June 19, 2018
Happy Fourth of July – History of the 4 th , Veterans numbers,
and the Economic Metrics.
The History: Why do we celebrate our nation’s independence on the Fourth of July when it was July 2 nd 1776 that the Continental Congress actually voted in favor of our independence? The answer may seem a bit strange to those of us living in a digital age where all is communicated instantaneously via social media.

 In 1776, it took time to draft and publish copies of documents. It was not until July 4 th that the Continental Congress’ approved declaration became the final formal written document known as the Declaration of Independence that could then be publicly shared among the delegates of the original 13 colonies. That is why July 4 th - versus July 2 nd - is regarded as America’s official birthday. However, historical purists, such as John Adams, believed the official recognition of America’s founding should have been July 2 nd. He protested the July 4 th recognition until his death – which ironically occurred on July 4 th. And interestingly enough, two other presidents have also passed away on July 4 th – those being Thomas Jefferson and James Monroe. Aside from this bit of trivia, the 4 th of July holiday is an important recognition of our veterans, and a time to honor all those that have fought for our independence and freedoms. Use this coming week and the 4 th of July holiday to engage with and thank a veteran. If you are wondering where to find one, many veterans are likely a first-responder at one of the celebrations you will be attending this coming week.
Our Veterans: As of the last accounting by the Department of Veterans Affairs (Q3 2017), there are just shy of 20 million living veterans in the U.S. (19,998,800). WW II vets comprise the smallest subset of this population at just 625,000 - and we are losing them at a rate of more than 400 per day. California, Florida and Texas have the largest populations of veterans with numbers exceeding 1.0 million in each of those 3 states.  Alabama’s veteran population is estimated at 350,000.   VA.Gov Statistical Data Q3 2017

Approximately 10 percent of our 20 million living veterans are women - and that number is trending up. What is also trending up is our homeless veterans population - which is estimated to be approximately 150,000, or 50 percent larger than the population of Tuscaloosa, AL. Our failings for veterans is not just limited to healthcare; rather, it extends to housing and education. The Veterans Affairs reports that while there are 2.9 million VA home mortgages in existence, that figure represents slightly less than 15 percent of our veterans’ population.  Why are so few of our living veterans accessing a VA home loan benefit? Our homeownership rate at large in the US rose to 64% in Q4 2017. What is the home-ownership rate among our 20 million veterans? If the number of VA loans is a proxy at just 10% of the veterans population set, there is a problem. I welcome any updated data and insights on the rate of home-ownership among veterans. The data is sparce and/or dated. Send data or updated insights to  kcconway@culverhouse.ua.edu

On the topic of vetrans’ education, only 27 percent of our 20 million veterans have a college degree or higher, according to the National Center for Veterans Analysis and Statistics. Why such a low rate? That too is another pertinent question worthy of some research.  One positive initiative among the real estate industry in this area is the offering of scholarships to veterans by the CCIM Institute to attain the CCIM designation.  If you are a veteran – or know one looking at a career in commercial real estate – contact CCIM.org to obtain more information. Current CCIM president David Wilson, ascending 2019 CCIM Preseident Barbara Crane, and 2020 CCIM President-elect Eddie Blanton are all strong advocates of this intiative and CCIM program for our veterans.  The University of Alabama also has programs to assist with veteran education. Reach out to a veteran and let them know of these opportunities for career education. The largest percentage of our living veterans falls in the working age group of 35-54 (33%). We owe it to them to assist with transition to civilian employment after their years of service.  Thank you CCIM, University of Alabama, and the AL Housing Authority for all that you do for veterans.
 
Economics of the 4 th of July Holiday:  Spending on this year’s 4 th of July holiday is estimated to be just shy of $7.0 billion ($6.9 billion or $200 million less than 2017) - or half what we just spent on Father’s Day.  Why less? Two factors are at play. First is higher gasoline prices and second has to do with time of the week that the holiday falls in 2018. Holidays on, or adjoining the weekend, out perform those in the middle of the week. This year’s 4 th on a Wednesday plays into that impact. Regardless, $7.0 billion is a decent chunk of spending. So where will it all be spent? Primarily on food and travel – primarily gasoline, restaurants and beach, or recreation area hotels. According to the National Retail Fedeartion, 216 million Americans will observe the 4 th of July and partake in:
·    150 million cookouts
(The Climate Change hawks won’t be happy with all this carbon activity)
· Grilling of 150 million hot dogs (beef, turkey and vegetarian); and
· Consumption of $167 million of watermelons (all with seeds) and    $107 million of popsicles.

