Charles Baum Tennessee Realtors Association March 18, 2019 Outline - - PowerPoint PPT Presentation

Economy 101: Where Are We? Where Are We Going?

Charles Baum Tennessee Realtors Association March 18, 2019

Outline

I. The U.S. Economy’s Health

• II. U.S. Economic Forecast
• III. Tennessee’s Budget
• IV. Forthcoming State Issues Affecting Realtors

1

GDP

Gross Domestic Product (GDP): the dollar value of all goods and services produced in an economy (the United States) during a period of time (a year).

• What is the U.S.’s GDP?
• What is the largest country in the world?
• Which country has the largest population?
• Which country has the largest economy (as measured by GDP)?

2

Charles Baum Economy 101

Largest Countries by Area

1. Russia 2. Canada 3. China or the U.S. (depending on territories)

3

Charles Baum Economy 101

Largest Countries by Population

World (7.6 billion) 1. China (1.386 billion) 2. India (1.322 billion) 3. United States (0.325 billion)

4

Charles Baum Economy 101

Largest Countries by GDP

5

Charles Baum Economy 101

Source: Wikipedia, “List of Countries by GDP (nominal).”

U.S. GDP

U.S. GDP (March 17, 2019):

$20,946,862,000,000

• r

$21 trillion

6

Charles Baum Economy 101

Source: U.S. Debt Clock.org

Economic Growth

Trump has targeted economic growth of 3% (or 4%) per year.

• r

$19.3 trillion

7

Charles Baum Economy 101

Source: CNBC, “Here’s how Trump’s 3% economic growth target stacks up against past presidents.”

Economic Growth

2018 Fourth Quarter: 2.6% 2018 Full Year: 3.1% 2018 Third Quarter: 3.4% 2017 Full Year: 2.5%

8

Charles Baum Economy 101

Source: Bureau of Economic Analysis, “National Income and Products Accounts.”

The Rule of 70

The “Rule of 70” shows how long it takes for money (investments or GDP) to double.

• With 3% growth, GDP doubles every 23.3 years (from 70/3).
• With 2% growth, GDP doubles every 35 years (from 70/2).
• With 1% growth, GDP doubles every 70 years (from 70/1).

9

Charles Baum Economy 101

Business Cycles: Recent Recessions

10

Charles Baum Economy 101

Peak Trough Length of Recession July 1953 May 1954 10 months August 1957 April 1958 8 months April 1960 February 1961 10 months December 1969 November 1970 11 months November 1973 March 1975 16 months January 1980 July 1980 6 months July 1981 November 1982 16 months July 1990 March 1991 8 months March 2001 November 2001 8 months December 2007 June 2009 18 months

Source: Hubbard, R. Glenn and Anthony Patrick O’Brien. (2017). Economics. Boston MA: Pearson.

U.S. Debt

U.S. Debt (March 17, 2019): $22,132,140,000,000 or $22 trillion.

11

Charles Baum Economy 101

Source: Debt statistics from the U.S. Office of Management and Budget, www.truthfulpolitics.com.

Debt-to-GDP Ratios

U.S. Debt-to-GDP = $22/21 = 105%.

12

Charles Baum Economy 101

Source: U.S. Department of the Treasury, Bureau of the Fiscal Service, www.marketrealist.com.

When Will We Be Greece?

• Recall that U.S. Debt is $22 trillion.
• Recall that U.S. GDP is $21 trillion.
• U.S. added $14 trillion in debt over last 16 years (0.875 trillion per

year).

• U.S. debt-to-GDP ratio will be 1.6 when debt equals $33.6 trillion

(from $21 trillion X 1.6 = $33.6 trillion).

• This will occur in 14.4 years (from 12.6 trillion divided by 0.875 trillion

per year).

13

Charles Baum Economy 101

Costs and Benefits of Government Debt

Costs

• Higher interest rates
• Government spending ‘crowds out’ private investment
• Lower long-run economic growth

Benefits

• Infrastructure
• Households borrow for homes, so why can’t the government borrow

for capital projects?

• Public goods

14

Charles Baum Economy 101

Unemployment

Unemployment Rate: 3.9% in U.S. (Feb. 2019) and 3.3% in TN (Jan. 2019)

15

Charles Baum Economy 101

Source: Macrotrends, “U.S. National Unemployment Rate,” http://www.macrotrends.net/1316/us-national-unemployment-rate.

Unemployment

• Over 300,000 new jobs created in January 2019.
• Virtually no wage growth in January 2019.
• Only 20,000 new jobs created in February 2019.
• 3.4% wage growth in February 2019 (year-over-year).

16

Charles Baum Economy 101

.

