REPUBLICANS VS. DEMOCRATS€¦ · DOW JONES INDUSTRIAL AVERAGE United States PAYROLL JOB GROWTH United States CONSUMER SPENDING United States 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%

The upcoming 2016 presidential election has spurred several questions from our clients, such as which political party is better for the economy, particularly here in the Washington metro area, the seat of the federal government. Looking at just the numbers, the economy historically performs better under a Democratic president. However, looking at just the numbers tells only part of the story, as it does not take into account the cause. In addition, broader analysis is needed to explore how the economy performs based on which party controls Congress, as this tells a different story.

This report answers these questions by analyzing 17 indicators based on historical annual1 change during both presidential and congressional terms covering the past 71 years2, as detailed in the first section of this report. The indicators analyzed include, but are not limited to, gross domestic product, corporate profits, household net worth, and job growth. This paper also investigates other questions raised by our clients, such as if political party influences federal government versus professional/business services job growth and if party affiliation impacts defense versus health procurement spending. Since economic progress effects office demand, this report also investigates performance of net absorption by political party.

Following the summary of data findings, this report delves into events that could have impacted the results. Detailing the cause shifts the interpretation of the data. The results are not completely due to policy choices, as events play a notable role and are sometimes beyond the federal government’s control as presidents and members of Congress are subjected to the highs and lows of business cycles and global events. The report concludes with an outlook, exploring the potential impact of the 2016 election.

JULY 2016

REPUBLICANS VS. DEMOCRATS: How Political Party Influences the Economy and Office Demand

SUMMARY OF DATA FINDINGS

The majority of indicators analyzed showed the economy historically performed better with a Democratic president. However, when looking at which party controlled Congress, the majority of indicators showed the economy performed better under Republicans. Notably, in most cases the economy performed above the long-term average under total party control, when one party controlled both the presidency and Congress3. Roughly half of the indicators showed economic performance was below the long-term average when Congress was divided by party. Looking at the data by party control of Congress in addition to the presidency regardless if the opposing party controls the opposite, the results were equally split between Democrats and Republicans. Provided in this section are select graphs, but for more detail see the table on page 5.

1 Annual change was used as each presidential term varied. 2 Start dates vary on select indicators. Please see the table on page 5 for specific dates.3 For this indicator, both Democrats and Republicans were analyzed together due to limited historical sample.

How Political Party Influences the Economy and Office Demand | July 2016 Republicans vs. Democrats | 1

JULY 2016


GROSS DOMESTIC PRODUCT (GDP)United States

DOW JONES INDUSTRIAL AVERAGEUnited States

PAYROLL JOB GROWTHUnited States

CONSUMER SPENDINGUnited States

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Total Party Control Republican Democrat Republican Control Democrat Control Divided Control

Long-Term Annual Change =

2.9%

AN

NU

AL

CH

AN

GE

DU

RIN

G T

ER

M

PRESIDENT CONGRESS

Source: Bureau of Economic Analysis, Transwestern.

Note: Since 1945; inflation adjusted.

PRESIDENT & CONGRESS

0%

2%

4%

6%

8%

10%

12%

14%


Long -Term Annual Change =

8.1%

AN

NU

AL

CH

AN

GE

DU

RIN

G T

ER

M

PRESIDENT CONGRESSPRESIDENT & CONGRESS

Source: WSJ , Transwestern.

Note: Since 1945.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%



1.8%

AN

NU

AL

CH

AN

GE

DU

RIN

G T

ER

M


Source: Bureau of Labor Statistics , Transwestern.

Note: Since 1945.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%



3.1%

AN

NU

AL

CH

AN

GE

DU

RIN

G T

ER

M


Source: Bureau of Economic Analysis, Transwestern.


JOB GROWTH BY SECTOR

Looking at job growth by sector, both Republican and Democratic presidents have historically reduced, albeit slightly, federal government jobs over the past 71 years. Federal jobs grew when Democrats controlled Congress, compared to sharply declining when Republicans had control. Professional/business services jobs, which has a notable impact to office demand, grew at a faster rate when a Democrat was president, but grew at a faster rate when Republicans controlled Congress.


JULY 2016


FEDERAL GOVERNMENT JOB GROWTHUnited States

PROFESSIONAL/BUSINESS JOB GROWTHUnited States

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%



-0.1%

AN

NU

AL

CH

AN

GE

DU

RIN

G T

ER

M


Source: Bureau of Labor Statistics, Transwestern.Note: Since 1945, excludes post office.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%



3.0%

AN

NU

AL

CH

AN

GE

DU

RIN

G T

ER

M


Note: Since 1945.

