Description: Industry Challenges: Mortgages and Tariffs Lauren Baker, Economist, ITR Economics Rising costs of building materials have become a big challenge for the nation's home building sector. Tariffs and the possibility of an escalating trade war threaten the profitability or homebuilders, the housing recovery and the affordability of homes.

2. THE WORLD IS CHANGING –
ARE YOU PREPARED?
LAUREN SAIDEL-BAKER, CFA
Economist

3. 3-Month Moving Average 3/12 Rate-of-Change
Quarter-over-Quarter Growth Rate
•
• Phase:
• Quarter-over-Quarter:
ITR
Outlook
2018:
2019:
2020:
US Gross Domestic Product
SAAR, Chained 2009 $
12
14
16
18
20
12
14
16
18
20
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21
-9
-6
-3
0
3
6
9
-9
-6
-3
0
3
6
9
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21
US Gross Domestic Product
$18.5 trillion
B
2.9%
2.5%
0.5%
2.7%
Source: BEA
3

4. Raw
Oct-16 1.5
Nov-16 1.5
Dec-16 1.4
Jan-17 1.5
Feb-17 1.3
Mar-17 1.3
Apr-17 1.6
May-17 1.6
Jun-17 1.5
Jul-17 1.7
Aug-17 1.6
Sep-17 1.7
Oct-17 1.7
Nov-17 1.7
Dec-17 1.6
Jan-18 1.7
Feb-18 1.5
Mar-18 1.5
Apr-18 1.9
May-18 1.7
Jun-18 1.7
Jul-18 1.9
Aug-18 1.7
Sep-18 1.7
3/12 Rate-of-Change
=
𝑆𝑒𝑝𝑡𝑒𝑚𝑏𝑒𝑟 2018 3𝑀𝑀𝑇
𝑆𝑒𝑝𝑡𝑒𝑚𝑏𝑒𝑟 2017 3𝑀𝑀𝑇
× 100 − 100
=
5.3
4.8
× 100 − 100 = 10.4%
3MMT
4.4
4.4
4.4
4.2
4.1
4.2
4.5
4.7
4.8
4.8
5.0
5.0
5.1
5.0
5.0
4.8
4.7
4.9
5.1
5.3
5.3
5.3
12MMT
18.0
18.2
18.4
18.6
18.8
19.0
19.2
19.4
19.7
19.8
20.0
20.2
20.3
12/12
26.7%
25.5%
25.2%
22.4%
20.0%
18.3%
15.4%
12.7%
12/12 Rate-of-Change
=
𝑆𝑒𝑝𝑡𝑒𝑚𝑏𝑒𝑟 2018 12𝑀𝑀𝑇
𝑆𝑒𝑝𝑡𝑒𝑚𝑏𝑒𝑟 2017 12𝑀𝑀𝑇
× 100 − 100
=
20.3
18.0
× 100 − 100 = 12.7%
3/12
15.9%
13.6%
13.6%
14.3%
14.6%
16.7%
13.3%
12.8%
10.4%
10.4%
A Powerful Management Tool
Rate-of-Change

5. 50
200
350
500
650
800
-180
-120
-60
0
60
120
'06 '08 '10 '12 '14 '16 '18 '20 '22
MMTR-O-C
12MMT
3/12
12/12
Rate-of-Change – A Management Tool
5

6. Phase A - Recovery
Annual Sales are BELOW
Year-Ago Levels, but the
Rate-of-Decline is SLOWING.
Phase B –
Accelerating
Growth (Best)
Annual Sales are ABOVE
Year-Ago Levels, and are
GROWING at a RAPID
Pace.
Phase C – Slowing
Growth (Caution)
Annual Sales are ABOVE
Year-Ago Levels, BUT the
Rate-of-Growth is
SLOWING
Phase D -
Recession
Annual Sales are BELOW
Year-Ago Levels, and are
DECLINING at a RAPID
Pace.
Business Cycles
6

7. Foreign
New
Orders
Production
Nonresidential
Construction Consumer
Prices
Housing
Medical
Financial
00
Soft Landing
Hard Landing
Wholesale Trade
Retail
Trends 10

8. The US Economy

9. State Gross Domestic Product
Data Sources: BEA; IMF
9

10. US States Renamed by GDP Compared to
Countries with Advanced Economies
Source: IMF

11. Source: Census Bureau
Does not include immigration into the US
1
Net Migration Between States, July 2016-July 2017
+160,854-190,508

12. State Population Growth Rates
Source: Census Bureau
Percent Change from Population Estimates 2010 to 2017
12

13. Tariffs and other
fun things

14. US Trade in Goods with World (Exports) are an
important part of economic health
Sources: Census Bureau, FRED
12/12 Rates-of-Change
4
8.1%
-4.8%
-15
-10
-5
0
5
10
15
20-30
-20
-10
0
10
20
30
40
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
Exchange RateExports
Exports Exchange Rate
3/12: 11.2% C