U.S. Inflation

Inflation: the rate at which prices increase over time.

17

Charles Baum Economy 101

Source: Bureau of Labor Statistics: Consumer Price Index (CPI), All Urban Consumers

Interest Rates

Discount Rate: the rate at which banks borrow from the Fed. Federal Funds Rate: the rate at which banks borrow from each other.

18

Charles Baum Economy 101

Source: Board of Governors of the Federal Reserve System, “Effective Federal Funds Rate.”

Interest Rates

• Federal funds rate

i. Actual: 2.40% (February 2019). ii. Target: 2.25-2.50% after the December 2018 increase and 8 other increases since 2015 from 0.00-0.25% in 2008.

• Fed’s target affects most other interest rates (current 3-month

treasury bill is 2.39%; 10-year treasury note is 2.68%; and 30-year treasury bond is 3.04%).

• How much will rates rise? With low interest rates, federal payments
• n national debt are about 11-12% of federal government

expenditures.

• Politicians may pressure the Fed to keep rates low to minimize

unemployment.

19

Charles Baum Economy 101

Growth Rates for Investments

• Rates of return are typically higher on riskier investments than on less

risky assets, all else equal, to compensate the investor for assuming greater risk.

• 20-Year Average Returns (March 1997-March 2017):

i. 1-year treasury bills: 2.34% ii. 10-year treasury notes: 3.89%

• iii. 20-year treasury bonds: 4.46%
• iv. Aggregate bond total returns index: 5.22%

v. S&P 500, dividends excluded: 5.69%

• vi. S&P 500 dividend yield: 1.93%

20

Charles Baum Economy 101

Source: Board of Governors of the Federal Reserve System and my Own Calculations using the SPX index and Barclay’s AGG index.

Trade

Trade Balance: Exports minus imports (-$59.8 billion in December 2018).

21

Charles Baum Economy 101

Source: Board of Governors of the Federal Reserve System, “Trade Balance: Goods and Services.”

Trade

Free Trade (and Globalism) versus Trade Restrictions (and Protectionism)

• Who are the winners from free trade?
• Who are the losers from free trade?
• North American Free Trade Agreement (NAFTA)
• Trans-Pacific Partnership (TPP)
• Recent Trade Policy (Bush/Clinton/Bush/Obama v. Trump)

22

Charles Baum Economy 101

Trade and Exchange Rates

• Our trade balance is affected by exchange rates.
• Is a “strong” dollar good or bad?

i. What is the EU price of an iPhone that costs $200 if $1=1€? ii. What is the EU price of an iPhone that costs $200 if $2=1€?

• Does President Trump want a “strong” dollar?

i. “The President said that a strong dollar ‘sounds good’, but added that ‘our dollar is getting too strong…it is very, very hard to compete when you have a strong dollar and other countries are devaluing their currency’. He also said that he ‘likes a low interest rate policy’ and that Janet Yellen is ‘not toast’.” (Financial Times, “President Trump Abandons the Strong Dollar Policy” April 15, 2017).

• The effect of interest rates on the dollar’s value.

23

Charles Baum Economy 101

Trade and Exchange Rates: Euros

24

Charles Baum Economy 101

U.S. Economic Forecast

Our Economic Outlook is Enhanced by:

• Low taxes—including lower corporate tax rates
• Deregulation
• Low interest rates
• Low inflation

25

Charles Baum Economy 101

U.S. Economic Forecast

Economists are Concerned about:

• Potential federal government shutdown
• Trade wars and tariffs
• Brexit
• Slowing Chinese economy

But economists are usually worried—and often about things that are more problematic, such as wars, oil prices, financial crisis, housing crisis.

26

Charles Baum Economy 101

U.S. Economic Forecast

• U.S. economy is healthy with good fundamentals and
• Economic worries are relatively minor,

But…

• The economy moves in cycles,
• History repeats itself, and
• Our expansion is at record-length.

27

Charles Baum Economy 101

The Real Estate Market: Overview

• The market for real estate is one that is competitive but strong,

particularly in the Nashville MSA, which generates an overall positive

• utlook.
• The employment of real estate brokers and agents is predicted to grow

about as fast as the average occupation over the next decade, with employment growth of 6 percent by 2026 of 24,900 new real estate brokers and agents (nationwide) from 444,100 in 2016 (Bureau of Labor Statistics, 2018).

• Growth will be partially driven by:

I. an overall improving job market, II. a rise in consumer spending, and

• III. individuals and families looking to move into larger homes and

re-locating.

