The presentation from Dr. Joseph Von Nessen given at the Charleston Trident Association of Realtors' annual Residential Market Update. This presentation reviews residential real estate activity in the Charleston, SC MSA in 2016 and offers a look forward to 2017.

1. The Boom is Back!
Stephen Slifer
NumberNomics
www.NumberNomics.com

2. The Highlights
1. Why has GDP growth been so slow?
2. How can we speed up GDP growth?
3. What impact will Trump’s policies have?
4. What is the outlook for GDP, inflaIon in 2017/18?
5. How will all of this affect the Fed?
6. No recession unIl 2020 at the earliest.

3. Why Has GDP Growth Slowed?

4. Economic Speed Limit
Growth in Labor Force + ProducIvity

5. Economic Speed Limit
Labor Force + ProducIvity = Speed Limit
1990’s
1.5% + 2.0% = 3.5%

6. Economic Speed Limit
Labor Force + ProducIvity = Speed Limit
1990’s
1.5% + 2.0% = 3.5%
2016
0.8% + 1.0% = 1.8%

7. -0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
Jan 1990
Jan 1991
Jan 1992
Jan 1993
Jan 1994
Jan 1995
Jan 1996
Jan 1997
Jan 1998
Jan 1999
Jan 2000
Jan 2001
Jan 2002
Jan 2003
Jan 2004
Jan 2005
Jan 2006
Jan 2007
Jan 2008
Jan 2009
Jan 2010
Jan 2011
Jan 2012
Jan 2013
Jan 2014
Jan 2015
Jan 2016
Labor Force
In the 1990’s the labor force grew by about 1.5%.
Today is growing by 0.8%. Why?
The baby boomers are reIring.

8. 0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2000-Q1 2002-Q1 2004-Q1 2006-Q1 2008-Q1 2010-Q1 2012-Q1 2014-Q1 2016-Q1
Nonfarm ProducIvity -- 3 yr.
4
In the 1990’s the producIvity grew by about 2.0%.
Today is barely growing. Not clear why so slow.
Longer-term 1.0%?

9. Economic Speed Limit
Labor Force + ProducIvity = Speed Limit
1990’s
1.5% + 2.0% = 3.5%
2016
0.8% + 1.0% = 1.8%

10. -30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
NonresidenIal Invest.
Year-over-year
NonresidenIal Investment
ProducIvity growth is determined largely by
pace of investment spending.

11. Why Are Firms So Reluctant to Spend?

12. Why Are Firms So Reluctant to Spend?
1. Corporate tax rate is 35%. Rest of the world = 23%.
Firms are shicing their headquarters overseas.

13. Why Are Firms So Reluctant to Spend?
2. Firms are taxed twice on corporate earnings – once
overseas and again in U.S. if earnings repatriated.
Thus, corporate earnings are locked overseas.
EsImates range from $2.5-4.0 trillion.

14. Why Are Firms So Reluctant to Spend?
3. Crushing regulatory burden. Federal register is
more than 80,000 pages.

15. Why Are Firms So Reluctant to Spend?
4. DysfuncIonal health care system.
Not enough young, healthy people have signed up.
Premiums skyrockeIng.
Insurance companies dropping out. Unprofitable.
Businesses more than 50 employees must offer.

16. Why Are Firms So Reluctant to Spend?
5. Unsustainable fiscal policy.
Treasury debt outstanding is far too high.

17. Why Are Firms So Reluctant to Spend?
1. Corporate tax rate is 35%.
2. Unable to repatriate overseas earnings.
3. Crushing regulatory burden.
4. DysfuncIonal health care system.
5. Unsustainable fiscal policy.

18. They All Require AcIon
By Our Policy Makers in Washington
to Solve

19. How Will Trump’s ElecIon
Impact the Economy?

20. Why Are Firms So Reluctant to Spend?
1. Corporate tax rate is 35%. Rest of the world = 23%.
Trump soluIon:
Lower corporate tax rate to 15%.

21. Why Are Firms So Reluctant to Spend?
2. Firms are taxed twice on corporate earnings – once
overseas and again in U.S. if earnings repatriated.
Trump soluIon:
Repatriate profits earned overseas at a 10% rate.
Will bring those funds back to the U.S.

