2017 Economic Forecast – What is the Direction of the US Economy?


(uplifting music) – There are a lot of people in this world who believe there is a new paradigm shift in the economic environment
in the United States, that we are permanently
stuck in an environment where the best we can expect is two or 2.5% growth in our economy each year that historically the economy has grown around 3.5% on average since World War II, man, that
we’re now stuck at something close to half that long-term
historical growth rate. Now the slide you see up here is real GDP on a quarterly basis
going back three years. You can see a great deal of
volatility on a quarterly basis with the chart going like this. So really, the better result is to look at what’s going on in the past,
is to go back and look at it on a year-over-year basis. And here you can see, if you
look at the numbers annually instead of quarterly, you can
see what I’m talking about. We’re talking about an economy
growing just a little bit over 2% on average and
for the last six years. And as I said, many people
think that’s the new normal. Whatever normal is, this is the best we’re gonna be able to do. I wholeheartedly disagree with that, and we’re gonna go
through today the reasons why I don’t believe we are
in a new normal environment that is well below anything
we’ve experienced in the past. I did this last year for those
of you who will remember it, but I went back and put up on
the slide what is real GDP? What are the components? Well, it’s a dollar measure of the output, or consumption actually,
in the United States for a given period of time. And there are three spending
components that are measured. First of all, personal
consumption expenditures, which are consumers; secondly,
capital expenditures, which include business fixed investment and residential construction; and the third element is
government, both state and local, as well as federal. So the real GDP is the total of those three spending
categories in the United States. Now for those of you who can see this, and we purposely made it
very dark so you can’t, which is how economists stay in businesses is keeping people in the dark, thank you,
(audience laughing) that’s a problem in the world. 99% of economists make
the rest of us look bad. So I mean, it’s really difficult sometimes to keep up with the profession. And for those of you
who don’t believe that, I’ll give you one more statistic. 42.7% of all statistics
cited by economists are made up on the spot. So you’ll have to always take
that with a grain of salt. Tough crowd here today. What I wanna point out
here is of those three spending categories, 70% of
real GDP is consumer spending. So the economy, US economy,
is not going to grow at a faster pace than it has
over the last five or six years unless consumer spending
grows at a much faster pace than it has over the last few years. The other 30% of the real GDP, capital spending and government spending, can grow but not generate
sufficient growth because of the relative
size of the economy to get the overall economy to grow. So we’re back to what
are consumers gonna do? What kind of expectations can
we have for consumer spending? So if we look at the
year-over-year real GDP numbers, what I’ve put up here
are the last five years of personal consumption expenditures, that 70% of the economy that represents consumer final demand. And as you can see for
four of those years, we saw very low levels
of personal consumption expenditure growth, the highest
being the 2.7% rate in 2014. And it picked up in 2015 to 3.2%. So we’ve seen an increase
in consumer spending over the last two years
from what it had been coming out of the Great
Recession in ’08 and ’09. So we’re starting to see
consumers come out of the woodwork and they’re beginning
to spend money on things that they had delayed purchases of, had decided not to buy
things, concerns about jobs and whether they were
gonna keep their jobs or if they lost it, was there
another job to replace it. It’s certainly the biggest
reason why consumers had been so conservative coming out of what was a very deep quick
recession in ’08 and ’09. The magnitude of that recession was so big that it certainly impacted
consumers’ attitudes and their confidence levels. And therefore, probably
most of you in this room either know somebody or
had somebody in your family who lost a house in
the ’08, ’09 recession. That kind of an event
certainly has an impact on consumer attitudes, and
it’s taken five or six years to get past that where
consumers are now beginning to feel more comfortable. In fact if you look at the
growth in incomes that we’ve had, which have been very
modest, you’ll see that what consumers have
done as jobs have grown and incomes have risen, is
use that incremental growth in their incomes to do two
things: they’ve paid down debt, they deleverage their own balance sheets and they’ve increased their savings. We’re running a savings rate
in this country of over 5%. And for probably 40
years after World War II, we ran negative savings
rates where people spent more money than their incomes were. They borrowed it, which
was a great business or a great time to be
in the banking business. But when consumers are saving more money and the increase in their
incomes are going toward increasing their liquidity
