The Republicans Have to Learn How to Count

Last night's re-election win for President Barack Obama was a lesson in arithmetic that the Republican Party had better learn if it is ever to be successful in future presidential elections. Simply put the Republicans can't appear downright hostile to the fast growing Latino population that now accounts for 10% of the vote. When a party loses the Latino vote by 40 points, it is obvious it will lose New Mexico, Colorado, Virginia, Nevada and likely Florida. Knock knock, is anybody home. Time to support immigration reform.

Furthermore the Republicans can't appear hostile to the life style choices of millions of young single women and gay Americans. The party certainly can be pro-life, but does it make sense to support state required vaginal probes and sanctify the fetuses that are the result of rape? The two wacko Senate candidates in Missouri and Indiana nationalized the "rape issue" to the benefit of the Democrats.

It would also help if the party emulated the Obama campaign's effective use of "big data" to identify potential voters and to get them to the polls. Thus learning how to count is essential and doing it better certainly won't hurt.

My Letter to Comcast CEO Brian Roberts on MSNBC

I wrote this letter a month ago and have yet to receive a reply. As a long shot, maybe making it public will get a response.

Mr. Brian L. Roberts

Chairman and CEO
Comcast Corporation
One Comcast Center
Philadelphia, PA 19103-2838

 October 1, 2012

Dear Mr. Roberts:

I am writing you as a fiduciary for my wife and daughter who collectively own XXX(original has exact number of shares) shares of Comcast “A” stock. There is a cancer growing on our NBC News franchise and that cancer is MSNBC. By becoming the house organ of the American Left and the mouthpiece for President Obama’s reelection campaign MSNBC is destroying the credibility of NBC News. To be sure if MSNBC were completely separate from NBC News, it would be possible to maintain the hard earned credibility of NBC News. Unfortunately that is not the case.

 Although “Morning Joe” remains a credible outlet for NBC News personalities, it cannot be said for the rest of MSNBC’s programming. I weep when I see the formerly credible Andrea Mitchel get sucked into the partisanship of MSNBC. The same can be said about Tom Brokaw, a newscaster I have watched since he was doing local news in Los Angeles. Moreover our news super-stars, Brian Williams and David Gregory, lose all credibility when they do election coverage with the likes of Rachel Maddow, Ed Schultz and the formerly reasonable Chris Matthews.

 While I agree there is a real cable audience for a Left perspective on the news, I do not believe there is a mass audience for it. Remember NBC News is in the mass audience business and herein lies my worry. The more NBC News mingles with MSNBC it loses credibility with less partisan viewers and those viewers, in my opinion, will find their news elsewhere. Thus whatever is gained with cost-synergies between NBC and MSNBC, more will be lost on the revenue side as ratings drop.

Mr. Roberts, I don’t think I am a right wing crank. The issues I am raising speak to the credibility of the news business. Maybe it was lost a long time ago, but it will make running our democracy far more difficult. Furthermore if NBC and MSNBC continue on their current paths, the profitability of Comcast will be eroded. Speaking for my family, NBC/MSNBC’s share has declined over the past year.

 Yours truly,

David Shulman

A Note on the Publc Education Employment Revisions in the September Unemployment Report

A very exciting title, but this stuff is important. Buried in yesterday's employment report for September 2012 was a positive 97,000 job revision for public employment in education in August. What happened? Simply put several school districts, including the 40,000 teacher strong Los Angeles Unified School District, started school early this year. So instead of having the jobs reported in September, they were pick up in the revision for August. Thus there was no hiring surge over the summe. Moreover private sector jobs were revised down by 5,000 for July and August. All this means is that yesterday's job report was over-hyped. To be sure it was good news that the unemployment rate dropped to 7.8%, but don't be surprised if it returns to 8% next month.

"The Muddle Through Economy". UCLA Anderson Forecast, September 2012

 

 
The economy continues to muddle through at a very sluggish pace as it has since the nadir of the Great Recession in mid-2009. In general real GDP growth has been in a 1-3% channel and it is now operating at the lower end of the range. Specifically, we are forecasting real GDP growth of 1.3% in the current quarter and 1.5% in the fourth quarter. (See Figure 1) Nevertheless, as we get into 2013, growth will ratchet up to above 2% and 2014 could very well put the run rate of GDP growth in excess of 3% as economic activity is buoyed by strength in residential and nonresidential construction and a rebound in export growth.