28

Charles Baum Economy 101

The Real Estate Market: Where We’ve Been

29

Charles Baum Economy 101

2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

New Home Sales Year

New Home Sales in Tennessee

The Real Estate Market: Where We’ve Been

30

Charles Baum Economy 101

5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

New Housing Permits Year

New Housing Permits in Tennessee

Total 1 Unit 2 Units 3 or 4 Units 5 Units or More

The Real Estate Market: The Forecast

• During the next decade, many millennial households will begin buying

a first home as they become of working-age.

• Many millennial households had otherwise delayed buying a first

home due to personal and financial considerations.

• Conversely, higher real estate purchase prices and tighter credit

regulations (such as higher credit requirements) will promote renting.

• The real estate market remains highly sensitive to overall economic

conditions (Bureau of Labor Statistics, 2018b).

31

Charles Baum Economy 101

The Real Estate Market: Renting

• Forbes explains the rental market is largely driven by population shifts

and affordability, predicting rates of annual rent increases will fall from the 6- to 8-percent range to a more historically typical rate of 2 percent nationally, although many markets in the southeastern U.S., including the Nashville MSA, remain “hot” (Forbes, 2018).

• CNBC reports home prices have increased 14 percent over the past

year while rent has only increased about 4 percent nationally and that dramatically-increasing home prices will continue to result in an increase in renting (CNBC, 2018).

• Furthermore, CNBC concludes fast-rising home prices have made

renting a better financial strategy (when combined with investing the savings from renting versus accumulating home equity).

32

Charles Baum Economy 101

The Real Estate Market: Renting

• Bloomberg reports that rents in some metropolitan areas, including

Nashville, are now beginning to drop for the first time in a number of years, partially due to an increase in supply and partly due to many millennials transitioning to home-ownership (Bloomberg, 2018).

• In particular, the average rent in Nashville over the July 2017 to July

2018 period decreased 0.27 percent, after increasing by 2.89 percent from July 2016 to July 2017.

33

Charles Baum Economy 101

The Real Estate Market: Renting

The Nashville rental market is expected to remain strong, after experiencing seven straight years of increasing average rent over the July 2010 to July 2017 period (Tennessean, 2018). Average rent in the Nashville MSA increased:

• 1.38% between 2011 and 2012,
• 2.46% between 2012 and 2013,
• 4.89% between 2013 and 2014,
• 9.24% between 2014 and 2015,
• 4.99% between 2015 and 2016, and
• 2.89% between 2016 and 2017.

34

Charles Baum Economy 101

Tennessee’s 2018-2019 Budget

• Proposed budget is 38.6 Billion.
• No new debt.
• $6 million tax cut from eliminating the Amusement Tax on small gyms

and fitness centers.

• Adding $240 million to rainy-day fund.
• Rainy-Day fund should grow from $875 million to $1.1 billion.
• New funding for education ($25 million for ESAs; $30 million for SROs;

$20 million for rural broadband access), criminal justice reform (monitoring devices), health care (grants for rural doctors; hiring Medicaid fraud investigators), and private charities.

35

Charles Baum Economy 101

State Issues: Development Taxes

• Rutherford County currently has a $1,500 development tax under a

private act.

• The $1,500 development tax has not been increased since 2003.
• With inflation, schools cost more: $51 million in 2010 versus $75

million in 2018.

• Rutherford County seeks to increase its development tax, and the

Rutherford County Commission has requested the ability to do this from the state.

36

Charles Baum Economy 101

State Issues: Development Taxes

• Rutherford County’s private act must be repealed for it to use the

2006 “County Powers Relief Act” (i.e., T.C.A. § 67-4-2901 through § 67-4-2913).

• An option allowed by the County Powers Relief Act would be to levy a

privilege tax of $1.00 per square foot instead (resulting in, for example, a $1,500 tax on a 1,500 square foot house).

• To increase the privilege tax allowed by the County Powers Relief Act,

a certain amount of time must have passed (i.e., four years) and the county must have experienced a certain amount of population growth (i.e., 20% population growth between two consecutive censuses or 9% growth over a four-year period).

• The maximum increase in the privilege tax is 10% (every four years).

37

Charles Baum Economy 101

About the Presenter: Charles Baum

Charles Baum is a professor of economics at Middle Tennessee State University, where he as taught since 1999. Baum received his Ph.D. in economics from the University of North Carolina at Chapel Hill earlier that

• year. He served as chairman of the MTSU Department of Economics and

Finance from 2008-2014. He was elected in November 2018 to represent Tennessee District 37 in the Tennessee House of Representatives. He serves

• n the House’s Finance Committee and Education Committee.

Email: Rep.Charlie.Baum@capitol.tn.gov Phone: (615) 741-6849

38

Charles Baum Economy 101