and they’re paying down debt by refinancing mortgages at lower rates, taking 15-year mortgages
than 30-year mortgages, pay it off faster, that’s
what consumers were doing. It’s only been in the last year and a half that we’ve begun to see
consumers increase their spending at something closer to the
historical average increase that we would expect to see
coming out of the recession. In fact, if you compare the two, the grey line being personal
consumption expenditure growth and the yellow line being real GDP growth, and I extended this out
to the first half of 2016, you’ll see that was in 2015
and the first half of 2016 where personal consumption
expenditure growth was much faster than
overall real GDP growth. So we’re starting to see the
consumers be willing to spend and buy and consume at a faster pace than any time since
the ’08, ’09 recession. Now the fear is this isn’t gonna continue. The concern that people
have is this is a bubble, that this is an
unsustainable level of growth and that consumers are
gonna hunker down again and slow their spending
and we’re not gonna get the boost to overall economic
growth from consumer spending. And we’re gonna talk about
that a little bit more as we go forward. The reasons why people
feel this is a temporary unsustainable situation. But first I wanna tell
you why I don’t think it is temporary and I think
it is going to continue at least through the end of 2017. We’ll have our forecasts up
here in a minute for 2017, but as you get older, the one nice thing about getting to be my age
is the definition of infinity gets much shorter. And therefore, long-term forecasts become less important to me. So we’re gonna focus a
little bit mostly on 2017 as we go forward. Well, the first reason of
course is consumer confidence. We see Consumer Confidence Surveys reflect nearly record levels. Now we got Consumer Confidence
released this last Tuesday for the month of September. Actually it’s for the month of October, and we saw it back off a little bit from 103.5 to about 98. But even at 98 on the
index, which is reflected in this slide, it’s still
at near record levels in terms of consumer confidence. This is required. We have to see consumer
confidence at high level if we’re going to expect
them to grow spending and consumption at faster
rates going forward than they have in the past. Now there’s lots of reasons
why consumer confidence is as high as it is, the most
important of which is jobs. The smoother line is the unemployment rate and the jagged line is monthly
non-farm payroll number. When jobs grow, consumers’
confidence rises and that is going to lead
to faster spending growth. So as long as we have positive job growth, we’re gonna continue to see higher levels of consumer confidence. Even a month like September,
which is the last month we have the data for,
non-farm payroll growth was only reported at
156,000 for the month. I say only because in the prior months, two months prior to that,
we saw well over 200,000 average non-farm payroll
growth each month. So the September report in early October was characterized as
a disappointing number or a weaker number. The reality is that we need, given the demographics in this country, something around 125 to
130,000 job growth a month to drive the unemployment rate down. Unemployment rate will come down as long as we’re growing jobs
at something a little bit, at least 125 to 130,000 a month. So 156,000, which is the
number that was reported, is certainly high enough to drive the unemployment rate down. And we are approaching
certainly what most people would consider to be
nearly full employment. Now there is something
called the JOLTS Index. Not many people are aware of it. Stands for Job Openings
and Labor Transfer Survey. And basically, what the
government is doing is surveying companies and totaling up the number of unfilled job postings these companies have across the country. We stand right now at
5.4 million jobs posted that are not filled. So in that environment,
we would certainly expect, and that’s a near record high. The only number that was higher than that was actually the 5.7
million that it stood at, at the end of August. So we’re at near record
levels on that number. As long as we have that
many unfilled job openings in this country, jobs are
gonna continue to grow. And I know most of us, as we drive around, we know and note the
number of now hiring signs, taking application signs. Many of you running a business. And I’ve been told by many business people that one of the biggest problems they have is finding qualified workers. They can’t attract the qualified workers. They’re not in the marketplace. Even in a market like
Finley, which is growing by leaps and bounds and has all kinds of great economic news
about your local market, the biggest issue in Finley
is attracting businesses here because you can’t demonstrate
that you have the workforce available for them for the
jobs they’d have to offer if they were to move their
business operations to Finley. That’s gonna be a problem. In fact it’s a problem in Northwest Ohio. Anybody here read the Toledo Blade? Good decision. Oh at least a couple of you do, all right. It is one of America’s newspapers. (audience laughing) For those of you who remember, it says, one of America’s
great newspapers at the top, I just refer to it as one
of America’s newspapers. Even they had an article
