Transcript Association of Foreign Investors in Real Estate

GLOBAL ECONOMIC OUTLOOK
Dr. Rajeev Dhawan
Director
ECONOMIC
FORECASTING
CENTER
Presented at the
AFIRE Annual Meeting
Washington, DC
September 26th, 2005
Office: 404-651-3291
email: [email protected]
http://www.robinson.gsu.edu/efc
Anonymous Ventor
My girlfriend demanded that I
take her to someplace expensive,
so I took her to a gas station
Source: AJC, April 21st, 2005
Is Katrina Going to Derail the Economy by Itself?
No
Is Rita Going to Derail the Economy by Itself?
No
Are They Both Going to Make For a Perfect Storm?
No
Calculating the Impact of
Hurricanes
1. Refinery damage affects gasoline supply until mid September,
prices fall only a few weeks after that; $3.00+ per gallon price
remains for the next one month; High gas price affect
discretionary consumer spending
2. Consumer confidence slips in September and October
(refugee crisis + high gas) but recovers by early January as
rebuilding begin in New Orleans
3. Ports, refineries, oil and gas pipelines fully operational by
January
4. FED keeps on its “measured” hike path to combat inflation
caused by Katrina.
5. 10-Year Bond remains low as flight to quality persists giving a
break to consumers
Impact of Hurricanes on Gasoline Prices
($/Gallo
n)
3.50
Hurricane Rita
3.00
2.50
Hurricane Katrina
2.00
1.50
1.00
Jan'03
May
Sep
Jan'04
May
Sep
Jan'05
May
Sep
Jan'06
May
Sep
Jan'07
May
Sep
Gas Spending Dings Discretionary Expenses
(Bil.$)
280
(%)
10.0
260
8.0
240
220
6.0
200
4.0
180
160
2.0
140
120
I
II
2002
III IV I
II
2003
III IV I
II
2004
III
IV I
II
2005
Spending on Gasoline (Left)
Growth in Food, Clothing & Shoe Spending (Right)
0.0
But Tax Cuts Have Eased the Oil
Price Shock this Time
Average Effective Income Tax Rates
Federal, State and Local Combined
28%
Bush Tax cuts have absorbed
energy price shocks
Past Oil Price Shock came when
tax rates were rising rapidly
26%
24%
22%
Source: Prof. Larry J. Kimbell, Nov. 2004
2004
2003
2002
2001
2000
1999
1998
1981
1980
1979
1978
1977
1976
1975
1974
1973
20%
Impact of Past Hurricanes
Name
Date
States Impacted
Personal Income Growth
Before
Q2
After
Q3
Q4
Hugo
1989 Sept
South Carolina
North Carolina
3.2
5.3
-19.3
-1.0
40.6
10.8
Andrew
1992 Aug
Florida
Louisiana
5.1
7.6
-12.7
0.3
37.8
12.2
Floyd
1999 Sept
North Carolina
4.2
-1.1
12.5
Charley
Frances
Jeanne
2004 AugSept
Florida
9.1
2.5
14.8
Ivan
2004 Sep
Alabama
7.9
2.2
10.3
Impact of Hurricane(s) on Consumer Sentiment
(Index 2000=100)
96
94
92
90
Confidence Drops by 10% in Coming Months
It Recovers as New Orleans Gets Dry by 06q1
88
86
84
III
2005
IV
I
2006
Baseline
Hurricane(s)
II
III
IV
I
2007
II
III
IV
Impact of Hurricane(s) on Auto Sales
Impact of Hurricane(s) on CPI Inflation
(Mil.)
18.5
(% Ch.)
5.7
18.0
4.7
Inflation Kicks up Initially
Which Keeps the FED Aggressive
3.8
17.5
Minor Drop!
2.8
17.0
1.9
16.5
16.0
0.9
III
2005
IV
I
2006
II
III
IV
I
2007
0.0
II
III
IV
Baseline
Hurricane(s)
IV
I
2006
II
III
IV
I
2007
II
III
IV
Baseline
Hurricane(s)
Impact of Hurricane(s) on 10-Year Rate
Impact of Hurricane(s) on Housing Starts
(%)
5.6
(Mil.)