22. Why Are Firms So Reluctant to Spend?
3. Crushing regulatory burden. Federal register is
more than 80,000 pages.
Trump soluIon:
Eliminate all unnecessary, needlessly complex, and
overlapping regulaIons.
If propose a new regulaIon, must eliminate 2
exisIng ones.

23. Why Are Firms So Reluctant to Spend?
4. DysfuncIonal health care system.
Trump soluIon:
Offer health savings accounts.
Offer high deducIble health insurance plans.

24. Why Are Firms So Reluctant to Spend?
5. Unsustainable fiscal policy.
Trump soluIon:
Cut individual and corporate income taxes.
Repatriate overseas earnings.
Grow economy at 4% pace.
Tax revenues will rise sharply. Deficit will shrink.
Simpson/Bowles - 2010, House Repub. -- 2016

25. Economic Speed Limit
Labor Force + ProducIvity = Speed Limit
1990’s
1.5% + 2.0% = 3.5%
2016
0.8% + 1.0% = 1.8%

26. Economic Speed Limit
Labor Force + ProducIvity = Speed Limit
1990’s
1.5% + 2.0% = 3.5%
2020
0.8% + 2.0% = 2.8%

27. What About 2017-2018?

28. ConsumpIon
60%
Government
15.0%
Trade
10.0%
Investment
15%
GDP Components

29. 50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
90.0
95.0
100.0
Jan 2007
Apr 2007
Jul 2007
Oct 2007
Jan 2008
Apr 2008
Jul 2008
Oct 2008
Jan 2009
Apr 2009
Jul 2009
Oct 2009
Jan 2010
Apr 2010
Jul 2010
Oct 2010
Jan 2011
Apr 2011
Jul 2011
Oct 2011
Jan 2012
Apr 2012
Jul 2012
Oct 2012
Jan 2013
Apr 2013
Jul 2013
Oct 2013
Jan 2014
Apr 2014
Jul 2014
Oct 2014
Jan 2015
Apr 2015
Jul 2015
Oct 2015
Jan 2016
Apr 2016
Jul 2016
Oct 2016
Consumer SenIment
Recession
Consumer confidence is at its highest
level since January 2004.

30. 600
800
1000
1200
1400
1600
1800
2000
2200
S&P 500
The stock market is at a record high level.

31. 14.50
15.00
15.50
16.00
16.50
17.00
17.50
18.00
18.50
Financial ObligaIons RaIo
Trend
Consumer debt in relaIon to income is
the lowest it has been since the 1980’s.
We can pick up the pace of spending
if we choose to do so.

32. 3.0
4.0
5.0
6.0
7.0
8.0
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
30-year Mortgage Rate
At 4.2% 30-year mortgage rates are
sIll very low.

33. -9.0%
-7.0%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
-6.0%
-1.0%
4.0%
9.0%
14.0%
Apr 2011
Jun 2011
Aug 2011
Oct 2011
Dec 2011
Feb 2012
Apr 2012
Jun 2012
Aug 2012
Oct 2012
Dec 2012
Feb 2013
Apr 2013
Jun 2013
Aug 2013
Oct 2013
Dec 2013
Feb 2014
Apr 2014
Jun 2014
Aug 2014
Oct 2014
Dec 2014
Feb 2015
Apr 2015
Jun 2015
Aug 2015
Oct 2015
Dec 2015
Feb 2016
Apr 2016
Jun 2016
Aug 2016
Oct 2016
Dec 2016
Consumer Loans (%)
Consumer Loans (L)
Year-over-year (R)
Consumer loans becoming more easily aoainable.
Have risen 8.5% in the past year.

34. -900
-700
-500
-300
-100
100
300
500
Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16
Private Employment
Payroll Employ.
3-mo. average
Employment climbing by 170 thousand per month.
Generates income which enables us to keep
spending.

35. $1.70
$2.20
$2.70
$3.20
$3.70
$4.20
Gasoline Prices
Gasoline prices are expected to
remain low throughout this year
at about $2.25 per gallon.

36. -6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
ConsumpIon spending
Year-over-Year
ConsumpIon Spending (%)
As a result expect consumer spending to be about
2.4% in 2017 and 2018.