a couple weeks ago about the shortage of
skilled trade people, that local contractors
were turning down jobs, building opportunities,
because they couldn’t find carpenters and bricklayers and everything. And the extent to which
those companies are going to try to train bricklayers
and carpenters and electricians in order to fill those
jobs so they could actually bid on the projects that
were being put on for bid. And the problem of the contractor
said is we can’t even get inexperienced people,
who have no experience in the building trades
to start working for us. We can’t attract them. So the issue is we have
a very tight labor market and what’s gonna happen
as a result of that? Congress has tried several
times in the past 30 or 40 years to repeal the law of supply and demand. They’ve been an unable to do so yet, although they’re working on it. We’re gonna talk about
politics in a little bit. Oh boy, I know you’re all
looking forward to that. The reality is that we
have a labor shortage in this country. And how bad would it be if we didn’t have 13 or 14 illegal million, oh
you can’t say that, excuse me. Undocumented workers. I have to get the right
politically correct term. Can’t call them illegal
aliens, that’s not proper. Fortunately I’m not running for office so I get to call them illegal aliens. What would we be if we didn’t
have those people here, and how tight would our labor markets be? Well, when we get this
tight in the labor market, what are companies gonna
have to do in order to retain and attract the employees they need? They’re gonna have to raise wages. They’re gonna raid other companies for the workers they need, and that’s what creates income growth. So we think incomes are gonna
grow at a much faster pace over the next year and
a half than they have in the past five or six years, which is the amount of
time it took us to absorb the unemployed that were coming
back into the labor force. So we expect the
unemployment rate to go down, and we expect wages and
personal income to rise at a much faster pace. That contributes, is the
single biggest factor in that environment, single biggest factor affecting consumer confidence. So with a high level of
consumer confidence already and the outlook is it’s not gonna go down, it’s probably gonna go up
over the next year and a half, we think consumer final demand
is gonna continue to grow. We see it in a number of areas. For example, car sales. We’re running about 17.5
million cars sold a year in this country on average. We’ve plateaued up at that
level, but that’s a very high level of car sales. At the depth of the recession, back in actually 2010, we
had about 240 million cars registered in the United States. And the average age of
those 240 million cars was a little over 12 years. Today, we have 243 million cars registered in the United States, and the average age of that fleet is a little over nine years. So we’ve dropped from a little over 12 to a little over nine. But nine years, and I
know cars last longer, they’re better quality,
there’s lots of reasons why a nine-year-old car is still a viable alternative for people, but the reality is the new cars, particularly
the new technologies that are being added to them,
is attractive to consumers. And I think people do wanna buy a car. So with consumer confidence
high, jobs growing, I think car sales have not
peaked and are headed south. I think if we can maintain
16.5 to 17 million annually car sales a
year, we’re gonna have a very strong auto industry. And if there’s any car
dealers in the audience, it ought to be pretty
good years going forward, at least over the next couple. We also know the housing
sector continues to improve. The biggest barrier frankly
to existing home sales, which is the chart I’ve put up here, is the lack of inventory
in a lot of price ranges. There’s a lot of markets in this country where there’s very few homes in certain price ranges on the market. And that’s the barrier to
faster existing home sales. Now with a lack of
inventory of those homes, what do we see consumers do? They decide to go out and buy a new house. So we see starts and permits increasing, continued to increase, while the existing home sales level increases
had been much more modest. So we expect to continue to see how is it the housing construction market will be very strong going forward. We don’t see this slowing down at least over the next year and a half, assuming they could find the
workers they need to do that. The good news in all of
this is that normally one of the things that
result from this kind of economic environment
is rising inflation. Obviously, if you’re gonna
grow at a faster pace and you’ve got labor costs
rising because you have to raise wages, you expect
companies to raise prices and see inflation increase. The reality is we have not seen any significant increase in inflation in the last seven years. In fact, the Fed has said
that they have a goal of getting inflation up to 2%. They believe a 2% inflation
rate is a reflection of a healthy economy. And it also is enough cushion that if the deflationary
pressures in Europe and Asia were to be exported
into the United States, we have a real problem. So they want to get inflation up to 2% to give them a cushion
against the risk of deflation coming from those other
