The 2018 Economy · 2018-10-02 · CCFC 25th Annual Conference Economic Outlook, Mark Schniepp...

CCFC 25th Annual Conference Economic Outlook, Mark Schniepp

09/11/2018

1

Mark Schniepp Director

September 11, 2018

What you should know, higher prices

trade tensions, and the expanding economy

The 2018 Economy


09/11/2018

2

The annual updateWhy are you here?

(1) I’m here for the update workshops later today, but I need my morning coffee now

(2) I want to hear about interest rates

(3) I want to hear about the outlook for California

(4) When is the next recession?

(5) I’m here for the networking and cocktail hour, I couldn’t sleep and I have nothing to dofor the next hour›

Last year (11-14-17)

(1) Disruptive forces: Robots, AVs

(2) U.S. Economy and Trumponomics

(3) Tax reform

(4) State of the California economy

(5) Cannabis outlook for California

(6) The general economic outlook


09/11/2018

3

Also this year . . . .

(1) What you should know about today’s economy---- tough trade talk and tariffs

(2) Building in California, and

(3) The challenges that all builders now face: construction pressures

(4) The 2019 outlook

What you should know the U.S. unemployment rate fell to 3.9%

in August, the lowest since 2000 wages are rising more steadily now business is still hiring 9+ years into

the economic expansion And there are more jobs openings now than ever

If the expansion can last another year, it will be the longest ever


09/11/2018

4

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

Jun-03 Feb-05 Oct-06 Jun-08 Feb-10 Oct-11 Jun-13 Feb-15 Oct-16 Jun-18

Job Openings / U.S. June 2003 -- June 2018

thousands of jobs

The real meaning of a tight labor market

(1) It’s extraordinarily difficult to hire

(2) Anyone that wants a job can get a job

(3) And that includes, for the most part, a position in your career field and full time

(4) Wages and salaries are rising more sharply

(5) If you are at all dissatisfied with your current job, now is the time to make a change. Opportunities have never been better


09/11/2018

5

expansion

recession recovery

we are here

expansion

0

25

50

75

100

125

Oct 45 - Nov 46

Oct 49 - Jul 53

May 54 - Aug 57

Apr 58 - Apr 60

Feb 61 - Dec 69

Nov 70 - Nov 73

Mar 75 - Jan 80

Dec 82 - Jul 90

Mar 91 - Mar 01

Nov 01 - Dec 07

Jul 09 - Sep 18

37 45

39

24

105

36

58

91

120

73

110

Economic Expansions in Months / U.S. 1945 to Now

months


09/11/2018

6

January 31, 2018

February 18, 2018


09/11/2018

7

95

105

115

125

135

145

155

Jul-08 Oct-09 Jan-11 Apr-12 Jul-13 Oct-14 Jan-16 Apr-17 Jul-18

Index of Leading Indicators / U.S. index 2010 = 100

July 2008 -- July 2018

17,750

18,750

19,750

20,750

21,750

22,750

23,750

24,750

25,750

26,750

Sep-16 Dec-16 Feb-17 May-17 Aug-17 Oct-17 Jan-18 Apr-18 Jun-18 Sep-18

Dow Jones Industrial Average September 11, 2016 -- September 10, 2018 index


09/11/2018

8

30

40

50

60

70

80

90

100

110

120

130

Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18

Consumer Confidence / The Conference Board index 1985=100 August 2009 -- August 2018

current conditionsexpected conditionsHighest reading since 2000

Extremes you should know• Stock market near all time record high• Wealth of HHs at all time record high• Positive sentiment of workers and

households near all time record highs• Unemployment rates – lowest in a generation• GDP growth above trend

– 4.2% GDP growth in 2nd Quarter – the 3rd Q is tracking at 3.7%– fourth quarter likely around 3 percent


09/11/2018

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0

1

2

3

4

5

2014 Q4 2015Q3 2016Q2 2017Q1 2017Q4 2018Q3 2019Q2

Real Gross Domestic Product Growth 2014 Q4 - 2019 Q2

percent change

we are here

0

5

10

15

20

25

30

35

Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Probability of Recession / U.S.