Tepid GDP growth, combined with a structural adjustment in the economy, has caused employment gains to be modest. (See Figure 2) As a result, the unemployment rate has stayed above 8% for three and a half years. (See Figure 3) With several quarters of 1-2% growth ahead of us we do not expect the unemployment rate to dip below 8% on a quarterly basis until the first quarter of 2014. Simply put, job growth on the order of 160,000 a month in 2013 will not be sufficient to make any real dent in the unemployment rate. However, as job growth accelerates to 200,000 a month in 2014 the unemployment rate will begin to meaningfully improve.
Figure 2 Unemployment Rate, 2005Q1 – 2014Q4F
Figure 1 Real GDP Growth, 2005Q1 -2014Q4F

 


 
The economy is being held back by a still over-leveraged consumer and that is working to dampen consumption, a slowdown in corporate investment spending, a softer export environment and a pall of policy uncertainty with respect to fiscal policy and regulation.
1

Aside from working off the hangover caused by the debt binge of 2003-07, consumers are being plagued by a decline in real household income. Although the economy can and did grow in the face of stagnant median income in the 2000s, weakness in median income is certainly no help. According to Sentier Research, a new economics consultancy founded by two former Bureau of the Census senior staffers, real median household income has declined by 5% since early 2008 and is still 2% below where it was when the economy bottomed in June 2009. (See Figures 4 and 5)
Figure 3 Payroll Employment, 2005Q1 -2012Q4

Sources: Bureau of Labor Statistics and UCLA Anderson Forecast
Figure 4 Real Median Household Income Indexed (thin line) and Unemployment Rate (thin line), 2000 – June 2012
Source: Sentier Research



Business Investment Slowdown



After rising at a very robust 11% rate in 2011, we project that investment in equipment and software growth will slow to 8.1% and 6.4% in 2012 and 2013 respectively. (See Figure 6) To a great degree, the strong growth in investment represented a catch up from the 16.4% collapse in 2009. Similarly, we expect minimal growth next year for investment in business structures as factory, mining (gas drilling) and utility construction started in 2011 is completed later this year and early in 2013. A rebound in these sectors, as well as a ramp up in commercial construction, will cause investment in structures as a whole to grow by 7% in 2014. (See Figure 7) Furthermore, the rapid growth in exports witnessed in 2010 and 2011 is ebbing as Europe is mired in recession and growth in China, Brazil and India slows. (See Figure 8)
Figure 5 Real Consumer Spending,
2005 – 2014F, Annual Data
Figure 6 Real Investment in Equipment Software, 2005 – 2014F, Annual Data
 
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
Figure 7 Real Investment in Business Structures, 2005 – 2014F, Annual Data



Sources: U.S. Department of Commerce and UCLA Anderson Forecast

 

Housing Rebound



As we noted last quarter, the one bright spot in the economy is the long-awaited rebound in housing construction. Led by multi-family construction, housing starts are ramping up from 612,000 units in 2011 to 763,000 units this year and just under one million units in 2013. By 2014, we anticipate that housing starts will be in excess of 1.3 million units. (See Figure 9) The growth in housing will account for about a full percentage point in GDP growth by 2014. The strength in housing is being underpinned by gradually rising home prices, record low mortgage rates, improved household formations and modest employment growth.

All Out Monetary and Fiscal Policy


The sluggish growth of the past few years has occurred against a backdrop of extremely stimulative monetary and fiscal policies. Since 2008 the Federal Reserve has had its "pedal to the metal" by engendering an unprecedented explosion in its balance sheet which has more than tripled in size. (See Figure 10) Initially the Fed engaged in a largely conventional monetary policy by lowering its target for the Federal Funds rate from 5 ¼% to essentially zero where it has stood since late 2008. (See Figure 11)

With the policy rate stuck at the "zero bound," the Fed engaged in a large scale asset purchase program known as quantitative easing and made a commitment to maintain its zero interest rate policy through 2014. Fed Chairman Ben Bernanke noted in his recent Jackson Hole remarks that there is academic support for the notion that the Fed’s non-traditional policies lowered the yield on 10-year U.S. Treasury bonds by 80-120 basis points; hardly trivial.
3

Thus far, the extraordinary monetary policy has not ignited inflation nor an increase in inflationary expectations. Put simply, despite a commodity scare that has accompanied the second round of quantitative easing in late 2010, inflation has been quiescent. (See Figure 12) Nevertheless, if we are correct about acceleration in economic growth in 2014, we won’t be surprised to see inflation rising above their 2% inflation target.
Figure 8 Real Exports, 2005 – 2014F,
Annual Data, Percent Change