The 4 th of July is also the number one holiday for the consumption of beer, and Nashville, TN may become the first city to knock off New York for the largest fireworks display on the 4 th of July. I forecast the Nashville, TN finale will spell out “Amazon HQ2 here” as a final pitch to Amazon. I still forecast that Pittsburgh PA and Columbus OH maintain an edge in the Amazon HQ2 competition. However, Amazon is succeeding in turning this economic prize into a PR blunder with a number of “20-Finalist MSAs” bowing out or rethinking the growth implications of an Amazon HQ2 (Denver, Arlington, Maryland, etc.). My advice is “Just Announce It!”

All this fun and consumption equates to spending of $75 per American. 2018 will rank among the top three 4 th of July holidays in terms of retail expenditures. That is not bad considering gasoline prices are up approximately $0.65 per gallon over a year ago.  AAA estimates the average price for a gallon of gasoline will be $2.85 versus $2.20 last 4 th of July – and that nearly 47 million people across the country will travel at least 50 miles. I will be among them with our family traveling 440 miles round-trip for my middle daughter’s orientation at the University of Alabama – Roll Tide, another one off to college and one to go.

Enjoy your 4 th of July and prepare for Q2 earnings and corporate guidance as to the adverse impact of tariffs commencing July 6 th when you return from the Holiday. As good as 1H 2018 was from an economic performance perspective, I fear 2H 2018 will not be as vibrant with tariffs and the ramp up for mid-term elections in November. Consider my practice of exiting the stock market during the July to Thanksgiving period and avoiding 80 percent of the annual down draft and losses each calendar year.  The bad stuff happens August, September and October
The Bulls & Bears Scoreboard: We are half way through 2018 and the Bulls were clearly in command. As we head into 2H 2018, though, the Bears have clearly come out of hibernation awakened by both Fed rate hikes and the impending implementation of tariffs next week. February (the Groundhog Day jobs report and concerns of inflation and a 10-Year Treasury rising to 3.0%) and June (a second Fed rate hike and lack of any pullback from the brink on tariffs) have been the only two months in which the Bears out-scored the Bulls.  Economic momentum is being lost and is coming through in key metrics from Consumer Confidence and Housing GDP.  January, March and May were likely the strongest Bull months in 2018. Headwinds will slow the economy from its 3% level back to 2% level if a tit-for-tat Trade War develops and remains through the mid-term elections.  To put it all in perspective, l et’s run through the key metrics from 2H June starting with the updated housing data from the week of June 18-22 and progressing through last weeks revisions to Consumer Confidence and GDP. The key focus for July will be Q2 corporate earnings and the ripple effect of the president’s tariffs on manufacturing, exports and GDP. Will it spill over to a slowdown in jobs and be the mid-term elections issue usurping immigration and a Supreme Court nominee?  Get ready, 2H 2018 is shaping up to be turbulent.

Housing:  On June 18 th , 20 th and 21 st the market received updated key metrics on housing: i) Starts and Permits on Monday June 18th; ii) Existing Home Sales on June 20th; and iii) the broader FHFA home price appreciation report on Thursday June 21st. Despite all the hand wringing over a dearth of new supply to meet with growing demand, the Starts and Permits data is encouraging. 

Starts & Permits: Building in the housing sector is progressing at a historically high rate. For the May period, Starts increased to 1.35 million units compared with 1.287 million units in April. On a year-over-year basis, Starts are up 20.3 percent; Completions are up 10.4 percent; and Permits have increased 8.0 percent. However, after nearly five years of suppressed activity, supply has to increase further in order for home price appreciation to cool back below a more sustainable rate of 3%-5% versus the present 7.0 percent.  The challenge for builders is constructing homes at the under $300k price point with double-digit materials and labor increases.  The margins are too thin to deliver entry housing.

Existing Home Sales: The hope that Existing Home Sales activity would increase this spring and summer providing some inventory relief is not materializing.  Existing home sales in May fell to 5.43 million annualized units compared with 5.46 million in April. That translates to a Year-over-Year decline of 3% despite the average exisitng home sales price rising 4.9 percent to $264,800. It is my belief that the reason Existing Home Sales are flat to declining is a combination of: i) new home prices rising faster making it a challenge for existing home owners to cycle out into newer product; and ii) a tough credit/financing environment. The hurdles to financing a home today versus pre the 2006-2008 housing crisis are exponentially more challenging. Existing home owners have scratched and dented credit and/or lack the fortitude to endure the new refinancing process. Congratulations bank regulators, the Fed and CFPB on curtailing credit demand for housing. The unintended consequences are another housing affordability crisis and drag on a most important contributor to GDP – housing construction.
Home Price Appreciation: The FHFA home price data bears out the slowing in the rate of home price apreciation. The FHFA house price index edged up only 0.1 percent for April - and that follows a nearly as soft 0.2 percent increase in March. The year-on-year rate, which peaked at 7.4 percent early in the year, is down to 6.4 percent in this latest June report for the April period.   The combination of two Fed rate hikes, rise in mortgage rates to 4.75% from 4.0% a year ago, and anxiety over tariffs spillover into the labor markets are causing prices to cool nationally - but not so much in hot western markets like San Francisco and Seattle or under-supplied MSAs in the Southeast such as Atlanta, Birmingham, Charlotte, Huntsville, Nashville, Raleigh or Tampa. 

