Rip-Roaring job growth.” It’s more “BLS-L=BS.” I can’t encourage you enough to become familiar with the new Linkedin monthly Workforce report. While it is only a year-old, it’s Skills Gap analysis that identifies skills gaps by MSA is an unprecedented new employment and site selection tool. Don’t lose a site selection assignment or labor forecast again by relying on BLS jobs data. Start with ADP and Challenger-Gray monthly reports and finish with LinkedIn Workforce report!

Review of the Key Economic Measures: GDP – Final Revision to Q4 2017: As I had been predicting, the Government’s initial guesses at Q4 2017 GDP were low and would end up being final-revised close to 3.0 percent. The BEA’s final estimate of Q4 2017 GDP released March 27th concluded that the US economy expanded an annualized 2.9 percent in the last three months of 2017, higher than 2.5 percent in the second revised estimate at the end of February. Personal

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consumption expenditure (PCE), Services and Durable Goods rose more than anticipated, while non-durables (stuff sold in department and big-box retail stores) increased less. What does that economic-speak mean? It means we are buying houses and cars and not so much apparel and department store stuff. Another bright

spot in GDP is business spending. Fixed investment and business CapEx spending increased 8.2 percent – and keep in mind that this increase in Q4 2017 was before passage & implementation of Tax Bill. It suggests Q1 2018 GDP and Fixed Investment will be quite strong as the impact from the December 2017 Tax Bill starts to kick in. I am forecasting Q1 2018 GDP will be best in a decade and in +1.5%-2.0% range. A bright spot in the GDP revisions for real estate is that Investment

rose more than expected for structures. Lastly, exports jumped 7.0 percent – something we could see unwind with a trade war from tariffs in Q2 and Q3 2018 GDP. We just won’t know the damage until it’s too late in Fall 2018. Keep in mind that Exports ADD to GDP and imports detract from it. The increasing threat of a Trade War seriously undermines all the good from the Tax Bill and derugulation efforts by the Trump administration. Employment/Job Growth: Ignore the “BLS-L=BS” report and look at the reliable jobs reports by ADP and LinkedIn that are rooted in real primary data and not a “household survey.” March’s jobs data and press release by ADP sum up the employment picture pretty succinctly and require no interpretation. When you get “rip-roaring” from Mark Zandy, that is a good jobs report!

“We saw impressive momentum in the first quarter of 2018 with more jobs added per month on average than in 2017,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “Midsized businesses added nearly half of all jobs this month, the best growth this segment has seen since the fall of 2014. The manufacturing industry also performed well, with its strongest increase in more than three years.” Mark Zandi, chief economist of Moody’s Analytics, said, “The job market is rip-roaring. Monthly job growth remains firmly over 200,000, double the pace of labor force growth.”

Below is a comparison of the ADP, LinkedIn and BLS jobs figures for March 2018. All I will add is that if you are not incorporating the new LinkedIn Workforce report into you economic outlook and real estate forecasting models, you are in the “flip-phone” age of econometrics. The “Skills-Gap” analysis (see below from my “No-Foolin’” April presentation deck ) is the most valuable new employment/site selection tool since advent of the Challenger-Gray Jobs Cuts report.

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Case-Shiller Home Price Appreciation: The March 27, 2018 S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index reported a 6.2% annual gain for the January 2018 period – a 3.5 year high. The 10-City Composite annual increase came in at 6.0%, no change from the previous month. The 20-City Composite posted a 6.4% year-over-year gain, up from 6.3% in the previous month. Seattle (+12.9%), Las Vegas (+11.1%), and San Francisco (+10.2%) reported the highest year-over-year gains among the 20 cities. “Since the market bottom in December 2012, the S&P CoreLogic Case-Shiller National Home Price Index has climbed at a 4.7% real – inflation adjusted – annual rate – or twice the rate of economic growth as measured by GDP.” Housing – Pending Home Sales: Home sales have been struggling to move higher due to a lack of New Home inventory, but the latest Pending Home sales index raise expectations for improvement. Buyers are increasingly turning to Existing Homes and if

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an Existing Home goes up for sale it is quickly going under contract. Pending home sales rose an impressive 3.1 percent for February. Even the Nor’easter beleagured Northeast is showing life with February pending sales jumping 10.3 percent in the month. Pending sales in the South rose 3.0 percent despite a nearly ½% increase in mortgage rates since the beginning of 2018. The Midwest (up 0.7 percent) and the West (up 0.4 percent) are either hibernating with the Groundhog waiting for spring or in sticker shock – seen the HPA in Seattle, San Francisco, Denver lately? It is no wonder Amazon is looking for a HQ2 in the east given home prices in the west. Manufacturing – ISM Update: Although the media headline was ISM declined in March, keep in mind that February’s figure of nearly 61 was a 14-year high and raised concerns of supply-chain stress and input cost inflation. March’s slipping 1.5 points and back below 60 to what is nevertheless a strong 59.3 is actually good news. And judging by the strength for

orders, whether new orders, export orders, or backlog orders, the PMI is more likely to return to or above the 60-level in the coming months – subject to of course the threat of a trade war. The questions of capacity stress remain given a second 60-plus reading for supplier deliveries which indicates lengthening times and suggests that the supply chain is increasingly jammed up. Input costs, at 78.1, are at an eight-year high as well and have the Federal Reserve’s eye regarding inflation concerns. The only good news on

