National Economic Outlook November 2018

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

The Gross Domestic Product is one way of looking at the economy. It includes consumer spending, what companies invest in new equipment and buildings, changes in business and farm inventories, exports and imports, and government spending. In the news we usually hear how much it’s changed from quarter to quarter, which varies a lot. But if we look at the change from the same quarter of the previous year it’s easier to spot trends.

Seen that way, GDP has been steadily growing for the past two years, particularly because of more spending on healthcare. It doesn’t match the surge of healthcare spending when the Affordable Care Act was enacted, but points to the fact that healthcare spending – and the jobs it creates - will be driving local economies for quite some time.

In October, total jobs were up 1.7 percent from last year. Jobs were up 1.4 percent in finance, 2.6 percent in business services, 2.1 percent in healthcare, and 1.6 percent at restaurants. Government jobs barely increased, as did jobs in retail. With more and more on-line shopping, we have to accept that the low job growth in retail is now a permanent feature of the economy.

Job gains in manufacturing were 2.3 percent, continuing the trend of the past year. This may be a temporary response to international trade disputes, but it could also signal that highly-automated US factories have regained the edge in making good-quality products at a reasonable cost.

National Economic Outlook - October 2018

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

After the wrenching ups and downs of real estate markets over the last ten years, it's fair to ask where we are now. Home construction can give us a partial answer. Back in the boom days before 2008, when sub-prime mortgages put an extra 5 million people into a home, builders were putting up units as fast as they could - about 2 million per year. It still wasn't enough, though, and home prices kept climbing.

Then, during with the recession, when many sub-prime loans ended in foreclosure, construction plunged to little more than half a million units per year - and many builders went out of business. In recent years activity picked up again and last year 1.3 million new homes were built.

For the size of the US population, however, the average number of homes built per year should be 1.8 million. We haven't seen that level since 2006. What this means is that even though too many homes were built before 2008, we're now facing a chronic shortage. Builders can't possibly scale up fast enough, so we'll see demand greater than supply for years - and higher home prices.

Total jobs in September were up 1.7 percent from last year, the same rate we've seen for months. Jobs were up 2.2 percent in manufacturing, 0.4 percent in retail, 1.4 percent in finance, 2.8 percent in business services, 1.9 percent in healthcare, and 1.7 percent at restaurants. As usual, government jobs were almost flat.

The increase in manufacturing jobs is encouraging, but it's business services that's pulling the economy along. The lack of growth in retail jobs - online shopping - looks like it's permanent.

National Economic Outlook - September 2018

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

I've been harping about consumer debt for a while now because I think it will cause the next recession. It won't trigger it, that will be some unrelated event, but all of a sudden people will realize they can't spend any more money. Here are some facts. Adjusted for inflation, ordinary consumer debt - that is, not including mortgages - is now $12,000 per man, woman and child in the US, up from $4,000 in 1980. That's equal to 40 percent of income, mainly in the form of credit cards and student loans. It used to be 20 percent.

The problem I see is that banks - which formerly made their money from businesses but now make it from consumers - have every incentive to encourage people to borrow more and more. And politicians have every incentive to help the banks do it.

With no natural brake on the system, where will it end? When debt is 50 percent of income, 80 percent? Or maybe it will never end and we'll have a larger portion of the population spending less and less, while an ever-smaller, wealthier one spends more and more. That would be a social and political disaster.

Jobs in August were up 1.7 percent over last year. They were up 2 percent in manufacturing, 2.6 percent in business services - the main driver for the economy right now - 2 percent in healthcare, and 1.6 percent at restaurants. Jobs in the retail sector struggled slightly higher after a disastrous year, while jobs in government were again essentially flat.  

Jobs in the construction sector were up 4 percent. This may seem like a big deal, but it's not. After a decade of empty homes and fewer people who can afford to buy - and despite the new boom in California - the construction industry is still smaller than it was ten years ago.

National Economic Outlook - August 2018

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

I normally don't pay much attention to the Gross Domestic Product. I'm not an economist and how you can accurately estimate the output of as large and complicated an economy as the US to within a percentage point is thankfully beyond my understanding. Furthermore, the swings from one quarter to the next are sometimes so large that the number in an quarter seems meaningless. The last time GDP was over 4 percent (4.9 percent, in the third quarter of 2014), in the very next quarter it was 1.9 percent.