37. What About Housing?

38. 3,300
3,800
4,300
4,800
5,300
Jan 2008
Apr 2008
Jul 2008
Oct 2008
Jan 2009
Apr 2009
Jul 2009
Oct 2009
Jan 2010
Apr 2010
Jul 2010
Oct 2010
Jan 2011
Apr 2011
Jul 2011
Oct 2011
Jan 2012
Apr 2012
Jul 2012
Oct 2012
Jan 2013
Apr 2013
Jul 2013
Oct 2013
Jan 2014
Apr 2014
Jul 2014
Oct 2014
Jan 2015
Apr 2015
Jul 2015
Oct 2015
Jan 2016
Apr 2016
Jul 2016
Oct 2016
ExisIng Home Sales
Home sales are the fastest they have
been thus far in the cycle.

39. 3.5
4.5
5.5
6.5
7.5
8.5
9.5
10.5
11.5
12.5
Jan 2007
May 2007
Sep 2007
Jan 2008
May 2008
Sep 2008
Jan 2009
May 2009
Sep 2009
Jan 2010
May 2010
Sep 2010
Jan 2011
May 2011
Sep 2011
Jan 2012
May 2012
Sep 2012
Jan 2013
May 2013
Sep 2013
Jan 2014
May 2014
Sep 2014
Jan 2015
May 2015
Sep 2015
Jan 2016
May 2016
Sep 2016
ExisIng Homes -- Inventory
Home sales would be even faster if it were not
for an extreme shortage of homes for sale.

40. 145.0
155.0
165.0
175.0
185.0
195.0
205.0
215.0
Aug 2009
Nov 2009
Feb 2010
May 2010
Aug 2010
Nov 2010
Feb 2011
May 2011
Aug 2011
Nov 2011
Feb 2012
May 2012
Aug 2012
Nov 2012
Feb 2013
May 2013
Aug 2013
Nov 2013
Feb 2014
May 2014
Aug 2014
Nov 2014
Feb 2015
May 2015
Aug 2015
Nov 2015
Feb 2016
May 2016
Aug 2016
Nov 2016
Housing Affordability -- ExisIng
Even with mortgage rates at 4.2% housing
remains affordable because consumer
income is rising.
Consumers today have 57% more income
than
necessary to purchase a median-priced home.
In 2007 the comparable number was 15%.

41. 4.5
5.5
6.5
7.5
8.5
9.5
10.5
1980:Q1 1985:Q1 1990:Q1 1995:Q1 2000:Q1 2005:Q1 2010:Q1 2015-Q1
Rental Vacancy Rate
There is an acute shortage of rental properIes available.
The vacancy rate for rental units is the lowest it has
been in 30 years!

42. -1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
Jan 2007
Apr 2007
Jul 2007
Oct 2007
Jan 2008
Apr 2008
Jul 2008
Oct 2008
Jan 2009
Apr 2009
Jul 2009
Oct 2009
Jan 2010
Apr 2010
Jul 2010
Oct 2010
Jan 2011
Apr 2011
Jul 2011
Oct 2011
Jan 2012
Apr 2012
Jul 2012
Oct 2012
Jan 2013
Apr 2013
Jul 2013
Oct 2013
Jan 2014
Apr 2014
Jul 2014
Oct 2014
Jan 2015
Apr 2015
Jul 2015
Oct 2015
Jan 2016
Apr 2016
Jul 2016
Oct 2016
Shelter -- Rent
The shortage of available rental properIes
is pushing up rents.

43. 525
725
925
1125
1325
1525
1725
1925
Housing Starts
Trend
Housing Starts (Projected)
Builders are trying to step up the pace of
producIon but cannot find enough skilled workers.
Should conInue to climb to perhaps 1.4 million by the end of
2017.

44. 8.0
10.0
12.0
14.0
16.0
18.0
20.0
Jan 2008
Apr 2008
Jul 2008
Oct 2008
Jan 2009
Apr 2009
Jul 2009
Oct 2009
Jan 2010
Apr 2010
Jul 2010
Oct 2010
Jan 2011
Apr 2011
Jul 2011
Oct 2011
Jan 2012
Apr 2012
Jul 2012
Oct 2012
Jan 2013
Apr 2013
Jul 2013
Oct 2013
Jan 2014
Apr 2014
Jul 2014
Oct 2014
Jan 2015
Apr 2015
Jul 2015
Oct 2015
Jan 2016
Apr 2016
Jul 2016
Oct 2016
Car & Truck Sales
In addiIon to homes, car and truck
sales are steamy. This is a big deal.
Houses and cars are the two biggest Icket
items in the consumer’s budget.

