Clear Sailing Ahead

Dr. Mark G. Dotzour College Station, Texas

mdotzour@gmail.com www.markdotzour.com

2018 Has Emerged into

An Economic Boom

A time of prosperity

To progress swiftly and vigorously

A sudden increase in growth

How long can it last?

Sensationalized “News” Everything is unprecedented, biblical and catastrophic

Sensationalized News Or maybe it’s not

2,742,414 Texas 2,031,864 California 1,792,590 Florida 655,684 Arizona 643,179 North Carolina 584,698 Georgia 547,395 Virginia 544,388 Washington 500,825 Colorado

States With Most Employment Growth In the 21st century

-377,273 Michigan -125,967 Ohio - 56,537 Illinois - 42,461 Mississippi - 28,284 West Virginia 1,499 Rhode Island 8,559 Kentucky 8,661 Maine 11,511 Vermont

States With Least Employment Growth In the 21st century

622,550 Dallas-Fort Worth-Arlington 523,748 Houston-The Woodlands 416,602 Austin-Round Rock 322,063 San Antonio-New Braunfels - 269,467 Boston-Cambridge - 300,987 San Francisco-Oakland - 956,597 Chicago-Napier -1,710,512 Los Angeles-Long Beach -2,809,903 New York-Newark

Net Domestic Migration In the 21st century

Population Projection: Austin Metro Area

Source: Texas State Data Center at UTSA

Population Projection: DFW-A Metro Area

Source: Texas State Data Center at UTSA

Population Projection: Houston Metro Area

Source: Texas State Data Center at UTSA

Population Projection: San Antonio Metro Area

Source: Texas State Data Center at UTSA

Texas Leading Index

Source: Federal Reserve Bank of Dallas

Recent weakness due to strong dollar impacts on Texas exports.

Austin Business-Cycle Index

Dallas Business-Cycle Index

Fort Worth Business-Cycle Index

Houston Business-Cycle Index

San Antonio Business-Cycle Index

Oil and Gas

U.S. oil output hit 11 million barrels per day for the first time ever. “The international recovery has finally started. The backlog on integrated drilling projects is the most we have ever seen.” Paal Kibsgaard, CEO Schlumberger Schlumberger 2Q revenue was up 11% from a year ago. Baker Hughes 2Q revenue was up 2% from a year ago.

Source: WSJ 7/21/18

• Mar 1991 to Mar 2001 120 months • Feb 1961 to Dec 1969 106 months • Nov 1982 to Jul 1990 92 months • Jun 1938 to Feb 1945 80 months • Nov 2001 to Dec 2007 73 months

Current expansion as of September 2018 is 111 months

Longest U.S. Economic Expansions Current expansion began in June, 2009

Index of Leading Economic Indicators

Source: Federal Reserve Bank of St. Louis

Source: The Conference Board

Consumer Confidence Index

30405060708090

100110120130140150

Aug-

00Fe

b-01

Aug-

01Fe

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Aug-

02Fe

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Aug-

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09Fe

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b-11

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b-18

Aug-

18

The index rose to 133.4 in August, the highest since October, 2000

Household Net Worth since 1980

Source: Federal Reserve Bank of St. Louis

Now exceeds $100 trillion

Monthly Increase in Jobs

Source: Bureau of Labor Statistics; Federal Reserve Bank of St. Louis

Rate of Wage Growth Since 1960’s

Source: Federal Reserve Bank of St. Louis

Wages and salaries in June grew at 2.9%, the highest since 2008.

Job Openings in America Looking for Workers

Source: Bureau of Labor Statistics BLS release on September 11, 2018

Total Job Openings in July 6,939,000

Construction 273,000

Manufacturing 506,000

Trade, Transportation, Utilities 1,307,000

Professional & Business Services 1,203000

Education & Health Care 1,249,000

Leisure & Hospitality 1,003,000

Government 6223,000 July ‘18 number of 6.9 million was the highest ever in series history. Began in December 2000

Corporate Profits

Source: Federal Reserve Bank of St. Louis

Corporate profits were up 16.1% in the 2nd quarter. Taxes paid by US companies was down 33% from a year ago.

