June 19, 2018
Happy Father’s Day:
Dedicated to my late father (would’ve been 101 last week),
and fathers stepping up every day.
We will get to the economic and real estate news of last week and what is ahead this week shortly, but first things first – Happy Father’s Day. I thought it both appropriate and of economic value to share a bit on this holiday’s history - and connect the dots economically as to how fathers impacts our economy.   Let’s start with the history.

History: Father’s Day traces its roots back to a Sunday sermon in July 1908 to remember 362 men who had died in a coal mine accident in Monongah, West Virginia. The following year a Spokane, Washington, woman named Sonora Smart Dodd (herself raised by a widower) tried to establish an official equivalent to Mother’s Day for male parents. She succeeded after much grass-roots lobbying, and Washington State became the nation’s first state to celebrate a statewide Father’s Day on June 19, 1910. The holiday in Washington State, though, did not take root nation-wide. It met with resistance from many fronts, including men that “scoffed at the holiday’s sentimental attempts to domesticate manliness with flowers and gift-giving, or whom derided the proliferation of such holidays as a commercial gimmick to sell more products–often paid for by the father himself.” That resistance may have been a bit prophetic when one reflects on how fathers are depicted by Hollywood today and after the NRF tallies retail and restaurant sales for the third Sunday in June. Despite subsequent efforts by Presidents Wilson (1916) and Coolidge (1924) to encourage states to acknowledge a Father’s Day, it was not until 1972 that it became a nationally recognized holiday when signed into law by President Nixon. Father’s Day, though, is not celebrated uniformly across the globe. In Latin American and countries like Spain, Portugal and Italy, Father’s Day is recognized on March 19 th - St. Joseph’s Day. So if you want to double-dip this holiday, take a Spring Break trip to Spain or Italy for St. Pats Day - and then be back in the U.S. during the 3 rd week in June. 

Economics and Trivia of Father’s Day : The obvious economics question here is where does Father’s Day rank among retail sales for the respective holidays? Not surprisingly, it ranks fourth behind #1 Christmas, #2 Valentines Day, #3 Mother’s Day, and #4 Easter (National Retail Federation). With an estimated 2018 spending of $15 billion, Father’s Day pales by comparison to Mother’s Day spending at $23 billion. The good news is Father’s Day spending still out ranks Halloween. The bigger impact on the economy from Fathers’s Day, though, is not the holiday itself or retail spending on it; rather it’s the impact as a predictor of economic success for children and communities. Sadly, nearly 25% of U.S. children are raised in “father-absent” homes (Fatherhood Factor.com); and approximatley half of those 20 million children are living at or below the poverty level. Why is this data economically relevant? The PEW Research Center has studied the devasting results on these children with an absent father through incarceration or separattion and found, like Fatherhood.com, that children raised in a father-absent household are 70% more likely NOT to graduate from high school; and 80% more likely to have social behavior issues and become involved with dugs leading to incarceration. It is a vicious cycle that has a mind-numbing cost to society and our economy. The numbers are so staggering - and the government data so dated – that one wonders why more economic attention is not devoted to the topic. The latest data available is based on 2010 Bureau of Justice surveys. The BJS data shows in excess of 1.3 million adult males incarcerated nation-wide – of which an estimated two-thirds are fathers. I could belabor the point and drone on with statistics, but the key point is that Fathers are important predictors of education and wealth. As we wrestle with skilled labor shortages and a desire to grow economic participation and homeownership, it all starts with both parents being present in a child’s life. The pathway to our next decade of economic prosperity is not paved just with tax cuts, deregulation, and automation.  The pathway also needs more fathers as guideposts along that trail.

