Monday, June 12, 2017

National Economic Outlook - June 2017

Written By:
Ingo Winzer, President

Local Market Monitor

Continuing the trend of recent months, in May the number of jobs in retail sales was no better than last year. This very worrying development isn't really so surprising because we've seen that the income of consumers has barely increased for years, while the amount of debt they're carrying has grown. At some point that has to translate into less spending.

Other parts of the economy are still doing well. Jobs in business services, for example, are growing at a faster rate than last year. Jobs in healthcare are growing at a slower rate, but still at a good clip - and growth seems to be fine in finance, construction and at restaurants. Ok, jobs aren't growing in manufacturing or government - almost a quarter of the economy - but they haven't for a while. So why is the poor showing in retail now so important? Because it's a LEADING indicator.

Jobs in healthcare didn't even feel the 2008 recession until 2009, jobs in business services were still doing fine in late 2007. But jobs in retail had already sputtered in 2006, well before the crash in early 2008. Stay tuned.

Overall, jobs in May were 1.5 percent higher than last year. This seems to be the new normal in 2017, as 1.8 percent was the new normal in 2016. Jobs were up 3 percent in construction, flat in manufacturing, flat in retail, up 2 percent in finance, 3 percent in business services, 2.3 percent in healthcare, 2 percent at restaurants, and a half percent in government.

Unemployment is at a low 4.3 percent, whatever that means these days when many people have just dropped out of the regular workforce.

Thursday, May 11, 2017

National Economic Outlook - May 2017

Written By:
Ingo Winzer, President

Local Market Monitor

I noted last month that the number of jobs in the retail sector, while still higher than  a year ago, is only growing very slowly. Statistics from April point to the same disconcerting conclusion, so we'll now examine more closely what's going on here. There are two important reasons: when people buy less stuff, the rest of the economy follows; and, retail is one of the last sectors where people with no special skills can find a job. Retail provides 11 percent of all jobs in the US.

The rate of growth in retail jobs was 1.4 percent in January, 0.8 percent in February, and 0.3 percent in both March and April. Is this because people are buying less stuff? Very likely. Sure, internet sales are up but internet sales are still only ten percent of retail sales. For the first three months of the year, retail sales in dollars were up 4 percent, but subtract inflation of 2.5 percent and sales are pretty meager - concentrated in cars (bought on credit), furniture (bought on credit), gas (prices are higher), drugs (paid by insurance), and building materials (mainly bought by businesses). People are buying less real consumer stuff - food and clothes.

Measuring things is difficult, so statistics aren't always correct. It's too early to conclude the economy is in trouble. But a few more months of this trend and I'll be willing to stand up and start shouting.

Overall, the number of jobs in April was up 1.4 percent from last year, the LOWEST rate of growth since the last recession. Jobs were essentially flat in manufacturing and retail, up 2 percent in finance, 3 percent in business services, 2 percent in healthcare and at restaurants. The government is a non-player. Unemployment fell to a low 4.4 percent in April.

Wednesday, April 12, 2017

National Economic Outlook - April 2017

Written By:
Ingo Winzer, President

Local Market Monitor

Because the government reports such detailed statistics about the economy, we can think of developments in some subsectors as leading indicators of what will happen with the overall economy in the near future. For example, we closely watch the number of jobs in truck transport and temporary help because we think these are quickly affected by a slowdown of demand. But the data for these subsectors, which are around one percent of all jobs, can vary a lot from month to month, so you can't always be sure what they're telling you.

An even closer connection to demand is the number of jobs in retail stores. This subsector is much larger - about ten percent of all jobs - and if the data from the last few months can be believed, it's telling us that we will see a significant slowdown sooner rather than later. In March, the annual rate of growth in retail jobs was 0.3 percent - compared to 1.4 percent in January and 1.7 percent a year ago. TV reports tell us this is just because more people are buying on-line, total demand remains the same. But people have been buying on-line for a long time, so I wouldn't bet on that as the full explanation. The numbers may vary from month to month, but I'll be watching the retail job figures very closely this year.

