Strategic Intelligence Presenters: Presenter:Michael Blackburn Dennis Cantalupo Economic Outlook 2016 Michael Blackburn February 4, 2016 U.S. Economy in 2015 2016 Outlook • The Good: - After weak Q1, down 2.1%, GDP growth strengthened mid- year and then was weaker than expected in Q4, up 2.6% - Unemployment fell to 5%, well below heights of 10% in 2009, 2.7 million jobs added in 2015 - Consumer sentiment holding strong - Housing stable - prices up 5.8% through Nov (Case Shiller) - Inflation under control: lower fuel & commodity prices - Bankruptcy activity remains modest, although retail activity has increased - Equity markets volatile coming into 2016, driven by strong dollar and lower oil prices • The Bad: - Wage growth since recession has been slow; job growth in low wage positions - Underemployment rate at 10%, and labor participation rate remains only 63%, a 40-year low; 25-54 age group rate is 80.8%, or about 2% below pre-recession levels - Income disparity still an issue - High public and private debt - Corporate capital spending improving but still restrained - Lower fuel prices hurt energy sector, lower capex - Fed initiated rate hike in December, at least two more increases were expected in 2016, but Fed recently more dovish • China soft landing & transition, growth nearing a 20 year low • U.S. is a bright spot in the Global economy, but high dollar and sluggish global economies could hurt trade. • Risks: EU break up; cyber attacks; China economy falls; middle east; Russia; climate change; oil rebound; US presidency Economic Indicators – GDP 2016 Outlook Average GDP growth since 1950s is 3.2%, compared to 1.5% since 2006, or 2.2% since 2010 Q4 Contributions to GDP Growth Consumer spending grew 2.2%, down from 3% in Q3 Contributions from residential fixed investment and federal spending were partially offset by negative contributions from private inventory investments, state spending, exports and nonresidential fixed investments. Source: Federal Reserve, Wall Street Journal 3 Economic Indicators – Income & Consumption 2016 Outlook Real median income fell from about $57,400 in 2007 to about $54,000 in 2014 A good measure of consumer/economic strength is disposable Real disposable income (DPI) up 2.4% income, defined as after-tax income in 2014, after a 0.2% decrease in 2013; Real disposable personal income rose 3.2% in Q4 after 3.8% Real personal consumption increase in Q3; Personal savings rate increased to 5.4% from expenditures (PCE) increased 2.5%, 5.2% in Q3 compared to a 2.4% increase For 2015, DPI grew 3.5% and PCE grew 3.1%, compared to 2.7% for both in 2014. Dec consumer spending was essentially flat as the savings rate grew, despite low fuel prices and inflation 4 Economic Indicators – Too Much Debt? 2016 Outlook Total federal debt rose to $18.150 trillion, or just over 100% of GDP; debt held by public reached $13.120 trillion, including $2.800 trillion held by the Fed Low rates, below GDP growth, have helped contain debt growth. As of 9/30/15, consumer debt was at $12.07 trillion, up 3% yoy, still about 5% below peak $12.680 trillion in 2008. Most non-housing debt has been stable in the last three years, except student loans, which have increased 10% to $1.2 trillion, with delinquency rates over 10%. Auto loans also grew in 2015 5 Economic Indicators – Inflation & Pricing 2016 Outlook Inflation pressure remains weak. IMF Commodity Index fell 30.7% in 2015 with energy dropping 39.3%; non-fuel prices fell 19.1%, partly reflecting US$ appreciation 6 Economic Indicators – Financial Markets 2016Outlook Treasury Yield Curve • Fed began to raise rates in December, first increase since 2006. At least 2 increases expected in 2016, with target rate expected to increase to between 0.75% to 1.00% • Prime rate currently 3.5% could hit 4% by year-end • 10-year rate held at just over 2% most of 2015 •Yield curve remains normal, though steepened in 2015 - inflation risk remains low in 2016 but overall credit risks are increasing DJIA DJIA closed 2015 at 17,425, down 2.2%; 52 week range: 15,370-18,351, similar to 2014 7 2016 Outlook Federal Reserve – 2016 Projections GDP growth remains soft; another slow Q1? Fed expects growth of around 2% through 2018, and stable unemployment in 5% range 2.7 million jobs added in 2015, but not enough to boost GDP growth. Number of Americans with jobs or seeking employment remained near a 40-year low of 62.5%; 81% among workers aged 25-54. Adjusted for part-time and marginally attached workers, the rate was 9.9% in Dec, down from about 17% in 2010. Inflation, as measured by PCE Index, should increase and stay in 2% range. The price index fell 0.2% in Dec and was up 0.7% in 2014. U.S. economy still vulnerable to external shocks. 