Father’s Day Trivia:
·  What year did the U.S. finally make Father’s Day a national holiday? 1972 – vs. Mother’s Day in 1914
·  What state was first to make Father’s Day a state-wide holiday? Washington State
·  What percent of households have the father as the sole means of financial support? In 2017 the figure was 27% - compared with 47% in 1970 (PEW Center for Research).
·  What percent of children are raised in “Father-absent” homes? Approximately 25% (Fatherhood Factor.com).
·  In many parts of Latin America and Europe, Father’s Day is celebrated when? St. Joseph’s Day or March 19 th.
·  What is the annual spend on Father’s Day, and where does it rank among the holidays? According to the National Retail Federation, the 2018 spend from this past weekend was $15 billion - ranking 4 th behind both Easter and Mother’s Day, but still ahead of Halloween. Christmas and Valentines rank #1 and #2, respectively.
·  Name three historical Fatherhood role models? Try reading about such figures as Charlemagne, Darwin, Mark Twain. There are many good and bad examples in history. Among the worst would have to be Constantine the Great, Ivan the Terrible, and Herod the Great. I won’t dare proffer a modern-day best and worst Father’s list. Let’s just conclude that there are many work-in-progress examples. I will share that many of the Fathers I have come to know this past year in the ACRE community - and whom are members of our Corporate Cabinet and Trustees - make the “good role models” list.  
The Bulls & Bears Scoreboard: Last week was anything but a “dog days of summer” week of economic news with: i) a noteworthy 10-Year Treasury auction ii) updated news from the NFIB that revealed their optimism index broke through the record 107-level again reinforcing that small businesses are as optimistic as ever despite looming tariffs in July; iii) a Fed rate hike (second of 2018) with guidance for 2 more rate increases in 2018; iv) strong retail sales data; and v) the ratcheting up of tariffs and a looming trade war. 
Let’s run through the highlights starting with the 10-Year Note auction last Monday. Pay attention to these Treasury auctions in 2H as the bid-to-cover ratio is typically predictive of bumps in the road and the likely shape of the future yield curve. When the Bid-to-Cover ratio falls close to or below 2.5:1, problems can lie ahead as the message is that foreign and investment buyers are not biting at the longer term debt instruments. It hints a bias toward an inverted yield curve (short term rates higher than long-term rates) and often foretells a recession. We began to see this concern earlier in 2018. I called it to your attention and we then observed lots of business media stories on the risk of a potential inversion of the Yield curve if the Fed raised rates too aggressively in advance of infaltion. Last Monday, though, the Bid-to-Coverage ratio climbed to 2.59. It was the highest ratio since January - and even exceeded the average ratio in Q1 2018 (2.51) and average for CY 2017 (2.44). Investor demand was strong last Monday with non-dealers taking down 72 percent of the $22 billion offering. The 2.962 percent high yield last Monday was 3.3 basis points below last month's awarded yield, which was the highest auction rate for the note since January 2014. The reason I ascribe to the turn around and strengthening Bid-to-Cover ratio is a flight to safety with an impending trade war and ratcheting up of tariffs. Remember, the U.S. is still the largest economy in the world and our tariffs will hurt growth in both Europe and throughout Asia. That means trouble for recovering European economies – especially those with leftover debt challenges like Italy.
Small Business:  Next most noteworthy from last week’s economic news was the update on Tuesday June 12 th from the NFIB on Small Business Optimism.  The index rallied back above the historic high-water mark of 107 to 107.8 for the second highest level in the 45-year history of the survey - easily exceeding analysts forecasts and the consensus forecast for a modest rise to 105.2. Leading the monthly index higher was a 10-point increase in expectations of higher real sales and expectations that the economy will improve (37 percent of respondents). And, the rise in optimism among small business owners was broad-based, with 8 of the 10 components of the index showing improvement. Also contributing to the overall gain were plans to increase inventories, strong earnings trends (rising 4 points to a survey record), and plans to make capital outlays. The employment front provided the only decline albeit from a very high level, with current job openings falling 2 points to a net 33 percent. Regardless, employment remains robust and the job market very tight, with a net 18 percent of small business owners planning to increase employment, up 2 points from prior month. A shortage of qualified workers continues to plague small business owners, with concerns about labor quality at the second highest level in the survey's history. While 58 percent of firms reported hiring or trying to hire, 83 percent of those firms reported few or no qualified applicants for the positions they were trying to fill. A result of the qualified labor shortages was higher worker compensation, where reports rose 2 points to a net 35 percent – also a record for the 45-year survey. 
What is the bottom line? The NFIB and small business owners are telegraphing record levels of optimism on several fronts (good for growth and GDP), but they are also warning of the highest inflation pressures in 10 years as owners raise price to offset higher compensation costs. The FED likely digested this news before their rate hike decision Wednesday. It bolsters the case for a tighter monetary policy by the Federal Reserve in 2H 2018. My forecast from Jan remains 4 rate hikes in 2018.
 
FOMC Meeting and Rate Hike: 
And on Wednesday came the FOMC meeting decision with news of more than just the anticipated .025% rate hike. Guidance to expect two more hikes in the second half of 2018 followed in the conference after the statement release. The Fed has four more meetings during 2018. My educated forecast is for rate hikes in September and December continuing the hike … pause … hike … pause pattern. The specific dates to plug into your calendar are:  July 31/August 1, 2018 / September 25-26 / November 7-8 / December 18-19
What were the specific comments in the Fed rate hike statement and clarifiedin the subsequent press conference?
·       “Since the Federal Open Market Committee met in May, the information received indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined.”
·       “Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly.”
·       “On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent.”
·        “The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term.”
·       “Risks to the economic outlook appear roughly balanced.”

Translated, the FOMC is conveying that the economy is growing sufficiently to be weaned off QE to a more nomalized monetary policy and interest rate structure – or QN. The FED does not believe rate hikes will choke off growth - and inflation outside the more volatile food and energy sectors is now at the FED’s objective of 2%. Actually, it is higher than 2% when considering wage pressures and home price increases approaching 7% on an annualized basis (refer to last Colum wth both Case-Shiller and FHFA home price data and trends ). With the economy expanding nicely on a broad basis, the FED is going to raise rates. The increases will be gradual or likely consistent with its recent hike … pause … hike … pause pattern. 

