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
3
Percent
2
June, 2003
1
0
Funds
2-Yr
5-Yr
10-Yr
Fed
Source: Federal Reserve Bank of St. Louis
Yield Curve in the 2000’s
Flat yield curve can lead to recession
5
June 7, 2006
4
Percent
3
2
June, 2003
1
0
Funds
2-Yr
5-Yr
10-Yr
Fed
Source: Federal Reserve Bank of St. Louis
Corporate Profits
(With Inventory Valuation Adjustment & Capital Consumption Adjustment)
$1,200
$1,100
$1,000
$900
Billions
$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
Source: Department of Commerce
% Planning to Increase Employment
Small Business Outlook
30
% of Respondents
20
10
0
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
National Federation of Independent Business
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
Capacity Utilization:
Jan-02
Jan-01
Manufacturing
Source: Federal Reserve Board
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
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
17000
Thousands of Workers
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