8 Economic Indicators – Housing 2016 Outlook Home price growth appears to be stabilizing at about 5%, S&P/Case Shiller 20 city index was up 5.8% in Nov year-over-year. Existing home sales rose 15% in December, and reached 5.26 million for the year, the highest level since 2006. However, with prices and interest rates rising, sales growth is expected to slow in 2016 to 1% to 3% (National Assoc of Realtors). Home prices have climbed 29% from their bottom in Jan 2012, but are still nearly 5% below their record level from July 2006. Housing starts fell 2.5% in Dec, with declines in all markets except the Northeast 9 2016 Outlook Geographic Trends Dec 2015 Foreclosure Rate Heat Map Source: Bureau of Labor Statistics • Foreclosure trends continue to improve. • The median sales price of a non-distressed home was $181,000 in Nov 2015 (up 25% yoy). The median sales price of a foreclosure home was $114,240, or 37% lower than non-distressed home sales. Foreclosure filings fell 10% yoy in December. (RealtyTrac) • National unemployment rate fell to 5% in Dec 2015, from 5.6% at the end of 2014 and peak of 9.9% in Oct 2009 • Highest unemployment - New Mexico (6.8%), D.C. (6.6%), W. Virginia (6.5%), NV (6.5%); Lowest unemployment – ND (2.7%), NE (2.9%), SD (3%), HI (3.2%), NH (3.2%), 10 2016 Outlook Commercial Real Estate Trends • Store closings continue – JCP, Sports Authority, Sears, Radioshack, Bi-Lo/Winn-Dixie, Macy’s, Walmart, Alco, Target Canada, the Gap, Hancock, office suppliers. • New store growth limited; capex trimmed and focused on remodels, technology, online and customer experience; M&A has created consolidation. •Vacancy rate for regional malls decreased slightly o 7.8% in Q4 2015 from 7.9% in Q3 and 8% Q4 2014. This is down from a cycle peak of 9.4% in Q3 2011. The strip mall vacancy rate decreased to 10% in Q4, from 10.1% in Q3 and 10.2% in Q4 2014. (Reis). •Reis noted construction remains at weak levels, and there has not been much change in rental rates over the past five quarters (up around 2% year over year) . • Strip mall rent growth accelerated slightly versus last quarter but the quarterly growth rates are so weak that any difference is marginal and insignificant. Certain markets such as San Francisco, NY, Phoenix and Miami seeing strength. •Creditntell Retail REIT Roundup : 95.2% occupancy, 3.2% increase in average base rent 11 2016 Outlook Retail Backdrop • Consumption comprises about two thirds of GDP – retail is critical component of economy • Consumer sentiment, averaged around 93 in 2015, stronger on improved employment and lower fuel trends, but wage growth still weak • NRF – Holiday sales grew 3% to $626.1 billion, down from 4.1% in 2014; retailers used deep discounts to drive traffic; non- store holiday sales grew 9% to $105 billion • Risks: rising interest rates and health care costs; minimum wage hikes; data breach; stronger dollar Source: NRF 12 Sales Trends 2016 Outlook • Retail sales fell 0.1% in Dec from Nov 2015, and rose just 2.1% for 2015 (0.9% excluding auto). U.S. Commerce Dept. • 2015 - General merchandise rose 0.8%, electronics and dept stores fell 2.4%; and 2% Foodservices up 8.1% and food stores up 2.5%; Nonstore retail up 6.3%. • Consumer sentiment rose to 92.6 in Dec and 93.3 for Jan – jobs and fuel – but will it translate to higher sales? • Moody’s expects core retail sales, excluding auto and gas sales, to grow about 5% in 2016. • Trends: Rise of internet and off-price retail 13 Retail Operating Trends 2016 Outlook Source: S&P Retail/Restaurant Revenue & EBITDA Growth 14 Who’s Opening, Who’s Closing 2016 Outlook Most Recent Previous Count Most Recent Previous Count Food & Convenience Period Year Pct Change Change Food & Convenience Period Year Pct Change Change Shake Shack 41 26 57.7% 15 SUPERVALU Inc. 1,536 1,528 0.5% 8 K-VA-T Food Stores, Inc. 133 106 25.5% 27 Metro Inc. 857 856 0.1% 1 Buffalo Wild Wings, Inc. 573 463 23.8% 110 Tesco PLC 3434 3433 0.0% 1 Alimentation Couche-Tard, Inc. 8,915 7,423 20.1% 1,492 Bashas' Inc. 120 120 0.0% 0 Natural Grocers by Vitamin Cottage, Inc. 103 87 18.4% 16 Bozzuto's, Inc 5 5 0.0% 0 Noodles & Company 424 370 14.6% 54 Central Grocers, Inc. 37 37 0.0% 0 Sprouts Farmers Market, Inc. 216 191 13.1% 25 Fairway Group Holdings Corp. 15 15 0.0% 0 Chipotle Mexican Grill, Inc. 1,931 1,724 12.0% 207 Marc Glassman, Inc.