The Economy is Solid!...Existing Home Sales Are Clearly Plateauing And have been doing so for quite some time now. And, the economy rocks! MBA Mortgage Purchase Apps Flatten 1st time

Presented by: Elliot F. Eisenberg, Ph.D.

President: GraphsandLaughs, LLC

November 7, 2018St. Petersburg, FL

THE ECONOMY IN 2019: TERIFFIC, TURBULENT OR TEPID?

The Economy is Solid!

GDP = C+I+G+(X-M)

The Stock Market Is (or Was) Doing WellDespite numerous stressors it holds up

Households Are Re-leveragingMortgage debt remains slightly below the 2008 peak. Total debt is 5% higher

Total Delinquencies Rates Keep Falling Severely derogatory is flat but everything continues to decline

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New Auto Prices Stop FallingHad been declining for months

Auto Loan Lending Growth Has Dramatically SlowedIt’s almost completely stopped

Auto Loan Size has Been Steadily RisingNot surprising as prices keep rising

Used Car Values Stop FallingHad been falling for two years

Auto Loan Delinquencies are Worryingly HighWhen the recession hits, watch out.

Credit Card Delinquencies are RisingDefaults are low but clearly rising!

Average Net Credit Card Charge-Off Rates are Up AmEX, BofA, CapitalOne, Citigroup, Discover, JPMorganChase, US Bancorp & Wells

As interest rates rise, this will get worse

Delinquency Rates RiseHousehold delinquency rates are lower than before the recession but are rising

University of MI Consumer Confidence is GoodReading is near multi-year highs.

Small Business Confidence is Super StrongSpectacular rise since election. Near 9/18 all-time high of 108.8!

Hotel Occupancy Rates are Excellent!Occupancy is superb as is the ADR and the RevPAR

Las Vegas Attendance Is goodThe gamblers are generally back along with the conventioneers

Let’s Buy an RV!Sales are now higher than ever

US Light Vehicle Sales Slow SlightlyBut, no records will be set

Housing Improvements & Repairs Keep RisingHomes are aging, rates are low, home equity is good, and a lack of inventory

Let’s Buy a Horse

Annual Y-o-Y Percent Change in PCEA solid growth rate of 2.75%

Drilling Activity is High But Flat Rising prices should help but are a lack of pipelines hurting investment?

Corporate Profits are Way UpAt an all-time record

Bank Net Interest Margins Are Growing!Higher interest rates help, maybe a change of loan lengths too?

ROE for Banks Had Been Slowly Improving

ROA for Banks Had Been Slowly Improving

Weak Demand and Tightening Standards For CRELoans with construction and land development purposes

Banks are Tightening Slightly C&I Loan StandardsNo increased demand for C&I from small, middle sized or large firms

Money Supply Growth is Flattening!Low monetary velocity suggests weak lending

ISM Manufacturing Numbers are StrongManufacturing is less important than in decades past. Has it peaked?

ISM Non-Manufacturing Numbers are Very GoodService sector is doing well

Look at Capital Goods Orders! Very Strong Growth Minus defense and aircraft

Tax Cuts Are Going to Supercharge the EconomyBut, only in the short run

Deficit Will ExplodeAnd then continue deteriorating

$50 Billion in Trade Tariffs Will Hurt GDP MildlyThe impact will rise over time, but is not huge

$250 Billion Trade War Hurts GDPThe impact will rise over time, and is now quite small

GDP Growth Will Slow Impact of Trump tax cuts and spending increases will fade through 2019

GDP Can’t Grow Fast! Very weak population growth and labor productivity growth

Best of All, No Recession Any Time Soon!Yield Curve Inversion Test: 1-Year Treasury Yield – 10-Year Treasury Yield

Labor Markets: They’re Tight, Very Tight

Historical Job Growth Y-o-Y Total employment growth is slowing. We are running out of workers

STEADY Labor Market Improvement: Involuntary Separation Long Term Trends: 1967-2017 Initial claims below 300K for 186 straight weeks!

Quits, No matter How Measured Are SuperbAre above their pre-recession level. At 2.4% (in blue) or 3.6 million (in red)

Job Openings are Hard to Fill Increasingly hard to fill

Wage Growth is Weak, But...

Y-o-Y Percent Change in Hourly EarningsDespite a very low unemployment rate, wages growth is weak

Changes in Median Wage Growth Looks OK!Looks only at those continuously full-time employed

Changes in Median Wage Growth Looks Good!of those continuously full-time employed

Less Unionized Labor Reduces Bargaining PowerThe number of strikes is way down

Rise in the Gig EconomyThese workers have less bargaining power, and thus wage growth is slower.

Inflation?

It’s Coming

CPI: Inflationary Pressures are RisingModest pressures are slowly building

Core PCE Price IndexSurprisingly late in the business cycle, but inflation is here!

Gap Between Potential GDP and Real GDP is Gone!Nice news, but note that the blue line fell! Now inflation may rise!

Federal Reserve Behavior

Rates Will Rise.

But, How Fast?  

Taller Fed Chair, Higher Rates?

Federal Reserve BehaviorMost optimistic scenario

• Fed funds is currently 2.125%       

• 12/31/18: 2.375% 10‐yr Treasury @ 3.25% 

12/31/19: 3.125% 10‐yr Treasury @ 3.65%

• 12/31/20: 2.875% 10‐yr Treasury @ 3.45%

• Balance sheet keeps shrinking.

New Housing?Not enough is being

built!

Residential Fixed Investment StallsNon-residential is up 9%, public is down 6% and residential is down 17% from peak

Single-Family and Multifamily Starts – A Slow RecoveryLack of lots, rising rates, high prices, SF remains near recessionary lows

New Home Prices Are Too High, But Slowing GrowthWay above the nominal pre-recession high

New Home Prices Are Too High Due to Regulation

Construction Workers are in Serious Short Supply Average wage growth/year for construction workers is 5%, much higher than the average

Input Costs Were Way Up due to Policy and ChinaPrices are down 12% to 12% Y-o-Y. Tariffs, wildfires, who cares!

Is Existing Inventory Bottoming? Flat in July and August first time since June 2015 inventory has not fallen! Rental

conversions especially at lower price points, aging in place & mortgage lock-in are hurting

Price Growth Appears to be Topping Prices rise faster than wages! Y-o-Y prices up 5.1%, 5.5% or 5.8% depending on the measure

Existing Home Sales Are Clearly Plateauing And have been doing so for quite some time now. And, the economy rocks!

MBA Mortgage Purchase Apps Flatten1st time applications are up 0.2% Y-o-Y, at level of the late 1990s!

2019 purchase volume looks to be $1.17 trillion, unchanged from 2018

Refinance Activity Keeps Declining! 2019 refi activity falls to $400 billion from $450 in 2018 and $600 in 2017. Pretty dismal

Credit is Tight: Thus, No Housing BubbleNo deterioration in FICO Scores through Q2 2018

Millennials Will Keep This Issue Front and CnterBeginning to approach the Peak. Chase Millennials, move-up buyers and Boomers

What About Things Here?

Population Growth by State 1950 to PresentThe west grows fastest!

US Farm Income is Very WeakAt its lowest level since 2009

Things Are Good Everywhere

The Future Looks Good Too!

Elliot F. Eisenberg, Ph.D.

Cell: 202.306.2731

[email protected]

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