15. Ease of Doing Business
Source: The World Bank
NZ 1
Singapore 2
Denmark 3
Korea 4
Hong Kong 5
US 6
UK 8
Germany21
Japan 35
Russia 36
China 75
India 100
Brazil 125

16. US Imports of Steel Products From China (Volume)
Source: CEIC/US Census Bureau
Millions of Metric Tons
1
6
-31.8%
-14.5%
0.7
0
3
6
9
12
15
18
21
-300
-200
-100
0
100
200
300
400
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
MMTR-O-C
3/12
12/12
3MMT
12MMT
It’s working
Flat to mildly negative 12MMA
since August 2016
Lowest in almost 8 years
More decline ahead
All steel imports
6.4% YOY for Q2

17. US Primary Metals Average Hourly Wage
Source: BLS
Dollars per Hour
2.2%
1.4%
26.7
20
25
30
35
-20
-10
0
10
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
MMAR-O-C
12MMA
3MMA
12/12
3/12
7
Ongoing upward pressure on wages
Includes steel mills, steel products produced from purchased steel,
other nonferrous metal production, and foundries

18. Commodity Prices
Source: WSJ, London Metal Exchange, Steel Market Update
3/12 Rates-of-Change
18
-15.8% Zinc
0.9% Alum
20.6% Steel
-7.3% Copper
-60
-30
0
30
60
90
120
150
-60
-30
0
30
60
90
120
150
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
All Others Copper & Steel

19. $60 Billion of Goods Subject to Tariffs Aimed at China
Source: US Census Bureau
Exports from the US to China stand at $130.1bn, or 0.7% of US GDP.
Exports from China to the US are a record high $436.9bn, or 3.8% of China GDP.
The US is China’s Biggest Customer
Slowing exports to the US will hurt their economy more than ours
but it is not risk free.
Potential US ConsequencesInflation
Downstream
Production
Job & Profit
Loss in Export
Supply Chain
(to China)
Industry Exports US $ bn
Aerospace $ 16.3
Soybeans $ 12.4
Motor Vehicles $ 10.0
Semiconductors $ 6.9
Oil & Gas $ 6.9
Waste & Scrap $ 5.6
Ctrl Instruments $ 5.6
Synthetic Rubbers $ 3.9
Pharmaceuticals $ 3.4
Ind’l Machines $ 3.3
$200

20. US Top Goods Export by State
Source: US Census Bureau
Based on annual data, 2017

21. Manufacturing Increasingly Takes Place in Asia
Source: Harvard Business Review
Percent Share of Global Manufacturing, by Value Added
40%
34 33 30
26 24
24%
28 29 33 41 45
24% 25 26 25
21 20
6% 7 6 6 6 5
6% 6 6 6 6 6
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 1995 2000 2005 2010 2015
Rest of World
Latin America
North America
South/East Asia
Europe

22. Leveling the Manufacturing Field Around the Globe
Years of 15% to 20% per annum labor cost increases
in China without corresponding productivity increases
Cheap and readily available energy in North America
Aggressive reengineering and automation
The China Advantage?
2016: Only 1 Percent Point Difference
2004: 15 Percentage Point Advantage

23. Leveling the Manufacturing Field Around the Globe
Years of 15% to 20% per annum labor cost increases
in China without corresponding productivity increases
Cheap and readily available energy in North America
The China Advantage?
2016: Only 1 Percentage Point Difference
2004: 15 Percentage Point AdvantageMoving Forward
Robotics Protectionism Politics & Economic Stability

24. Top of the List
Sources: trademap.org; International Trade Center
Out of the more than
6,000 Chinese
products on the
latest U.S. tariff list,
the top 20
accounted for over
$75 billion in U.S.
imports last year-or
more than a third of
the total import
value of all targeted
items.
Note: The descriptions of items on the tariff list have been simplified, and the corresponding values don’t include all items within those descriptions.

25. Brands That Have or Will Be Increasing Prices Due to Tariffs
Source: Business Insider, “These popular brands say Trump's tariffs will force them to raise prices”
5
TOYOTA
WHIRLPOOL
COCA-COLA
WINNEBAGO
MILLER COORS
SAMUEL ADAMS
CAMPBELL SOUP
LG ELECTRONICS
GENERAL MOTORS
KLEENEX & HUGGIES
POLARIS INDUSTRIES
NEWELL BRANDS
(Crock-pot, Rubbermaid, Yankee Candle, & Sharpie)
“I can't just go to the shareholders and say, 'You're
just going to have to accept my profit's going to be
$40 million less. It doesn't work that way…”
- Gavin Hattersley, CEO MillerCoors

26. US Truck Transportation of Freight Producer Price Index
Source: BLS
Jan 2009 = 100
7.7%
5.6%
119.8
95
105
115
125
135
145
-15
-10
-5
0
5
10
'10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
3/12
12/12
3MMA
12MMA

27. US Consumer Price Index to US Producer Price Index
Source: BLS
1/12 Rate-of-Change
27
2.7%
3.6%
-10
-5
0
5
10
-10
-5
0
5
10
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
Consumer Price
Producer Price

28. US Construction Materials Producer Price Index
Source: Bureau of Labor Statistics
1/12 Rate-of-Change
28
8.0%
-15
-10
-5
0
5
10
15
-15
-10
-5
0
5
10
15
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
Constr. Mat.

