Elliot Eisenberg is an economist who likes to make people laugh — hence the name of his company, Graphs & Laughs. He’s also a fan of brevity, as anyone who subscribes to his daily Econ70 blog can attest — he summarizes the day’s economic news in a streamlined 70 words.
At Inman Connect New York last week, he condensed his outlook for 2016’s housing and global markets into 19 minutes and some change. Watch the video:
Please see the entire transcript of Elliot’s talk below:
Are you the type of person who looks at graphs, charts, economy reports and things? Boring. Well you obviously haven’t heard our next speaker making economics actually fun. Please welcome Elliot Eisenberg.
Good morning. It’s a pleasure to be here. Wow. There’s lots to talk about. Chinese market, stock market declining, all that kind of stuff, but I’m basically pretty optimistic. I don’t see any real big problems in the economy. Let me begin by giving you what I think the real story looks like and what’s really going on here.
So the economy is okay. It’s not spectacular but it’s fine. The economy is composed of four parts. See household consumption and that’s going to drive our economy forward. If we see suggestions that that’s going to get weak that’s when we start pulling the ripcord. But I don’t see it happening. Corporate spending, eye on capital spending, not going to go anywhere. Governments not going to do much. And exports minus imports the last term in brackets is going to make us cry. Alright? So it’s all going to be see. Let’s look at details and see what see is going to bring.
First, disposable income is really good. We used to spend 18-19% of our money, way up there on top there on paying the mortgage and student debt and car loans and stuff, but we’ve paid off our bills, you know we defaulted on our houses conveniently ten years ago and now we have no money to do anymore. Gas prices are cheaper, cash flow is good. This is good for households.
Next, wealth is pretty good. Yeah the stock markets taken a dive in the last couple of weeks but house prices continue to chug up at 5-6% a year. This is good. Households feel pretty good. Most households don’t have a tremendous amount of wealth. Only rich people do. Right? So the fact that the middle class and lower middle classes see their house price appreciating is way more important than the stock market moving. So that also makes us feel good. And as a result of that we go, “Hey. Let’s borrow more money.” You know it’s very hard to have a good time when you say, “Honey, let’s not go on vacation.” or “Let’s not go out to eat tonight” or “Let’s not celebrate our 25th wedding anniversary. We’ll stay home and have macaroni and cheese.” But you see debt going up here not tremendously quickly but it’s going up. The red is student debt, which is a bit of a problem but not a catastrophe. They’re better educated than they are before so this is okay but debt is going up.
Incomes are going, we’ll talk about incomes in a second. Wealth is going up. You know disposable income is better. And wages are starting to go up. I wouldn’t say they’re going up quickly but if you look at the very left hand side of this graph here it’s between 1.5% and 2%. And if you look at the very far right the blue graph it’s at 2.5%. This may not seem like large increases to you and me but objectively this is not bad, especially with inflation having declined over the last several years. So inflation adjusted wages aren’t terrible. And as unemployment falls hopefully this will go up a little bit more. So we have more wealth, we have more disposable income, we’re borrowing more, we have a bit more growth in our wage rate.
Alright this is not half bad. And unemployment is quite low. It’s right now at 5%. By the end of the year it hits what? 4.6%? Maybe at worst 4.7%. Even if there’s massive labor force growth these are really low numbers. I mean if you want to get a job jobs are out there. And the blue line which is on the other axis on that side tells us that almost no one’s getting fired. The total number of people getting fired today is the same as it was 40 years ago. So as I joke if you don’t like your boss just give them the finger. Tell them off because he’s not going to fire you or she’s not going to fire you. No one’s getting fired. Unemployment is low. As it gets lower wage rates will start to rise hopefully a little bit faster. So we have more wealth, we have more cash flow, we have more income, we’re borrowing more money. Fewer and fewer of us are unemployed. This is a pretty good story.