markets into the United States. Well, if you look at the CPI index, which is what we have
up here, the core rate, excluding food and energy,
and they do that because of the volatility of
food and energy prices and the fact that those prices move for non-economic reasons,
things like weather or a pipeline that shuts
down or refinery problems, supply issues, that kind of thing; or the political decisions
made in the Mideast about how much output they’re gonna do. So they take food and energy out of that and look at core, what
they call core inflation. The core rate of the
CPI is much more stable than is the total CPI on a monthly basis. On a trailing 12-month basis,
the core rate of the CPI is up 2.2%. So it’s up more than the Fed’s target. But the Fed doesn’t use
the core rate for the CPI as their primary measure of inflation. They use what’s called the PCE core index, which is Personal Consumption
Expenditure core price index. That index is up 1.7%
over the last 12 months. So we are very close
to the inflation target the Fed has set, whether
we use the PCE core index or the Consumer Price Core index, and we’re approaching, if not
at already, full employment. The Fed has two mandates that have been given to them by Congress. That was in the days when Congress could actually make a
decision and do something, which means it was a lot of years ago, but the two mandates the Fed
told to manage monetary policy to accomplish is maintain full employment, maintain price stability. The Fed is at that point. And therefore, the Fed believes, and I think we’ll see this,
that they need to back away from the stimulative
monetary policy position of the last eight years by raising short-term interest rates
and get interest rates to what they call a more normal level. And this is where we
get into a lot of debate about what is the new
normal for interest rates. But we expect the Fed will raise 25 basis points in December. The Fed’s own forecast says they’re gonna raise rates twice in 2017. I think frankly it’s gonna be three times because I think our economic
forecast is stronger than the Fed’s economic forecast. So I think we’re gonna see
further rate increases in 2017. Even doing that, I mean take an example. Housing. I don’t believe that after
some period of adjustment, some period of getting used to it, that a 5% 30-year mortgage
will keep somebody from buying a house they wanna buy. 5% for a 30-year mortgage
is still an attractive rate. Now you can get those
30-year mortgages right now for a little over 3%. So we’re talking about a
200-basis-point increase in mortgage rate over
the next year and a half. Will that be enough to stop housing? And I don’t believe it will. May slow a little bit, but
I don’t think it’ll stop it. And I think the Fed has
to be concerned about whether or not they can raise rates without causing an economy
to slip into recession. The one area that we’ve
got a big problem with and we characterize it with
industrial production numbers, you saw the graph where personal
consumption expenditures were accelerating and
GDP in total was not. Well the reason that
real GDP did not move up as much as the increase in
personal consumption expenditures in the last six quarters has been because of a
total lack of confidence in the business sector. Business people today have
very little confidence about what’s gonna happen in the future. In some cases, business people say gee I’ve had a great two or three-year run. Two or three-year run in my industry historically is a long time,
so it’s just gonna get tired, the economy, and we’re gonna
slip into a recession again or slow growth. Many business people have
no clue what their taxes will be next year, have no
clue what their regulations are gonna be dealing with next year. You put all of that together and finally, business people have no
confidence that the surge in personal consumption
expenditures that we’ve already seen over the last six quarters is sustainable. For example you can see
it in bank deposits. Significant growth in bank deposits that’s coming from companies holding cash in their balance sheet. They’re not investing
in their own business. They’re not willing to go
out and buy new equipment, they’re not willing to expand production because of their uncertainty
about what the future may hold for them. We have to correct that,
we have to get business more confident and
willing to use that cash to invest back in their own business with increasing production levels. In the second quarter of this year, we had historically
almost unprecedented event where inventories in this country declined by almost $10
billion for the quarter. So that means companies
did not produce goods sufficient to meet the
demand in the second quarter. They sold out of inventory. Well, you can’t do that very long because you’ll run out of product and miss sales opportunities. So what we need to see
here in the third corner, which I think we will see, is
a turnaround with an increase in inventories, however modest, so it’s not a drag on
overall economic growth but in fact is a small
contributor to economic growth. And we expect to see that happen. But we need the business sector to become much more confident
than they are right now. The net result of all
this is our forecast, and this is really a dangerous chart because I’ve got a third
quarter of 2016 number up there of 3.1% for real GDP. Now that is significantly
