Presented by: Elliot F. Eisenberg, Ph.D.

President: GraphsandLaughs, LLC

November 16, 2016Madison, WI

THE ECONOMY IN 2017: MUCH LIKE 2016, I THINK!

The Economy is Stable!

GDP = C+I+G+(X-M)

Households are Repairing their Balance SheetsTrillions in Net Worth Recovered, at a New Record Level

More Home Equity

Households are Repairing their Balance SheetsMore Income to Spend Elsewhere

Households Deleveraging is Done!!!!!!Lack of income growth hurts, but debt is growing once again. Down 6.5% from peak

Home Equity Lines of Credit are Back in Fashion!Volume is double what is was at the trough in ‘09-’10-’11.

Households Deleveraging is Done!!!!!!Household delinquency rates are lower than before the recession but are no longer falling

12

Household Delinquencies are Steadily Improving Total late and derogatory debt is lower now than in 2003! Steady improvement.

Conference Board Consumer Confidence is FineIndex is near its post-recession high.

Hotel Occupancy Rates are Excellent!Occupancy is superb as is the ADR and the RevPAR

As has Las VegasThe gamblers are back, the conventioneers a bit less so. Housing related?

US Light Vehicle Sales are Absolutely Fantastic!

Annual Y-o-Y Percent Change in PCEA solid growth rate of 2.75%

Oil Prices are a Huge WildcardBut cheaper oil is a huge benefit, and cheaper is better, but only in the long-run

The Ying and Yang of Natural Gas Prices One CF is (roughly) equal to 1,020 BTU’s

Milk Prices are in a Bear Market

Corn Prices are in a long Bear MarketCorn prices have flat-lined at a level first reached in a decade ago.

Soybean Prices are in a Long Bear Market

Corporate Profits Grew Rapidly but have Stopped

Profits For Financial Firms are Flat

Bank Net Interest Margins Have Been Shrinking

OK. Now, Look at Capital Goods Orders! Minus Defense and Aircraft

Y-o-Y % Chng in Real Final Sales to Domestic Buyers Measures spending and investment by U.S. businesses and households. Strips out gov’t spending, inventory swings and exports. Steady if undramatic growth at 2.5%.

More of Us are Working in State and Local Gov’t! Employment is rising

Fiscal Policy Looks Increasingly ExpansionaryDefense, infrastructure, tax cuts will boost the deficit

The Dollar is Strengthening Against all Currencies It will hurt employment growth but will reduce inflation

Weak

Stronger

Strong

Manufacturing Employment is Climbing AgainOr is it falling? Strong dollar, weak global growth and weak energy prices are why.

The Trade Deficit is ImprovingThe deficit in stuff (red) is finally flattening. Our shrinking petroleum deficit (black) helps.

Annual Y-o-Y Percent Change in GDP

GDP Growth Drivers – Fiscal Policy Uncertainty

No Real Volatility or Fear!

Best of All, No Recession is in the Cards!Designed to track real macroeconomic activity in real time

Best of All, No Recession is in the Cards!Yield Curve Inversion Test: 1-Year Treasury Yield – 10-Year Treasury Yield

Labor Markets: They’re on the mend

Great Job Growth!

You Want A Job, You Got A Job

We are All Quitters

Wage Growth is Weak, but Improving!

Wages Really Are Rising (But Slowly!)

I Really Mean It!

Changes in Median Wage Growth Looks Good!of those continuously full-time employed

Inflation?What Inflation!

Import Prices for all Commodities: Inflation!!Rising, but largely due to energy price increases

Export Prices for all Commodities: Inflation!!Rising nicely and due to general rise in all prices except agriculture commodities

Producer Prices Show Signs of Inflation!!

Inflation is Rising

By This Measure too!

Inflation Expectations? Rising of Late?5 year and 10 year breakeven rates

Federal Reserve Behavior

Rates Will Rise.But, How Fast?

Federal Reserve BehaviorLower bound estimates

• Fed Funds is 0.375%

• By 12/31/16: 0.625%. (90% Prob.)