Federal Reserve Balance Sheet Unwinding: There was one other metric to note from the week of June 18-22 – and it is going to impact housing via mortgage rates. That metric is the Federal Reserve’s Balance Sheet. As the Fed unwinds from QE to QN (Quantitative Normal), liquidity is drained from the market requiring more mortgage support from the private market place - and not so much from the Fed. With a potential Trade War at hand, and foreign central banks and sovereign wealth funds less inclined to purchase U.S. paper investments with longer term durations, the 10-Year Treasury bond yield and mortgage rates will be forced upward in 2H 2018. As reported on June 22 nd , the Federal Reserve's assets totaled $4.316 trillion in the June 20 week, down $9.0 billion from the prior week and down $144.5 billion from the beginning of balance sheet unwinding in October 2017 . Treasury holdings were $2.378 trillion in the June 20 week and are down $87.3 billion since October. Treasuries are scheduled to decline another $21 billion to $2.357 trillion by the beginning of July. Holdings of mortgage-backed securities remain especially high but did come down in the latest week, to $1.731 trillion which is down $36.5 billion since October.  MBS was the largest factor draining reserves in the latest week, down $8.2 billion. As MBS declines from the Fed’s balance sheet, the market has to be willing and able to replenish the Fed’s position . This expectation could come under pressure in 2H 2018 and mortgage rates rise above and beyond the anticiapted 2 additional rate hikes in 2H 2018.  Anticipate > 5% mortgage rates by Q4 2018.
 
Key Economic and Real Estate Metrics for the Week of June 25-29: 
Housing spilled over to the start of the last full week of June with the New Home Sales report Unlike the annualized decline of 3.0 percent in existing home sales, New home sales remain robust and increased to a higher-than-expected 689,000 annualized rate for May versus a revised 646,000 rate in April. While the median price fell 1.7 percent in the month for a year-on-year decline of 3.3 percent to $313,000 - the price decline is being attributed to both a: i) increase in supply of new homes for sale to 299,000 (up 3,000 homes in May); and ii) a different mix of homes for sale with less luxury units and more homes priced in the $300,000 to <$500,000 segments where the market has the most depth. Months of Supply is still below the equilibrium point of 6 months at 5.2 months nation-wide – and that is down or even tighter from April’s measure of 5.5 months despite more new home supply.   In other words. New Home demand and supply remain robust and where the action is in housing.  Alabams’s housing markets are outperforming these national metrics.  Refer to ACRE’s newest housing construction activity information at New Construction Report - April 2018 produced by my collegaue Stuart Norton. 
Consumer Confidence: The approaching July 6 th implementation of tariffs appears to finally be impacting consumer confidence.  The June measure fell to 126.4 from 128.8 in May.  The decline was centered in the expectations component of the overall index which fell 4.0 points. The consumers' assessment of the June labor market is mixed with those saying jobs are plentiful down 2.1 percentage points to 42.1 percent, offset by those saying jobs are hard-to-get, declining seven-tenths to 14.9 percent. Despite the overall decline in Consumer Confidence, the near-term implications of June’s report remain quite favorable, pointing to a solid month ahead for consumer spending.  However, the longer-term outlook is more likely that the reality of tariffs and what that means for prices and jobs is beginning to erode consumer confidence.  A month from now after some forward guidance from corporations in their Q2 Earnings reports, I suspect we see Consumer Confidence decline much more than 2.4 points in July toward the 120 level. If a Trade War develops over the summer with more tit-for-tat retaliatory behavior, I forecast a larger decline in Consumer Confidence below the 120 level that spills over into the NFRIB Small Business Optimism index and NAHB-HMI home builder index.  The early signals of a turbulent 2H 2018 are being flashed.

Pending Home Sales: The pending home sales index for May fell 0.5 percent. Weakness in the report was concentrated in the South - the biggest housing region and where contract signings for resales have fallen the last two reports. It is not just an inventoy/lack of supply concern any more. Anemic Existing Home Sales, slowing rate of home price appreciation, and declining builder confidence – coupled with the headwinds of more Fed interest rate increases and the impending implementation of tariffs in July - are converging to slowdown housing.