better than anything we’ve seen in the last, well, six or seven years. We’ve had one or two quarters
where it’s been above 3% and immediately dropped right off again. But I have a 3.1% estimate forecast for third quarter real GDP. What’s dangerous about that is tomorrow morning they’re gonna
release the advance report on real GDP for the third quarter. I could be wrong faster
than I’ve ever been wrong in my life with that kind of a forecast. I’ve tried to get this meeting
moved to tomorrow at noon so I’d have that number and
didn’t have to do the forecast. For some reason, the bank
said they couldn’t do that. We’re looking for 3.1%. Now remember the advance
report is always subject to huge revisions because
in the advance report they don’t have the final
personal consumption expenditures for September, the last
month of the quarter, and they don’t have the trade deficit for September released yet. So they estimate those, and
those are major components obviously of real GDP. So could we get a 2.5%
number released tomorrow in the advance report and then revised at the end of November to three or 3.1? Probably, and I think
that’s what we’re gonna see. So I think when it’s all said and done, the third quarter is gonna be a three to 3.5% rate of growth. You can see that my expectations for 2017 call for the real GDP to grow in that 3.5% area as opposed
to the 2.2% that we’ve averaged in the last seven years,
primarily driven by consumer spending but a
turn around we expect to see in inventory growth, in
business fixed investment. Businesses can only grow so
long without replacing equipment and expanding production. We think they’re at that point. Now having said that’s our forecast, what could go wrong with it? What are the uncertainties? Certainly, the labor
market is one of them. I mean obviously, if jobs
don’t continue to grow or better than 125 to 30,000 a month, consumer confidence will not increase and we will not get the
boost to consumer spending that we expect to see. Given the JOLTS index and other indicators of the labor market, the
demographics involved, we think it will grow at
better 125 or 30,000 a month through the end of 2017. Many people would call
that forecast in question. Foreign economic conditions
certainly could derail us. If Europe were to fall
off the cliff again, they’ve kind of stabilized
at the low level, If China doesn’t begin to
grow at a little faster pace, if we end up with a trade war with tariffs and renegotiate NAFTA
and TPP and a whole bunch of other things and end
up with large tariffs, we could end up with
a huge negative impact on the US economy. So there’s lots of
uncertainties about whether the foreign economic
conditions which have impacted our economy over the last few years, that there will be greater risk from that or less risk from that in 2017. At this point, we don’t
think there’s any change. We think it’s gonna stay about the same. We think Europe has the chance to grow at a slightly better pace from a low level and that China will accelerate
in terms of its growth. Japan, which has been in
a recession for 25 years, we probably don’t have any hope for. But at least in South America for example, we do expect faster economic
growth out of that sector. So on balance, we don’t think the foreign economic environment is
going to be as negative going forward as it has
been going backwards. Obviously one of the big issues we have, and it’s because it’s
largely an election year, is fiscal policy. I mean there’s only two kinds of policies the government could deal with, or has the tools to deal with, to react to economic environments. One is monetary policy
that the Federal Reserve’s charged the responsibility of managing; but the second is fiscal policy. Now after having the worst
recession in ’08 and ’09 that we had since the Depression, what fiscal policy stimulus programs has the government passed? Can anybody name a fiscal
policy stimulus program since the ’08, ’09 recession? Anybody name one? There’s only one. Anybody know what it was? You live in Finley, you
got to know what this was. Highway Reconstruction Act. They called it some fancy,
infrastructure spending? And by the way, one of the
best investments I’ve ever made is I bought stock in
the company that makes the orange barrels. (audience laughing) My gosh, that stock is doing really well. All the construction you
see, and it’s everywhere, it’s not just I-75, it’s everywhere, is because entities, counties,
states, local municipalities are all rushing to get
these projects started so they can get the money out of this infrastructure rebuilding program. It’s the only fiscal stimulus
program that we’ve had. And unfortunately, I
don’t see fiscal policy getting any better going forward. It looks to me like no
matter who’s elected, I usually try to avoid names because they’re hard to say. Not phonetically hard to
say but just hard to even say the names but whether
it’s Hillary or Trump, it doesn’t make any
difference who gets elected in terms of a change in our fiscal policy. We’re still gonna have a
Republican-controlled house. We may have a Senate that is either 50/50 or maybe switches over to the Democrats. More likely it’s gonna
stay as a Republican. They’ll probably lose four or five seats, but that’s extremely
temporary in the Senate. If you look at 2018’s election,