But the 4.1 percent GDP growth in the second quarter of this year has been trumpeted as evidence of a very strong economy, so we better have a closer look. The largest portion of the 4.1 percent was 2.7 percent due to consumer spending. Other than that, exports were up, imports held steady, and the government spent a bit more. I actually find the high level of consumer spending a bit disturbing because I strongly suspect it was built on borrowed money - credit cards.

GDP is an income statement, not a balance sheet, and if GDP looks good only because consumers keep borrowing, what's good in the short run will have bad consequences down the road. The next GDP report comes out in late October, just in time for the elections.

Overall, jobs in July were up 1.6 percent from last year, the same level we've been at for months. Jobs were up 2.6 percent in manufacturing - this is a big deal if it continues. Manufacturing is now just 10 percent of the economy (measured by jobs) but if it's doing better because US factories have become more efficient, we can expect the entire sector to keep growing for years.

Jobs were up 2.6 percent in business services, 1.8 percent in healthcare, 1.8 percent at restaurants, 1.3 percent in finance, and just 0.6 percent in retail trade. As always, government jobs were flat.

National Economic Outlook - July 2018

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

Manufacturing is no longer the engine of the US economy, like it was 50 years ago, but it's had a rebirth of sorts over the last few years as companies in America find they can produce many products better and more cheaply than foreign manufacturers. A lot of these are intermediate products, specialty components - used in other products - where precision, speed of delivery, and adaptability to changing specifications are important to buyers, along with price. Two of the biggest job gainers have been machine shops - highly automated and flexible operations - and makers of structural metal products.

Two other expanding segments are producers of heavy equipment - mining and construction machinery, for example - and producers of industrial equipment - the automated machines that are the vital ingredient for sustained growth in the manufacturing sector. Production in these segments depends on creative design and heavy use of computer technology rather than low-cost mass production.

Aside from providing a boost to the economy in general, the new manufacturing jobs have a special impact on real estate markets because they provide fairly high pay. And because they tend to be mid-sized operations that can be located anywhere, they're quite likely to show up in markets where the cost of manufacturing is low but the workforce is skilled - such as Midwest markets with available land and a technical college nearby.

Real estate investors might want to assemble a list of such markets and keep track of new plant announcements.

Including the strong 2.3 percent increase in manufacturing jobs in the past year, total jobs increased 1.6 percent in June. Jobs were up 2.6 percent in business services, 2 percent in healthcare, 2 percent at restaurants, 1.5 percent in finance, and 0.5 percent in retail.   

National Economic Outlook - June 2018

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

While the monthly jobs data tell us how the economy is doing overall, it's also worthwhile to see in what ways it's been changing. We're used to the idea that manufacturing jobs have disappeared overseas and that computers will soon be doing all those that are left, but automation and the export of low-skill jobs are part of a self-correcting process by which businesses take advantage of opportunities to provide more and better services - not just cheaper versions of the same old ones.

We can see this happening in two important areas, manufacturing and healthcare. In the past year 260,000 new jobs were created throughout the manufacturing sector, largely because automation, logistics and communications have replaced low wages as the most important costs for many companies. Similarly, there were almost 400,000 new jobs in healthcare, and not as low-wage nursing home aides. These are mainly jobs where people now use computer technology as a matter of course, providing more care than in the past (though we can debate whether it's better).

How the economy fares in the next few years has little to do with low-wage jobs or more automation - it's probably consumer debt that will upset the cart - but the rejuvenation of industries through the use of more technology is the important long-term trend.

Total jobs in May were up 1.6 percent over last year, the same as in previous months. Not great but at least steady. Jobs were up 4 percent in construction, 2 percent in manufacturing, healthcare and at restaurants, 1 percent in retail and finance, 2.4 percent in business services, and flat in government.

National Economic Outlook - May 2018

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

Like most people, I'm most confident talking about an economy that produces physical things like airplanes or soybeans or TV shows, or even data. I'm less sure when it comes to financial activities that place a value on things like stocks, sub-prime mortgages, credit card debt or real estate.

So, while I'm happy that the manufacturing part of our economy is adding jobs at a good clip, I'm less happy that the same is true for the financial sector. The added jobs are a good thing, but the expanding activity makes me nervous, especially because computers magnify financial effects these days.

The government also worries about the financial sector, which is why it's let the big banks get bigger - easier to regulate a few. But their concern is just that banks follow the rules, while my worry is that perfectly legal activities will - once again- blow up in our faces. And - once again - it will be the real estate sector (homeowners included) that gets hit the hardest. The greater concentration of jobs and real estate value in a smaller number of big markets is itself a risk we haven't seen before.