GDP: The third and final estimate of Q1 2018 GDP released last Thursday disappointed. The BEA final revised Q1 2018 GDP down from +2.2% to 2.0%. Why/What happened? The reason for the second consecutive decline in the GDP calculation was a downward revision to Personal Consumption, which declined from an annualized bottom line contribution of 0.71% in the last estimate to 0.60%; additionally there was a drip in private Inventories, which declined from the initial reading of 0.0.13% to a negative -0.01%. The ongoing drop in personal consumption, which was again revised lower from 2.75% in Q4 to just 0.60%, the lowest since Q2 2013, was largely a result of a pronounced drop in spending on autos and various other durable goods. The implementation of tariffs in July will hurt U.S. exports which are accretive to GDP. My forecast is that Q2 GDP will be strong in the 3.0%+ range as the second quarter predated the tariffs that implement in next week at the onset of Q3. However, the real impact of tariffs will appear in Q3 GDP which I expect to fall below 3.0%.  Our 3% Economy may become short-lived. I do not see a recession on the horizon for 2H208, but GDP will have peaked in Q2 when we get the data starting end of July. The forward view is more important and will likely come in the form of guidance in Q2 earnings reports that commence in July. If ever there has been a time to pay attention to guidance in corporate earnings reports, Q2 corporate reports are it. Pay attention the next 4-6 weeks for the preview of what is ahead for 2H 2018 GDP.
What is ahead for the first two weeks of July 2018?
First up it’s jobs week starting with ADP and Challenger jobs reports on Thursday, July 5 th - followed by the Governments “BLS-L=BS” Employment Situation report on Friday, July 6 th. Look for disappointing monthly job creation numbers below 200,000 for June.  Why? We have a skilled labor shortgage and a low unemployment rate below 4%. “ Where are the workers to hire” is the challenge as opposed to a lack of demand for skilled labor. The new JOLTS (Job Openings and Labor Turnover Survey) report on Tuesday, July 10 th will further highlight that we have more openings than workers to fill the available positions.

Then we turn our attention to corporate earnings for Q2 2018 starting with the largest banks on July 13 th (Citi, JPM, WFC, PMC) follwed by the regional banks like Synovus, Regions and Key Bank on July 17 and July 19, respectively. Look for good results from the Alabama-based Synovus and Regions banks due to both improving Efficiency Ratios and growing loan demand with no major credit problems

A few other bellwether corporate earnings reports to pay attention to in July include CSX railroad on July 17 th and Norfolk Southern on July 25 th as a proxy for how things are moving between the factories and ports. Will there be any guidance about Supply-Chain disruption from the tariffs? The railroad company guidance on the impact of tariffs to East-coast ports – especially in VA, FL, GA and SC – will be market impacting. 

Also pay attention to industrial real estate giant Prologis on July 17 th and the domestic auto manufacturers FORD and GM on July 25 th . And then UPS on July 26 th .  Collectively, entities like Prologis, Ford and GM and UPS begin to paint the picture of what to expect in a post July 6 th tariffs world. How tariffs begin to impact manufacturing, port activity, and Supply-Chain movement will be the story in July. 

Conclusion:
1H 2018 is behind us and was as good as the economy gets with tax and deregualtion stimulus . 2H 2018 faces the headwinds of more Fed interest rate hikes and tariffs of the likes we have not experienced in a post WWII era. The President is looking for real change to balance out the trade deficits and curb the theft of intellectual property. He is not going to fold easily - and views trade as an important mid-term election issue necessary to retain support in the “Blue Sates” he won in 2016. Don’t expect a “Read My Lips” reversal on tariffs without real trade reform. Corporate earnings and the forward guidance to be provided by bellwhether entities like Prologis, CSX and Norfolk Southern railroads, domestic auto manufacturers facing punitive and retaliatory tariffs, and the regional banks will set the stage for 2H 2018.  My forecast is a 5-6 month tit-for-tatt tariff led Trade War lasting through the November elections and then some resolution. However, the damage will have been done to our short-lived 3% economy - and we will slip back to a 2% or less GDP economy. The stage could then be set to have a second-wind for the second half of Trump’s first term. Prepare for volatility after you return from summer vacation.  Alabama and southeastern states will be particularly impacted by the tariffs with their AG, auto manufacturing and export industries. Ports from Virginia to Jacksonville, FL and around the Gulf Coast from Tampa to Mobile and Houston are vulnerable to slowing import and export activity. State Port Authories like Mobile and South Carolina may require some short-term budget support from their state legislatures to cushion the impact and not disrupt critical long-term capital improvement programs for deepening and terminal expansions. Now is the time for port authorities, port customers and state legislators to be in dialogue with each other. Think more like a Boy Scout and “Be Prepared!” 
Send any feedback on this week’s Column to KCConway@Culverhouse.ua,edu  
Disclaimer: This report reflects the analysis and opinions of the author(s), but not necessarily those of the faculty and staff of the Culverhouse College of Business or the administrative officials of The University of Alabama.
Advancing Relationships
Sincerely,
KC Conway
ACRE Director of Research & Corporate Engagement
CCIM Chief Economist
kcconway@culverhouse.ua.edu / 678.458.3477