Lastly from week of June 11-15, Retail Sales:
The Fed mentioned household spending/retail sales in its FOMC statement, and the Retail Sales data on Friday validated the observation. Household spending has picked up in response to both job growth and home sales.  Retail sales jumped 0.8 percent in May which was double the revised rate for May and consensus forecast of just 0.4%. And the May retail sales data included upward revisions for April which were intially reported at +0.3% and now stand at a revised +0.4%.  And the Retail Sales data were strong regardless of how one looked at them – in aggregate, ex-autos, or even ex-autos and energy. Someone has forgot to tell the consumer to read the newspaper while at the beach and note that there is a pending Trade War commencing in July with the implementation of new tariffs.
What is ahead the Week of June 18-22?
It’s housing week time again starting Monday with an update to the NAHB’s HMI index of builder sentiment followed by Housing Starts on Tuesday June 19 th and then Existing Home Sales on Wednesday. Then we get the FHFA’s refreshed view on home prices Thursday - and you can head to the beach early on Friday or commence that summer vacation before the July employment reports.  So what is likely to unfold? 

·        Builder optimism: Builders are anxious about both rate hikes and the tariffs with so much dependency on Canadian lumber. I would not be surprised to see some pullback on Builder Optimism. However, the optimism index has been at a historically high range above 70 since last December, with one exception – April following the 10-Year rise above 3% and mortgage rates climbing into 4.75% to 5.0% territory. With a second rate hike completed and home building material prices rising more with implementation of traiffs in July, don’t be alarmed unless the HMI falls into low 60 range.

UPDATE: At time this Column went to final editing and press, the NAHB HMI was released and it did fall from 70 to 68. That was an expected decline and one that is still conducive to new home building activity. It is a long way from the <10 range at the bottom of the Housing Crisis in 2009 – or the 58-63 prior to 2016 Presidential elections. Don’t fall prey to sensational media headlines. Home Building activity is still quite healthy.

·        Housing Starts : It will be more of the same – we need more but the inventory is rising.  The expectations for May period are 1.320 million annualized Starts, compared to 1.287 million in April, and 1.350 million for Permits vs April's 1.352 million. Results in this report have been flat in recent months though the underlying trends are solidly positive with starts up 10.5 percent year-on-year and permits up 7.7 percent. The prior numbers and Consensus outlook are as follows.
·        Existing Home Sales: Like Housing Starts, the results here will be M.O.T.S. (more-of-the-same). It is a bit of a broken record to restate that we have a shortage of housing inventory for sale. The challenge in Existing Home Sales is inventory for sale and not lack of demand or buyers. Lack of Supply is what is holding sales back versus lack of demand. I do believe as home prices rise at another annualized rate of 6%-7% this Spring and Summer, more existing homeowners are going to be tempted to sell – especially Babyboomers that want to downsixe and move into retirement housing.  Existing home sales in April were down 2.5% MOM and are down 1.4% YOY heading into this week’s report for May 2018. Consensus has ben and will remain for Exsting Home Sales to remain range bound between 5.4 million and 5.6 million units. Don’t expect any big surprises here this week. Even with strong home price increases, resales have been stubborn to come onto the market to relieve pressure on a lack of new home inventory. The Existing Home Sales charted against rising mortgage rates picture looks like this:
·        FHFA Home Price Appreciation: I would not be surprised if the new report for April period shows the YOY rate hitting 7.0%. Thursday will report for the April period. Consensus is for +0.4% increase.  The YOY is runing +6.7% and I believe the consensus forecast is low. April was a strong month for sales and I would not be surprised to see April FHFA HPA be in the +0.6 to +0.9% range with a YOY increase close to or exceeding 7.0%. The historic picture going into Thursday looks like the following:
Conclusion:
June has been an incredible month of firsts. Last Column I covered the news that for the first time in history women will be chair for three of the five leading commercial real estate organizations in 2H 2018 and into 2019. Earlier this year AnneMarie DiCola ascended for the second time to Chair CREFC – Commercial Real Estate Finance Council and leading organiztion for CMBS. Later this year Barbara Crane will become the CCIM Institute’s global chair this October in Chicago, and Julie Melander will succeed Joe Nahas as the global chair for the Counselors of Real Estate in Charleston SC - also in October.    While its hard to top that, we did experience two other amazing sports feats this month.

·        Triple Crown horse racing champion for only the 13 th time since the start of the Triple Crown in 1919 with Justify winning the third-leg (Belmont Stakes). It was only the second such occurrence since the last rein of 4 such champion horses 1973-1978 starting with the great Secretariat in 1973 (owned by my late father’s founding partner in Vail ski resort, Bob and Penny Tweety). Winning the Triple Crown is an amazing feat of endurance.

·       And, a back-to-back U.S. Open golf champion on Father’s Day for only the 7 th time in history – a feat that not even Jack Nicklaus, Armold Palmer of Tiger Woods accomplished. Brooks Koepka became the first player in three decades to repeat as US Open Champion Sunday, at Shinnecock Hills, NY. A year after Brooks Koepka won his first U.S. Open at Erin Hills, Koepka kept his composure and repeated the amazing feat. He is the first player since Curtis Strange in 1988-89 to win back-to-back US Open titles.
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