Jobs in March were up 1.6 percent from last year, same as previous months. Jobs were up 2 percent in manufacturing, 1.5 percent in finance, 2.6 percent in business services, 2 percent in healthcare, and 2 percent at restaurants. Jobs were up slightly in retail, and flat in government. Unemployment was down a touch.

National Economic Outlook - March 2018

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

March 22, 2018:  One reason a lawyer might pay off a porn star with a home equity line rather than a credit card is that interest rates on credit card balances are very high, around 15 percent at a time when inflation is only 2 percent. The high rates are needed partly because banks constantly have to write off credit card balances that are uncollectable. This can be a big deal - the 2008 recession pushed 'charge-off' rates over 10 percent.

Current charge-off rates are around 3.5 percent, far from the danger level, but they have been increasing - back in 2015 they were below 3 percent. And the other part of the picture - credit card delinquencies - have also risen, from 2 percent to the current 2.5 percent.

This news isn't yet ominous, but it could quickly become so because of the outsized role that consumer debt now holds, both in the profitability of banks and in the ability of consumers to keep spending money. Regulators will focus on the stability of the banking system, but the bigger problem will come from the consumer side. We don't know at what level delinquencies and charge-offs will become dangerous because consumers have never carried so much debt, it's new territory.

Jobs in February were up 1.6 percent from last year, pretty much the same story we've seen in previous months. Jobs were up 1.8 percent in manufacturing, 2.4 percent in business services, 1.9 percent in healthcare, and 2.2 percent at restaurants. There was a very small increase in retail and in government.

It's too early to know how much of an impact the recent tax restructuring will have on jobs or income.

National Economic Outlook - February 2018

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

Measured by Gross Domestic Product the economy grew 2.3 percent in 2017 - better then 2016, not as good as 2015. As usual, the spending of individuals was 80 percent of economic activity.

What GDP doesn't tell us is how much risk is building up. We don't have to look back very far - only ten years - to know that spending is just one part of the equation. If the spending that drives the economy is only funded by more and more debt - or by the illusion of wealth from higher and higher home prices - it can't go on forever.

It would have been difficult to measure the risk created by the sub-prime mortgage boom as it happened, and in the same way it's difficult to put our finger on what the next big risk to the economy might be, but here are a couple of prime suspects: consumer debt and a new real estate bubble.

We don't know how much consumer debt is dangerous because we're in uncharted territory - even adjusted for inflation and the growing population, it's never been higher. Setting aside the $14 trillion of mortgage debt, other consumer debt in the shape of credit cards, car loans, home equity loans and student debt is close to $4 trillion - about $11,000 for every man, woman and child in America. It's doubled since 2000 and it's shooting higher as we speak. At what point will consumers no longer be able to borrow?

We're all too familiar with the other potential risk, a real estate bubble, but that doesn't mean we can do anything about it. So far, a boom is underway in only a couple of dozen markets - Denver, Miami, LA, San Francisco, Seattle, Dallas, Austin, Charleston among them - but a lot of people live there and how will they change their spending habits when home values drop ten percent?

Total jobs in January were up 1.5 percent over last year. Jobs were up 1.5 percent in manufacturing, 2.3 percent in business services, 1.9 percent in healthcare, and 2.2 percent at restaurants. Jobs were flat in retail and in government. Unemployment stayed at 4.1 percent.

National Economic Outlook - January 2018

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

One of the bright spots of the economy is the financial sector. For the last several years jobs in finance increased at a steady pace of almost 2 percent per year; there are now almost a million more than in 2010. These are mainly well-paid jobs - over $70,000 per year - that boost the real estate market.

While these jobs still increased 1.6 percent in 2017, this is slower growth than just last year. Because these jobs are associated with individual transactions in banking, wealth management, debt management, insurance, and real estate itself, they are very susceptible to automation and internet replacement.

With ballooning personal debt on one side and high invested wealth on the other, the financial sector is larger than ever, but the future of jobs in finance is likely to be less rosy. This by itself isn't bad for real estate, it's just another indicator of the future tilt towards more renting.

The ascent of the financial sector is itself a potential liability because it's built on ever larger amounts of debt. The last time around, Wall Street offered good returns through securities backed by risky mortgages. The same pressures for high returns can easily produce similar risks when so much other debt is floating around.

Jobs in December were up 1.5 percent from last year, in line with recent growth levels. Manufacturing jobs were up 1 percent, jobs in retail and government again were flat. Jobs were up 2.5 percent in business services, 2 percent in healthcare, and 2 percent at restaurants. Unemployment remains at 4.1 percent.