Source: Bureau of Labor Statistics, Transwestern.

PROCUREMENT SPENDING BY AGENCY

Federal procurement spending feeds government contractors in the Washington metro area, as $70.5 billion, or 17%, of the U.S. total is allocated to the metro area. This is particularly true with defense and health spending, of which $27.8 billion, or 10%, and $7.2 billion, or 38%, of the U.S. total is allocated to the metro area, respectively. For more information on how federal contractors impact the Washington metro area click here for our March 2016 report.

With the tightening of the federal budget, our clients naturally ask if one party spends more on defense versus health, as this spending impacts the Northern Virginia office market for defense, where defense contractors are located due to the Pentagon, and Suburban Maryland for health, where health-related contractors are located due to the National Institutes of Health. In the Washington/Baltimore region, Department of Defense (DOD) procurement spending4 grew at a faster pace under a Republican president and a Republican-controlled Congress, but sharply increased under total party control. Health and Human Services (HHS) spending grew at a faster pace under a Republican president, but at a faster pace when Democrats controlled Congress.

4 Federal procurement spending data dates back to 1981 due to data availability.

DEFENSE PROCUREMENT SPENDINGWashington/Baltimore Region

HEALTH/HUMAN SERVICES PROCUREMENT SPENDINGWashington/Baltimore Region

0%

2%

4%

6%

8%

10%

12%


Long -Term Annual Change =

4.6%

AN

NU

AL

CH

AN

GE

DU

RIN

G T

ER

M



Source: FPDS.gov, Transwestern.

-10%

-5%

0%

5%

10%

15%

20%

25%



9.2%

AN

NU

AL

CH

AN

GE

DU

RIN

G T

ER

M



Source: FPDS.gov, Transwestern.


http://www.transwestern.net/public/MidAtlantic%20Region/Bethesda/Industry%20Brief/2016/March%202016/Industry%20Brief_2016_03.pdf

JULY 2016


OFFICE DEMAND

Since economic performance and procurement spending impacts office demand, what follows is an analysis on net absorption5 by political party. Washington metro area office demand historically performed better with a Republican president and when Republicans controlled Congress.

OFFICE NET ABSORBTIONWashington Metro Area

Source: CoStar, Transwestern.

0

1

2

3

4

5

6

7

8

Total Party Control Republican Democrat Republican Control Democrat Control Split Control

Long-Term Annual Average = 6.3

Million SF

Note: Since 1970.

AN

NU

AL

AV

ER

AG

E D

UR

ING

T

ER

M (

IN M

ILL

ION

S S

F)


POTENTIAL DRIVERS OF THE RESULTS

This section focuses on major events and fluctuations in the data that could influence the results discussed in the previous section. Of note, it is impossible to respond to every potential variance due to a plethora of factors that occur in the world economy. What follows is a look at each data point and the major drivers behind the data.

The data indicates the economy historically performed better with a Democrat as president, but better with a Republican-controlled Congress. In addition, total party control of both the presidency and Congress performed above the long-term average. This can be partly attributed to the timing of recessions and when each party was in power. Of note, presidents and members of Congress are subjected to the highs and lows of the business cycle, with some of the lows inherited without enough time to take preventive measures.

Of the 11.6 years the U.S. was in a recession, as classified by the National Bureau of Economic Research (NBER), only 2.9 years occurred under a Democratic president versus 8.7 years under a Republican president. Comparatively, only 1.1 years of recession occurred under a Republican-controlled Congress versus 8.4 years under Democratic control, and 2.2 years when Congress was divided. Only 3.7 years of recession was experienced under total party control. For more detail see the timeline table on page 7.

5 Office net absorption data dates back to 1970 due to data availability.


JULY 2016


SUMMARY OF SELECT OF ECONOMIC AND OFFICE MARKET INDICATORS

Indicator - Annual Average Change Since 1945

Long-Term Average 1

Total Party Control 2

PRESIDENT CONGRESS STATE OF ECONOMY WAR/PEACE TIME 3

Republican Democrat Republican Democrat Divided Recession 1 Recovery 1 War Time Peace Time