45. ConsumpIon
60%
Government
15.0%
Trade
10.0%
Investment
15%
GDP Components

46. -30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
NonresidenIal Invest.
Year-over-year
NonresidenIal Investment
Investment spending had been cruising along
at about an 8% pace unIl oil prices collapsed.
But such spending dried up at the end of
2014.

47. $25
$35
$45
$55
$65
$75
$85
$95
$105
$115 7/21/2009
10/21/200
1/21/2010
4/21/2010
7/21/2010
10/21/201
1/21/2011
4/21/2011
7/21/2011
10/21/201
1/21/2012
4/21/2012
7/21/2012
10/21/201
1/21/2013
4/21/2013
7/21/2013
10/21/201
1/21/2014
4/21/2014
7/21/2014
10/21/201
1/21/2015
4/21/2015
7/21/2015
10/21/201
1/21/2016
4/21/2016
7/21/2016
10/21/201
Crude Oil Spot Prices
Oil prices dropped from $107 per barrel in
October 2014 to $50 per barrel.

48. 400
600
800
1000
1200
1400
1600
1800
2000
2200
Rig Count
As oil prices dropped, producers shut down
70% of the oil rigs in operaIon, cut spending
on oil drilling equipment, oil exploraIon, and
research.
Big hit on investment spending.
As oil prices have rebounded some drillers
are opening previously closed wells.
Drag on investment has disappeared.

49. -40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
800
1000
1200
1400
1600
1800
2000
2200
2400
2007-Q3
2007-Q4
2008-Q1
2008-Q2
2008-Q3
2008-Q4
2009-Q1
2009-Q2
2009-Q3
2009-Q4
2010-Q1
2010-Q2
2010-Q3
2010-Q4
2011-Q1
2011-Q2
2011-Q3
2011-Q4
2012-Q1
2012-Q2
2012-Q3
2012-Q4
2013-Q1
2013-Q2
2013-Q3
2013-Q4
2014-Q1
2014-Q2
2014-Q3
2014-Q4
2015-Q1
2015-Q2
2015-Q3
2015-Q4
2016-Q1
2016-Q2
2016-Q3
2016-Q4
Corporate Profits w/o IVA and CC
Corporate profits have rebounded
following an oil-related slump.
Should grow at a double-digit pace
In 2017.

50. 8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
2007-Q1
2007-Q2
2007-Q3
2007-Q4
2008-Q1
2008-Q2
2008-Q3
2008-Q4
2009-Q1
2009-Q2
2009-Q3
2009-Q4
2010-Q1
2010-Q2
2010-Q3
2010-Q4
2011-Q1
2011-Q2
2011-Q3
2011-Q4
2012-Q1
2012-Q2
2012-Q3
2012-Q4
2013-Q1
2013-Q2
2013-Q3
2013-Q4
2014-Q1
2014-Q2
2014-Q3
2014-Q4
2015-Q1
2015-Q2
2015-Q3
2015-Q4
2016-Q1
2016-Q2
Corporate Cash / Assets (%)
CorporaIons have plenty of liquid assets
ready to invest.
They need a catalyst.

51. 30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017
ISM Index
The possibility of corporate tax cuts,
repatriaIon of overseas earnings at a
favorable tax rate, and a reducIon in the
regulatory burden has boosted confidence
at manufacturing firms to a 2-year high.
Confidence at service sector firms has
also climbed.

52. -30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
. NonresidenIal Investment
We expect investment spending to pick up
to about 2.6% in 2017 and 5.0% in 2018.

