Transcript Beautiful new title page - Hunter Hotel Conference

Economic Outlook
1Q 2015
Economic Outlook
OIL, Interest Rates, Jobs .. Oh My!
Gregory Miller
Chief Economist
The ONE THING You Need to Remember
 The Economy is Stronger Than You Think.
First: the Fed …
 The Fed will begin raising interest rates. It is less important when
they do it than it is how much and how fast.
 Fed aims at “Fed Neutral” – in the neighborhood of 3.5%.
Interest Rate Forecast
U.S. Treasury Yield Curve Rises and Flattens
3.5
3.0
%
2.5
2.0
1.5
1.0
0.5
0.0
Fed Funds
3 Mo
6Mo
1 Yr
3Q15
2 Yr
4Q16
5 Yr
10 Yr
4Q17
30 Yr
Monetary Policy: Transmission Shift is Material
 The Fed is still providing liquidity.
 Shift from bond purchase to Fed funds rate shifts liquidity
transmission from long-end to short-end of yield curve.
o Bond purchases were transmitted to large investors.
o Small business and households borrow through banks.
o So even as rates rise, more (smaller) investors have access.
 Rising Rates are not the same as High Rates.
 Bank lending accelerates during initial phase.
Oil: In Economics, All Roads Lead Back to Price
The drop in oil prices positive for US economy
 Prices fell 2/3’s in 200 days.
 $50 oil implies US gas price at $2.25. $40 oil implies gasoline price at $2.00
 US Consumer and US Business – an “after-tax, tax cut”
o Implied per driver saving: $1,200 per year.
4.00
3.80
3.60
3.40
3.20
3.00
2.80
2.60
2.40
2.20
2.00
120
100
90
80
Motor gasoline prices:
Unleaded gasoline
70
60
West Texas
Intermediate
50
Feb 2015
Oct 2014
Jun 2014
Feb 2014
Oct 2013
Jun 2013
Feb 2013
Oct 2012
Jun 2012
Feb 2012
Oct 2011
Jun 2011
Feb 2011
Oct 2010
Jun 2010
40
USD per Barrel, NSA
110
Feb 2010
USD per gal, NSA
Crude Oil
The Fed’s Inflation vs. Deflation Conundrum
 Inflation/Deflation is a lagging event.
 Excess liquidity on the Fed’s balance sheet is a hyper-inflation
risk, so is wage inflation. But farther out on the horizon.
 A few prices have been skirting deflation for the past year, but..
 Oil is not deflationary, immediately.
o
Oil lag to Core-PCE is 1.5 to 2 years.
o
The Globe is deflationary. The dollar is the linkage.
 Contemporary US inflation is driven by capacity.
o Services sector prices are rising about 2.0%.
o Goods sector is deflating -1.1%.
o Wages have only begun to rise.
US$: Pits Exporters against Consumers
 Strong dollar reduces US exports;
o export producers unable to shift to domestic sales, production slows,
jobs suffer.
 Weak bilateral currencies drop $-prices to sustain trade;
o US consumers benefit.
 Unstable global currencies risk collapse.
Currencies: US Trade Weighted Dollar Index, Euro, Yen
(Indexed to 100 = March 2009)
130
120
110
100
90
80
70
60
2010
United States Dollar Index
2011
2012
Euro
2013
Yen
2014
2015
Non-residential Construction and Hotels
Non-Res construction peaked late, about mid-recession; then it flatlined until recovery began in 2013.
Dodge Construction Index (US$ Mill):
"Post-weather Momentum"
(US$ Mill)
350000
300000
250000
200000
150000
100000
Jan 2000
Jan 2002
Jan 2004
Jan 2006
Jan 2008
Dodge Construction Index: Non-Res (2000 = 100)
Jan 2010
Jan 2012
Jan 2014
Non-Res (12mma)
Finance:
 Mortgage Money Available at a Price.
 Banks are eager to make loans, but the rules are different …
Average Mortgage Commitment:
Hotel/Motel
LTV Turning Higher,
From a Very Low Place
105000
90
80
65000
70
45000
60
25000
50
5000
Commercial Mortgage Commitment: Hotel/Motel
1965Q3
1967Q3
1969Q3
1971Q3
1973Q3
1975Q3
1977Q3
1979Q3
1981Q3
1983Q3
1985Q3
1987Q3
1989Q3
1991Q3
1993Q3
1995Q3
1997Q3
1999Q3
2001Q3
2003Q3
2005Q3
2007Q3
2009Q3
2011Q3
2013Q3
2013Q3
2010Q3
2007Q3
2004Q3
2001Q3
1998Q3
1995Q3
1992Q3
1989Q3
1986Q3
1983Q3
1980Q3
1977Q3
1974Q3
1971Q3
1968Q3
-15000
40
1965Q3
US$ 000
85000
Loan to Value: Hotel/Motel
LTV (5cma)
-2.0
6.0
% Y/Y
ENR: Building cost index,
(1913=100)
4.0
2.0
0.0
-4.0
ENR: Building cost index, (1913=100)
6.0
Jan 1984
Jun 1985
Nov 1986
Apr 1988
Sep 1989
Feb 1991
Jul 1992
Dec 1993
May 1995
Oct 1996
Mar 1998
Aug 1999
Jan 2001
Jun 2002
Nov 2003
Apr 2005
Sep 2006
Feb 2008
Jul 2009
Dec 2010
May 2012
Oct 2013
Mar 2015
Jan 1984
Jan 1985
Jan 1986
Jan 1987
Jan 1988
Jan 1989
Jan 1990
Jan 1991
Jan 1992
Jan 1993
Jan 1994
Jan 1995
Jan 1996
Jan 1997
Jan 1998
Jan 1999
Jan 2000
Jan 2001
Jan 2002
Jan 2003
Jan 2004
Jan 2005
Jan 2006
Jan 2007
Jan 2008
Jan 2009
Jan 2010
Jan 2011
Jan 2012
Jan 2013
Jan 2014
Jan 2015
% Y/Y
Construction Cost: Low but for how long?