UNITED STATES

GDP 4 2.9% 3.0% 2.8% 3.0% 3.1% 2.9% 2.6% 1.0% 3.8% 3.1% 2.6%

GDP Per Capita 4 1.7% 1.7% 1.6% 1.7% 1.8% 1.6% 1.7% -0.2% 2.6% 1.9% 1.4%

Gross Output 4 2.8% 3.6% 2.4% 3.2% 3.1% 3.0% 1.5% 0.0% 4.1% 2.9% 2.6%

Dow Jones Industrial Average 8.1% 9.0% 6.8% 9.4% 13.3% 6.2% 8.3% 5.1% 9.5% 5.4% 12.0%

Corporate Profits 4 3.2% 4.4% 2.8% 3.6% 6.2% 2.3% 2.8% -5.2% 7.2% 4.0% 2.1%

Household Net Worth 4 3.2% 4.5% 2.4% 4.0% 4.9% 2.5% 3.3% -0.2% 4.7% 3.0% 3.4%

Consumer Spending 4 3.1% 3.6% 3.0% 3.2% 2.8% 3.2% 2.8% 1.5% 3.8% 2.9% 3.3%

Consumer Sentiment 5 86.3 87.3 83.9 88.7 96.2 84.0 83.1 75.7 90.2 84.8 88.3

Inflation 3.8% 3.4% 3.9% 3.7% 3.4% 4.0% 3.5% 4.6% 3.4% 3.0% 4.9%

Personal Income 4 2.8% 2.9% 2.8% 2.7% 2.5% 2.9% 2.4% 1.3% 3.5% 3.2% 2.1%

Federal Deficit - % of GDP 5 2.7% 3.6% 2.4% 3.1% 1.1% 3.0% 4.0% 3.0% 2.6% 2.3% 3.4%

Payroll Jobs 1.8% 1.8% 1.4% 2.1% 1.9% 1.8% 1.3% 0.1% 2.6% 1.6% 1.9%

Professional/Business Services 3.0% 2.8% 2.4% 3.5% 3.7% 2.8% 2.5% 1.1% 3.9% 2.3% 4.0%

Federal Government -0.1% 1.0% -0.2% -0.1% -2.9% 1.1% -1.2% -0.7% 0.1% 1.4% -2.4%

Unemployment 5 5.8% 5.5% 5.9% 5.7% 4.8% 5.7% 7.5% 5.9% 5.8% 5.5% 6.3%

Procurement Spending 6 1.4% 4.1% 3.6% -1.6% 3.8% -1.2% 1.8% 3.0% 0.9% 3.3% -0.4%

Department of Defense 1.0% 5.3% 3.2% -2.1% 4.9% -3.4% 1.7% 2.2% 0.6% 3.1% -1.0%

Health and Human Services 7.6% 8.3% 9.1% 5.7% 10.2% 15.6% -2.7% 7.6% 7.6% 11.5% 4.0%

WASHINGTON METRO AREA

Procurement Spending 6,7 4.7% 6.5% 6.3% 2.5% 4.1% 5.4% 4.4% 9.7% 3.2% 4.2% 5.1%

Department of Defense 4.6% 10.6% 6.9% 1.5% 5.0% 3.1% 5.6% 11.3% 2.6% 3.0% 6.1%

Health and Human Services 9.2% 6.1% 10.3% 7.9% 11.6% 20.1% -3.8% 18.6% 6.5% 14.6% 4.1%

Net Absorption (in millions SF) 5,8 6.3 5.6 7.5 4.5 7.1 6.4 5.3 6.3 6.3 4.6 7.9

Northern Virginia 3.0 2.2 3.8 1.8 3.1 2.9 3.0 3.6 2.7 2.4 3.6

Suburban Maryland 1.3 1.1 1.7 0.7 1.0 1.5 1.3 1.6 1.2 1.0 1.6

District of Columbia 2.0 1.6 2.4 1.4 1.4 2.1 2.3 2.3 1.9 1.8 2.1

Source: Bureau of Economic Analysis, WSJ, University of Michigan, Bureau of Labor Statistics, FPDS.gov, CoStar, Transwestern.

1 Includes all data, regardless of party affilication.

2 Includes data only when Republicans or Democrats had control of both the presidency and Congress.

3 Major wars only.

4 Inflation adjusted.

5 Annual average during term.

6 Data dating back to 1981.

7 Includes data on Washington/Baltimore region.

8 Data dating back to 1970


JULY 2016


Roughly half of the indicators showed economic performance below the long-term average when Congress was divided by party. This is less likely due to recessions, as only 2.2 years of recession occurred under divided control. For this data point, it is important to note that Congress was divided only 12 years out of 71 years analyzed. Coupled with the 2.2 years of recession, four of 12 years occurred during 2011 to 2014 when the economy was in a slow economic recovery and market conditions were soft compared to past recovery cycles.

