long live(d) economic growth

peter rupertprofessor

department of economics, ucsbdirector, ucsb economic forecast project

beautiful granada theatermay 16, 2019

roadmap for today

global and national outlook

the changing nature of expansions

recent local trends

where do we go from here?

headwinds and tailwinds

global outlook

kinda sucks

global outlookkinda sucks

U.S.

doesn’t suck

U.S.doesn’t suck

Per

cent

0

1

2

3

4

5

3.3% 3.3%

1%

0.4%

1.5%

2.3%

1.9%1.8% 1.8%

3%2.8%

2.3% 2.2%

4.2%

3.4%

2.2%

3.2%20

15

2016

2017

2018

2019

Economic Forecast Project Source: BEA

Real GDP

quarterly change at an annual rateyear−over−year change

1946 1955 1965 1975 1985 1995 2005 2015

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Economic Forecast Project Source: Federal Reserve

Household LeverageLiabilities to Disposable Income

1947 1955 1965 1975 1985 1995 2005 2015

3.5

4.0

4.5

5.0

Economic Forecast Project Source: Federal Reserve

Household Net Worth (Assets−Liabilities)Ratio to GDP

1947 1955 1965 1975 1985 1995 2005 2015

0.02

0.04

0.06

0.08

Economic Forecast Project Source: Federal Reserve

Checkable Deposits and Currency, Nonfinancial Corporate BusinessRatio to GDP

1947 1955 1965 1975 1985 1995 2005 2015

0.8

0.9

1.0

1.1

1.2

Economic Forecast Project Source: Federal Reserve

Net Worth, Nonfinancial Corporate BusinessRatio to GDP

270262

178

282

108

277

196

227

312

56

189

263

218218218218218218218218218218218218

0

100

200

300

Jun 18 Sep 18 Dec 18 Mar 19Date

Ch

an

ge

(0

00

s)

United States

Monthly Employment Change

Source:BLS

2001 2004 2007 2010 2013 2016 2019

1000

2000

3000

4000

5000

Midwest

2001 2004 2007 2010 2013 2016 2019

1000

2000

3000

4000

5000

South

2001 2004 2007 2010 2013 2016 2019

1000

2000

3000

4000

5000

Northeast

2001 2004 2007 2010 2013 2016 2019

1000

2000

3000

4000

5000

West

Unemployed Persons (000’s) Vacancies, (000’s)

1995 1998 2001 2004 2007 2010 2013 2016 2019

−1

0

1

2

3

4

AHEPCE

PCE Inflation and Average Hourly EarningsPercent change from a year ago

the recovery

big question

when will it end?

currently the 2nd longest

local trendsreal estate

0

20

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CA Average: 29%

US Average: 56%

Affordability 2017Q4

local trendsdemographics, employment and other stuff

Population and Components of Change: Santa Barbara County

Population Population Births Deaths Natural Net PopulationJuly 1 Change Increase Migration Growth Rate

2005 411,683 493 6,301 2,936 3,365 -2,872 0.122006 412,853 1,170 6,175 2,860 3,315 -2,145 0.282007 416,648 3,795 6,252 2,708 3,544 251 0.922008 419,970 3,322 6,327 2,898 3,429 -107 0.802009 422,423 2,453 6,180 2,876 3,304 -851 0.582010 423,567 1,144 5,970 2,879 3,091 -1,223 0.272011 425,354 1,787 5,746 2,881 2,865 -1,078 0.422012 430,318 4,964 5,638 2,888 2,750 2,214 1.172013 435,329 5,011 5,701 2,990 2,711 2,300 1.162014 440,090 4,761 5,758 2,999 2,759 2,002 1.092015 444,491 4,401 5,809 3,016 2,793 1,608 1.002016 447,309 2,818 5,590 3,140 2,450 368 0.632017 450,138 2,907 5,463 3,256 2,207 700 0.652018 453,288 3,150 5,544 3,363 2,181 969 0.68Average per Year 3,071 5,845 2,959 2,887 227 0.73

Source: CA Department of Finance

Population Distribution1-year 5-year

2017 2018 Growth Rate Growth Rate

Buellton 5,098 5,291 3.8% 8.7%Carpinteria 13,697 13,704 0.1% 4.5%Goleta 31,622 31,949 1.0% 6.5%Guadalupe 7,341 7,604 3.6% 7.0%Lompoc 43,881 43,599 -0.6% 1.9%Santa Barbara 94,244 94,807 0.6% 5.6%Santa Maria 107,978 108,470 0.5% 8.0%Solvang 5,653 5,771 2.1% 8.9%Unincorp Area 140,511 142,262 1.2% 4.4%

SB County 450,025 453,457 0.8% 5.5%

Tri-Counties 1,585,145 1,592,631 0.5% 3.5%Source: CA Department of Finance

Population and Housing: Santa Barbara County

2012 2013 2014 2015 2016 2017 2018

Population (Jan. 1) 428,194 433,073 438,512 442,987 447,073 450,025 453,457% change 0.89 1.14 1.26 1.02 0.92 0.66 0.76

Total Housing Units 153,689 154,170 154,733 155,353 156,520 157,578 158,622% change 0.28 0.31 0.37 0.40 0.75 0.68 0.66

Vacancy Rate 6.70 6.60 6.50 6.20 6.00 6.10 6.20

Source: CA Department of Finance*All values are January 1 estimates.

population is growing faster than housing

Government

Financial Activities

Prof. & Bus. ServicesWholesale Trade

Educ. & Health Services

Trans., Ware. & Util.

