Economy 101: Where Are We? Where Are We Going? Charles Baum Tennessee Realtors Association March 18, 2019 Outline I. The U.S. Economy’s Health II. U.S. Economic Forecast III. Tennessee’s Budget IV. Forthcoming State Issues Affecting Realtors 1
GDP Gross Domestic Product (GDP): the dollar value of all goods and services produced in an economy (the United States) during a period of time (a year). • What is the U.S.’s GDP? • What is the largest country in the world? • Which country has the largest population? • Which country has the largest economy (as measured by GDP)? Charles Baum Economy 101 2
Largest Countries by Area 1. Russia 2. Canada 3. China or the U.S. (depending on territories) Charles Baum Economy 101 3
Largest Countries by Population World (7.6 billion) 1. China (1.386 billion) 2. India (1.322 billion) 3. United States (0.325 billion) Charles Baum Economy 101 4
Largest Countries by GDP Source: Wikipedia, “List of Countries by GDP (nominal).” Charles Baum Economy 101 5
U.S. GDP U.S. GDP (March 17, 2019): $20,946,862,000,000 or $21 trillion Source: U.S. Debt Clock.org Charles Baum Economy 101 6
Economic Growth Trump has targeted economic growth of 3% (or 4%) per year. or $19.3 trillion Source: CNBC, “Here’s how Trump’s 3% economic growth target stacks up against past presidents.” Charles Baum Economy 101 7
Economic Growth 2018 Fourth Quarter: 2.6% 2018 Full Year: 3.1% 2018 Third Quarter: 3.4% 2017 Full Year: 2.5% Source: Bureau of Economic Analysis, “National Income and Products Accounts.” Charles Baum Economy 101 8
The Rule of 70 The “Rule of 70” shows how long it takes for money (investments or GDP) to double. With 3% growth, GDP doubles every 23.3 years (from 70/3 ) . • With 2% growth, GDP doubles every 35 years (from 70/2). • With 1% growth, GDP doubles every 70 years (from 70/1). • Charles Baum Economy 101 9
Business Cycles: Recent Recessions Peak Trough Length of Recession July 1953 May 1954 10 months August 1957 April 1958 8 months April 1960 February 1961 10 months December 1969 November 1970 11 months November 1973 March 1975 16 months January 1980 July 1980 6 months July 1981 November 1982 16 months July 1990 March 1991 8 months March 2001 November 2001 8 months December 2007 June 2009 18 months Source: Hubbard, R. Glenn and Anthony Patrick O’Brien. (2017). Economics . Boston MA: Pearson. Charles Baum Economy 101 10
U.S. Debt U.S. Debt (March 17, 2019): $22,132,140,000,000 or $22 trillion. Source: Debt statistics from the U.S. Office of Management and Budget, www.truthfulpolitics.com. Charles Baum Economy 101 11
Debt-to-GDP Ratios U.S. Debt-to-GDP = $22/21 = 105%. Source: U.S. Department of the Treasury, Bureau of the Fiscal Service, www.marketrealist.com. Charles Baum Economy 101 12
When Will We Be Greece? Recall that U.S. Debt is $22 trillion. • Recall that U.S. GDP is $21 trillion. • U.S. added $14 trillion in debt over last 16 years (0.875 trillion per • year). U.S. debt-to-GDP ratio will be 1.6 when debt equals $33.6 trillion • (from $21 trillion X 1.6 = $33.6 trillion). This will occur in 14.4 years (from 12.6 trillion divided by 0.875 trillion • per year). Charles Baum Economy 101 13
Costs and Benefits of Government Debt Costs Higher interest rates • Government spending ‘crowds out’ private investment • Lower long-run economic growth • Benefits Infrastructure • Households borrow for homes, so why can’t the government borrow • for capital projects? Public goods • Charles Baum Economy 101 14
Unemployment Unemployment Rate: 3.9% in U.S. (Feb. 2019) and 3.3% in TN (Jan. 2019) Source: Macrotrends, “U.S. National Unemployment Rate,” http://www.macrotrends.net/1316/us-national-unemployment-rate. Charles Baum Economy 101 15
Unemployment Over 300,000 new jobs created in January 2019. • Virtually no wage growth in January 2019. • Only 20,000 new jobs created in February 2019. • 3.4% wage growth in February 2019 (year-over-year). • . Charles Baum Economy 101 16
U.S. Inflation Inflation: the rate at which prices increase over time. Source: Bureau of Labor Statistics: Consumer Price Index (CPI), All Urban Consumers Charles Baum Economy 101 17
Interest Rates Discount Rate: the rate at which banks borrow from the Fed. Federal Funds Rate: the rate at which banks borrow from each other. Source: Board of Governors of the Federal Reserve System, “Effective Federal Funds Rate.” Charles Baum Economy 101 18