Looking at the performance of industry job sectors, federal jobs grew when Democrats controlled Congress. This was likely due to the ramp up of civilian employees in the Department of Defense, particularly during the Korean War in 1951 when defense employees grew by 49.4%. This boosted the overall average growth for a Democratic-controlled Congress. Federal jobs likely declined when Republicans controlled Congress, as the Department of Defense was still shedding civilian jobs following the aftermath of World War II, with a decline of 33.1% in 1947 and the aftermath of the Korean War in 1953 and 1954 with an average decline of 6.1%.

The reason behind professional/business services jobs growing at a faster rate under a Democratic president was likely due to select presidents not encountering recessions during their term, such as Johnson, Carter, and Clinton, who averaged a 4.9% growth rate, above the 3% long-term average. Job growth in this sector likely grew at a faster rate when Republicans controlled Congress for the same reason, most of these terms occurred during recovery periods and not recessions. Notably, this sector grew 5.4% between 1995 and 2000 when Republicans controlled Congress and when Clinton was president.

When reviewing economic indicators against periods of recession, it is clear the majority indicators rise at a faster pace during recovery periods compared to recessionary periods and therefore impact whatever political party is in power at the time. See the table on page 5 for more detail.

SELECT ECONOMIC INDICATORS AND RECESSIONSUnited States

AN

NU

AL

% C

HA

NG

E

-15%

-10%

-5%

0%

5%

10%

15%

45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

Gross Domestic Product Job Growth Prof/Bus Services Job Growth Consumer Spending

444555 33 3 777 99 0011 7 0000000

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Transwestern.

Note: GDP and Consumer Spending are inflation adjusted; red bars represent recessions.

11196777444


JULY 2016


YEAR PRESIDENT CONGRESS STATE OF ECONOMY

WAR/PEACE TIME

1945

HARRY TRUMAN

WW II1946

1947

1948

1949

1950

1951

KOREA1952

1953

DWIGHT EISENHOWER

1954

1955

VIETNAM

1956

1957

1958

1959

1960

1961 JOHN F. KENNEDY1962

1963

1964

LYNDON B. JOHNSON

1965

1966

1967

1968

1969

RICHARD NIXON

1970

1971

1972

1973

1974

1975 GERALD FORD1976

1977

JIMMY CARTER

1978

1979

1980

1981

RONALD REAGAN

1982

1983

1984

1985

1986

1987

1988

1989

GEORGE H.W. BUSH

1990

1991

1992

1993

BILL CLINTON

1994

1995

1996

1997

1998

1999

2000

2001

GEORGE W. BUSH

2002

2003

IRAQ (03-11) & AFGAN. (01- )

2004

2005

2006

2007

2008

2009

BARACK OBAMA

2010

2011

2012

2013

2014

2015

2016

KEY: Republican Republican Recession War Time

Democrat Democrat Recovery Peace Time

Divided

PARTY POWER AND MAJOR EVENT TIMELINE

GULF

Department of Defense procurement spending grew at a faster pace during Republican presidencies due in large part to global events. The majority of this growth occurred during the terms of Ronald Reagan and George W. Bush, as spending increased at a 10.7% and 12.4% rate, respectively, which is well above the 4.6% long-term average. Reagan significantly increased defense spending due to the wars in Iraq and Afghanistan after the 9/11 attack. The same theory can be applied to the spending that occurred when Republicans held Congress and under total party control, as most of this growth, at 12.2%, occurred between 2003 and 2006 due to the wars in Iraq and Afghanistan.

Health and Human Services procurement spending grew at a faster pace under a Republican president and a Democratic-controlled Congress. Most of this growth occurred between 1987 and 1992, when George H.W. Bush controlled the White House and Democrats controlled Congress. During this period, procurement spending sharply increased for medical programs. Specifically, procurement spending for the Centers for Medicare and Medicaid Services and Centers for Abuse and Mental Health Services Administration increased from a combined $21.5 million in 1987 to $127.2 million in 1992. Government health care programs experience rapid growth due in part to several laws such as the Omnibus Budget Reconciliation Act of 1986, the Family Support Act of 1988, and the Omnibus Budget Reconciliation Act of 1990. These laws further expanded Medicaid eligibility to pregnant women, infants, and children, provided emergency treatment to illegal immigrants who would otherwise qualify for Medicaid, and provided transitional assistance for families losing assistance under the Aid to Families with Dependent Children program, according to the Centers for Medicare and Medicaid Services. This in turn increased procurement funding to government contractors to help service this need.