Here’s another slide to reinforce this. 2016 is going to be good on the employment side. December was good. The last three months of 2015 were the best three months of the entire year. 2015 was the second best employment year total before 14, way back before the recession began. We are employing, creating lots of jobs, as long as this continues we can withstand all the trauma from the rest of the globe. Alright? If this falters watch out a little bit. But as long as you see job growth good, job growth of over 150, 160, 170,000 jobs a month we’re fine. We only have to produce about 90,000 jobs a month to soak up the new job entrants, the high school grads, college grads, and so on because our population growth just isn’t that big. So 16 won’t be as good as 15 which won’t be as good as 14 but it will still be a plenty good number to keep cranking unemployment down. This is good. Alright?
Consumer confidence is okay. This number comes from the University of Michigan. This was the mid-month, mid-January number. So it already included some of the catastrophes occurring around the globe right now. The consumers are holding up. Today, this morning home sales, home sales came out and they were very good. Alright? New home sales. So this is, the consumer doesn’t seem to be terribly stressed yet. This could change but not yet. If you put this together, all the good news on the consumption side, on the household side, the income and the wages and the unemployment numbers and the wealth and so on and so forth and the inflation of adjusted earnings personal consumption expenditure 68% of GDP is going to be growing at somewhere around 2.7%, 2.8%. This is not spectacular but it’s plenty good enough. There’s no problem here.
As for the rest of the economy however, hmm, sorry. Now it gets bad. You may want to leave or take some tissues. Okay? Here we go. Look.
This is corporate spending on plant and equipment. You can see it hit a peak about a year ago and then it came down. It’s making a U-shaped curve. It’s going back up again but with oil at 40 bucks forget it. Not much exploration in production the oil patch. You know with the dollar strengthening exports aren’t doing well. You know Christian Louboutin is selling lots of shoes here on 5th Avenue. Right? Because they’re cheaper now. They used to cost 1,800 bucks a pair. Now it’s just $1,200 a pair. So we’re buying tons of them. We’re buying lots of Volkswagens now because we can pollute the air and save money buying an imported car. You know so this is hurting manufacturing here so firms aren’t investing in plant and equipment so this is slowing us down.
On the government side government spending is going to go up a little bit in 2016. State and local government as you can see here employments going up. This is the last couple of years it’s been rising. And at the federal level the budget deficit is going to get a little worse because both Congress and the administration decided to raise the deficit for the next ten years by like a trillion bucks. So we’ll start to enjoy a little bit increase in government spending which in the short run will boost GDP and give us some protection from potential calamities around the globe. So this is all in all not half bad. The big catch here is the dollar getting much stronger. This is hurting manufacturing. And the Feds aware of this. And the Fed knows that if they keep cranking up rates they will strengthen the dollar because the European central bank, the Japanese central bank and the Chinese central bank are all indulging and really easing, making it more expansive monetary policy, not tightening on the reins. So as we tighten we’ll increase the value of the dollar, hurting manufacturing and hurting exports.
The Fed isn’t keen on this. Right? Alright. So they know this is the problem. This is why I think they’re going to hold back as these other central banks ease further the Feds not going to really tighten quickly. We’ll talk about this in a minute. And of course oil prices are in the garbage can. So exploration and production and employment and wages in the oil patch be it in Texas, Louisiana, Alaska, North Dakota, it’s a real stinker and it ain’t going to improve tomorrow morning. You can see rig counts here have completely collapsed. They’ve fallen by over 60% in the last 12 months. They may not get a lot lower but this is certainly not encouraging corporate spending on plant and equipment which is not boosting the economy. Alright?
So you put this together the institute of supply management tells us the red line on the far right is below 50. It’s been below 50 for two straight months. This suggests that the, that tells us that manufacturing, this graph, is in recession.