the off year elections, more than twice the number
of democratic senators are up for re-election than
Republican senators are in 2018. So you’re gonna see, even if
the Republicans were to lose the Senate at this point,
you’ll see it reversed in 2018 so that the Senate won’t
stay Republican very long. The key is though the house
will not go Democratic. Therefore, it doesn’t
matter who gets elected, we’re stuck with the same
environment we’ve had for the last eight, 10, 12 years, and that is gridlock in Washington. We’re not gonna get
anything out of Washington. All the talk about regulations
and free college tuition and build a wall and all the stuff that you’re being promised
isn’t gonna happen because we will not have
consensus in Washington. The reality is both political
parties have been captured by the extreme edges of their party. Democrats on the Left, the
Republicans and the Tea Party. And there are no bridges
between those two ends of the spectrum. Nobody’s attempting to build a bridge to bring those together. Until that happens, we have
gridlock in Washington. We are not gonna get any help
in terms of fiscal policy out of Washington. It’s unfortunate. I’ll kind of sidetrack here for a minute. It’s always amazing to me, and I know a lot of
people vote for candidates based on a single issue. It might be abortion versus right to life, it might be immigration policies. It might be any number of
specific issues, single issues that cause someone to
vote one way or the other when in reality, at some
point in this country, we have to step back and, as a country, define what the role of the
federal government should be. Should the federal government
be in the business of, at least working toward, providing equal opportunity for everybody? Or is it gonna be in the
business of providing equal outcomes for everybody? And frankly, at this point, we don’t have a consensus decision on
what the federal government should be doing. And we have to start with that. This is from an economist saying this, this is not a social engineer or dealing with all the
other social issues, but we have to come to a
decision in this country, what is the role of
the federal government? So if you believe it’s there to provide equal outcomes for everybody,
then you vote one way. And if it’s to create equal
opportunity for everybody, you vote a different way. But we haven’t reached
that decision as a country. We’re still about evenly
divided on that basic issue. So until that issue gets resolved, we’re gonna be stuck with
no help with fiscal policy propelling the economy at
a minimum, at a minimum, given what happened in ’08 and ’09, we should have had
significant changes in taxes in order to stimulate the economy. We got none. I mean it’s gonna be difficult
for this economy to grow at much more than 3.5%
when our corporate tax rate is the highest in the world. Companies are gonna continue to leave because our taxes system
encourages them to do that. Until we get some resolution
on those kind of issues, we’re not gonna get any
help from fiscal policy. Now that’s the bad news. Good news is it’s a neutral at this point because we haven’t had any
help from fiscal policy. The economy needs to be able to withstand rising interest rates,
which I think it will because I think the Fed is
gonna raise them gradually in small increments through 2017; and I think the economy is
strong enough to withstand that. And good news again, because
of the gridlock in Washington, a lot of the regulations that we all fear will gonna be dumped on us again are probably not gonna happen. There’s gonna be a real
political dogfight in Washington about the regulatory environment. Now we unfortunately don’t
do things to help us at all. We’re gonna get massive new regulations in the banking industry because
of what Wells Fargo did. When you cheat customers that way and do what Wells Fargo did, the government’s gonna jump
in and take care of bankers. Because you got to remember,
the government thinks bankers are really bad people. I mean bankers are, if you
ever need a heart transplant, you’d get one from a banker
because it’s never been used. And that’s the way people view… (audience laughing) See, this crowd is in there where they don’t like the bankers. I mean, you’re ready to
jump on that one, right? The reality is bankers are bad people, were the greedy people who
caused all the problems in the last 15 years in this country. And we’re gonna be highly regulated. That impacts you. It impacts you as a
borrower or a depositor or looking for business services. Because what banks are
gonna have to charge and the range of services they can offer are going to be more difficult
as additional regulations get forced in the banking industry. And that any time you put regulations in that restrict the flow of credit, it has an impact on
overall economic growth. But we brought it on ourselves. I don’t blame congress for this. I blame banks like Wells Fargo doing the kind of stuff they were doing. So when you do stupid stuff,
you end up getting government to do stupid reactions. But they’re gonna do it. Business sector confidence I talked about. A couple more points
before I’m almost done here about the uncertainties. So I mean this area is demographics. The fastest-growing segment
of our population is what? (distant indistinct muttering)
Pardon? – Indian.