Largely because of the slow growth in retail, overall job growth in March was 1.5 percent - the slowest rate in five years. Jobs were up 0.3 percent in manufacturing, 2.2 percent in finance, 3.2 percent in business services, 2.3 percent in healthcare and 1.9 percent at restaurants. Unemployment was a low 4.5 percent.

Tuesday, March 14, 2017

National Economic Outlook - March 2017

Written By:
Ingo Winzer, President

Local Market Monitor

We like to measure the growth of the economy in terms of jobs - rather than Gross Domestic Product, for example - because jobs translate directly into demand for housing. For some time now it's been clear that the economy is not creating the kinds of jobs it used to. A third of the new jobs created in the past two years are in restaurants, social services and retail stores, where pay is less than half the national average of about $50,000. At the other end, only ten percent of new jobs (mainly finance and  computer related) are in businesses where pay is close to $100,000.

Clearly, the former jobs encourage renting, while the latter spur home buying. Going forward, we'll more closely monitor the growth of low-end and high-end jobs.

As mentioned last month, we believe that the economy will be growing at a slower rate over the next few years. Because of the low level of home construction over the past decade, demand will nonetheless outstrip supply, pushing prices and rents up, but not in all markets. Higher interest rates will cut demand somewhat by increasing the cost of mortgages and decreasing the appeal of rental investments. This is not a danger point, but closer attention to the dynamics in individual markets is a good idea.

Jobs in February were up 1.7 over last year - flat in manufacturing, up 3.5 percent in construction, 1 percent in retail, 2.3 percent in finance, 3 percent in business services, 2.4 percent in healthcare, 2.3 percent at restaurants, and 1 percent in government.

Jobs in truck transport were up 1.3 percent - better; and temp jobs were up 3.2 percent - good.  

Low-end jobs (restaurants, social services, retail) increased 472,000; high-end jobs (finance and insurance, information, computer services) increased 210,000.

Wednesday, February 15, 2017

National Economic Outlook - February 2017

Written By:
Ingo Winzer, President

Local Market Monitor

Home prices are mainly determined by supply and demand, and a lot of the demand is tied to the economy. When the economy adds jobs, demand grows.

Our forecast of home prices in local markets estimates local economic growth over the next three years. Since the end of the recession, in about 2010, our forecast has assumed that all local economies will get better and better.

We're now changing that assumption. The national economy hit a peak in 2015 and has since been growing at a steadily slower rate. Our assumption for the next three years is that growth in all local markets, with some exceptions, will no longer get better and better but will just continue at the current rate.

The effect on our home price forecasts isn't very big. Nationally, the forecast for the next three years only drops from 17 percent to 14 percent, still a healthy increase. But the larger concern is the possibility that the economy is on a slide to slower and slower growth - which would affect demand more sharply.

Jobs in January were up 1.5 percent from last year; flat in manufacturing, up 1.4 percent in retail trade, up 2.3 percent in finance, 2.7 percent in business services, 2.4 percent in healthcare, 2 percent at restaurants, and up a half percent in government.

Jobs in truck transport were up 0.6 percent - not good; and temp jobs were up 3.1 - much better than in previous months.

Monday, January 2, 2017

National Economic Outlook - January 2017

Written By:
Ingo Winzer, President

Local Market Monitor

Three things to keep in mind for 2017: the economy will grow at a slower rate, home prices will continue to rise, but more people will want to rent. This isn't much different from 2016 but the risk of investing will be higher in some local markets.

The Economy

The Federal Reserve believes the economy is "strong" and will do even better next year. The Local Market Monitor thinks this is pie-in-the-sky optimistic.
The US economy moves in tidal waves that ebb and flow for years at a time. This is especially true for jobs. After the 2008 recession, job creation built back to a peak of 2.3 percent in early 2015 and since then it's receded to a 1.6 percent annual rate. Maybe another wave of growth will follow in 2017, but I doubt it. Some important stats say further slowing is more likely.

