Declining Trade Deficit Indicates Potential for Substantial Gains in GDP Growth

Just a single month after an increase in the US trade deficit inspired at least some degree of pause among economists, the $4-billion decline in the trade gap measuring goods has offered ample reason for economic optimism as well as the likelihood of continued GDP growth. While the January numbers indicated a trade deficit totaling $68.8 billion, data from the month of February indicated the trade gap closed to just $64.8 billion, leading some economic analyses to alter GDP growth prognostications by as much as half of a percentage point.

It is necessary to point out, however, that data taken from the opening months of any new year are subject to substantial variances because of a number of factors that remain somewhat fluid — yet not entirely unpredictable — on a year-to-year basis. The Chinese lunar new year, for example, has a significant influence on the national trade deficit of the US, as the overwhelming majority of China’s businesses shut down for the duration of the holiday. With China, more so than any other country, the US holds its greatest trade deficit, which is why the annual holiday wields so much influence over early year trade deficit metrics.

Even after accounting for the influence of the Chinese lunar new year, the decline in the US trade deficit supports the notion held by many economists regarding the potential for continued economic growth going forward. In fact, the likelihood of continued GDP growth is further bolstered by increases in inventory production, including both retail and wholesale inventories. In the case of both retail and wholesale inventories, the February data shows an increase of 0.4 percent.

With the closing of the trade deficit gap of $4 billion from January to February, along with significant data demonstrating a 0.4 percent increase in inventory production across retail and wholesale inventories, it seems clear that the economy is poised for a period of sustained growth in GDP, even in the face of the recently released data indicating a first-quarter slowdown for the 2017 year.

As most economists — not to mention the officials at the Federal Reserve — have concluded, the first-quarter slowdown in GDP growth does not appear indicative of an emerging economic trend. Instead, a closer look at the data reveals the existence of the necessary preconditions supporting the onset of a sustained period of stable economic growth. Given the fact that service-related trade patterns tend to remain stable and relatively predictive on a month-to-month basis, the $4-billion decline in the trade deficit pertaining only to goods offers ample support for an optimistic economic view for the foreseeable future.

Sharp Upward Trend Continues in Toronto Housing Market

The United States is not the only nation experiencing the return of a booming real estate market: Our neighbors to the north are also in the midst of a similarly extended surge in the marketplace, and it is the renewed strength of the Canadian economy that has powered this upward trend in the average price of existing home sales. Our analyses indicate Toronto is perhaps the most salient example highlighting this continued upward trend, particularly since the city’s average home sale price checked in at $1.2 million in the last month, increasing at a rate representing a 28-year high.

After reviewing each category of housing within Toronto’s city limits — including detached homes, condominiums, and townhouses — it is evident that the sharp increase in the average sale price applies more or less equally to the different types of housing. Even with the 33-percent increase in prices across all housing categories encouraging a 15-percent increase in new listings put on the market, the Toronto housing supply still remains limited by any measure.

Although the sudden increase in equity would lead most economists to predict a continued increase in the number of real estate listings — thereby introducing more balance within the market — our research indicates that many homeowners are still somewhat reluctant to cash in on their gains by putting their home on the market. It is somewhat ironic, but here at Tweed Economics we believe this might be the product of the limited housing supply leaving few good options for potential sellers who wish to remain in the city of Toronto.

City officials are looking at the limited supply of real estate as an issue that may need to be addressed through some sort of government intervention. Throughout our many years working in similar markets in which limited supply issues can be overcome with off-market expertise, intervention by government entities — despite wholly good intentions — all too often leads to unintended consequences that only exacerbate an existing issue or create new, more complex issues.

Various city officials have intimated potential steps they might take to intervene, citing the current lack of affordable housing as a deterrent for first-time homebuyers who wish to live and work in Toronto. This is certainly problematic, and city officials are right to be concerned about a continued lack of supply preventing potential buyers from entering the real estate market. Without first identifying the precipitating factors and understanding how each of these factors influences the market, outside intervention will almost certainly lead to a host of newer and more complicated problems for city officials to handle.

As Toronto city officials discuss the possibility of implementing a vacant-home tax or a foreign-buyers levy in the hopes of reducing real estate speculation, it’s worth pointing out that it is typically ideal to simply allow the market to self-correct. With home values continuing to soar in Toronto, it seems likely that potential sellers in the city will ultimately decide to take advantage of a strong marketplace rather than standing on the sidelines as others reap the rewards of the sharp rise in home equity.