July 2012 -- July 2018 % likelihood

the probability that the U.S. economy will be in recession in 6 months


09/11/2018

10

Recession• The odds that the U.S. will be in recession

in the next 6 months remain very low• Recessions normally occur when

imbalances develop• And no clear imbalances are forming . . . • Right now, there is NO immediate threat

of recession• The stock market is at all time high, supporting

consumers, businesses and investors

0.0

0.5

1.0

1.5

2.0

2.5

Jan-13 Feb-14 Mar-15 Apr-16 May-17 Jun-18

Federal Funds Rate and Core Inflation January 2013 -- July 2018

percent

Core Inflation

Federal Funds Rate


09/11/2018

11

1.9

2.1

2.3

2.5

2.7

2.9

3.1

Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 May-18 Jul-18 Sep-18

10 year U.S. Treasury Bond Yield December 10, 2016 -- September 10, 2018

percent yield

The Goldilocks Economy• Inflation still low• Interest rates still historically low• Labor market at full employment• GDP growth just right• No chance of recession• Despite spending surge by consumers,

households use of credit is still cautious


09/11/2018

12

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

1982Q2 1988Q2 1994Q2 2000Q2 2006Q2 2012 Q2 2018 Q2

Household Debt / U.S. 1982 Q2 -- 2018 Q2

as a percent of personal income

Quiz: Your Household Debt(a) I have no debt !

(b) mortgage only, or mortgage and car

(c) mortgage, car, and a small credit card balance

(d) most of the above, and student loans . .

(e) all of the above, plus payments on my RV, Boat, vacation time share, and Cessna 182


09/11/2018

13

Trade Agenda• Protectionist• Wave of tariffs, on $110 billion in imports

– First China and then Canada, the EU, everyone else– Now China again: 25 percent – manufactured goods– Necessary to counter theft of intellectual property– China has retaliated with 25% tariffs on chemicals– Mexico was threatened but a new NAFTA

agreement has been negotiated

• Washing machines, solar panels, steel, aluminum, tractors, chemicals, paper, motors, and other machinery

›

Tariffs: How Significant ?• Tariffs affect:

– 4.5 percent of all trade with Canada– 1.5 percent of all trade with the EU– 1.1 percent of all trade with Mexico– 12 percent of all trade with China

• No tariffs on services; no retaliatory tariffs on U.S. services exported

– Financial, technical and IT, professional • In total, tariffed imports account for only 4

percent of total U.S. imports


09/11/2018

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100

120

140

160

180

200

220

240

260

Jan-06 Feb-08 Mar-10 Apr-12 May-14 Jun-16 Jul-18

International Trade / U.S. January 2006 -- July 2018

billions of dollars, SA

Imports

Exports

California Another big year for jobs

-- Higher paying technology sector

Unemployment rate now stands at 4.2 %

Building boom in urban centers

-- Office buildings, hotels, retail centers

Some more housing this year

More building of every kind


09/11/2018

15

-861

-155

151

326 390 424 476 426 333 357

-1,000

-800

-600

-400

-200

0

200

400

600

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Jobs Created / California 2009 - 2018

thousands of jobs

46,000

50,000

54,000

58,000

62,000

66,000

70,000

74,000

78,000

Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Employment in Software Development / California jobs

July 2011 -- July 2018


09/11/2018

16

11

12

13

14

15

16

17

18

19

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Attendance at Disneyland / Anaheim 1999 -- 2017

millions of visitors

18.3 million

10

20

30

40

50

60

70

80

90

100

110

120

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Adult Single Ticket Price / Disneyland 1985 - 2018 dollars

$ 117

$ 135

quadrupled


09/11/2018

17

Lowest rate ever

1%

3%

5%

7%

9%

1983 1988 1993 1998 2003 2008 2013 2018

Unemployment Rate / San Francisco Metro Area 1983 -- 2018 rate

Lowest rate ever


09/11/2018

18

Construction Pressures labor market boom fires High speed rail Madera, Fresno, San Joaquin Counties 2,101 construction workers

Millennials are getting tired of living with their parents

population in general continues to grow immigration policy

25

50

75

100

125

150

175

200

225

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

New Housing Production / California 1998 - 2018

thousands of units permitted


09/11/2018

19

October2017

California Fires in 2017Northern California and Ventura County

Tubbs Nuns Pocket Cascade Atlas Redwood SulphurThomas

Fire Homes Commercial Damaged

4,655 639

3 203 445 314 134 777

94 32

0 1

17 5 2

183

310 172

2 2

120 42

8 280

Totals 7,170 334 936


09/11/2018

20

2018 FiresSanta Barbara and Northern California

MontecitoDebris Slide

Car FireRanch FireRiver FireDelta

incident Homes Commercial Damaged

127

1,077157146

2

2122

123118

0

294277nanana

Totals 1,509 281 571

Grand Totals 8,679 618 1,507

3

6

9

12

15

18

21

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Investment in New C&I Structures / California 1998 -- 2018

billions of dollars


09/11/2018

21

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Investment in New Hotels / California 1991 -- 2018

billions of dollars

20%

10%

20% 8%

42%

Investment in New C&I Structures / California 2018

Other

Retail

Industrial

Office

Hotels

AmusementParkingHospitals


09/11/2018

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0.0

0.4

0.8

1.2

1.6

2.0

1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Investment in New Parking Structures California

