Dr. Mark G. Dotzour
Chief Economist Real Estate Center Texas A&M University dotzour@tamu.edu
Major Themes: China
• Possible overheating in China. Fixed investment is up 27.7% in the first 3 months. The money supply grew at an annual rate of 18.8% in March. Funds are so plentiful that banks are cutting rates as the scramble for new business. • Sales of US brands in China are strong, but most of the products are made in China also. Including Buicks from GM and Head and Shoulders Shampoo. Chinese president Hu said in his trip to the US that 90% of what is made in China is no longer made in the US. “Actually its hard to find real US imports”, Mr. Hu concludes. • Passenger car sales in China rose 57% in April to 341,459 units compared to April, 2005. For the 1Q06, China sold 1.2 million cars, up 75.3% from a year earlier. The passenger car market has entered a new ‘boom period’.
Major Themes: India
• Dell plans to double the number of its employees in India to 20,000 in the next three years. Most of the hiring will be in call centers and possibly a new factory. • Infosys (Indian software outsourcing firm) revenue rose 30% for 1Q06. They added 38 new clients in the past quarter and 15,965 new employees in the past year. It plans to add another 25,000 employees to add capacity • India’s consumers are taking out a record number of mortgages and consumer loans. Credit grew 30% in the past year and could grow another 25% this year. Its stock market is one of the hottest in the world.
Major Themes: America
• Corporate pre-tax profits increased 14.4% in the 4Q05, the strongest growth rate since 1992. • Corporate profits accounted for 11.6% of GDP in 4Q05, the highest since 1966. • Companies have added 2.1 million jobs in the past twelve months. • Record corporate profits and low inventory levels created strong demand. Profit margins and business investment are at record levels. • Capacity utilization rose to 81.9%, the highest since July, 2000. “Getting close to the limits of their capacity.” -Fed
Major Themes: America
• Foreign direct investment in the US (buildings and factories, not stocks and bonds) was $128.63 billion in 2005, up from $106.83 billion in 2004. • Wal-Mart had a 6.8% increase in same store sales in April, beating its forecast. Target predicts it will post a 10% increase.
Major Themes
• Will the flattening yield curve result in a recession in 2007? • Eerie similarities between the 1990’s and the 2000’s.
Yield Curve in the 2000’s
Upward slope to stimulate a recovery
5 4 Percent 3 2 1 0 Fed Funds 2-Yr 5-Yr 10-Yr
June, 2003
Source: Federal Reserve Bank of St. Louis
Yield Curve in the 2000’s
Flat yield curve can lead to recession
5 4 Percent 3 2 1 0 Fed Funds 2-Yr 5-Yr 10-Yr
June 7, 2006
June, 2003
Source: Federal Reserve Bank of St. Louis
Corporate Profits
(With Inventory Valuation Adjustment & Capital Consumption Adjustment)
$1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 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
Billions
Source: Department of Commerce
% Planning to Increase Employment
Small Business Outlook
30 % of Respondents
20
10
0
Jan-98
Jan-99
National Federation of Independent Business
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Corporate Hiring Plans in Next 6 Months
Q2-2006 Q1-2006 Q4-2005 Q3-2005
More Jobs
41%
43%
40%
35%
Less Jobs
20%
15%
19%
24%
Source: Business Roundtable
Manufacturers' New Orders:
Non-defense Capital Goods Excluding Aircraft
$70,000 $60,000 Millions $50,000 $40,000 $30,000
2/1/1992 2/1/1994 2/1/1996 2/1/1998 2/1/2000 2/1/2002 2/1/2004 2/1/2006
Source: Department of Commerce
Jan-06 Jan-05 Jan-04 Jan-03 Jan-02 Jan-01 Jan-00 Jan-99 Jan-98 Jan-97 Jan-96 Jan-95 Jan-94 Jan-93 Jan-92 Jan-91 Jan-90 100 90 80 70 60 Percent Used
Source: Federal Reserve Board
Capacity Utilization: Manufacturing
Personal Consumption Expenditures
10,000 Billions of Dollars 8,500 7,000 5,500 4,000 2,500 1,000
Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05
Personal Consumption Expenditures, SA
Source: Department of Commerce
Debt Service Payments
as a Percent of Disposable Personal Income
15 14 Percent 13 12 11 10 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04
Source: Federal Reserve Board
US Employment: Education and Health Services