– Indian? Actually that may be
true, I don’t know that. But unfortunately, it’s
from such a small base it probably doesn’t have a lot of impact. In terms of the demographics,
so not the ethnic demographics but an age demographics. – [Audience member] Millennials. – Millennials, well actually
this is kind of interesting. Millennials are the largest
segment of our population, percentage of our population. But the fastest-growing segment of our, which is a different question,
is actually the baby boomers. The number of people turning 65 is greater than the number
of people turning 18 over the next few years. Now the Millennials will
still be the largest segment of our population, but the
fastest-growing segment are those people 65
years of age and older. That’s gonna last another 15 years because of the length of time
in each of these age groups. 65 year olds spend money
differently than 35 year olds do. At least I thought so until
I saw my credit card bills from Toys R Us for my grandkids so I’m not sure we’re still
spending a ton of money on toys somewhere. But the reality is we
spend money differently. 65-year-old baby boomers
have a different lifestyle than 35-year-olds do. We’re generally trying to downsize houses trying to get rid of junk that we’ve accumulated over the years. Since I’m in that age group, I know that. Whereas 35-year-olds
are still accumulating. 35-year-olds tend not to
be people who are savers and generate savings. They’re net borrowers, where
65-year-olds are net savers, they’re providers of capital. So there’s some big differences
between a millennial and a 65-year-old. Clearly that means shift
in the nature of spending. Will housing construction
and housing demand be the kind of housing demand that we had 25 and 30 years ago? Absolutely not. The condo villas zero lot line, somebody else cuts the grass,
somebody else takes care of, those are the places that are growing. And if you look at
what’s being built today, you’ll see that the number
of those kinds of units being built, or complexes,
are significantly more than single-family homes
on half acre ground. So it’s gonna be a shift
and it’s gonna impact the nature of spending. Demographics also affects
us because, for example, many people think that
first quarter real GDP is a flawed number, because personal consumption expenditures,
the way they calculate it, hasn’t caught up with the changes in the way we buy things, that
we’re not properly capturing Internet sales, online sales, that that’s weighted,
that process is weighted toward in-store retail sales
as a measure of spending. So we’ve got to catch up with the changes in our demographics, and
the changes in the way our demographic system works. That could affect economic
growth going forward. There are significant cultural changes. I went through this the other day one of the other groups,
and afterward I had… One of the people in the
audience came up to me and said I’m a millennial. Because my point was,
Millennials are different than X Gen or Baby Boomers. Their whole lifestyle is different. It’s a different generation. I said Millennials don’t
have as an objective owning a house. This is a gross generality. Certainly there are some who do. But for the most part, Millennials
don’t have an objective buying a, they marry later in life and have children later in life. They seem to wanna rent and
be close to a downtown area where bars and restaurants are, and they wanna spend their
weekends whitewater rafting or riding a bicycle or doing something that is a whole lot different than we did when I was in that age,
where my objective was I wanna own my own house. That doesn’t seem to be as
big a deal for Millennials. The person in the audience came
up after I said those things and said, you know the problem is, Millennials are afraid of commitment. They don’t wanna get involved in anything they can’t reverse quickly and easily. Now that’s a gross
indictment and as I said, I don’t make it but a millennial came up and said that to me. And it got me to thinking about
whether that’s true or not. But the reality is there is a
difference with Millennials. The biggest mistake we
made as baby boomers was to finish the basement,
because that’s where a lot of these Millennials live. (audience laughing) If we hadn’t remodeled the basement, they wouldn’t be down
there, a real mistake. But we did it, so there they are. That’s gonna impact the