1991 -- 2018

billions of dollars

2

4

6

8

10

12

14

1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

All Commercial and Residential Building Los Angeles County

1988 - 2018

billions of dollars


09/11/2018

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0

100

200

300

400

500

600

700

800

1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

New Commercial & Industrial Investment San Francisco County millions

of dollars 1988 -- 2018

500

575

650

725

800

875

950

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Construction Employment / California thousands of jobs

2000 -- 2018


09/11/2018

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3

6

9

12

15

18

21

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Unemployment Rate for Construction Workers / U.S. 2000 -- 2018 percent

-1

0

1

2

3

4

5

6

7

8

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Wage Inflation / Construction Workers California

1998 - 2018 percent

6.1%


09/11/2018

25

Cement

Lumber

Steel

Principal Components of New Building Construction Cost

65 %

skilledlabor

June 14, 2018


09/11/2018

26

200

300

400

500

600

2006 2008 2010 2012 2014 2016 2018

Steel Producer Price Index index 2006 -- 2018

Source: BLS

-60

-40

-20

0

20

40

60

2006 2008 2010 2012 2014 2016 2018

Steel Price / percent change in price percent

2006 -- 2018

34 % 22 %


09/11/2018

27

200

225

250

275

300

2006 2008 2010 2012 2014 2016 2018

Concrete Producer Price Index index 2006 -- 2018

Source: BLS

250

300

350

400

450

500

2006 2008 2010 2012 2014 2016 2018

Copper Producer Price Index index 2006 -- 2018

Source: BLS


09/11/2018

28

-30

-20

-10

0

10

20

30

2006 2008 2010 2012 2014 2016 2018

Copper Price /percent change in price percent 2006 -- 2018

17 % 13 %

200

250

300

350

400

450

500

550

600

Jul-98 Jul-02 Jul-06 Jul-10 Jul-14 Jul-18

Structural Panel Lumber Price dollars per thousand square feet July 1998 -- July 2018

Source: Random Lengths Company


09/11/2018

29

-20

-10

0

10

20

30

2006 2008 2010 2012 2014 2016 2018

Panel Lumber Price / percent change

percent 2006 -- 2018

Source: Random Lengths

18 %27 %

150

200

250

300

350

400

450

500

550

600

Jul-98 Jul-02 Jul-06 Jul-10 Jul-14 Jul-18

Framing Lumber Price dollars per thousand board feet July 1998 -- July 2018

Source: Random Lengths Company


09/11/2018

30

-20

-10

0

10

20

30

2006 2008 2010 2012 2014 2016 2018

Framing Lumber Price / percent change index 2006 -- 2018

Source: Random Lengths

19 %27 %

0

2

4

6

8

10

12

2006 2008 2010 2012 2014 2016 2018

Total Construction Costs / Percent Change percent

2006 -- 2018

California Non-Residential

California Schools


09/11/2018

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0

1

2

3

4

2004 2006 2008 2010 2012 2014 2016 2018

Consumer Price Inflation / California 1960 - 20102004 - 2018

percent

Cannabis and Tax Revenue in California


09/11/2018

32

Pot Facts to Date in 2018

Cultivation and sale of cannabis legalin California as of January 1, 2018

1-1-18: two new taxes went into effect-- Cultivation tax on harvests that enter

the commercial market, $9.25 / oz of flower-- Excise Tax on cannabis products paid by retailer-- 15 percent on all cannabis products by purchaser

Then there is already the sales tax-- at least 7.25 percent everywhere


Then there are local taxes on retailers and other stages of the supply chain

68,120 commercial growers in state last year 13.5 million pounds of pot produced in 2016 Estimated 15 million in 2017 Price per pound: $1,500 in 2017, but now falling Tax revenue implications: $23 billion in

value and $7.5 billion in taxes to State Another $1.5 billion to counties and cities