the inflation front in this report is that the strength in manufacturing isn't appearing yet in employment costs. Construction Spending: As we move into spring, there are signs that construction spending is emerging from a winter hibernation and up in key areas fro real estate. There are definitely signs of strength in the details. The most important gains are being posted for new single-family homes, up 0.9 percent for a second straight month for a year-on-year February increase of 9.5 percent. Multi-family home activity is also bouncing back with a 1.2 percent increase for February yielding a yearly 0.9 percent increase. Private non-residential spending is also positive, up 1.5 percent on the month - though the year-on-year increase is still tame at just +1.1 percent. Bank regulators breathe easy. We are not overbuilding commercial real estate again. Overall, total year-on-year spending is subdued, down two-tenths to only +3.0 percent, but I will take +3 percent over the past decade and no overbuilding risk. The gains in single-family home construction is exactly what the doctor is ordering to dampen the unsustainable rise in home prices and to provide inventory relief for millennials entering the housing market. I have been forecasting we would see builders add inventory in 2018 – and if they didn’t Existing Home Sales would rise as empty-nesters make their move to downsize. Both are happening – increase in new home inventory and rise in Existing Home Sales. It is a good time to be in the residential real estate business. Auto Sales: After 4 months of disappointing figures for total sales with expectations that March vehicle sales would fall below 17 million total annualized units - 13 million domestic units, the Bulls emerged with subprime financing in hoof to buy new SUVs and trucks. March vehicle sales defied pessimism, weather, stock market volatility, etc. and registered 17.5 million annualized sales. The strength remains in domestic-made light trucks. Total sales of domestic vehicle sales of at 13.7 million units surpassed even the highest estimate for March of 13.2 million. Expectations were for 12.9 million vehicle sales. However, before you get “revved-up” over March vehicle sales, the good news comes crashing down with a trade war – especially for southern states like AL, SC, TN, MS and KY. Approximatetly 40 percent of U.S. vehicle production in the southeast is for export. BMW (largest U.S. vehicle manufacturer exporting cars and SUVs), GM, Toyota, and Mercedes all face contraction risk and slowing

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production at southeastern plants if these tariffs implement and a trade war is what blooms for Spring 2018. The economies in southern states take a material hit from a trade war not just in auto manufacturing, but with AG exports (cotton, soybeans, poultry, etc.) and trade activity at ports. Industrial real estate – warehouses tied to activity at ports in GA, SC, VA and FL – are the most exposed commercial real estate property to a trade war. This Next Week: Football (the American kind that the SEC excels at), Groundhog Day, winter, March Madness/college basketball (the kind the ACC excels at until Tournament time), The Masters, and Q1 2018 are behind us. The next few weeks will shift focus to corporate earnings from Q1, implementation of Trump’s threatened tariffs/onset of a trade war, and interest rates/the Fed. Lots of Fed speak ahead this next week, and fortunately from the likes of Fed presidents with something to say, such as, Jim Bullard (St. Louis Fed president), Robert Kaplan (Dallas Fed president) and Eric Rosengren (Boston Fed president) who are veterans of the Fed, the economy, manufacturing and logisitics and bank regulation. When they speak, Industry listens!. We will also get the important FOMC meeting minutes from the March meeting on Wednesday April 11th. At this point in the year, its: one-part corporate earnings; one-part the Fed and interest rates; one-part Trump tariffs and instigation of a trade war; one-part Housing; and a “pinch-hit” of Baseball (just not in Atlanta as SunTrust Park and Atlanta Braves will disappoint again in 2018). Houston Astros are my odds-on-favorite team to watch come October. KC’s Travel Map: In response to many emails inquiring as to where I am traveling next in hopes for an oportunity to meet and talk shop along the way, ACRE is responding with this new feature. It is a map of where I have been and information as to where I will be in the coming month (April for this Column). If I am going to be in a city near you - or speaking at an event you will be attending - email me and let’s connect. This coming week, I will be back in Florida for CCIM leadership meetings and ARES (Tampa and Bonita Springs, respectively) and then Birmingham April 16th with Stewart Title followed by: i) Houston April 19-20 for CCIM Energy & TX Eco. Outlook; ii) Washington DC April 23 for a bank regulatory agency

briefing on CRE conditions and R.E. valuation trends; iii) Chicago April 29-30 for Counselors of R.E. meetings.

And in between I am scheduled to be interviewed by Michael Bull on his Commercial Real Estate show about the Amazon HQ2 selection decision and to final drafting the CCIM/ACRE Q2 paper to follow our inaugural Amazon HQ2 paper. May will be busy with trips to: i) San Francisco for the Colliers annual Logistics and

Transportation conference May 2-3; ii) Birmingham for ACRE’s second annual ACREres program May 3rd at The Club and organized by Cherie Moman

(one of ACRE’s stealth resources and leaders); iii) Alabama for NABE’s Q2 meeting on the SE economy in conjunction with the Culverhouse College’ CBER

(Center for Business and Economic Research). I suspect some chatter about tariffs/trade war); iv) Atlanta for my middle daughter’s graduation from High School May 21-22. She has distinguished herself in

academics, color-guard/marching band, and Odyssey of the Mind – they won 2nd at state this past weekend advancing to World OM competition end of May.

v) Birmingham May 24 and the BCRealtors meeting with new head Felicia Yonter

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Finally, add ACREres to your calendar for Thursday May 3, 2018 at The Club in Birmingham. Check out the Save-The-Date to follow and plan on contacting Cherie Moman for sponsor details or registration!

Send any feedback on this week’s Column to [email protected],edu