Economic Forecast 20/20
By Alan Nevin, January 6, 2020 from Expera Group
My ophthalmologist tells me I have 20/20 vision. From an economic standpoint, my “2020 vision” may not be perfect, but based on the key indicators in my sights, some things are abundantly clear.
With the upcoming election, its unlikely to be smooth sailing in the months ahead, at least politically speaking. On the other hand, when I look at the numerous indexes and their medium-to-long term trends, there does not appear to be any strong negative economic factors on the horizon.
Let me briefly take you through a dozen of the U.S. economic indexes I track regularly, so you can see how
they look now compared to 10 years ago, back when most consumer’s outlook was quite pessimistic due
to the “Great Recession.”
- New Car Sales: Over 17 million for six years in a row, which is remarkable. Ten years ago, the average
price of a new car was $22,000. Today, it’s $37,000.
- Used Car Sales: 40 million and growing steadily over the past decade. (Perhaps this is why transit
ridership has dropped nationwide.)
- Unemployment Rate: 2.5-3.0% just about everywhere in the nation. In California, it’s 3.9%, the lowest
in a decade. The unemployment rate for persons with a college degree: 2.0%.
- Minority Unemployment Rate: In 2010, the unemployment rate for African-Americans was 16%.
Today, it’s 5.4%, nearing the non-black average. A remarkable improvement. Other minorities had
- Job Openings: 7.3 million, more than double the 3.1 million of 10 years ago. Many are jobs that can’t
be filled because there are not enough qualified workers to fill them.
- Total Jobs: Since 2010, total employment in the U.S. has increased by almost 20 million and is
approaching 160 million.
- Weekly Unemployment Claims: 225,000, less than half what we saw 10 years ago.
- Mortgage Interest Rates: Fall 2010: 4-5%; Fall 2019: 3.0-3.25%.
- Retail Sales (Excluding Food): $460 billion per month today compared to $327 billion 10 years ago.
- Existing Home Sales: This year will top 5.5 million, up from 4.2 million 10 years ago.
- Manufacturing Output: Up from $1.7 trillion to $2.4 trillion in the past decade. We continue to produce
one-fifth of the world’s total manufacturing output (despite tariff headwinds). Yes, we are doing it
with fewer people, but the output is sensational.
- Building Permits: Since 2015, output has been remarkably stable. Each year for the past five years,
the U.S. has produced about 1.3 million housing units, about 800,000 of them single-family homes
and 500,000+ multi-family.
There are another dozen or so indexes that I track, but these are the ones I follow most closely. Since the last presidential election, every one of these indexes has been strong. There is not one that has trended in the wrong direction.
What could go wrong? I am generally of the opinion that presidents often have little impact on the state of the economy. Sure, post-midnight tweets could swing the mood of the stock market for a day, but demographics and market forces (such as adoption of breakthrough technology) have a much stronger long-term effect.
Therefore, as I look at 2020 with my 20/20 eyesight, I remain puzzled about voiced concerns. Trade wars have created headwinds, but our economic engine is pushing forward despite it. I don’t find enough substantial evidence that 2020 won’t deliver a strong and healthy economy.
California’s 2020 – Staying the Golden State
Having said that, let’s look at the Golden State, which still deserves the moniker.
The news media likes to report that people are moving out of the state, and that’s true. But, it is also true that people are moving in. The key fact is that college-educated people are moving in and those without a degree are moving out, due to the high cost of living.
That leads me to a necessary discussion on immigration. Our state is in desperate need of legal immigrants, whether from south of the border or from Old World continents. The immigrant population is the lubricant of our labor-desperate economy. It is the entry-level skilled labor that allows us to function, and the immigrants that come are often skilled. Further, as our population ages, we have a critical need for persons to work in facilities that care for the aged or infirmed.
The need for immigrants is particularly critical in the high-growth states like California, Texas and Florida, where the economy has the opportunity to expand but is hindered by a critical shortage of labor.
Austan Goolsbee, a rather renowned economist at the University of Chicago, has stated that half of the Fortune 500 firms were started by immigrants or their children.
The long and the short of the matter is that without immigration, our California economy will suffer and be hindered in its long-term economic goals.
Having said that, I should note that in 2020, California’s population will hit 40 million. The final numbers are not yet in for 2019, but it looks like for the 4th year in a row, California will add more than 300,000 jobs.
California likes to brag about being the fifth largest “nation” in the world, which is true economically. Our Gross Domestic Product keeps moving upward. This past year, our GDP totaled $3.0 trillion. Since 2012, the state’s GDP has been moving upward at a pace of 4.0-4.5% annually.
Lastly, let me turn to California’s weak spot: residential construction.
Governor Newsome has stated that we will build 3.5 million homes (500,000 homes a year) by 2025.
At our present delivery rate, we will produce approximately only 20% of that target if all goes well. In 2019,we were barely able to produce 100,000 units, half of those being single-family and the other half multifamily (mostly rentals).
One factor that’s different about construction in 2020 is that California’s 2019 Building Code goes into effect. Many home builders are scratching their heads on how to make anything affordable with the stricter requirements.
For 2020, I am projecting that we will produce 95,000 housing units, half of them single-family and half multi-family. That assumes mortgage rates stay low (and they will).
It is possible that granny flats will make up the differential between the governor’s goals and actual production, but most likely not.
The state will continue to be housing starved and job rich. It’s becoming an old story, but one that will be repeated every year unless major changes are made. That’s just the way it has been and is.
The governor’s very good intentions have had little impact on the forces of NIMBYism, CEQA, municipal regulations and office holders who are obsessed with keeping their jobs.
Enough said: 2020 will be a rather good year for the nation and California.
Residential Building Permits in California: 2015-2020(F)
Single Family Multi Family Combined
2015 – 98,000; 2016 – 100,000; 2017 – 118,000; 2018 – 117,000; 2019(P) – 105,000; 2020(F) – 97,000.
Alan is the Director of Economic and Market Research at Xpera Group. He serves the real estate and legal industries with residential and commercial real estate valuations, real estate development market studies and litigation support. He can be reached at (858) 436-7770 or [email protected] Alan Nevin