29. US Lumber Producer Price Index
Source: Bureau of Labor Statistics
1/12 Rate-of-Change
29
4.3%
-30
-20
-10
0
10
20
30
-30
-20
-10
0
10
20
30
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
Lumber
Lumber

30. US Construction Materials and Supplies New Orders
Source: US Census Bureau
Trillions of $
30
6.9%
7.0%
0.610
0.2
0.6
1.0
1.4
1.8
-45
-30
-15
0
15
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
MMTR-O-C
3/12
12/12
3MMT
12MMT

31. Retail Sales &
Housing

32. US Private Sector Employment
Source: BLS
Annual Data Trend
2
88
98
108
118
128
85
95
105
115
125
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
Employment Mils of Jobs
Private Sector Employment Growth
Job Openings
Involuntary Part Time Employment
Quit Rate – Rising
10.6% B
1.8% B
-11.4% D

33. US Retail Sales Excluding Gas Stations
Source: Census Bureau
Trillions of Dollars
3
5.2%
4.8%
5.463
2
3
4
5
6
7
8
-20
-15
-10
-5
0
5
10
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
MMTR-O-C
3/12
12/12
3MMT
12MMT

34. Delinquency Rates on Consumer Loans
4
Source: FRB
3MMA Data Trends
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Consumer Loan Delinquency Rate
Consumer Credit Card Delinquency Rate
Percentage Percentage
10 Year Average

35. Servicing the Debt is What Matters
Source: FRBNY
Percent
4.2%
10.9%
1.1%
0
3
6
9
12
15
0
3
6
9
12
15
'04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
Auto
Student
Mortgage 10 Year Average
10 Year Average
10 Year Average
Consumer Delinquency Rates (over 90 days delinquent)

36. US Housing Starts
Source: Census Bureau
Millions of Units
6
As seen in
Dec ‘09
May ‘11
Mar ‘13
1.5%
5.5%
1.259
0.2
1.0
1.9
2.7
3.5
4.4
5.2
-80
-60
-40
-20
0
20
40
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
MMTR-O-C
3/12
12/12
3MMT
12MMT

37. Single-Family Housing Unit Building Permits
Source: US Census Bureau

38. Source: Census Bureau
Millions of Units
8
As seen in
General Rise with No Great Recession Cliff for Now
US Single Unit Housing Starts
1.2%
6.6%
0.885
0
1
2
3
4
5
6
-100
-75
-50
-25
0
25
50
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
MMTR-O-C
3/12
12/12
3MMT
12MMT

39. US Housing Starts to Housing Affordability Index
Sources: US Census Bureau, National Association of Realtors
12/12 Rates-of-Change
39
5.5%
-6.0%
-30
-20
-10
0
10
20
30
-45
-30
-15
0
15
30
45
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
AffordabilityHousing
Housing
Affordability

40. US Multi Unit Housing Starts
Source: Census Bureau
Thousands of Units
0
As seen in
2.3%
3.1%
374
50
250
450
650
850
1050
-150
-100
-50
0
50
100
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
MMTR-O-C
12/123/12
12MMT3MMT

41. US Multi Unit Housing Starts to
US Apartment Vacancy Rate (Inverted)
Source: Census Bureau
Rates-of-Change
-45
-30
-15
0
15
30
45-90
-60
-30
0
30
60
90
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Housing Starts
Vacancy Rate
Vacancy RateHousing Starts
1

42. Mortgage Rates to Federal Funds
Sources: Federal Reserve Board, WSJ
Raw Data
2
-2
2
6
10
14
18
22
-2
2
6
10
14
18
22
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Mortgage Rates
Federal Funds

43. 0
2
4
6
8
10
12
14
16
'82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Yield on 10 Year Treasury NoteSource: FRB
?
Protectionism & Future US Bond Yields

44. FOMC Member Interest Rate Projections
Source: FRB
0
1
2
3
4
5
6
2018 2019 2020 2021 Longer Run
Fed Open Market Committee
September 2018

45. Phase A - Recovery
Annual Sales are BELOW
Year-Ago Levels, but the
Rate-of-Decline is SLOWING.
Phase B –
Accelerating
Growth (Best)
Annual Sales are ABOVE
Year-Ago Levels, and are
GROWING at a RAPID
Pace.
Phase C – Slowing
Growth (Caution)
Annual Sales are ABOVE
Year-Ago Levels, BUT the
Rate-of-Growth is
SLOWING
Phase D -
Recession
Annual Sales are BELOW
Year-Ago Levels, and are
DECLINING at a RAPID
Pace.
Business Cycles
2018 2019

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