Two special indicators - new jobs in trucking and in new jobs in temporary services - which both soared after the recession, have now dropped to their lowest level since then. Trucking jobs move goods to stores, and temps are the last ones hired before businesses stop hiring altogether. Lows in these areas are tough to square with a "strong" economy.

Job statistics tell us what the economy is likely to do, but they don't tell us why. To better understand what will happen with jobs - and therefore with real estate - we need to look at the longer-term situation of American consumers, who drive the economy but can only spend money when they make money. Or when they borrow it.

Before the last recession, consumers had borrowed - and spent - vast amounts of money against the value of their homes. When they could borrow no more, spending stopped and the recession started.

The next slowdown will probably happen when consumers are up their eyeballs in the vast amount of debt they have taken on to pay for college.

Over the last ten years, student debt increased by a trillion (yes, trillion) dollars. When a business borrows, it may invest in something that will grow the economy; but when a student borrows to pay for something that has no more value than a high school diploma once did, it's not an investment that will grow the economy - it's just a transfer payment to their college, and a debt that keeps them from spending money on other things.

The unfortunate situation we seem to be in is that our economy can only grow modestly unless consumers borrow to spend - first it was homeowners, now it's young adults. What will happen when all consumers have borrowed all they can?

Home Prices

Nationally, home prices bottomed out in 2012 and are up about 5 percent a year since then. But the local differences are stark. In the last three years, prices rose 30 percent in Southern California, yet just 5 percent in Alabama and Connecticut. Many local markets are still under-priced 25 percent or more. Not surprisingly, job and population growth account for much of the difference.

It's easy to list growing markets where prices will continue to rise, but are the under-priced markets an investment opportunity? For that matter, what's the best way to invest in markets that are already over-priced? The answer may lie in the rental question.

Buying Versus Renting

Buying, fixing up and then renting out single-family homes remains an attractive proposition. Right after the recession, bargain home prices were a big draw for such an investment, promising quick returns. But even with higher prices, the fundamental economics of renting will be favorable for years.

In 2005, 37 million American households were in rentals. In 2016 it was 44 million. Builders, however, have not kept pace - in the last five years just 2 million new rentals built although 4 million were needed. And there are good reasons to think this imbalance will continue.

The income of the average worker increased just 10 percent in the last five years - no better than inflation. More importantly, the income of the lower half of workers increased only 8 percent. Fewer people have the income to buy a home and more of them are already saddled with debt.

The Take-Away

Slower job creation in 2017 - incomes for many people don't match inflation - the debt of consumers goes even higher - more people need to rent - but builders aren't building enough rentals. 

Thursday, November 10, 2016

National Economic Outlook - November 2016

Written By:
Ingo Winzer, President

Local Market Monitor

The Trump administration will probably launch a local infra-structure construction program to boost local incomes. The money to pay for this program will have to come from increasing the deficit, which will mean higher interest rates.

The combination will increase demand for homes but also the cost of buying them, and will accelerate the trend towards more renting.

Throughout most of the Rust Belt, where Donald Trump won strong support, prices for homes remain very low - partly because the local economic situation has for years been very poor. If government money is routed towards these most visible areas of economic stagnation, local home values will rise for years, as will demand for single-family rentals.

Jobs in October were up 1.6 percent from last year, the slowest rate of growth in three years. Jobs were down 1.2 percent in manufacturing, but up 1.5 percent in retail, 2.1 percent in finance, 2.7 percent in business services, and 2.6 percent in healthcare. Government jobs were up almost 1 percent, mainly at the local level.

Jobs in truck transport were up just 0.4 percent, a very negative development, and temp jobs were up 1.8 percent, also an indication of slower growth.

Overall, the economy has been growing at a slower pace during the past year, with the prospect of even lower growth in 2017 and 2018. A government construction program, even if it can't kick in for a while, will come at just the right time to reboot the economy.