JULY 2016


Office demand in the Washington metro area was, on average, higher with a Republican president. This was likely due to the office boom of the 1980s. The boom occurred under Ronald Reagan and into George H.W. Bush’s terms where net absorption averaged 9.9 million SF per year in the metro area, well above the long-term average of 6.3 million SF. Under Reagan’s term, professional/business services jobs, primary office-users, rose at a notable pace, at 7.3% in the metro area during his term, compared to the long-term average of 4.2%. This was due in part to federal procurement spending on the Cold War mentioned earlier. Notably during the height of the boom during the mid-1980s, net absorption averaged 11.7 million SF per year, which pushed the rate for Republican presidents ahead of Democrats. It is important to note that after this boom, there was a downturn as the vacancy rate increased to 15% in the Washington metro area due to overbuilding, the highest vacancy rate experienced to date6. Further crippling occurred with the Savings and Loan Crisis of the late 1980s. In addition, office returns took a hit in the early 1990s, declining on average 1.3%, compared to rising 13.3% during the height of the office boom, according to NCREIF.

Net absorption under a Republican-controlled Congress slightly outpaced a Democratic-controlled Congress during 1995 to 2000, under Bill Clinton’s presidency, and during 2003 to 2006, under George W. Bush’s term. During this period, net absorption averaged 7.6 million SF in the Washington metro area, outpacing the long-term average of 6.3 million SF. Both time periods were not faced with recession and specifically during 2003 to 2006 George W. Bush fueled procurement spending, which in turn boosted office demand due to the wars in Iraq and Afghanistan following 9/11. In addition, net absorption during the current recovery period has been soft in the Washington metro area, as federal sequestration reduced procurement spending and caused federal contractors to shed office space. Since 2009, net absorption has averaged only 1.1 million SF.

OUTLOOK

The 2016 election will continue to heat up through early November. The key question surrounding the upcoming election is, “Which party is better at growing the economy?” Based on the findings in this report, we do not believe a new president will drastically alter the national or local economy, unless a notable event like the ones discussed previously occurs. In addition, the newcomer will be inheriting a sizable deficit, which will continue to limit federal spending under the new president and Congress.

Congress could shift power as well, out of Republican control. The Senate has a chance to turn to Democratic power, but it is unlikely the House will turn to the Democrats due to geographical advantages. Therefore, it is likely the new president will either have to work with a Republican-controlled Congress or a divided Congress. In addition, if Trump is elected with a Republican-controlled Congress, we do not expect major changes, as the above-average performance of total party control was likely due to lack of recessions during the time in power.

This is not to say that political policy does not influence the economy, as fiscal policy comes into play particularly during recessions. During the most recent recession, a handful of policies were initiated to help pull the United States out of recession, such as the American Recovery and Reinvestment Act of 2009 and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. During the early 1980s recessions, the Economic Tax Recovery Act of 1981 was implemented, and later amended, to cut personal

6 Dating back to 1970.


JULY 2016


and business taxes to in turn stimulate the economy, which also fueled investment in the office market. It is important to note there is a lag effect from when a policy is enacted and when results might appear in the economy. This lag could be anywhere from 12 to 24 months. Once the policy starts to take effect after this lag, it becomes difficult to determine if the policy was effective in improving the economy or if another factor was at play.

What does this all mean for the office market? We expect office demand to remain steady in the near-term as office-using jobs continue to grow. However, there are competing forces at play. Growth in office-using jobs does not always translate to office demand, as densification (tenants taking less SF per worker) and consolidations have and will continue to impact demand in the period ahead.

Although the information contained herein is based on sources which Transwestern (TW) believe to be reliable, TW makes no representation or warranty that such information is accurate or complete. All prices, yields, analyses, computations, andopinions expressed are subject to change without notice. Under no circumstances should any such information be considered representations or warranties of TW of any kind. Any such information may be based on assumptions which may or may not be accurate, and any such assumption may differ from actual results. This report should not be considered investment advice.

CONTACT

Elizabeth NortonManaging Research Director | Mid-Atlantic [email protected]


Documents

REPUBLICANS VS. DEMOCRATS€¦ · DOW JONES INDUSTRIAL AVERAGE United States PAYROLL JOB GROWTH United States CONSUMER SPENDING United States 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%