The Economic Outlook:
The US and Us.
Dr. Adam Jones
Starting with the US
2018 Has Been a Good Year
• Growth in 2018 has been 3-1/4 percent
• Up from growth in this expansion of 2-1/4
percent
• But is it sustainable?
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What is GDP?
• GDP is the market value of all the “stuff” we
make in the US, in a given period
• To make “stuff” we need:
• Labor
• Capital
• Natural Resources (inputs)
• Will we be able to make more “stuff” next year?
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The Labor Market
Growth Has Tightened Labor Markets
3
4
5
6
7
8
9
10
11
Perc
ent
Unemployment Rate
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“Shadow Unemployment” has Declined Too
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Perc
ent
Part Time for Economic Reasons
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Symptom of a Tight Jobs Market:
More Openings than Unemployed
0
2
4
6
8
10
12
14
16
18
Num
ber
(mill
ions)
Openings
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Unemployed
Usually, Tight Labor Markets Inflation
0
2
4
6
8
10
12
Perc
ent
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Core PCE
Inflation
Unemployment
Fed Target
Labor Costs Still Subdued
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0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Perc
ent
Employment Cost Index• But growing reports
of nonwage
compensation -
bonuses and flex
hours
• Also incurring costs
of training lesser-
skilled workers
Business Investment
Capital Goods Orders Are Still High
40
45
50
55
60
65
70
75
Bill
ions o
f $
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Mixed Picture for Business Spending• Cut in corporate tax rate and expensing
provision raised returns
• Regulatory rollback also improving incentives
to invest
• Financing conditions remain favorable
• Optimism generally high, especially among
smaller businesses
• But trade war leading to uncertainty and
caution
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Recall…
• Labor
• Tight markets – low unemployment
• Capital
• Business investment has picked up again
• May take time to show up in numbers
• Natural Resources
• Oil market not yet tight
• Trade war may have effects here
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Looking Ahead, Growth Slows
• Federal Reserve sees growth slowing
• But forecasts were recently revised upward
and growth could be stronger than they project
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2018 2019 2020
3-1/4 percent 2-1/2 percent 2 percent
Tension at the Fed
• % Growth ≈ % Δ Labor + % Δ Productivity
• Many estimates are ~2% as sustainable
• Tightening labor markets “should” push
inflation upward
• Fed is targeting 2%
Will have to raise rates to slow the economy
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What the Fed “Thinks” it Will Do
• Trying to balance inflation target and growth
• Will need to raise the funds rate
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Year-end federal
funds rate
2018 2019 2020
Fed 2.4 percent 3.1 percent 3.4 percent
Market 2.4 percent 2.9 percent 3.0 percent
Markets Not Yet Concerned About Inflation
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
Perc
ent
5-yr, 5-yr Forward Inflation Expectations
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Should We Fear an Inverted Yield Curve?
• Yield curve moving toward inversion
• Previous inversions preceded recessions
• Under well-executed policy, this should not happen
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-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
Perc
ent
10 yr minus 2 yr Treasury
Turning to Us
A few brief comments
• Pre-storm we were on track
• Storm disruptions
• Post-storm outlook is clear – for a little while
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Growth Was Settling In
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
% G
row
th
Gross Domestic Product Growth
Wilmington MSA (Current Series) Wilmington MSA (Prior Release)
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Employment Gap Closed
130
140
150
160
170
180
190
Em
plo
ym
ent
(000s)
Employment
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Regional
Employment
Estimated
Full Employment
Employment Gap Closed
0
2
4
6
8
10
12
14
16
Unem
plo
ym
ent
Rate
(S
A)
Unemployment
New Hanover Brunswick Pender
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Room Occupancy Taxes
0
2
4
6
8
10
12
14
Annual G
row
th R
ate
Room Occupancy Taxes
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Retail Sales Growth Normalizing
02468
10121416
Perc
ent
Gro
wth
Sales Tax Collections
Region New Hanover Brunswick Pender
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Wage Growth was Showing Signs of an Upswing…
-20
-15
-10
-5
0
5
10
15
20
Perc
ent
Change (
YoY
)
Separations and Wage Growth
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Wage Growth (6m MA)
Separations (6m MA)
…Early Next Year
-20
-15
-10
-5
0
5
10
15
20
Perc
ent
Change (
YoY
)
Separations and Wage Growth
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Wage Growth
18 Months in the Future (6m MA)
Separations (6m MA)
Home Prices Showing Signs of Break Out
0
50
100
150
200
250
Index
FHFA Home Price Index
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Home Prices Showing Signs of Break Out
-12.0
-7.0
-2.0
3.0
8.0
Perc
ent
(YoY
)
Home Price Increases
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How Fast
is too Fast?