09/11/2018

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97.2

38.7

12.3

7.7

9.4

8.6

21.3

0 20 40 60 80 100 120

Personal Income

Sales Taxes

Corporations Tax

Highway taxes

Motor Vehicle Fees

Regulatory Fees

Other

Revenue Sources / State of California / 2018-2019

billions of dollars

Cannabis Taxes:$7.5 billion


However, to date, only 4,833 permits have been issued to commercially farm pot-- this represents only 7.1 percent of the estimated

number of growers in the state Credit card companies won’t do business

with dispensaries or growers Growers and retail operations can’t open

checking accounts at banks Hence, it’s a cash business Cash breeds crime


09/11/2018

34

Cultivation Permits Issued to dateSanta Barbara 1,398Humboldt 908Mendocino 635Monterey 432Trinity 205Calaveras 195Riverside 189Los Angeles 159Sonoma 112Sacramento 92


09/11/2018

35

Cultivation Permits Issued to date

Buellton 504Lompoc 394Salinas 332Carpinteria 256Laytonville 91Sacramento 92Willits 89Desert Hot Springs 85

Pot Revenues in 2018

Expectations of Tax Revenue for California by Governor Brown

-- first 6 months: $ 185 million-- first year: $ 630 million

But tax revenues for first half of 2018 have fallen way short of expectations

$135 million in first 6 months 418 retail permits in 34 Cities LA, SF, Sacramento, Santa Ana, San Diego


09/11/2018

36

1,000

1,300

1,600

1,900

2,200

Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18

Average Cannabis Price per Pound / U.S. dollars

August 2014 -- September 7, 2018

cannabisbenchmarks.com

$1,108

$2,137

17 20.8

24 25 30 31.5

45

10

16

22

28

34

40

46

52

Oregon Alaska Mass Nevada Colorado California Wash

Effective Tax Rates on Cannabis by State 2018 percent


09/11/2018

37

Local Tax Rates / California

CITIES50 Cities with additional tax rates

Los Angeles: 10% gross final salesOakland: 5% gross receiptsPalm Springs: 15% of gross receiptsSan Diego: 15 % gross receiptsSacramento: 4% gross receiptsSanta Barbara: 2 to 6% of gross receiptsKing City: $30,000 fee per year

Effective Tax Rates

• The effective rate in California is in the range of 35 to 60 percent

• To date, given the licensing and first half tax numbers, the black market appears to be winning, and expanding

• The lesson for California is that tax rates are too high


09/11/2018

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2.0

2.2

2.4

2.6

2.8

3.0

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Total Student Enrollment California Community Colleges

1998 to 2018

millions of students

CC enrollment Nationwide decline, since 2010 Enrollments naturally decline when

the economy is strong and unemployment is low

When the economy begins to slow, look for a pick-up in enrollment

California demographics are not forecastto change much over next 10 years


09/11/2018

39

3.9

4.2 4.2 4.3

4.4

3.7

3.8

3.9

4.0

4.1

4.2

4.3

4.4

4.5

2010 2015 2020 2025 2030

Population Age 18 to 24 / California 2010 - 2025

millions of people

8.4

9.9

11.4

12.8

7.5

8.5

9.5

10.5

11.5

12.5

2010 2015 2020 2025

Population Age 55+ / California 2010 - 2025

millions of people


09/11/2018

40

Cracks in the Dike

The cracks aren’t big enough

• Housing prices continue surging• The response has been a corresponding

surge in apartment building• Tariffs could slow down export based

sectors, but it’s unlikely• Tensions in middle east, with Russia,

with North Korea have moderated• Slowdown in 2019 and 2020, but . . .


09/11/2018

41

What you can expect in 2019

• Slowdown the next 2 years becausethe stimulus effect from tax cuts starts to fade

• Continued building in California• Continued difficulty recruiting workers• Higher inflation and interest rates, wages

and commodity prices . . . . • Home price appreciation will slow down

Today’s Tips for 2019

• Think seriously about rebalancing• Stock market returns have out performed

foreign stocks, bonds, and cash• Buy and hold strategy should be reviewed• How long can you hold Apple and Amazon?• Think about foreign stocks, and bonds

• Ask for a big raise• Or better yet: Get a new job; now is the time


09/11/2018

42

September 11, 2018

2018 Economic Update

Mark Schniepp, Director

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The 2018 Economy · 2018-10-02 · CCFC 25th Annual Conference Economic Outlook, Mark Schniepp...

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