Traditionally when manufacturing went into recession, this was not necessarily a great thing although you can see it happens quite often and only the gray bars are actual recessions. But more importantly of late our economy is not, doesn’t have many manufacturing employees. Before the recession there were millions more people working in manufacturing, about two million more. We’re down to 12 million people working in manufacturing in a labor force of 140 million. So manufacturing just isn’t as important as it was. So even though this is hurting it’s not the calamity it was ten or fifteen years ago, by any stretch of the imagination. The non-manufacturing sector, 86% of our economy, is doing fine thank you very much. That’s why I continue to think that the spike in manufacturing weakness and the oil and exploration weakness and all of those lack of corporate spending, the rest of the economy is good enough to do fine. And as a result we’ll end up with GDP going forward not much better than it’s been now but not much worse either. Maybe one- or two-tenths better because the government spending will go up, assuming the global problems that we’re looking at don’t metastasize or don’t infect us, which so far they haven’t seemed to. Stock markets go down, they go back up. Right? And best of all no recession on the cards. This is a contemporaneous piece of data. There’s no recession likelihood out there.
And also look at this one, yield curve inversion. It’s the best measure. Every time the blue line goes above the red line yield curves invert, we have a recession within twelve months, the gray bars. But we’re not even close to that right now. And the Fed is not going to drive us into one.
So, let’s now look at inflation and what the Feds going to do going forward. Here we go. This is inflation. Red is core inflation, blue is overall CPI, right, PCE. This is the Feds favorite preferred measure. The gap is large. The expectation is as oil stops falling and the dollar stops strengthening the blue line will come up to the red line. We’ll see how fast that happens but that’s the expectation. It’s a realistic expectation. Of course the dollar keeps strengthening and oil keeps falling it doesn’t happen. But core inflation in red remains pretty steady and pretty solid. This is giving the Fed comfort in knowing that we’re not going to, bad deflation or spiraling thing isn’t going to happen. But, but if you look at this households in red, CPI is in blue, household expectations of inflation have been coming down ever so slightly. The Feds nervous about this.
Moreover if you look at Wall Street which is not that far from here you can look at the five year and ten year forward inflation and expectations. Five years in red, ten years in blue. They’re very low. So households see inflation going down and the markets don’t see much inflation either. So the Fed had better be careful what they do and they better not raise rates quickly. We can be sure they won’t do that. They may or may not raise in March. I tend to think that they won’t raise in March. They’re meeting today. They’re going to have an announcement at 2 o’clock today what they’re going to do. They’re not going to raise rates today. But they may in six weeks. All this global stuff may end. You know it may be fine. It may not. And, but they may wait till June. Who really cares? It doesn’t really matter. Alright? Rates rise slowly. This is my most optimistic scenario. There’s a 60% chance they raise rates in March and there’s about a 50% chance that they get four rate rises in this year. I think that’s just really optimistic with four. I don’t think they’ll get four. They may be lucky to get three. One in June, one in September, one in December. That’s about as much as it gets. Moreover it’s going to take them years to raise the Fed funds. You can see that by 2019, 19, maybe the Feds funds rate gets to 3.5%. This is a very, very low rate. So nothing is going to happen quickly.
And last but not least the correlation between Fed funds in blue and 30 year interest rates is exceptionally nonexistent. So I wouldn’t go there and go oh my God they’re going to raise rates. The housing market will go to hell. Remember, think back to 04 or 05 when there were liar loans and no doc, option only arms around. Right? Rates were much higher but no one cared. It isn’t the rate. The rate is a symptom of a weak economy. We don’t want low rates. We want a strong economy and the higher rates that go with it because economic growth and interest rates are correlated here in the long run. But here the Fed finds is not something that matters. As long as those inflation expectations are very low, we can go back one slide quickly. You can see the 30 year mortgage rates, one slide back if we can guys. They’re only going to be going up half as fast. Alright?
Look at the 30 year, 4.4%, maybe 4.4% by the end of this year, maybe 4.9% by the end of next year if things go well. Despite the fact that short lenders, that the Feds funds rate is going up by much more than that, in this scenario. So don’t worry about the interest rates. It’s not going to matter. The Feds going to do it leisurely.