References:

https://www.theglobeandmail.com/real-estate/greater-toronto-area-faces-looming-jump-in-housing-prices-royal-lepage/article33589023

https://www.bloomberg.com/news/articles/2017-04-05/toronto-home-prices-jump-33-in-march-as-market-tightens

 

Trump’s Win Could Spark US Housing Boom, Says Yale Economist

 

Yale economist Robert Shiller believes that Donald Trump’s surprise presidential win could prove a “turning point” that catalyzes a housing boom in the US. The Nobel laureate further argued that the real estate billionaire’s landmark election indicated a shift in American attitudes toward wealth and conspicuous consumption and away from modesty and prudence.

“We used to be more into modest living,” Shiller told CNBC, with regard to the post-Recession years. “Now people are thinking, ‘[that] doesn’t work.’ You know? You have to live big-league and you’re on your way.”

While the data aren’t there to support his cultural observations, Shiller noted that such excitement and attitudes could be seen at Trump rallies and in the stock markets, which rallied following the news of Trump’s win. Indeed, there is an emerging belief that Trump’s administration may usher in preoccupation with big living and materialism, and an aspirational culture reminiscent of the 1980s, according to CNBC.com.

Shiller speculated these attitudinal changes could, in turn, stimulate spending in the housing market: “Trump is a real estate man, right? He talks about living big, living large. I can imagine that this will boost housing demand as well, among at least those who are excited by Trump,” he said to CNBC.

Shiller’s statements came on the same day that the S&P CoreLogic Case-Shiller data came out, revealing that the 20-city property values index had risen 5.1% year-over-year in October 2016, with each of the cities seeing year-on-year gains. The Case-Shiller U.S. National Home Price Index soared by 5.6% during the same month, marking the highest margin of growth since 2014. US home prices have risen steadily due to increasing demand, higher employment, and rising incomes.

“I think we’re at a turning point. The numbers that we’re reporting today are October, before the Trump election, and everything looks different now,” the eponymous Shiller told Bloomberg Television. “There might be a Trump boom coming.”

Shiller also hastened to add that he was merely “wondering” about rather than forecasting a boom, given the uncertainty surrounding Trump’s policy positions.

Trump campaigned successfully on an economic platform of lower taxes, deregulation, and massive investment in infrastructure, all of which spurred palpable excitement among investors. The Dow rose 14.4% in 2016 whereas the S&P grew by 10.8%. That being said, Shiller warned that like Coolidge, Trump may preside over a short-lived era of American prosperity which ends badly. 

References:

https://www.bloomberg.com/news/articles/2016-12-27/trump-win-could-usher-in-boom-for-u-s-housing-says-shiller

http://www.cnbc.com/2016/12/21/americans-want-to-live-big-in-trump-era-nobel-prize-winner-says.html

https://www.bloomberg.com/news/articles/2016-12-27/home-prices-in-20-u-s-cities-increased-5-1-in-october

http://www.newsmax.com/Finance/Economy/robert-shiller-donald-trump-living-large/2016/12/24/id/765471/

Chinese Interest in US CRE Grows Following Trump Election

Trump’s election and pro-growth rhetoric are sparking heightened investment interest in US commercial real estate (CRE), especially as expectations of dollar appreciation grow. Much of the increased demand for dollar-denominated assets, particularly in commercial real estate, has come from China where the yuan has depreciated and economic growth has been slowing.

“(Investors) are seeing the U.S.commercial real estate marketplace as really standing out on a global basis,” said Hessam Nadji, CEO of Marcus and Millichap, to CNBC. “It’s not being overbuilt; it’s been very well balanced in this particular cycle in terms of loans that are not going up, the leverage that was very well balanced. They’re at much lower risk at this stage of recovery than we’ve seen in the past.”

The dollar appreciated considerably following Trump’s win, hitting eight-year highs against the yuan, leading to a flurry of speculation regarding US commercial real estate. Much of the foreign investment in US commercial real estate has been directed toward major metropolitan hubs including New York, Los Angeles (where Chinese developer Greenland has over $1 billion invested), San Francisco, and Chicago.

“The expectation is inflation will go up, job growth will improve and therefore commercial real estate becomes a better hedge in that scenario on a longer-term basis,” Nadji added.