Costs, like mortgage rates, are low, but the direction is clearly shifting.
ENR: Labor Cost
12.0
5.0
10.0
4.0
8.0
3.0
2.0
1.0
0.0
ENR: Common Labor Index, (1913=100)
ENR: Skilled Labor Index, (1913=100)
Back to the fundamentals: US Returns to Normal
 The US economy is in acceleration mode
o 2015 GDP should grow 3.5%+.
o Slowdown by mid-2016 as production and labor market hit capacity
constraints.
o However, significant risks persist.
 Acceleration Drivers.
o The Fed buries QE3 and begins grooming successor: Bank Lending.
o Business spending re-accelerates.
o Housing adds sales to production.
o Government contributes.
o Energy supports low business and household cost.
o Global malaise boosts US.
Four Significant Risks
 Cycle risk is high. There is a recession out there somewhere.
o The expansion has been running for five years.
o Normal cycle dynamics have been running for six years.
 Credit transmission.
o Bank Lending to replace QE.
o Mortgage finance hinders home sales; housing needs easier access to mortgages.
 The most likely risk of failure: Government continues in recession.
 The most dangerous risk: Consumer Spending.
o
Resources stretched thin.
o Wages no longer include pay for productivity.
o Business assigns 102% of productivity gains to profit.
o Management’s wage bargain: “If you’ll work at 102% of capacity we won’t fire
you first.”
Topic Appendix: The Failure of Political Policy
 Jobs rebound is skewed toward Skills and Experience.
o Unemployment is below NAIRU (NonAccelerating Inflation Rate of
Unemployment) .
o Policy does a poor job of employing the NAIRU remainder.
 The 2% Consumer is an economic health warning.
o The Skewing of Incomes and Dissipation of Wealth.
o Declining public safety net, with more entering the Population at Risk.
 The Death of the American Dream.
o
o
o
o
The labor force as vagabond.
Permanently Weak Home Sales.
First the home, then the vacation, then the car. Then things get tough.
Waiting longer to buy  fewer years to accumulate.
 The Greatest Country on the Globe.
Job gains late but now formidable
 Jobs returned. But labor market remains nettlesome.
o Skill dearth and Inexperience.
o Wages no longer stagnant, but gains are weak, and…
o Gains are dominant in only a few skills or industries.
o Labor force faces demographic and economic inflection.
Jobs: Broad-based Acceleration
w/ one conspicuous exception -- Government
Federal Government
Leisure & Hospitality
Heath Care
Education
"Office Using"
Past Twelve Months
Retail Trade
Long-term trend
Manufacturing
Construction
Mining
Payroll Jobs
-50
0
50
100
150
200
250
300
Most Dangerous Risk: Consumer Spending
 Media tells us: “Consumers are OK,” i.e., “growing at a modest pace.”
 We suggest: 2% consumer is not healthy. Consumer should grow 4%.
o Non-durables and services are particularly weak.
o Were it not for autos, durable goods spending would also be weak.
• And a 17 million run rate for unit auto sales is unsustainable.
Consumer Spending: Growing "Half" as Well as We Should Expect
% y/y
Personal
Consumption
Durable
Goods
Typical 1974 to 2007
Current Expansion 3Q09 to 3Q14
3.8
1.8
7.1
5.8
Source: BEA; STIEcon
Non-durable
Goods
Services Autos
2.9
1.4
3.6
1.4
6.6
12.1
Home Sales: Positive but multifaceted underperformance
 Home sales increasing 0.7% five years into expansion.
o 1990 - 2005, home sale grew an average 4.6%.
 Affordability is high. Production is slowing with inventories up.
 Home Ownership hasn’t been so low since the mid-1990s…
o … When mortgage rate averaged 9.5%!
Young Fall Hard

Millennials Alienated
Young Homeownership Falls Hardest
125
115
105
95
85
75
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Index: 1982 = 100
135
<25 years 1st time
35 years 1st move up
45 to 54 years Prime move up
> 65 years move down
Brief digression on US Global Status
 US global economic status unrivaled.
It’s not even close -- Really
o Population % of globe:
5%
o Largest global producer:
25%
o Largest global consumer:
35%
o Largest global wealth holder:
40%
o Deepest global capital markets.
o Strongest global productivity.
Economic Outlook
 The US economy is on the verge of returning to NORMAL economic
cycle.
o
o
o
o
Consumer spending is holding on, but resources are stretched thin.
Labor market is generating jobs; unemployment is lower, but …
… College grads, millennials, retirees, and women leave the labor force.
Government has resources to contribute to growth, but chooses to fail.
 The overriding issue is non-quantifiable: UNCERTAINTY.
o Government still has extensive unfinished and barely-started business.
o Global recession is a real issue but impact X/M effects are offsetting.
 Monetary Policy:
o The Fed isn’t trying to slow the economy. Just return to Neutral.
o Transition to traditional monetary transmission through bank lending.
o Target is “Fed Neutral”; rates will be higher but low by historic
standards.
Economic Outlook
1Q2015
Economic Outlook
OIL Bust !
Prepared by Chief Economist Gregory Miller. Material we present here is based upon information available on
the date of publication. We believe our data is reliable. However, we do not represent that it is accurate or
complete. We solicit no action based upon this material. Opinions we express are our judgment as of this date
and may change.