As for housing what’s going on? There are some really good, these are the news and some really bad pieces of news. The increase in foreclosures as you can see are coming down. They’re almost back to where they were before recession began. Unequivocally good news. Cash sales put up by core logic. You can see the red dotted lines. These are all cash sales. They’re all declining. Every type of purchase because the stories largely over. There aren’t all these cheap houses to get anymore. Good news more.
Number of homes, the percentage of homes with a mortgage that’s upside down continues to shrink. We’ve largely gotten rid of all the problems that were out there. Alright? This is really good news. Alright? And household formation, thank God, is finally improving. It’s kind of strange. We’ll look at the next slide and see where the household formation is coming and your minds think where is household formation coming? Don’t yell it out. You’ll be wrong. But think about where it is. You ready? You ready? Household formation you can see was bad, bad, bad, bad, and finally in 15 wee it starts jumping up and this is great news. But look where it’s coming from. It’s coming from frigging old people. (Laugh) And that’s why around the country the home prices, new home prices are going up and fancy condos and fancy rental apartments that are 3, 4, 5, 6,000 bucks a month, depending on where you live and which city. Manhattan, San Francisco being at the expensive end. Wichita, Kansas I’m sorry you’re from there, much lower. But the same idea, fancy stuff because it’s the older 55-plus crowd that’s buying, that’s house, forming houses.
Now, that one household formation slide, 25 to 34, that’s the beginning of the Boomers, Millennials, and this is important. So we have household formation. This is good. So we have less cash sales, we have less delinquencies and foreclosures, less REO, more household formation, but, and we mentioned this earlier. Wages are going up slowly. We mentioned briefly household debt being a problem. Credit is a bit of an issue. If we wait for credit to return to where it was back on 04 Goodall would be here and back a number of times before that happens, but it’s getting easier. So this is helping but it’s not the silver bullet by any stretch of the imagination.
Moreover wealth of the average household is down and moreover among youngsters that are the critical first time buyers they’re having more difficulty. They’re less resilient. The older you are when you face a shock the more resilient you are to it. So income, your wealth goes down, your income goes down but you have savings and you don’t run your savings down. Younger people tend to do that. This is a bit of a problem. But because job growth is good we will overcome all of this. House prices are going up a little bit too fast. They’re going up at 5%. Incomes are going up as 2%, as we talked about earlier. That’s a problem. And inventory sucks. (Laugh) No matter how you measure it in the red or blue, either in number of months or in number of units it doesn’t make any difference. For three straight years it’s been flatter than a pool table. And you can’t sell a house that doesn’t go on the market. And this is causing trouble. This is causing prices to rise. I would like to see more liquidity going on. That having been said existing home sales should go up by 3, 4, 5, 6% this year. Nothing particularly spectacular. House prices should also go up by 3, 4, 5, 6% a year. So origination activity should be good. Refi probably not so hot. Overall sales are pretty good. And that last V at the very end that was trade stuff. Ignore it completely. Nothing meaningful there.
And last but not least, I want to leave you with this thought. Look at housing sales and look at interest rates. Again, no real correlation going on. So the Feds going to do what the Feds going to do. The Fed may make mistakes. The Fed may be premature. The Fed may be a little late but they’re not going to make mistake after mistake after mistake and compound it. And they’re not going to wreck the housing market or the overall economy. They want to see what the impact was of the last quarter point raise they did in December, figure out if that had some impact on what’s going on now and they will act accordingly. They’ve done a pretty good job. They are not single handedly going to wreck us. Alright?
We have a lot to be thankful for. We are probably going to avoid a recession. Recession probability maybe 22% or 23%. Feds going to raise rates slowly. The economy will be fine. It will be driven by households. That’s the key, follow households. My name, my email address. If you want to get my daily 70 words on economics you know how to sign up. It’s right there. Website or text 22828 the word Bowtie. Thank you, thank you, thank you.