1.95
5.4
1.90
5.2
Bigger Impact
On Housing
1.85
5.0
1.80
4.8
Liquidity Motive Drops
10-Year Bond Rate
4.6
4.4
1.75
1.70
1.65
4.2
4.0
III
2005
III
2005
IV
I
2006
Baseline
Hurricane(s)
II
III
IV
I
2007
1.60
II
III
IV
III
2005
IV
I
2006
Baseline
Hurricane(s)
II
III
IV
I
2007
II
III
IV
Impact of Hurricane(s) on GDP Growth
(% Ch.)
4.5
Initial Drop in Growth: 0.6% in 2nd Half of ‘05
Strong Recovery in 2nd Half of ’06
Almost Makes up for Prior Losses!
4.0
3.5
3.0
2.5
2.0
1.5
III
2005
IV
I
2006
Baseline
Hurricane(s)
II
III
IV
I
2007
II
III
IV
National Impact of Hurricane(s)
Change from Base Forecast
Change In
2005Q3
2005Q4
2006Q1
2005
2006
GDP Growth
-0.7%
-0.9%
-0.5%
-0.2%
-0.2%
Cons. Growth
-0.5%
-0.5%
-0.8%
-0.1%
-0.3%
Employment
-51K
-310K
-499K
-90K
-363K
10-Year Bond
-0.3
-0.3
-0.3
-0.2
-0.1
Housing
Starts
-4.8%
-10.9%
-6.0%
-3.8%
-3.9%
Auto Sales
-0.6%
-1.2%
-2.4%
-0.6%
-1.8%
Source: EFC Calculations
The Good, the Bad, and the Ugly
US Sector or Area
Grade
Construction
A++
Tax Collections
A+
Real Dividend Growth
A+
Bank Loan Activity
A+
Corporate Revenue Growth
A
Health/Finance/Insurance Jobs
A
Weak Dollar (Earnings)
B+
Overall Job Growth
B+
Euro Zone Malaise
C
Oil Prices
D
Benefit/Health Costs
D
Manufacturing Jobs
D
Auto Over-Capacity
F
Iraq/Terrorism
F
Overall US Economy
A-
Views From the Top of the Himalayas
Can We Blame China for High Oil Prices?
Production (P)
NET Change in
Supply
Consumption (C)
2000
2004
DP
2000
2004
DC
US
7.73
7.24
-0.49
19.70
20.52
0.82
-1.31
Canada
2.72
3.09
0.36
1.94
2.21
0.27
0.10
Mexico
3.45
3.82
0.37
1.88
1.90
0.01
0.36
Japan
NA
NA
NA
5.58
5.29
-0.29
0.29
UK
2.67
2.03
-0.64
1.70
1.76
0.05
-0.69
China
3.25
3.49
0.24
4.99
6.68
1.70
-1.46
India
0.78
0.82
0.04
2.25
2.56
0.30
-0.26
Russia
6.54
9.29
2.75
2.47
2.57
0.10
2.65
23.38
24.57
1.19
4.60
5.29
0.69
0.51
Africa
7.86
9.26
1.41
2.46
2.65
0.19
1.22
VIN*
8.13
7.29
-0.84
1.75
1.94
0.19
-1.03
Middle East
* VIN – Venezuela, Indonesia, Norway
Source: BP Statistical Review of World Energy, June 2005
(DP – DC)
Hurricane Katrina
Source: Tine, September 26th, 2005
Factors That “Potentially” Affect
the 10-Year Bond Rate
1. Inflationary Expectations
2. FED Behavior
3. Liquidity/Safety Premium
4. Trade Deficit!
High Trade Deficit
Numbers Keep US Long
Term Bond Rates Low!
Global Current Account Balances
(Billions of U.S. Dollars)
Countries
1996
2003
Countries
1996
2003
46.2
-342.3
Developing
-87.5
205.0
-120.2
-530.7
Asia
-40.8
148.3
Japan
65.4
138.2
China
7.2
45.9
Euro Area
88.5
24.9
Hong Kong
-2.6
17.0
France
20.8
4.5
Korea
-23.1
11.9
Germany
-13.4
55.1
Taiwan
10.9
29.3
Italy
39.6
-20.7
Thailand
-14.4
8.0
Spain
0.4
-23.6
-39.1
3.8
12.5
25.3
Argentina
-6.8
7.4
Australia
-15.8
-30.4
Brazil
-23.2
4.0
Canada
3.4
17.1
Mexico
-2.5
-8.7
Switzerland
21.3
42.2
Middle East and Africa
5.9
47.8
United Kingdom
-10.9
-30.5
E. Europe and ex-USSR
-13.5
5.1
Industrial
United States
Other
Latin America
Source: Remarks by Governor Ben S. Bernanke, March 10, 2005
Net Foreign Purchases of U.S. Financial Instruments
($. Bil)
500
T-Bonds
400
Global Savings Glut
Is Showing up in T-Bond Holdings
300
Corp. Bonds
200
100
0
Agency
Stocks
-100
-200
90
91
92
93
94
95
96
97
98
Source: FRB Flow of Funds Data
99
00
01
02
03
04
The Bill Gross View
“The
Fed controls short rates. Intermediate
and long rates are determined by
institutions, individuals and foreign central
banks, such as China’s, which have been
massive buyers of Treasuries.”