Small Business Confidence: “Now is a Good Time to Expand”

0

10

20

30

40

Feb-

13

May

-13

Aug-

13

Nov

-13

Feb-

14

May

-14

Aug-

14

Nov

-14

Feb-

15

May

-15

Aug-

15

Nov

-15

Feb-

16

May

-16

Aug-

16

Nov

-16

Feb-

17

May

-17

Aug-

17

Nov

-17

Feb-

18

May

-18

Percent of Respondents

Source: National Federation of Independent Business

Small Business Confidence: “Hiring Plans in the Next Three Months”

0

5

10

15

20

25

30

Jan-

13

Apr-

13

Jul-1

3

Oct

-13

Jan-

14

Apr-

14

Jul-1

4

Oct

-14

Jan-

15

Apr-

15

Jul-1

5

Oct

-15

Jan-

16

Apr-

16

Jul-1

6

Oct

-16

Jan-

17

Apr-

17

Jul-1

7

Oct

-17

Jan-

18

Apr-

18

Jul-1

8

Net Percent of Respondents

Source: National Federation of Independent Business

Small Business Survey Results May 2018

• Compensation increases hit a 45 year record high. • Views about expansion are most optimistic in history • Reports of positive earnings trends at a record high • Reports of positive sales trends highest since 1995 • Concerns about labor quality second highest in history • Reports of price hikes the highest since 2008 • Plans to raise prices are the highest since 2008

Source: National Federation of Independent Business William Dunkelberg

Q3-18 Q2-18 Q1-18 Q4-17

More Jobs 56% 58% 61% 43%

Less Jobs 13% 13% 13% 18%

Large Corporate Hiring Plans: Next 6 Months

Source: Business Roundtable

The Business Roundtable Q1 2018 CEO Economic Outlook Index - a composite of CEO Projections- increased to 118.6 in the first quarter of 2018, the highest level since the survey began in the fourth quarter of 2002.

Corporate Bond Spread BB Corporate – 10 Year Treasury

Source: Federal Reserve Bank of St. Louis

7th Inning?

Looking Farther Down the Road

Source: WSJ 8/6/18

Fiscal stimulus “is going to hit the economy in a big way this year and next year, and then in 2020, Wile E. Coyote is going off the cliff.” -Ben Bernanke at an American Enterprise Institute conference in June

Revenue Act of 1964 Enacted February 26, 1964

•Recovery from recession of 1958 was slow. •JFK campaigned in 1960 with the slogan of "getting America moving again."

•Proposed cutting individual tax rates from a range of 20-91% to 14-65%

•Proposed cutting the corporate tax rate from 52% to 47%.

Percentage Change in Employment After the Kennedy Tax Cuts

Source: Federal Reserve Bank of St. Louis

Enacted Feb1964

Peak Jun 1966

1960 1971

Tax Reform Act of 1986 Enacted October 22, 1986

Top rate for individuals cut from 50% to 38.5%. Major reduction of depreciation for real estate Raised tax rates on capital gains. Corporate tax rate lowered from 50% to 35%.

Index of Leading Economic Indicators After Reagan Tax Cuts

Source: Federal Reserve Bank of St. Louis

Enacted Oct 1986

Peak Nov 1988

Interest Rate on 10-Year Treasury Bond

Source: Federal Reserve Bank of St. Louis

False Alarm

The CPI Inflation Rate Since 1950

Source: Federal Reserve Bank of St. Louis

Expected Returns Lowered for the Two Largest U.S. Pension Funds

The California State Teachers Retirement System (CALSTERS) reduced its expected future returns to 7% this year. The California Public Employees Retirement System (CALPERS) begins a multi-step drop to 7% by 2021. The median expected return of 130 public pension funds dropped to 7.25% in 2017. That rate was still 8% in 2012.

Source: WSJ 7/23/18

Margin Debt at Broker/Dealers Jan 98 through Dec 17

Source: Standard and Poor’s

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000Ja

n-98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

Jan-

16

Jan-

17

Mill

ions

Debit Balances in Margin Accounts at Broker/Dealers

Dow - 41%

Dow - 34%

Dow - 11%

200250300350400450500550600650700

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Margin Debt at Broker/Dealers Jan 2011 to present

Source: Financial Industry Regulatory Authority

Billion

Earnings per share of the S&P 500 were up 24.8% Over the second quarter of 2017. The rate is expected drop to 9.3% in 2Q19. WSJ 8/30/18

The Impact of the Last Major Rate Hikes DJIA and the Fed Funds Rate

4.74 4.94 5.56 6.50 6.61

4.03 3.10

1.75 1.16

1999 2000 2001 2002 2003

5.46 Five rate hikes Between Jun99 and May00

Rates fall from 6.6% to 1.75% in 2001

Dow peak 11,700

Existing Home Sales in Texas

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000Ja

n

Feb

Mar

Apr

May Ju

n Jul

Aug

Sept Oct

Nov De

c

2018

2017

2016

Source: Real Estate Center at Texas A&M

Months Inventory of Unsold Homes in Texas

3.0

4.0

5.0

6.0

7.0

8.0

9.0Ja

n-94

Jan-

99

Jan-

04

Jan-

09

Jan-

14

Mon

ths

Source: Real Estate Center at Texas A&M