National Economic Outlook - December 2017

Written By: Ingo Winzer, President of Local Market Monitor, Inc.

In previous economic cycles, the performance of the US economy could be measured by the growth or decline in jobs. No more. By measures like corporate profits or GDP, the economy is doing well today, but job growth keeps slowing down. What gives?

In a word, computers. The greater use of computers and information technology keeps displacing workers. This phenomenon isn't new - computer-controlled machines have been around a long time - but has accelerated with the build-out of the internet. Ironically, one of the strongest effects can be seen in the information sector itself, where jobs are down 2 percent over the past year. We all know that newspapers have been losing jobs, but that now extends to the movie and TV industries and to telecommunications.

It's difficult to know where this process will end. What will these displaced workers do instead? They can't all be retrained for high-tech jobs, especially since high-tech jobs themselves will eventually be relentlessly pared down.

In the meantime, the real estate industry is likely to follow the auto industry, where more and more vehicles are leased because fewer customers can afford to buy.

In November, jobs were up 1.4 percent from last year. Jobs were up 1.5 percent in manufacturing,1.8 percent in finance, 2.7 percent in business services, 2 percent in healthcare, and 2.1 percent at restaurants. Jobs in retail and government were flat. The unemployment rate is bumping along at 4.1 percent.

National Economic Outlook - November 2017

Written By Ingo Winzer, President of Local Market Monitor Inc.

Local data for October aren't available yet, but the overall effect of the hurricanes in Texas and Florida on jobs will probably be transient. Overall, jobs in the US in October were up 1.4 percent from last year, up from 1.2 percent in September and in line with previous months.

This doesn't mean the affected local markets will snap back. In both the Houston and Miami areas about 15,000 jobs were lost. (In Puerto Rico, the devastation is so great that no data at all are available.) Ironically, although the Houston economy may recover faster as refineries get back on-line, Miami will probably have a more complete recovery. Even before the hurricanes, growth in energy-dependent Houston had been slow - almost zero in 2016 - while growth in South Florida has been high for years, buoyed by foreign capital.

The hurricanes came on top of a national economy that the Fed says is going great guns but in terms of new jobs has been steadily slowing. Last year job growth was 1.7 percent, the year before that 2.1 percent. This year 1.5 percent is the new normal.

In October jobs were up 1.4 percent from last year, including (on a very positive note) 1.2 percent in manufacturing, 2.5 percent in business services, 1.9 percent in healthcare, 1.9 percent at restaurants, and 1.8 percent in finance. Retail jobs were down a half percent and government jobs were basically flat. Unemployment in October was 4.1 percent.

National Economic Outlook - October 2017

Written By: Ingo Winzer, President of Local Market Monitor, Inc.

The job data for September show some of the effects of the recent hurricanes. Overall, job growth slowed to a 1.2 percent annual rate - down from the 1.5 percent of previous months.

The drop was mainly due to a loss of jobs in retail and at restaurants, as you would expect in storm-ravaged areas. But the big question for the national economy is what comes next? Sure, rebuilding in Texas and Florida will provide a temporary boost in construction-related jobs, but will all the old jobs eventually reappear? The Houston area and Southern Florida have been among the fastest growing parts of the country for decades, so we can expect they will again - eventually.

But outside calamities can also accelerate trends that had been in the works for some time. Storms and floods and fires - because they provide an opportunity for individuals and businesses to re-assess their situation - can be a tipping point for local economies, just ask New Orleans. And with the national economy already running slower, it won't take much for weakness in one part of the country to spread to others through lower demand for goods and services, a lot of which depends more on psychology than immediate need.

Too cataclysmic? Probably. But my job is to anticipate things that might happen, and in a fragile economic environment any number of things can quickly have effects much bigger than we would have thought. Before 2008 who would have guessed the world economy would be felled by sub-prime mortgages?

In September, jobs were up 1 percent in manufacturing, 1.8 percent in finance, 2.6 percent in business services, 2 percent in healthcare, 1.4 percent at restaurants - and were down 0.4 percent in retail. Unemployment was 4.2 percent.

