NASCUS Summit August 2017
} Accomplishments to date that impact the economy positively or negatively 0 } Stock market surprisingly patient and could remain so } Bond traders still betting against Trump } Congress is where the real power lies } Nothing has really changed but Trump world remains full of promise and full of risk
130 14 120 110 100 90 80 70 60 50 40 30 CONCCONF MOM Index RSTA YOY 12 10 8 6 4 2 0-2 -4-6 -8 20-10 Jan-05 Jan-06 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
9 10 11 12 13 14 15 16 17 18 19 20 21 22 Feb-99 Aug-99 Feb-00 Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-07 Aug-08 Feb-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Units in millions annualized
} Year-over-year Retail Sales rebound and prior months revised higher } New auto sales down year-over-year but on high end of historical norms } Consumer Confidence stays at unusually high level even with the stalled agenda in D.C. } Jobs and confidence should continue to support growth in consumer sector after sluggish summer
500 400 300 200 100 0-100 -200-300 -400-500 -600-700 -800 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jan-08 Jan-13 Jul-13 Jan-14 Jul-12 Jan-15 Jul-15 Jul-14 Jul-16 Jan-17 Jul-17 Jan-16 500 400 300 200 100 0-100 -200-300 -400-500 -600-700 -800
} July Nonfarm Payrolls add 209k after 231k in June } Average monthly gain for 2017 195k } Wages steady at 2.5% } Health Care and Business/Professional sectors lead } UR rate 4.3% and labor pool grows } Continuing gains of 200k+ unlikely but the surprises could keep going
} Nonfarm payrolls up 50k for first six months of 2017 Avg. for the first six months of the last 5 years 171k } Unemployment rate 4.7% (record low) } Wage growth 4% vs. U.S. 2.5% } Slowdown or something else?
} LA Metro, San Bern/Riv. 4.5% } LA South 3.8% } San Diego 3.6% } O.C. 3.2% } Oakland 3.4% } San Jose and Santa Rosa 3.0% } San Fran and San Rafael 2.6% } Sacramento 4.1%
} El Centro 20.5% } Visalia/Porterville 8.6% } Merced 8.5% } Bakersfield 8.4% } Yuba City 7.5% } Fresno 7.4%.
1300 1200 1100 1000 900 800 700 600 500 400 Jan-09 May-09 Sep-09 Units (thousands) Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17
New Homes (thousands) Existing Homes (millions) 1250 1050 850 650 450 New Existing 7.25 6.75 6.25 5.75 5.25 4.75 4.25 250 3.75 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
New Homes (thousands) 700 New 600 Existing 500 Existing Homes (millions) 5.2 4.7 4.2 3.7 400 300 200 100 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 3.2 2.7 2.2 1.7
} Consistent market coast to coast market } High demand, low supply 4.2 mos. Vs normal 6.5 } Affordability a growing issue in some areas mortgage rates hold the key } Some more expensive areas slowing } Not a bubble, but some bubble-like behavior getting worrisome } Housing looks solid longer-term with big rental pool
In billions 2003 2010 2016 Autos $625 $650 $1110 Credit cards $675 $750 $1071 Student loans $220 $650 $1390 Total $1,520 $2,050 $3,571 Source: Federal Reserve Bank
In billions 2003 2008 2012 2016 Home mortgages Home equity $7,600 $12,100 $10,800 $11,800 $675 $895 $300 $575 Total $8,275 $12,995 $11,100 $12,375 Source: Federal Reserve Bank
} Delinquencies and charge-offs in normal ranges especially for credit unions } Non-mortgage consumer debt not large enough to threaten financial system } Mortgage defaults and foreclosures low } Missing element for mortgage crisis repeat is securitization } Any debt is too much if you lose your job
6 5 4 3 2 1 0-1 -2 Jan-95 Sep-95 May-96 Jan-97 Sep-97 May-98-3 Sep-99 May-00 Jan-01 Sep-01 May-02 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-99 11-Sep 5/30/2012 Jan-13 Sep-13 5/1/2014 1/1/2015 9/1/2015 5/1/2016 1/1/2017 Jan-11 CPI Core CPI
} Stock market and consumers showing surprising patience with Washington } Job growth should remain steady but monthly average should decline } Wage gains likely accelerate } European and Chinese economies performing above expectations } Emphasis shifts from Trump to Congress } Corporate tax cuts could boost business spending but implementation looks to be in 2018 instead of 2017
4 3.5 3 2.5 2 8/23/2017 3/13/2017 11/7/2016 1.5 1 0.5 0 FFunds 3m 6m 12m 2Y 5Y 10Y 30Y
4 3.5 3 Should be 8/23/2017 2.5 2 1.5 1 0.5 0 FFunds 3m 6m 12m 2Y 5Y 10Y 30Y
} 2013 EU on the brink with crisis in Crete and Greece U.S. budget crisis } 2014 Ukraine Ebola Plunge in Oil } 2015 Severe winter Another Greek crisis August Chinese stock market meltdown } 2016 Chinese meltdown Part II Brexit Election } 2017 o???
} Still optimistic on economy but less certain on inflation } Still indicates one more this year and two or three in 2018 range would be 1.75% to 2.25% } Balance sheet runoff relatively soon } Yellen might have one foot out the door } Remember, the Fed is not tightening in usual sense but normalizing
From March 2014?
} China pokes back Possible sharp devaluation, setting off tailspin in markets } Trump escalates trade war } Businesses sour on Trump and optimism fades } Core supporters turn against Trump and White House/Congress relationship crumbles } New add: North Korea
2.5 2 1.5 1 0.5 0-0.5 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Fed Funds 2yr T 5yr T 10y T
} Corporate tax cut and regulatory relief boost business spending } Wages rise as jobs hard to fill } Trump makes only small trade changes enough to declare victory before war starts } Individual tax cuts disappoint but not a deal-breaker } Inflation expectations rise but contained } Europe keeps it together one more year and economy improves
Recession nears? 3.5 3 2.5 2 1.5 1 0.5 0 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Fed Funds 2yr T 5yr T 10y T
} GDP } Consumer Confidence } Stock market } The absolute or nominal level of yields
} Weekly Jobless Claims go over 300k } Nonfarm Payrolls contract below 100k for three consecutive months } Auto sales fall below 15mm } Existing and new home inventories rise as sales stall
} Inverted yield curve shorter rates higher than longer rates } Most typical when Fed stays too tight too long but can be due to bursting of bubbles } A flattening but rising yield curve can be early sign but not always
7 6.5 6 5.5 5 4.5 4 6/30/1999 5/30/2000 12/31/2000 FFunds 3m 6m 12m 2Y 5Y 10Y 30Y
6 5.5 5 4.5 4 3.5 3 12/15/2005 6/1/2006 9/18/2007 FFunds 3m 6m 12m 2Y 5Y 10Y 30Y
} Typical cyclical V } Secular } Japanese style } Something different
} Economy will not turn on a dime the stock market is not the economy } This Fed remains slave to the markets; decisions will be market risk based } The transition from the world we knew (the Fed) to the Trump world will not be easy } Bond volatility should accelerate as some risks come and go
} If you ever had any doubt in the first place, you now know that President Trump is the same man as Candidate Trump; what he Tweets is what you get } Risk/reward ratio is very high } The biggest risks to the economy are the ones we can t see coming } Best approach for 2017-2018 is to be optimistic but wary
Dwight Johnston dj@ DJ s Viewpoints, Longer-term Commentary and more products available at http://