Interest Rates Federal funds rate • i. Actual: 2.40% (February 2019). ii. Target: 2.25-2.50% after the December 2018 increase and 8 other increases since 2015 from 0.00-0.25% in 2008. Fed’s target affects most other interest rates (current 3-month • treasury bill is 2.39%; 10-year treasury note is 2.68%; and 30-year treasury bond is 3.04%). How much will rates rise? With low interest rates, federal payments • on national debt are about 11-12% of federal government expenditures. Politicians may pressure the Fed to keep rates low to minimize • unemployment. Charles Baum Economy 101 19
Growth Rates for Investments • Rates of return are typically higher on riskier investments than on less risky assets, all else equal, to compensate the investor for assuming greater risk. 20-Year Average Returns (March 1997-March 2017): • i. 1-year treasury bills: 2.34% ii. 10-year treasury notes: 3.89% iii. 20-year treasury bonds: 4.46% iv. Aggregate bond total returns index: 5.22% v. S&P 500, dividends excluded: 5.69% vi. S&P 500 dividend yield: 1.93% Source: Board of Governors of the Federal Reserve System and my Own Calculations using the SPX index and Barclay’s AGG index. Charles Baum Economy 101 20
Trade Trade Balance: Exports minus imports (-$59.8 billion in December 2018). Source: Board of Governors of the Federal Reserve System, “Trade Balance: Goods and Services.” Charles Baum Economy 101 21
Trade Free Trade (and Globalism) versus Trade Restrictions (and Protectionism) Who are the winners from free trade? • Who are the losers from free trade? • North American Free Trade Agreement (NAFTA) • Trans-Pacific Partnership (TPP) • Recent Trade Policy (Bush/Clinton/Bush/Obama v. Trump) • Charles Baum Economy 101 22
Trade and Exchange Rates Our trade balance is affected by exchange rates. • Is a “strong” dollar good or bad? • i. What is the EU price of an iPhone that costs $200 if $1=1€? ii. What is the EU price of an iPhone that costs $200 if $2=1€? Does President Trump want a “strong” dollar? • i. “The President said that a strong dollar ‘sounds good’, but added that ‘our dollar is getting too strong…it is very, very hard to compete when you have a strong dollar and other countries are devaluing their currency’. He also said that he ‘likes a low interest rate policy’ and that Janet Yellen is ‘not toast’.” (Financial Times, “President Trump Abandons the Strong Dollar Policy” April 15, 2017). The effect of interest rates on the dollar’s value. • Charles Baum Economy 101 23
Trade and Exchange Rates: Euros Charles Baum Economy 101 24
U.S. Economic Forecast Our Economic Outlook is Enhanced by: Low taxes—including lower corporate tax rates • Deregulation • Low interest rates • Low inflation • Charles Baum Economy 101 25
U.S. Economic Forecast Economists are Concerned about: Potential federal government shutdown • Trade wars and tariffs • Brexit • Slowing Chinese economy • But economists are usually worried—and often about things that are more problematic, such as wars, oil prices, financial crisis, housing crisis. Charles Baum Economy 101 26
U.S. Economic Forecast U.S. economy is healthy with good fundamentals and • Economic worries are relatively minor, • But… The economy moves in cycles, • History repeats itself, and • Our expansion is at record-length. • Charles Baum Economy 101 27
The Real Estate Market: Overview • The market for real estate is one that is competitive but strong, particularly in the Nashville MSA, which generates an overall positive outlook. • The employment of real estate brokers and agents is predicted to grow about as fast as the average occupation over the next decade, with employment growth of 6 percent by 2026 of 24,900 new real estate brokers and agents (nationwide) from 444,100 in 2016 (Bureau of Labor Statistics, 2018). • Growth will be partially driven by: I. an overall improving job market, II. a rise in consumer spending, and III. individuals and families looking to move into larger homes and re-locating. Charles Baum Economy 101 28
The Real Estate Market: Where We’ve Been New Home Sales in Tennessee 20,000 18,000 16,000 14,000 12,000 New Home Sales 10,000 8,000 6,000 4,000 2,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year Charles Baum Economy 101 29
The Real Estate Market: Where We’ve Been New Housing Permits in Tennessee 50,000 45,000 40,000 35,000 New Housing Permits 30,000 25,000 20,000 15,000 10,000 5,000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year Total 1 Unit 2 Units 3 or 4 Units 5 Units or More Charles Baum Economy 101 30
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