Sources: U.S. Department of Commerce and UCLA Anderson Forecast
Figure 9 Housing Starts, 2005 – 2014F, Annual Data

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

 
Figure 10 Federal Reserve Bank Credit, 1991 – Aug 2012, Weekly Data, In $ Billions.
Source: Federal Reserve Bank of St. Louis
Figure 12 Price Deflator for Personal Consumption Expenditures, 2005Q1-2014Q4F
Figure 11 Federal Funds Rate vs. 10-year U.S. Treasury Bonds, 2005Q1 -2014Q4



Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Sources: Federal Reserve Board and UCLA Anderson Forecast



Similarly, fiscal policy has been highly stimulative with the cumulative federal deficit of the past four years amounting to $5.1 trillion. (See Figure 13) As a result, U.S. debt held by the public has risen from 36% of GDP in 2007 to 73% of GDP in 2012. However, with that level of deficit spending now being viewed as unsustainable, federal government purchases are actually contracting. (See Figure 14)

Remember, in the GDP accounts the bulk of Federal spending is accounted for as transfer payments, which mostly enter into the GDP stream as consumer and state and local government spending. This is important, because as sluggish as it has been, consumer spending has been supported by increases in unemployment compensation, disability payments and other income support programs.

Nevertheless if you spoke to most economists in late 2008 and you told them that the Fed would embark on a four year zero interest rate policy and more than triple the size of its balance sheet and that the federal government would run $5 trillion of deficits over the next four years; they would have predicted a major boom with inflationary consequences. Donald Kohn, the former Vice-Chairman of the Fed and long-time Fed staffer asked the question at Jackson Hole, "Why is it that we’ve had such incredibly accommodative monetary policy for so long and we’ve had so little growth?"
4

Strong growth has obviously not occurred and two constrasting hypotheses would argue that we were truly headed for Great Depression 2.0 and the policy prevented a disaster or that economic policy as we know it is not as effective as we thought. Perhaps more likely the truth involves a combination of the two alternative hypotheses. We have no answers to this question here and now, but this will be the topic of more than a few Ph.D. dissertations over the next few years. Counter-factual history is hard to do.


Falling Off the Fiscal Cliff?



At midnight December 31, 2012 the tax cuts enacted in 2001, 2003 and 2009 expire, and that includes not only the tax rate schedule, but also the
Figure 14 Real Federal Purchases, 2005 – 2014

Sources: U.S. Department of Commerce and UCLA Anderson Forecast
Figure 13 Federal Surplus/Deficit,
FY 2000 – FY 2022

Sources: Office of Management and Budget and UCLA Anderson Forecast

 

so-called alternative minimum tax patch and the two percentage point reduction in social security taxes.
5 In addition, about $55 billion of spending will be sequestered and emergency unemployment benefits will expire. All told, about $600 billion in tax hikes and spending cuts are scheduled to take effect. The Congressional Budget Office predicts that if all these eventualities occur, the deficit would be cut almost in half, but the United States would be pushed into recession with real GDP declining by 0.3% in 2013 and the unemployment rate rising to 9%.

The astute reader would have noticed that in Figure 13 above we have the federal deficit gradually coming down. There is no cliff. Why? In the triumph of hope over experience we are assuming that there will be a post-election compromise that will allow for a phase-in of tax increases and spending reductions. This will be especially difficult to do after what will likely be the most vitriolic election in years.

Furthermore, private sector activity is bound to be influenced as individuals and businesses handicap the likely outcome to all of the tax and spending changes on the table. Remember in the fourth quarter of 1992 activity was pulled forward to avoid the likely tax increases that were to come in the new Clinton Administration with a concomitant slowdown in the first half of 1993.