53. ConsumpIon
60%
Government
15.0%
Trade
10.0%
Investment
15%
GDP Components

54. Trump’s Trade Policy is Disturbing
Trump wants to:
Build a wall between U.S. and Mexico.
Impose steep tariffs on some goods from China
Impose duIes on any U.S. firm that goes overseas.
Pull out of or renegoIate NAFTA
Pull the plug on the Trans Pacific Partnership

55. Trump’s Trade Policy is Disturbing
Appears to be disturbed by loss of U.S. jobs going to
China and Mexico.

56. There is a Beoer Way

57. There is a Beoer Way
Keep businesses in the U.S.

58. There is a Beoer Way
Keep businesses in the U.S.
1. Offer them low tax rates.
2. Allow them to repatriate earnings at favorable rate.
3. Offer them a more relaxed regulatory environment

59. -800.000
-700.000
-600.000
-500.000
-400.000
-300.000
-200.000
2007q1
2007q3
2008q1
2008q3
2009q1
2009q3
2010q1
2010q3
2011q1
2011q3
2012q1
2012q3
2013q1
2013q3
2014Q1
2014Q3
2015Q1
2015Q3
2016-Q1
2016-Q3
Net Exports
The trade deficit widened early in 2014 and
2015 and became a big drag on GDP growth.

60. 5
6
7
8
9
10
11
12
13
14
15
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
China -- GDP %
Chinese growth has slowed from a double-digit
pace a couple years ago to 6.8% last year and to
6.3% in 2016.

61. 90.0
95.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
Jan 2001 Apr 2002 Jul 2003 Oct 2004 Jan 2006 Apr 2007 Jul 2008 Oct 2009 Jan 2011 Apr 2012 Jul 2013 Oct 2014 Jan 2016
Trade-weighted Value of the Dollar
As growth in China slowed, global investors
sought dollar denominated investments.
That caused the dollar to rise 22% between
October 2014 and the end of 2015.

62. 90.0
95.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
Jan 2001 Apr 2002 Jul 2003 Oct 2004 Jan 2006 Apr 2007 Jul 2008 Oct 2009 Jan 2011 Apr 2012 Jul 2013 Oct 2014 Jan 2016
Trade-weighted Value of the Dollar
Makes U.S. exports more expensive for
foreigners to buy.
Makes foreign goods cheaper for Americans
to buy.
Slower growth in exports, faster growth in
imports. Trade deficit widens.
.

63. 90.0
95.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
135.0
Jan 2001 Jul 2002 Jan 2004 Jul 2005 Jan 2007 Jul 2008 Jan 2010 Jul 2011 Jan 2013 Jul 2014 Jan 2016 Jul 2017
Trade-weighted Value of the Dollar
Going forward the dollar should strengthen
further as the economy gathers momentum
and U.S. interest rates rise.
But the increase should be about 10% in 2017 vs.
22% in earlier run-up.

64. -800.000
-700.000
-600.000
-500.000
-400.000
-300.000
-200.000
2007q1
2007q3
2008q1
2008q3
2009q1
2009q3
2010q1
2010q3
2011q1
2011q3
2012q1
2012q3
2013q1
2013q3
2014Q1
2014Q3
2015Q1
2015Q3
2016-Q1
2016-Q3
2017-Q1
2017-Q3
2018-Q1
2018-Q3
Net Exports
Net exports subtracted 0.4% from GDP
growth in 2015 and 2016.
Trade should subtract about 0.2% from GDP
growth in 2017 and 2018.

65. ConsumpIon
60%
Government
15.0%
Trade
10.0%
Investment
15%
GDP Components

66. -17.0%
-12.0%
-7.0%
-2.0%
3.0%
8.0%
13.0%
Federal Government
Year-over-year
Federal Government
Federal government spending declined
in 2014-2015 as we wound down the wars in
Iraq & Afghanistan. That slowdown has now
ended.
Government spending (defense) should rise
slightly in the quarters ahead.

67. Government Spending
Transfer
Payments
70%
Interest
6% Nondefense
8%
Defense
16%
But defense spending is only about 16% of all government spending.
The bulk of such spending (70%) is on “enItlements” which should shrink.

68. ConsumpIon
60%
Government
15.0%
Trade
10.0%
Investment
15%
GDP Components

69. 2017-2018 Forecasts
2016 2017 2018
GDP 2.0% 2.3% 2.6%

70. Let’s Talk Jobs

71. -900
-700
-500
-300
-100
100
300
500
Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16
Private Employment
Payroll Employ.
3-mo. average
Employment climbing by 170 thousand per month.