growth and consumer spending is this cultural change that’s occurred, and the difference is with Millennials. That’s a long-term impact,
it probably won’t affect us all that much in 2017 versus 2016, but it’s certainly an
impact going forward. And finally, political. We have to find some solutions
to the political chaos that exists in this country. At some point, compromise is, as people have to recognize,
that compromise is not a four-letter word. It involves a lot more
letters than just four. And that means that there
will be some things that, as a liberal, we don’t get; or as a conservative, we don’t get. But we’ve got to step
back and say on balance, here’s what’s good for this country and we’re not doing that today. This election season is a prime example of very little discussion about
what’s good for the country versus what’s bad by the other candidate. And we’ve got to get away from that. I don’t see any hope of that
happening with this election. I don’t see this election
changing anything dramatically in terms of getting Washington
to focus on solutions and addressing problems. Therefore, we’re stuck with
the gridlock that we’ve had. We’ve managed through that gridlock and that’s why I think that
we’ll probably see that 3.5% kind of growth, which is about equal to the average growth
that we’ve experienced since World War II, but
the chance of us getting four or five or 6% real GDP
growth given that problem is probably pretty low. So on balance, I think I’m
basically optimistic about 2017. And since my retirement date
is at the end of next year, I’m not gonna worry about 2018. I got mine, you guys
all worry about yours. (audience laughing) So I take the typical baby boomer approach and only worry about that. Now the last thing I wanna
do is if they’ll turn the lights down, I do have my
watch and I’m gonna hold it up and I want you to watch it real… (audience laughing)
No, I won’t do that to you. But as usual, anytime
I give a presentation there’s always two or
three people that nod off during the presentation,
and there was today. I watch kind of the audience (mumbles) and so I’d like to have those three people to stand to be recognized, if I could. No, I won’t do that, I
won’t do that either. But I will ask if there are any questions about something I haven’t talked about that you think I should
have, or something I said you think I’m dead wrong on. Questions? Yes? – [Man] Do you see China
having a day of reckoning for their loan banking industry and such in terms of, is there
confidence in that and is there (distant indistinct muttering) in terms of what they’re trying to do? – Loan problems? You mean the loan
problems are being hidden? I don’t think that problem
exists just with China. Bank regulators today are very concerned about a speculative bubble building in commercial real estate
prices in the United States, that commercial lending in
that area has been diluted the underwriting standards. We see a lot more loans
being written not by citizens but by other banks. Did I get that right? Good thought, right. Where some of the
requirements that made sense are being abandoned. So yes I think that we are, I am concerned that we are building a speculative bubble in commercial real estate values. And we know the pain that we go through when a speculative bubble
of any kind bursts. It was the dotcom bubble
in the early 2000s and it was the real estate
bubble in ’08 and ’09. When those bubbles burst, we
end up with real problems. (phone rings)
I apologize, that’s my phone. I have to leave a dollar somewhere. We’ll ignore it. At any rate, yeah I think we have to be concerned about that, and
I think the best thing we ought to do frankly is
go back to a Glass-Steagall and separate investment banking
from commercial banking. I think it’s very dangerous to keep both of those banking segments under one roof, under one ownership. I think you end up creating too much risk. So I do have a concern that,
that could happen absolutely. Now I just did a speaker’s
trick, which is whoever asks the first question you give
them a really long answer and then nobody else
wants to ask questions. (audience laughing) Guys shut up, I wanna get out of here. So that’s an old speakers trick. But I will ask if anybody
else has any other questions. If not, I appreciate you
being willing to listen to me, at least my opinion today. And I hope very much that 2017 is better than 2015 or 2016. And obviously, that’s what
my forecast calls for. (uplifting music)

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