• By 12/31/17: 1.125%.

• By 12/31/18: 1.875%

• By 12/31/19: 2.875%

Fed Funds and 30-Yr Mortgage RatesThe relationship is a very weak one

Housing?It’s Improving but In

Fits and Starts!

Residential Fixed Investment Slowly Rises!Up 4.4% Y-o-Y. Non-residential up 3%, public down 17%, Residential down 33% from peaks

Household Formation is Finally on the Move

Credit is Generally Very Hard to Get It was getting easier, but now not so much!

Subprime Credit is Available Elsewhereconsumer loans, auto loans, credit cards, personal loans etc….

Change in Wealth by Median Household 2003 -2013

Credit Source: Russell Sage Foundation

Price Growth Appears to Finally be Slowing. Prices rise faster than wages! Y-o-Y prices up 4.2% 5.1% or 5.1% depending on the measure

Existing Home Inventory and Duration Move Together!Every 300K change in units equals 1 month of inventory

Bigger Houses Continue to Get Built

New Home Prices Are Recovering Too Nicely

Apartment Vacancy Rates MF vacancy decline is over. Appreciation may be starting to wind down. Vacancy rate is up 3 quarters in a row, 1st time since Q4/09. Too much building. Rents still rise, but more slowly.

Apartment Vacancy Rates The multifamily party is winding down especially at the upper end! S > D. Rent growth should slow and vacancy rates will rise. 4 quarters in a row below 50

Single-Family and Multifamily Starts from 2005 Forward

Residential Remodeling – Slowly Rising Owner-Occupied Improvements. Expected slight slowdown late in 2015

Existing Home Sales1st-time buyers remain largely MIA. Distressed sales are just 6% of total. Where is inventory?TRID was the reason for the 14% November decline.

Recent Existing Home SalesSlow steady improvement. Taper tantrum is the reason for the 15% decline in 2013, TRID was the reason for the 14% November decline.

Purchase Application Activity

Refinance Activity Growth Is Done

Delinquencies & Foreclosures Continue Falling30 and 60 day delinquencies are below normal!

Cash Sales are Down from Peak Cash sales were 29.7% in 7/16, down 190 BP Y-o-Y. Resales are 80% of all sales.

Historically cash sales are 25%. Peak was 46.5% in 1/11. At lowest level since 2007

Negative Equity is Less and Less of a ProblemPercent of Loans in Negative Equity Situation

Demographics Will Start to Really Help Beginning to approach the Peak. Chase Millennials, move-up buyers and Boomers

What About Things Here?

Things May Not Be Great, But they Are O.K.

The Future Looks Better than the Present

State Unemployment RatesSignificant differences exist: However, unemployment is below 7% everywhere!

Population Growth within the Madison, WI MSA Dane County grows fastest, while the remaining counties converge on the state rate

State of Wisconsin Real GSPAfter bottoming in 2009 it has been rising nicely since.

Unemployment Rates in Wisconsin MSAsMadison, Appleton, and GB are #1, #2, #3. Milwaukee, J’ville Racine follow. J’ville improves!

Labor Force Growth Rates Around WisconsinAll are rising!!!! Jamesville is on the move! Madison and Appleton are very good.

Elsewhere, growth is 1% or slower. Racine is weak.

Non-Farm Payroll Growth Around WisconsinJanesville is super. Madison & Appleton are OK, GB and Milwaukee are fair. Racine is weak.

Per Capita Personal Income in Wisconsin MSAsMadison and Milwaukee on top. GB and Appleton are next, Racine and Janesville suffer.

Let’s Do this Without A Lawyer, Thank You!Foreclosure inventory is 1% of homes with mortgage, still double the historic average.

House Price Recovery Rates around Wisconsin Vary Madison is tops. Appleton is good. GB, J’ville, and Milwaukee are recovering. Racine….

Madison, WI MSA Housing StartsSingle-family, is at the level of 1997 but, multifamily rocks!

Elliot F. Eisenberg, Ph.D.

Cell: 202.306.2731

elliot@graphsandlaughs.net

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