- Bill Gross
Founder and Chief Investment Officer
Pimco, Newport Beach, Calif.
Source: Barron’s, January 19, 2004
Trade and Holding of US Treasuries
by Central Banks
Trade in Goods and Services
U.S. Treasury Securities Holdings
Currency
As of 2004
Change
As of 2004
Change
Appreciation
Japan
Japan
China
-75.2
-75.2
-162
-9.3
-9.3
-38.1
702
702
196
353.7
353.7
49.4
4.3
4.3
0.0
South Korea
-19.8
-6.9
67.1
8.6
13.4
Taiwan
South Korea
-12.9
-19.8
1.2
-6.9
59.1
67.1
18.2
8.6
6.7
13.4
Hong Kong
6.5
1.8
52.9
22.7
0.0
Singapore
4.3
2.9
26.9
4.1
4.1
Germany
-45.8
-6.6
59.5
19.5
8.0
UK
-10.4
-1.7
171
124.0
7.1
UK
-10.4
-1.7
171
124.0
7.1
In one year Japanese Bought
$350+ Bil. worth of Treasuries to
Keep their Currency from Appreciating
* All numbers are in billions of U.S. dollars
Source: BEA (Trade) and US Treasury Department
2004 US Balance in International Trade
What We Buy From Them
What They Buy From Us*
Crude Oil
-135.7
Airplanes
13.2
Vehicles
-123.2
Chemicals (Plastic)
10.9
Clothing
-67.9
Airplane parts
10.5
Home Electronics
-67.8
Soybeans
6.6
Office Electronics
-65.6
Corn
6.0
Petroleum Preparations
-28.3
Wheat
5.0
Furniture and Bedding
-23.7
Scientific Instruments
4.5
Natural Gas
-21.1
Cotton
4.2
Electrical Machinery
-20.2
Metal ores
3.2
Toys, Sporting good
-19.1
Animal Feeds
3.0
* Billions of Dollars
Source: US Bureau of Economic Analysis
2002 Passenger Car Production and Sales
Country
Production
Sales
Deficit/Surplus


Japan
8,117,563
4,289,683
Germany
5,301,189
3,341,718
U.S.
4,879,119
8,422,625
-3,543,506
France
3,181,549
2,254,732
926,817
S. Korea
2,471,444
1,065,161
1,406,283
Spain
2,211,172
1,437,192
773,980
Brazil
1,495,622
1,295,119
200,503
U.K.
1,492,365
2,458,769
-966,404
Canada
1,274,853
868,188
406,665
Mexico
1,000,715
667,565
333,150
China
703,521
780,604
-77,083
India
573,808
601,321
-27,513
Sweden
251,035
246,581
4,454
Source: Ward’s World Motor Vehicle Data
3,827,880
1,959,471
Is GM Just in Business to
Service Their Workers’ Pension Plans?
Source: Dhawan and Lieberman (2002), forthcoming in Management Science
What’s the Solution?
1. Dhawan & Lieberman (2002) Study
– Increase Volume/Plant by Adopting
Toyota’s JIT Practices
2. Negotiate with Unions
3. Bring Back Some Creative Designing
4. Issue to Top Management & Workers
30-Year Company Bonds as Part of their
Compensation (with Restrictions on
Re-sales)
10-Year Bond Rate and Trade Deficit
10-Year Bond Regression
Source: May 2005, Forecast of the Nation
10-Year Bond Rate
4.3
4.3
4.9
5.5
CPI Inflation
2.7
3.5
3.0
1.8
1.8
2.3
2.2
2.0
Core
But What About the value of the
Dollar?
The Meryl Witmer View
“If the dollar is low enough, the
world can get its plastic surgery
here.”