Nevertheless, fiscal discipline is sorely needed. Despite all of the campaign rhetoric that we have already heard and soon will hear, entitlement programs are going to be cut and taxes are going to be raised. A policy of spending roughly $3 for every $2 taken in is hardly sustainable. Indeed with the current debt load equal to GDP and with the debt held by the public equal to 73% of GDP we are rapidly approaching the danger zone identified by Rogoff and Reinhart in their cross country comparisons of historical debt crises.
6
Conclusion
The economy continues to muddle through in a 1-3% growth environment that will keep the unemployment rate painfully high. Although not contracting, consumer spending, exports and business investment will remain sluggish. In addition, federal purchases weighed down by a high debt load are contracting. The one bright spot is the beginning of the long awaited rebound in housing. The big near-term risk comes in the form of the fiscal cliff where a too rapid fiscal consolidation could very well trigger a recession in early 2013.
Endnotes 1. See Shulman, David, "The Uncertain Economy," UCLA Anderson Forecast, September 2010.
2. See Shulman, David, "Rebuilding the Housing Economy," UCLA Anderson Forecast, March 2012
3. See Bernanke, Ben S., "Monetary Policy since the Onset of the Crisis," Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, August 31, 2012
4. See Hilsenrath, Jon, "Bernanke Faces Skepticism Over Policy," The Wall Street Journal Online, September 2, 2012
5. See, "An Update to the Budget and Economic Outlook: Fiscal Years 2012-2022," Congressional Budget Office, August 2012
6. For an updated version of Rogoff and Reinhart see, Reinhart, Carmen. M., Reinhart, Vincent R., and Rogoff, Kenneth S., "Public Debt Overhangs: Advanced Economy Episodes since 1800," Journal of Economic Perspectives, Summer 2012, pp. 69-86.

My Latest USNEWS Blog, "Neither Democrats nor Republicans Have Debt Crisis Solution," August 22, 2012

For the full url see:

http://www.usnews.com/opinion/blogs/economic-intelligence/2012/08/22/seek-truth-from-facts

The Ryan Choice

Mitt Romney's choice of House Budget Chairman Paul Ryan as his running mate is a strong governing choice, but it represents very risky political choice. By this choice Romney has decided to play on President Obama's playing field by making this presidential election a choice on the future direction of the country, instead of a referendum on the sad state of the economy. You can bet on it, that the airwaves will be be filled with Obama ads showing Romney and Ryan throwing granny off the medicare cliff, while a few fat cats are toasting their tax cuts with glasses of champagne.

Nevertheless Paul Ryan is a strong campaigner and he, more than any of the other VP hopefuls, can articulate the case that the United States is on a fiscally unsustainable path.  This election will be about big things, not small bore stuff. No matter what President Obama says, he knows and most senior Democrats know, medicare, medicaid and social security have to be reformed. Simply put, the postwar entitlement state has run out of gas and the Democratic leadership continues to lie to the American people about it. The Republicans lie when they say the fiscal problems of the the United States can be solved without any tax increases. As an aside the big loser from today's announcement is Vice President Joe Biden. He will have his work cut out for him when he meets Ryan in their debate.

In terms of governing, should the Romney-Ryan team win in November they will be able to hit the ground running with respect to the budget. This would be an enormous advantage given the fiscal situation our Nation faces. Furthermore, as a complete outsider, it looks to me that Romney and Ryan really get along; they are both highly focused numbers people.

"Rebuilding the Housing Economy," UCLA Anderson Forecast, June 2012

After an agonizing six year decline where nearly $7 trillion of wealth was destroyed, the housing economy is now in the process of rebuilding. With average home prices declining by one-third, it has been a searing experience for most homeowners who never believed that housing prices would ever fall. (See Figure 1) As a result, with existing homeowners being foreclosed upon and potential homeowners either unable to meet more stringent purchase requirements or fearful of continued price declines, the homeownership rate declined from a peak of 69% in 2004 to 66% in 2011 and is forecast to drop to 65% by the end of this year. (See Figure 2)
Figure 1 Case-Shiller Home Price Index, 2000 – March 2012, Monthly Data, 2000 = 1.0. Source: Federal Reserve Bank of St. Louis and Standard & Poor's 

Nevertheless, there are many indicators offering evidence that the housing market has bottomed and a recovery is underway. Despite a regulatory logjam in the process, foreclosures appear to have peaked. (See Figure 3) Concomitantly, existing home sales are now on the rise. After peaking at 7.1 million home sales in 2005, the series declined to 4.1 million units in 2008 and is expected to exceed 5.0 million units in 2013. To be sure, about one-third of existing home sales are accounted for by either foreclosures or "short sales," yet, the steady rise in activity is indicative of recovery. (See Figure 4)

The recovery is underpinned by a gradually improving labor market, a rebound in household formations and record low mortgage rates, now below 4%. (See Figures 5, 6, and 7) For example, household formations averaged 1.33 million a year between 2000 -2007 and then collapsed to 327,000 in 2009. By last year household formations recovered to 1,072,000 and we forecast a robust 1.7 million run rate in 2013- 14.
Figure 2 Homeownership Rate, 1990 -2012E, Yearend Data, Percent
Source: U.S. Bureau of the Census and UCLA Anderson Forecast
Figure 3 Loans in Foreclosure and Past Due Mortgages, 2005Q1 – 2012Q1, Percent
Source: Mortgage Bankers Association and The Wall Street Journal
 Simply put there are too many young adults living in their parent’s homes, an untenable situation for all of the parties involved.