National Economic Outlook - September 2017

Written By:
Ingo Winzer, President

Local Market Monitor

Why do the monthly economic statistics matter to long-term investments in real estate? It's partly a matter of timing - you'd prefer not to make an investment just as the economy is tanking. But aside from spotting the infrequent recession, investors can dissect current performance to take advantage of the strategic changes that will affect their long-term decisions.

One of the ongoing changes in the current economy is the rapid drive for efficiency fostered by computer technology, which has eliminated many jobs altogether and allowed others to be done overseas - probably the biggest dislocation since technology began eliminating farm jobs a hundred years ago, when most people lived on farms. The TYPES of jobs now being eliminated (or created) - and where they're located - has an enormous effect on the types of housing people need. The bifurcation of incomes - more high, more low, not as many in the middle - is also an opportunity for investors who can identify where and how real estate demand is restructuring. It's easy enough to SAY these changes are taking place, but translating them into actual investment decisions can only be done effectively by finding the fine print in the short-term statistics the government so generously supplies.

Jobs in August were up 1.5 percent from last year, this seems to be the new normal in 2017. Jobs were up 1 percent in manufacturing, 2 percent in healthcare, 2.5 percent at restaurants, 3 percent in business services, and were flat in retail and in government.

For those who like very early warning, jobs in finance were up 1.8 percent - lower than the 2.3 percent rate earlier this year. Growth in finance jobs peaked 18 months before each of the last two recessions.

National Economic Outlook - August 2017

Written By:
Ingo Winzer, President

Local Market Monitor

If the number of jobs in retail, instead of increasing 2 percent a year, will slowly erode from now on, is this a bad thing for the economy? Retail sales seem to be doing fine, its just taking fewer people to produce those results.

From an economic perspective, any efficiency is a good thing. But looking at the larger picture, the 300,000 jobs with annual pay of $30,000 that AREN'T being created every year are a blow to families for whom this is often a second income. Aside from restaurants and hotels, retail is the lowest-paying sector in the economy and the last possibility for people with no special skills. The $9 billion of retail salaries saved each year will go into somebody's pocket, but the social consequences of yet another disappearing opportunity near the bottom of the ladder may end up being a lot greater than that.

Overall, the number of jobs in July was up 1.5 percent from last year, in line with results so far this year. Jobs were flat in manufacturing, retail and government - which together make up a third of all jobs - up 2 percent in finance, 3 percent in business services, 2 percent in healthcare, and 3 percent at restaurants. In the construction sector jobs were up 3 percent, which seems like a lot but, starting from such a low level, it's nothing to write home about.

National Economic Outlook - July 2017

Written By:
Ingo Winzer, President

Local Market Monitor

Jobs in retail sales were flat again in June. What's going on here? I've been harping on this for a few months but the picture still isn't clear. Is the lack of growth in retail jobs an indicator that growth is slowing down? Or does it just mean that we're buying more stuff on-line?

In dollars, retail sales (including on-line) increased 4 percent in 2014, 3 percent in 2015, 3 percent in 2016, and 4 percent so far this year. So, there isn't a downward trend in spending, at least not in the past few years,. But this IS slower spending than the 5 and 6 percent increases we used to have. What we're probably seeing is a combination - more internet sales, but also a SHIFT in spending, mainly by people whose income has been flat. Consider that 40 percent of renters pay more than a third of their income for housing, and a bunch of the rest now goes for phone and internet service.

All of this doesn't completely answer our question, because the lack of new jobs in retail - the lowest paying part of the economy - isn't being made up elsewhere. While internet sales did increase, we're ALSO seeing a slowing of overall growth. Jobs in June overall were up 1.5 percent from last year - flat in manufacturing, retail and government, but up 3 percent in business services, 2 percent in healthcare, and 2 percent at restaurants.

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.

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.

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.

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.

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.

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.