- Meryl Witmer
General partner
Eagle Capital Partners, N.Y.
Source: Barron’s, January 19, 2004
20%
Dow 30 Revenue Growth
15%
10%
5%
?
AIG, Merck, Walmart
& Exxon Mobil
0%
-5%
01q1 01q2 01q3 01q4 02q1 02q2 02q3 02q4 03q1 03q2 03q3 03q4 04q1 04q2 04q3 04q4 05q1 05q2
Greenspan’s Dilemma
Fundamental Pressures
Incipient Inflation
Handicaps
Super Hot Housing
Productivity Worries
Financial Fragilities
Faster Job Growth
Source: Business Week, July 5, 2004
Wild Card
TOP 20 MSAs with HIGHEST House Price Appreciation
MSA
1-Year
1-Qtr
5-Year
1. Las Vegas, NV
36.23
1.67
84.09
2. Bakersfield, CA
30.46
5.15
92.41
3. Reno-Sparks, NV
30.09
4.52
79.48
4. Riverside-San Bernardino-Ontario, CA
29.58
3.83
112.14
5. Visalia-Porterville, CA
27.23
3.97
67.44
6. Palm Bay-Melbourne -Titusville, FL
26.25
3.79
85.86
7. Salinas, CA
25.71
3.28
116.19
8. Los Angeles - Long Beach - Glendale, CA
25.19
2.73
102.73
9. Fresno, CA
25.10
3.99
103.49
10. Santa Barbara - Santa Maria-Goleta, CA
24.98
3.21
121.06
11. Santa Ana-Anaheim-Irvine, CA
24.56
1.88
106.48
12. Merced, CA
24.45
5.12
115.10
13. San Diego-Carlsbad - San Marcos, CA
24.41
1.99
119.40
14. Oxnard-Thousand Oaks - Ventura, CA
23.90
1.65
105.53
15. Yuba City, CA
23.80
5.54
111.57
16. West Palm Beach-Boca Raton-Boynton Beach, FL
23.36
2.90
94.38
17. Sacramento-Arden-Arcade-Roseville, CA
23.19
2.80
111.79
18. Stockton, CA
23.16
4.32
104.98
19. Port St. Lucie-Fort Pierce, FL
22.87
3.00
97.29
20. Punta Gorda, FL
22.87
4.31
92.18
Source: OFHEO Report, 4th quarter 2004
But Statistically One
Can’t Prove That There
is a Home Price Bubble!
Home Price Appreciation and Aggregate Income Growth by State
(1991:1 - 2004:4)
17
Annualized home price appreciation (%)
Median = 4.97
DC
Red Zone
15
CA
13
11
NV
FL
NY
VA
Median = 7.74
MN
9
AZ
PA
7
WA
5
NC
OH
GA
TX
TN
Safe Zone
3
1
3
3.5
4
4.5
5
5.5
6
Annualized aggregate income grow th (%)
6.5
7
7.5
Cash-Out Refinancing is Used For…
Paying down other expensive debt
Start a new business
Consumption of Durable Goods
Take a vacation in Bahamas
Send your kid to Harvard
10-Year
Estate
Cycles
10-YeartReal
Real
Estate
Cycles
Los
Angeles
Los
Angeles&
& NYC
NYC
(1990=100)
140
120
100
80
60
40
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00
Los Angeles
NYC
Tiny Bubbles
Celebrity Reality TV Shows
The Simple Life 4, Being Bobby Brown, Hogan Knows Best… the list goes on.
Source: Fortune, August 8th, 2005
ARE PRIVATE ACCOUNTS A GOOD IDEA?
THIS NUMBER HAS BEEN AUTHORIZED FOR
IS THERE REALLY A CRISIS?
Signature
Health Care Cost Projections
Our forecast scenario predicts that by
2020, the share of medical consumption
in GDP will rise to 13% from the current
9%.
At 8% rate of growth the share is
21%
At 9% rate of growth the share is
30%
How Do We Solve This Problem ?
1. Tax Hikes and Benefit Reductions
2. Ship Boomers to India
3. Bring in 100 Million Immigrants
Solution
“Work ‘em Until They’re Dead!”
Prof. Larry J. Kimbell
September 1997
What’s needed are medical advances that
prolong the productive life-span and not so
much the actual one! Prof. Rajeev “M.” Dhawan
September 1998
Please Send Your Comments
and Questions to
[email protected]