Goods Producing

Information

Total Farm

Leisure & Hospitality

Retail Trade

Other Services15.8

13.7

11.4

9.38.7

7.77.3

7 6.1

6

4.9 2.20

10

20

0 25 50 75 100Percent of Total Real GDP, 2017

2016

−20

17 G

row

th R

ate

(%)

Real Gross Domestic Product (GDP) by Industry Santa Barbara County

0%5%

10%15%20%

Source: CA Employment Development Department, Current Employment Survey (CES)

Percentage of Total Employment, by Industry Santa Barbara County

Dec '98 Dec '08 Dec '18

GovernmentLeisure and Hospitality

Educ. & Health Services

Prof. & Bus. ServicesTotal Farm

Goods−Producing

Retail TradeFinancial Activities

Other Services

Wholesale

Information

Trans., Ware. & Util.

19 13.7 13.3 10.9 10.8 10.79.2

3.33

2.521.6

−3

0

3

6

0 25 50 75 100Percent of Total Employment

Jan

2018

− J

an 2

019

Gro

wth

Rat

e (%

)Annual Employment Growth by Industry Santa Barbara County

headwind or tailwind?

tariffs

headwind

tariffsheadwind

not again

monday: tariff war

US: increase from 10% to 25%

China: tariff increase on $60 billion

bottom line: makes both parties poorer

it is not a zero-sum game

SP 500 and Dow down 2.4% as a result

fed independence

tailwind

fed independencetailwind

Yugoslavia, 1993

Zimbabwe, 2008

wtf!?

this can’t happen here!

read the book

more meddling

fast forward to 1969

burns and nixon

what happened next?

1959 1965 1975 1985 1995 2005 2015

−15

−10

−5

0

5

10

15

20

Economic Forecast Project Source: BEA

PCE, Chain−type Price IndexMonthly, annualized rate of change

1971 1976 1982 1988 1994 2000 2006 2012 2018

0

5

10

15

20

Economic Forecast Project Source: BEA

30−Year Fixed Rate MortgagePercent

1959 1965 1975 1985 1995 2005 2015

0

2

4

6

8

10

12

AHEPCE

PCE Inflation and Average Hourly EarningsPercent change from a year ago

unfunded pension liabilities

headwind

unfunded pension liabilitiesheadwind

pensions

defined benefit pension liabilities

how are we doing?

we will look at perf, ca teachers and UC

what is a pension?

a promise to pay

so what is the problem?

pensions

underfunded pensions

ok, but how much?

how to value pension liabilities?

it is a debt owed by the government

like any other debt (treasuries)?

pensions are promises, not risky investments!

12.8%

8.2%2.1%

12.3%

53.7%

8.9%

CommoditiesEquitiesFixed IncomeHedge FundPrivate EquityReal Estate

2018 Fiscal Year End HoldingsPortfolio Allocation: California Teachers

Economic Forecast Project Source: Center for Retirement Research

www.efp.ucsb.edu

10.8%7.7%

6.8%

22.5%

48.9%EquitiesFixed IncomeHedge FundPrivate EquityReal Estate

2018 Fiscal Year End HoldingsPortfolio Allocation: California PERF

Economic Forecast Project Source: Center for Retirement Research

www.efp.ucsb.edu

5%4%

15%

25%

51%EquitiesFixed IncomeMisc. OtherPrivate EquityReal Estate

2018 Fiscal Year End HoldingsPortfolio Allocation: University of California

Economic Forecast Project Source: Center for Retirement Research

www.efp.ucsb.edu

how to value

should use risk-free rate from yield curve

current practice: 7.3%

recall rule of 70

doubles in about 9.5 years

so, if owe $100k in 10 years

then $50k in assets is “fully funded” (gasb 67)

cannabis

tailwind

cannabistailwind

a burgeoning industry

uncertain growth

big potential?

0

200

400

600

800

ALAMEDA

HUMBOLDT

LOS A

NGELES

MENDOCINO

MONTEREY

RIVERSID

E

SACRAMENTO

SAN BERNARDIN

O

SAN FRANCIS

CO

SANTA C

RUZ

License Types

Distributor

Laboratory

Microbusiness

Retailer

Top 10 CountiesMarijuana Licenses

Source: Bureau of Cannabis Control

0

5

10

15

20

25

2014 2016 2018Year

Mill

ions

of $

Marijuana License and Fees

Retail Marijuana Excise Tax

Retail Marijuana Sales Tax

Sales Tax

State of ColoradoMarijuana Tax Revenue by Source

Source:Colorado Department of Revenue

minimum wages

headwind

minimum wagesheadwind

30% in CA make < $12.50/hr16% in bay area38% in Imperial countysource: legislative analysts office

minimum wages

a better solution

earned income tax credit

non-profit sector

tailwind

non-profit sectortailwind

0

500,000,000

1,000,000,000

1,500,000,000

2009 2010 2011 2012 2013 2014 2015 2016 2017

North County

South Coast

Santa Barbara CountyTotal Contributions to Non−Profits

Source: Guidestar.org

0

500,000,000

1,000,000,000

1,500,000,000

2009 2010 2011 2012 2013 2014 2015 2016 2017

Direct ReliefOther

Santa Barbara CountyTotal Contributions to Non−Profits

Source: Guidestar.org

final remarks

economy continues strong growth

signs of slowing?

always some signs of slowing

recession coming? yes

when? don’t know, sorry

final remarks

economy continues strong growth

signs of slowing?

always some signs of slowing

recession coming? yes

when? don’t know, sorry