72. 3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
Unemployment Rate
Full Employment
The unemployment rate now stands at 4.7%.
But Yellen says this rate is misleading.
It does not include people who are
“underemployed”.

73. 200
400
600
800
1000
1200
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17
Discouraged Workers
Discouraged workers” are people
who have been searching for a job for
so long that they have given up looking.
Has fallen steadily but sIll a bit higher
than it was at beginning of recession.

74. 4000
5000
6000
7000
8000
9000
10000
Part Time - Economic Reasons
Also includes people who are working
part Ime but would like a full Ime posiIon.
Steadily declining but sIll somewhat higher
than it was at beginning of recession.

75. 3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0
Broad vs. Official Unemploy. Rate
Full Employment
Full Employment
Yellen says we are supposed to be watching
the broad unemployment rate which includes
all these people.
It is at 9.2%; official rate is at 4.7%.

76. 3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0
Broad vs. Official Unemploy. Rate
Full Employment
Full Employment
If full employment for the official rate is 5.0%
then full employment for the broad measure
should be about 9.0%.
The broad measure is at 9.2%.

77. 2017-2018 Forecasts
2016 2017 2018
GDP 2.0% 2.3% 2.6%
Unemploy. Rate 4.7% 4.5% 4.3%

78. Will InflaIon Accelerate?

79. 3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0
Broad vs. Official Unemploy. Rate
Full Employment
Full Employment
With the economy at full employment
firms cannot find enough skilled labor.
Firms must offer higher wages or more
aoracIve benefits.
Wages represent 2/3 of a firm’s total cost.

80. 1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Mar-07
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Nov-14
Mar-15
Jul-15
Nov-15
Mar-16
Jul-16
Nov-16
Hourly Earnings
Acer rising at a 2.0% pace for several years,
earnings are now climbing at a 3.0% pace.
But there is one other thing to consider – producIvity.

81. Unit Labor Costs
CompensaIon – ProducIvity = Unit Labor Costs
2016 2.3% - 0.0% = 2.3%

82. Unit Labor Costs
CompensaIon – ProducIvity = Unit Labor Costs
2016 2.3% - 0.0% = 2.3%
2017 3.5% - 1.0% = 2.5%

83. 60
80
100
120
140
160
180
200
220
CommodiIes -- Energy vs. Nonenergy
Non-energy
Energy
Commodity prices are the remaining 1/3 of a firm’s costs.
Oil prices as well as commodity prices other than oil –
copper, lead, zinc, gold, silver, beef, fish-- fell steadily
for more than a year. Helped push inflaIon lower.
But now all commodity prices have turned upwards.
Downward bias to the inflaIon rate will disappear.

84. -1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
Jan 2007
Apr 2007
Jul 2007
Oct 2007
Jan 2008
Apr 2008
Jul 2008
Oct 2008
Jan 2009
Apr 2009
Jul 2009
Oct 2009
Jan 2010
Apr 2010
Jul 2010
Oct 2010
Jan 2011
Apr 2011
Jul 2011
Oct 2011
Jan 2012
Apr 2012
Jul 2012
Oct 2012
Jan 2013
Apr 2013
Jul 2013
Oct 2013
Jan 2014
Apr 2014
Jul 2014
Oct 2014
Jan 2015
Apr 2015
Jul 2015
Oct 2015
Jan 2016
Apr 2016
Jul 2016
Oct 2016
Shelter -- Rent
The shortage of available housing
is pushing up rents.
They are currently rising at 3.6% pace.
Rents are 1/3 of the enIre CPI.

85. 1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
Jan 2007
Apr 2007
Jul 2007
Oct 2007
Jan 2008
Apr 2008
Jul 2008
Oct 2008
Jan 2009
Apr 2009
Jul 2009
Oct 2009
Jan 2010
Apr 2010
Jul 2010
Oct 2010
Jan 2011
Apr 2011
Jul 2011
Oct 2011
Jan 2012
Apr 2012
Jul 2012
Oct 2012
Jan 2013
Apr 2013
Jul 2013
Oct 2013
Jan 2014
Apr 2014
Jul 2014
Oct 2014
Jan 2015
Apr 2015
Jul 2015
Oct 2015
Jan 2016
Apr 2016
Jul 2016
Oct 2016
Medical
Medical costs have accelerated from 2.5%
a year ago to about 4.0%.

