ELLIOTT D. POLLACK
& Company
FOR IMMEDIATE RELEASE
December 17th, 2018
The Monday Morning Quarterback
A quick analysis of important economic data released over the last week
Given that Christmas Eve and New Year’s eve both fall on Mondays this year, the MMQ will be taking the next two weeks off. Thus, in this week’s commentary we thought it would be a good time to take another look at the outlook for 2019. This is especially pertinent given the recent and continued declines in the stock market and the narrowing of the yield curve.
For the 2019 outlook, we analyzed the latest Blue Chip Economic Indicators in detail. The Blue Chip is a highly regarded consensus forecast of the U.S. economy. Its approximately 50 panelists are generally well thought of and credible.
Despite volatility in the stock market, the outlook remains favorable. The Blue Chip consensus suggests the U.S. economy will continue on a steady growth path through the end of next year with a moderately slowing tendency. The forecast remains at 2.9% for real GDP growth in 2018 and 2.6% growth for 2019. Inflation estimates, as measured by forecasts of the consumer price index, are tapering with the current forecast showing 2.4% on average for this year (down from 2.5% in the last four months) and 2.1% for 2019 (down slightly as well from recent forecasts). Based on this, the panel expects interest rates to climb but at a slower pace the previously anticipated. The panel expects the Fed to raise rates at the December 18-19 meeting. But, more than half of those surveyed believe that the Fed will raise rates only twice in 2019 and less than 20% anticipate four increases of 25 basis points each.
By expenditure category, consumer spending (about two-thirds of real GDP) is expected to stay steady at 2.7% in 2018 and 2019. The other major domestic spending sector, nonresidential fixed investment, is also expected to show reasonable growth next year (up 4.3%) after a sharp, tax cut induced growth rate of 6.8% in 2018.
The other categories, housing and net exports, are seen in a more negative light. The housing market, both new and resale, has already turned negative, although only modestly so. Yet, the Blue Chip panel expects housing starts, which are expected to be 1.26 million this year, to be very slightly up next year to 1.28 million. This includes all new housing. Existing home sales have been sliding as well.
On the surface, the demographics facing housing appear great. There are lots of millennial reaching home buying age. The economy remains strong. Consumer confidence remains high and the unemployment rate is the lowest in decades. Yet, demographic shifts coupled with continued price and cost increases have hurt. As we have discussed in the past, delayed marriage, high levels of student loan debt and modest wage growth has pushed out the timing of when millennials will buy and could keep the homeownership rate from returning to historically normal levels.
But, by far and away the biggest problem for the single family market at the present time is affordability. Builders are facing continued margin pressures as land development costs, building materials, labor and financing costs all continue to rise. There appears to be little relief in sight at the moment. This affordability issue was reflected in the University of Michigan Survey of Consumer Sentiment. The proportion of consumers who believe that now is a good time to buy a home has fallen 23 points since April of 2017. According to a recent article by three Wells Fargo analysts quoted in the latest Blue Chip forecast, declines of that magnitude have typically preceded pronounced slowdowns or even outright recessions in the housing sector. According to the article, “the slide in homebuyer sentiment…suggests sales will weaken further.” Despite all of this, Wells Fargo expects sales of new homes to rise 1.6% in 2019. Even resales are expected to grow by 1%. Thus, the underlying demographics (sheer numbers) of millennials are expected to mitigate at least to some degree the pressures of affordability.
As for trade tensions that appear to be at least partly to blame for the recent volatility in the stock market, the general feeling is that the impact will be small. The impact on inflation is expected to be less than 20 basis points and the effects of the recent 10% tariffs are expected to be small as well.
Thus, the overall outlook for 2019 remains positive although slightly less so than in 2018. Given the signals of the past few weeks, this is good news indeed.
U.S. Snapshot:
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The consumer price index for all urban consumers (CPI-U) was unchanged on a seasonally adjusted basis in November after rising 0.3% in October. It is up 2.2% from a year ago. The index less food and energy increased 0.2% in November and also stood 2.2% above year earlier levels.
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Retail and food service sales for November were up 0.2% from October and stood 4.2% over a year ago. The month to month increase in November was slower than increases in September and October.
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Industrial production increased 0.6% in November over October. This compares to a decline of 0.2% in October compared to September. Year over year, the November number was up 3.9%.
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The combined value of distributive trade sales and manufacturers’ shipments for October were up 0.3% from September and 6.1% from year earlier levels. This is a good performance.
Arizona Snapshot:
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Population data for Arizona for July 1, 2018 show that the state’s population grew to over seven million people. The exact number was 7,076,199. That’s an increase of 110,302 people from July 1, 2017 or 1.6%. The bulk of the gain was in Greater Phoenix which grew by 85,764 people to 4,735,051. That’s a gain of 1.8%. Greater Tucson grew by 8,102 or 0.8% to 1,034,201 over the same period.
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According to the Home Builders Association of Central Arizona (Greater Phoenix), new single family permits for November 2018 were almost identical to November 2017 (1,529 in November 2018 vs. 1,531 in November 2017). Year-to-date through November, permits were up 14.2% (20,846 vs. 18,258). This is a surprisingly strong number given all the talk of weakness and traffic reduction that has occurred lately.
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In Greater Tucson, year over year listings continue to decline (3,332 vs. 3,611) while total sales were about flat in November vs. year earlier levels (1,138 vs. 1,134).
About EDPCo
Elliott D. Pollack & Company (EDPCo) offers a broad range of economic and real estate consulting services backed by one of the most comprehensive databases found in the nation. This information makes it possible for the firm to conduct economic forecasting, develop economic impact studies and prepare demographic analyses and forecasts. Econometric modeling and economic development analysis and planning are also part of our capabilities. EDPCo staff includes professionals with backgrounds in economics, urban planning, financial analysis, real estate development and government. These professionals serve a broad client base of both public and private sector entities that range from school districts and utility companies to law firms and real estate developers.
For more information, contact –
Elliott D. Pollack & company
7505 East Sixth Avenue, Suite 100
Scottsdale, Arizona 85251
480-423-9200