Thousands of Workers 17000 15000 13000 11000 9000
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
Source: Bureau of Labor Statistics
US Employment: Financial Activities
9000 Thousands of Workers 8500 8000 7500 7000 6500 6000
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
Source: Bureau of Labor Statistics
US Employment: Government
22000 Thousands of Workers 21000 20000 19000 18000
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
Source: Bureau of Labor Statistics
US Employment: Leisure and Hospitality
13000 Thousands of Workers 12000 11000 10000 9000
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
Source: Bureau of Labor Statistics
US Employment: Retail
16000.0 Thousands of Workers 15000.0 14000.0 13000.0 12000.0
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
Source: Bureau of Labor Statistics
US Employment: Trade, Transportation & Utilities
27000 Thousands of Workers 26000 25000 24000 23000 22000
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
Source: Bureau of Labor Statistics
US Employment: Professional and Business Services
18000 Thousands of Workers 16000 14000 12000 10000
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
Source: Bureau of Labor Statistics
US Employment: Information Services
4000 Thousands of Workers 3500 3000 2500 2000
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
Source: Bureau of Labor Statistics
US Employment: Goods Producing Industries
26000 Thousands of Workers 25000 24000 23000 22000 21000 20000
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
Source: Bureau of Labor Statistics
US Employment: Construction
8000 Thousands of Workers 7000 6000 5000 4000
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
Source: Bureau of Labor Statistics
Real Estate Still Preferred by Investors
• 24% of investors believe that stocks are a better investment than real estate. • 69% of investors believe that real estate is a a better investment than stocks. • “On a relative basis, commercial real estate still appears to be priced appropriately when compared to stocks and bonds.”
– Tom Garbutt, TIAA-CREF managing director
Source: Roper Public Affairs survey for TIAA-CREF in 2005, Published in BALANCE, Winter 2006.
Real Estate Still Preferred by Investors
• 51% of American investors believe that recent corporate scandals are “just the tip of the iceberg.” Same as 2004. • Only 9% of investors say financial services companies in general are “very trustworthy,” down from 14% in 2004. • Only 13% of investors find the largest public accounting firms to be “very trustworthy.”
Source: Roper Public Affairs survey for TIAA-CREF in 2005, Published in BALANCE, Winter 2006.
On The Radar Screen
The Explosion of 1031 Exchanges: A Little History of the Marginal Tax Rates
A History of Marginal Tax Rates
“In the beginning…”
In 1913, 36 states ratified the 16th Amendment to the Constitution. Congress passed a new income tax law. Lowest rate was 1% Highest rate was 7% Less than 1% of the population paid any tax.
Source: US Treasury Department
A History of Marginal Tax Rates
The Great War 1914-18
The 1916 Revenue Act Lowest rate was raised from 1% to 2%. Highest rate was raised from 7% to 15%.
Source: US Treasury Department
A History of Marginal Tax Rates
The Great War 1914-18
The War Revenue Act of 1917 Highest rate was raised from 15% to 67%.
Source: US Treasury Department
A History of Marginal Tax Rates
The Great War 1914-1918 United States
The War Revenue Act of 1918 Highest rate was raised from 67% to 77%. Lowest rate raised from 2% to 6%. Only 5% of the population paid income taxes.
Source: US Treasury Department
A History of Marginal Tax Rates
The Roaring Twenties
Through 1921, the top tax rate was over 70%. 1921-24, the top rate was dropped to 60%. In 1925-28, the top rate was dropped to 25%.
Source: US Treasury Department
A History of Marginal Tax Rates
The Great Depression
The Tax Act of 1932 raised taxes to pay the budget deficits. The Tax Act of 1936 Raised the minimum rate back to 6% Raised the maximum rate to 79%.
Source: US Treasury Department
A History of Marginal Tax Rates
World War II
By the end of the war (1945) the minimum rate rose from 6% to 23% the maximum rate from 79% to 94%.
