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As Good as it GetsThe Aging Expansion Powers On. . . but for How Much Longer?

Andrew J. NelsonChief Economist | USA, Colliers International

Ten Years After: A Full if Imperfect Recovery

> Growth still below average; GDP “potential” keeps dropping

> Jobs well above prior peak and still going strong

> Consumers financially stronger and confident

> Record household wealth

> Home prices above prior peak nationally

> College enrollment still strong (if down modestly)

> GDP growing stronger and now back to “full potential”

> Wage growth finally rising

> Numerous homes still seriously underwater; affordability reducing homeownership rates

> Student debt levels soaring

> Most Americans still live paycheck to paycheck

> Wealth (and income) even more highly concentrated at the top

> Inflation negating wage gains

> Fewer people working; more low-end and part-time jobs

The Aging Moderate

Expansion. . . Deserves

more respect

As Good as it Gets? (1)Economy surges . . . but less than it seems

As Good as it Gets? (2) Job growth strong but slowing

2%

4%

6%

8%

10%

12%

14%

16%

18%

U3 U6

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Quarterly Nonfarm Jobs Growth at Annualized Rate Unemployment (U3) vs. Underemployment (U6) Rates

. . . as unemployment falls

As Good as it Gets? (3) Job openings now exceed hires

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Hires Openings

Hires vs. Job Openings (3-Mo. MA)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Unemployed Openings

Unemployed Workers vs. Job Openings

. . . and unemployed workers!

Leading Indicators Still High – but for how long?Virtually all states to keep expanding into 2019

State Leading Indexes: Expected Six-Month Change U.S. Leading Economic Indicator Index

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Business and Consumer Confidence Both near high point for this cycle

Consumer Confidence vs. Manufacturing and Services PMI*

55

60

65

70

75

80

85

90

95

100

105

30

35

40

45

50

55

60

65

PMI: Manufacturing PMI: Nonmanufacturing Consumer Confidence

At/near high point in this cycle

Home Sales Strong-ish but StallingBoth new and existing home sales flat to falling since the spring

Existing Home Sales, SAAR (000s) New Home Sales, SAAR (000s)

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

2000 2003 2006 2009 2012 2015 2018

Thou

sand

s

0

200

400

600

800

1,000

1,200

1,400

1,600

2000 2003 2006 2009 2012 2015 2018

Thou

sand

s

New Home Sales - US

Yield Curve FlatteningLong-term yields still > short-term yields – but barely

10-year minus 2-year Treasury Yields

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

GDP Output Gap is Positive and RisingOverheating economy prompting Fed to cool growth with rate hikes

GDP Output Gap = (Actual GDP – Potential GDP) / Potential GDP

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Key Economic Themes for 2018+New life for a maturing expansion . . . but comes with risks

Drivers› Tax cut / reform and new budget spending provide short-term boost› Exuberant business sector to keep investing (though pace softening)› Consumers confident but tapped out› Global growth (and trade) slowing again after brief peak in 2017› Fed increasingly pivots from expansionary to neutral (to contractionary)› Increasingly tight labor markets raise wages, cool job growth

Near-Term Risks› Rising dollar and growing costs of trade wars› Equity prices (still) looking pricey, risk of correction› Emerging market contagion from oil / currency shocks› Accelerating inflation: wages, fiscal overdrive, deficit spending› Overcorrection from Fed

2018+ U.S. Economic Forecast“Mostly sunny with increasing clouds and a chance of T-storms”

› We’re (much) closer to the end of the expansion than the beginning• 2018 will be very good year but economy starts to cool in late 2019• Job growth slowing as we near “full employment”• Inflation and interest rates finally rising in earnest• Another one to two good years left but rising downside risks by 2020

› We’re much (much!) closer to the top of the market cycle than the bottom• Absorption and sales transactions to continue slowing.• Financial returns will continue easing as cap rates stabilize / rise . . .• But strong investor interest will maintain asset values for now.

› Next recession / downturn likely to be kinder to property sector• “Great Recession” was unusually deep / long / broad . . . and focused on property sector.• Next recession likely to be shallower / shorter / regional, and focused on other sectors. . . • But does Fed have tools to fight the next one?

colliers.com/Andrew.Nelson

http://knowledge-leader.colliers.com/author/andrew-nelson/