In all, Chinese investment in foreign real estate reached $16.1 billion in the first half of 2016, double the figure from the same period in 2015. Investors at the recently-concluded 3rd Real Estate Globalization and Overseas Investment Summit in Beijing discussed growing opportunities in overseas investment. Henry Zou, founder of the Henry Global Consulting Group, encouraged attendees to prepare for stronger Sino-US ties in 2017,  anticipating that the Bilateral Investment Treaty between the world’s two largest economies would be ratified.

However, such overseas investment may be hampered by a Chinese government wary of massive capital outflows. In late November, China’s National Development and Reform Commission, The People’s Bank of China, The Ministry of Commerce and The State Administration of Foreign Exchange issued a statement warning of higher scrutiny of outbound investment. They are expected to pass stricter controls for foreign investments exceeding $10 billion, and for property deals by state-owned firms exceeding $1 billion, according to the Wall Street Journal.

Such regulatory controls may make it more difficult for Chinese firms to make large-scale real estate deals in the US, and may also hurt in-progress development projects that rely on Chinese capital.

References:

www.forbes.com/sites/elyrazin/2016/12/22/5-commercial-real-estate-trends-to-watch-in-2017/3/#6ce4fcee6b4e

http://www.forbes.com/sites/kenrapoza/2016/12/05/what-chinas-capital-controls-mean-for-global-real-estate/#44ca965041e5

http://therealdeal.com/2016/11/29/big-chinese-investors-rethink-some-us-real-estate-bets/

http://www.wsj.com/articles/chinese-developers-reassess-u-s-projects-1480435760

http://www.cnbc.com/2016/12/22/chinese-money-moving-to-us-commercial-property.html

http://www.globaltimes.cn/content/1022358.shtml

US Drilling Spikes in Wake of OPEC Agreement

US oil and gas producers have ramped up their drilling activity to the highest levels since April 2014, in the wake of last month’s OPEC accord. The total active rig count in the US grew by 27 last week, with active oil rigs increasing by 21, and the active gas rigs growing by 6. The 21-rig jump represents the highest increase in active oil rigs since July 2015. The Permian Basin saw the largest growth in drilling activity, with an 11-rig week over week increase. Following the rig count last Friday, crude oil price experienced an uptick by midday trading, with Brent crude increasing 0.3% to $54.12 and West Texas crude climbing 0.6% to $51.34.

The primary impetus behind the surge is likely the OPEC agreement to curb oil production, the first such accord in eight years which will cut 1.2 million barrels from the organization’s daily output. OPEC was also able to extract commitments from some non-member states to reduce production by as much as 558,000 barrels a day. Accordingly, crude prices rose to a 16-month high earlier this week.

The US made no such commitment to curtail production. As such, whereas domestic oil producers sidelined more than 1,000 rigs last year, the total number of oil and gas rigs in the US spiked from 27 to 624 last week, according to Baker Hughes, Inc. Last week, total US oil output rose by 100,000 barrels to a rate of 8.8 million barrels a day, up from a daily rate of 8.7 million during the week prior. While these numbers are subject to revision and change, the steady rise in the four-week average for US oil output suggests that a sustained resurgence is occurring.

This does not bode well for OPEC, whose plan to mitigate oversupply by cutting production may be undermined by rising prices, which have in turn stirred hundreds of US oil rigs from inactivity and breathed new life into the domestic shale industry. “OPEC’s going to have its hands full with them for a time,” said John Kilduff of Again Capital to CNBC, further noting that US oil activity posed a “major concern” for OPEC. In all, the US has been indifferent to the will of the cartel and is steadily bringing its active oil rig count back to the 2015 count of 524. As it stands, the US had 498 active oil rigs as of last week, or 26 less than last year.

References:
https://www.thestreet.com/story/13912682/1/u-s-oil-and-gas-producers-add-rigs-as-opec-promises-to-cut-production.html

www.cnbc.com/2016/12/14/us-drillers-pumped-like-crazy-last-week-and-thats-a-major-concern-for-opec.html

http://oilprice.com/Energy/Energy-General/The-OPEC-Effect-US-Rig-Count-Spikes-Most-In-31-Months.html

https://www.bloomberg.com/news/articles/2016-12-09/u-s-rig-counts-jump-in-wake-of-opec-s-production-accord-chart