Increases reasonable compared to income
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
Ratio
Home Price Index / Income Index
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Watching:
No Alarms Yet
The Outlook was Sunny…
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Source: wtkr.com
…Then it Went Dark
Hurricane Florence
• Property Damage
• Mostly due to water damage
• Business Disruptions
• Low intensity strikes ~1% of regional GDP
• Likely closer to 2% for Florence
• Outside Perceptions
• Home prices suffer after multiple strikes
• Recover quickly after last in series
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What to expect going forward
• Other Storms
• Houston – Hurricane Harvey, August 2017
• Upwards of 60 inches of rain
• Baton Rouge – Flooding, August 2016
• Upwards of 20 inches of rain
• New Orleans – Hurricane Katrina, August 2005
• Upwards of 10 inches of rain, levy breaches, winds
• Atlantic City – Hurricane Sandy, October 2012
• Upwards of 12 inches of rain
Unemployment Recovers Quickly
0
0.5
1
1.5
2
2.5
3
3.5
Local R
ate
–N
ational R
ate
Months Pre and Post Storm
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Baton RougeHouston
New Orleans
Atlantic City
Nonfarm Employment Resilient
50
60
70
80
90
100
110
120
Em
plo
ym
ent
Index
Months Pre and Post Storm
Total Employment
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Baton RougeHouston
New Orleans
Atlantic City
Retail Employment Likely to Hold Up
50
60
70
80
90
100
110
120
Em
plo
ym
ent
Index
Months Pre and Post Storm
Retail Trade Employment
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Baton Rouge
Houston
New Orleans
Atlantic City
Manufacturing Employment Largely Unaffected
50
60
70
80
90
100
110
120
Em
plo
ym
ent
Index
Months Pre and Post Storm
Manufacturing Employment
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Baton RougeHouston
New Orleans
Atlantic City
Leisure and Hospitality
50
60
70
80
90
100
110
120
Em
plo
ym
ent
index
Months Pre and Post Storm
Leisure and Hospitality Employment
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Baton Rouge
Houston
New Orleans
Atlantic City
Construction Employment is Likely to Rise
65
75
85
95
105
115
125
135
Index
Months Pre and Post Storm
Construction Employment
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Baton Rouge
Houston
New Orleans
Housing Permits Will Increase as Well
0
20
40
60
80
100
120
140
160
180
200
Index
Months Pre and Post Storm
Housing Permits
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Houston
New Orleans
Home Prices Likely to Increase and then Normalize Again
115
135
155
175
195
215
235
255
275
Index (
1995 =
100)
Months Pre and Post Storm
Home Prices
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Baton Rouge
Houston
New Orleans
Looking Forward• Likely to see a boost to “measured” gross
domestic product for 2019
• Expect:
• Home prices to rise over the next year, then slow
• Construction employment to increase, on the order of 20%
• Tourism sector to continue moderate growth*
• Loss of wealth, time, and leisure not in traditional economic statistics
• Risks of “hard landing” and policy uncertainty
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Soon But Not Soon Enough…
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Thank you.