Number of taxpayers in 1939: 4 million Number of taxpayers in 1945: 43 million
Source: US Treasury Department
A History of Marginal Tax Rates
The Korean War Era
By 1954, the maximum tax rate was still 87% By 1964, the maximum tax rate was 91%
Source: US Treasury Department
A History of Marginal Tax Rates
The Reagan Tax Cuts
The Economic Recovery Tax Act of 1981 featured a 25% reduction in individual tax rates. The top rate was dropped to 50%.
Source: US Treasury Department
A History of Marginal Tax Rates
The Reagan Tax Cuts
The Tax Reform Act of 1986 The top rate was dropped 50% to 28%.
Source: US Treasury Department
A History of Marginal Tax Rates
“Here we go again”
In 1990, The top rate was increased from 28% to 31% In 1993, The top rate was increased from 31% to 39.6%
Source: US Treasury Department
A History of Marginal Tax Rates
“A Temporary Respite ??”
In 2001, The top rate was lowered 39.6% to 33%.
(phased in over a long period of time)
Source: US Treasury Department
Social Security and Medicare: Social Security
• Between now and 2016, SS can easily pay benefits because dedicated revenues are projected to be greater than promised expenditures. • Beginning in 2017, promised expenditures are greater than dedicated revenue. The government will have to draw on other sources to pay for the benefits. • The present value of this deficit is $4 trillion dollars, or $13,000 per person.
Source: Craig S. Hakkio and Elisha J. Wiseman, “Social Security and Medicare: The Impending Fiscal Challenge” Economic Review, Federal Reserve Bank of Kansas City, First Quarter, 2006.
Social Security and Medicare: Medicare
• Over the past 50 years, healthcare costs have risen more than 2 percentage points faster than GDP. • For Medicare A, “hospital insurance” the unfunded liability is $8.6 trillion. • For Medicare B/D, “doctors, outpatient care and prescription drugs” the unfunded liability is $21.1 trillion.
Source: Craig S. Hakkio and Elisha J. Wiseman, “Social Security and Medicare: The Impending Fiscal Challenge” Economic Review, Federal Reserve Bank of Kansas City, First Quarter, 2006.
Social Security and Medicare: Combined effect
• Currently SS and Medicare absorb about one-third of total federal government spending. • By 2030, when the last Baby Boomer retires, 0they will absorb two-thirds of federal government spending. • The rise will be particularly sharp between 2010 and 2030.
Source: Craig S. Hakkio and Elisha J. Wiseman, “Social Security and Medicare: The Impending Fiscal Challenge” Economic Review, Federal Reserve Bank of Kansas City, First Quarter, 2006.
Social Security and Medicare: Combined effect
• To eliminate the SS shortfall, the payroll tax would have to be increased from 12.4% to 14.32%. • To eliminate the Medicare A liability, the payroll tax would have to increase from 2.9% to 5.99%.
Source: Craig S. Hakkio and Elisha J. Wiseman, “Social Security and Medicare: The Impending Fiscal Challenge” Economic Review, Federal Reserve Bank of Kansas City, First Quarter, 2006.
Social Security and Medicare: Combined effect
• The Medicare unfunded liability ($29.9 trillion) is more than five times the Social Security unfunded liability ($5.7 trillion). • The total liability of $35.6 trillion is almost five times the total federal debt of $7.4 trillion.
Source: Craig S. Hakkio and Elisha J. Wiseman, “Social Security and Medicare: The Impending Fiscal Challenge” Economic Review, Federal Reserve Bank of Kansas City, First Quarter, 2006.
Social Security and Medicare: Conclusion
“ ….any viable solution is likely to involve changes in the Social Security and Medicare programs themselves, along with changes in other government spending and revenue.”
Source: Craig S. Hakkio and Elisha J. Wiseman, “Social Security and Medicare: The Impending Fiscal Challenge” Economic Review, Federal Reserve Bank of Kansas City, First Quarter, 2006.
Fat Kings
• King Charles (the fat) 884-888 • King Louis VI (the fat) 1168-1137