86. -2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
CPI
Ex Food & Energy
CPI -- Projected
InflaIon is poised to accelerate – but not explode,

87. 2017-2018 Forecasts
2016 2017 2018
GDP 2.0% 2.3% 2.6%
Unemploy. Rate 4.7% 4.5% 4.3%
InflaIon (Core CPI) 2.2% 2.7% 2.7%

88. What Is the Fed Going to Do?

89. The Fed Will Raise Rates Slowly

90. 2017-2018 Forecasts
2016 2017 2018
GDP 2.0% 2.3% 2.6%
Unemploy. Rate 4.7% 4.5% 4.3%
InflaIon (Core CPI) 2.2% 2.7% 2.7%
Fed Funds Rate 0.5% 1.3% 2.0%

91. 0
1
2
3
4
5
6
7
8
9
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-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
Jan-18
Jan-19
Jan-20
Fed Funds Rate -- Projected
If the Fed raises rates slowly it will take
unIl mid-2020 for rates to be “neutral”.
How high is “neutral”?
A “neutral rate” should be about 3.0%.

92. -6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Jan-61
Jul-62
Jan-64
Jul-65
Jan-67
Jul-68
Jan-70
Jul-71
Jan-73
Jul-74
Jan-76
Jul-77
Jan-79
Jul-80
Jan-82
Jul-83
Jan-85
Jul-86
Jan-88
Jul-89
Jan-91
Jul-92
Jan-94
Jul-95
Jan-97
Jul-98
Jan-00
Jul-01
Jan-03
Jul-04
Jan-06
Jul-07
Jan-09
Jul-10
Jan-12
Jul-13
Jan-15
Jul-16
Real Funds Rate
Over the past 50 years the funds rate
has averaged 1.0% higher than inflaIon.
Typically regarded as a “neutral” real rate.

93. -6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Jan-61
Jul-62
Jan-64
Jul-65
Jan-67
Jul-68
Jan-70
Jul-71
Jan-73
Jul-74
Jan-76
Jul-77
Jan-79
Jul-80
Jan-82
Jul-83
Jan-85
Jul-86
Jan-88
Jul-89
Jan-91
Jul-92
Jan-94
Jul-95
Jan-97
Jul-98
Jan-00
Jul-01
Jan-03
Jul-04
Jan-06
Jul-07
Jan-09
Jul-10
Jan-12
Jul-13
Jan-15
Jul-16
Real Funds Rate
If a “neutral” real funds rate is 1.0%
and the Fed has an inflaIon target of 2.0%,
then a neutral funds rate should be about 3.0%.

94. 0
1
2
3
4
5
6
7
8
9
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-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
Jan-18
Jan-19
Jan-20
Fed Funds Rate -- Projected
It will take unIl the middle of 2020 for rates
to reach the “neutral” level of 3.0%.

95. 0.0
5.0
10.0
15.0
20.0
Fed Funds Rate
The U.S. economy has never gone
into recession unless the funds rate
has been higher than “neutral”.

96. 0
1
2
3
4
5
6
7
8
9
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-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
Jan-18
Jan-19
Jan-20
Fed Funds Rate -- Projected
If the funds rate does not become “neutral”
unIl mid-2020, the earliest date for a
recession is 2020.

97. The longest expansion on record

98. Long rates will conInue to rise slowly

99. 2017-2018 Forecasts
2016 2017 2018
GDP 2.0% 2.3% 2.6%
Unemploy. Rate 4.7% 4.5% 4.3%
InflaIon (Core CPI) 2.1% 2.7% 2.7%
Fed Funds Rate 0.5% 1.3% 2.0%
10-year Note 2.5% 2.9% 3.4%
30-year Mortgage 4.2% 4.6% 5.1%

100. Important Takeaways
1. Raise Economic Speed Limit – 1.8% to 2.8%
2. Faster growth in wages – 2.3% to 3.5%.
3. Faster growth in our standard of living.
4. InflaIon accelerates slightly – 2.2% to 2.7%.
5. Fed raises rates very slowly -- 0.5% to 1.3%
6. Great environment for stocks. New highs.

101. It Doesn’t Get Much Beoer