Nonetheless the recovery will continue to be gradual and uneven. Though improving, the job market remains far from healthy and higher down payment and credit score requirements are working against the stimulative effects of low interest rates. New to this cycle is the impact of exploding student loan debt that will keep potential buyers out of the housing market for years to come. (See Figure 8)
Figure 4 Existing Home Sales, 2000 – 2014E
Figure 6 Household Formations, 2000 – 2014E

Source: Bureau of the Census and UCLA Anderson Forecast

Source: National Association of Realtors and UCLA Anderson Forecast
Figure 5 Payroll Employment, 2000Q1 -2014Q4E
Figure 7 30-Year Fixed Mortgage Rate, 2000Q1 – 2014Q4E

Source: Federal Reserve Board and UCLA Anderson Forecast

Sources: Bureau of Labor Statistics and UCLA Anderson Forecast

At one trillion dollars, student loan debt now rivals credit card debt. And because student loan debt is not extinguishable in bankruptcy, it will impair the ability of younger people to buy homes in the years to come.

After peaking at nearly 2.1 million units in 2005, housing starts plummeted 73% by 2009 to 554,000 units. (See Figure 9) After remaining at roughly that level in 2010 and 2011, housing starts are expected to reach 755,000 units this year and exceed one million units in 2013. Although this looks like a steep recovery, at one million units housing activity would have only recovered from depression levels to recession levels. Remember that from 1991 – 2010 housing starts averaged 1.42 million units a year. As we noted earlier, household formations on the order of 1.6 million a year can easily support this long-run average.

The real drama taking place is in multi-family housing. We are now in the midst of a boom in multi-family construction, especially in rental apartments. Like housing starts in general, multi-family starts collapsed from its peak in 2005 of 354,000 units to a nadir of 112,000 units in 2009. Since then starts will have more than doubled to the 260,000 units forecast in 2012. (See Figure 10) We would not be surprised to see multi-family starts exceed 400,000 units in 2014.
Figure 8 Student Loan Debt, 2000Q1 -2011Q4
Figure 9 Housing Starts, 1991- 2014E, Annual Data

Source: U.S. Department of Commerce and UCLA Anderson Forecast

Source: Federal Reserve and The Wall Street Journal
Figure 10 Multi-Family Housing Starts, 1991 – 2014E

Source: U.S. Department of Commerce and UCLA Anderson Forecast
After all, the flip side of a falling homeownership rate is a rising rate of home renting.

The coming boom in multi-family starts is underpinned by a very low vacancy rate (below 5%), rising rents and a flood of institutional money coming into the sector. (See Figure 11) Although not reflected in the consumer price index where the rent regulated cities of New York and Los Angeles are over-weighted, rents on renewals are now rising at 4% and many of the publicly traded real estate investment trusts are reporting year-over-year rent increases on the order of 5% to 7%.

With 10-year U.S. Treasury yields below 2%, institutional investors are seeking out higher yielding alternatives and they are finding rental apartments to be increasingly attractive. Although going in, cash returns in the more active markets are at historical lows, around 4%-5%, rising rents offer the prospect of higher future income and capital appreciation. With a buying frenzy underway, investors can and do come up with very aggressive assumptions about future rents to justify new construction.

Of course this boom in multi-family construction will have within it the seeds of its own destruc-
Figure 11 Apartment Vacancy Rate, 2005Q1 – 2012Q1, Percent
Source: REIS Reports and Calculated Risk

tion. As rents rise, consumers will shift out of rental into ownership units. The American Dream of homeownership may be comatose, but it is not dead and the wakeup call will come in the form of higher rents.

As a result by 2014, supply will begin to outpace demand. New physical supply will be augmented by the renting of existing single-family homes by a growing number of investor groups. Although much of that supply is on the urban fringe, many observers forget that sub-prime lending financed and refinanced homes in central core areas. As rents increase those areas will become ripe for gentrification and become competitive with traditional rental housing.

When outlining our thesis to several real estate investors we heard a common objection which loosely stated is, "sure the money is there, but you’ll never get the zoning." Our counter to that argument is that the planning and zoning world has changed. Instead of discouraging density, governmental planners are now encouraging it. As examples we point to the passing of California’s SB 375 which more strictly links transportation with land use planning and the "transit village" concept now being employed in New Jersey. Yes, there will still be neighborhood fights, but there will be far fewer supply constraints than heretofore.