The Economic Outlook

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The Economic Outlook 2003
Dr. Mark G. Dotzour Chief Economist Real Estate
Center Texas AM University dotzour_at_tamu.edu
Speech presented on April 2, 2003 NAIOP National
Forums Symposium
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Consumer Confidence IndexExtended Downturn Due
to Iraq?
Source The Conference Board
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Industrial Production Index Manufacturing
Source Federal Reserve Board
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Cass Index of Freight ShipmentsBilling Volume of
1,500 Shippers
Source Cass Information Systems
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Recent Developments

• US companies plan a .1 increase in RD spending
  in 2003, compared with a .3 rise for 2002 and a
  5 rise in 2001.
• The paltry increase marks the slowest growth in
  spending by companies in about a decade.

Source WSJ 1/2/03 Batelle Memorial Institute
and RD Magazine
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General Merchandise Retail SalesSame Store Sales
Change from Year Earlier
Source Redbook Instinet Research
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Is Now a Good Time to Expand? Small Business
Outlook
Source National Federation of Independent
Business
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Planning to Increase Employment Small Business
Outlook
Source National Federation of Independent
Business
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Corporate Hiring Plans
Sixty percent of 150 chief executives surveyed by
The Business Roundtable, an association of
corporate leaders, said their company's workforce
would probably shrink next year, while only 11
percent expected new hires.
Source Reuters 11/12/2002
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Corporate Profits (With Inventory Valuation
Adjustment Capital Consumption Adjustment)
Source Department of Commerce
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SP 500 P/E Ratio(12-month trailing
earnings)
March 19th the P/E was 31
Source Standard and Poors
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Corporate Earnings Dow Jones Industrial Average
Dow 10,800
Dow 4,800
Dow 8,000
Dow 7,800
Dow 6,600
Source Barrons
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Wall Street The New Lexicon

• Day Trader

Someone who is disloyal at work from 9 to 5.
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Wall Street The New Lexicon

• Institutional Investor

Last years day trader who is now broke and
being treated for a gambling addiction.
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Wall Street The New Lexicon

• Value Investing

The art of buying low and selling lower.
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Wall Street The New Lexicon

• Bull Market

A random market movement causing an investor to
mistake himself for a financial genius.
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Wall Street The New Lexicon

• Bear Market

A 6 to 18-month period when the kids get no
allowance, the wife gets no jewelry and the
husband gets no sex.
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Why Real Estate Investment is Looking Very
Attractive
We expect P/E ratios to drop from current
levels. prices seem high even relative to bond
yields. Over the next ten years, we expect the
stock market to return only 6.5, barely half
its postwar average of 11.
Source SP Economic Investment Outlook June
2002
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Good Times to Buy StockSP 500
P/E 10 Year Ratio Date Annual Return
7 1982 13 9 1980 13 9 1983
12 14 1988 14 15 1989 15
15 1987 13
Source Federal Reserve Bank of Kansas City
Economic Review Fourth Quarter, 2000
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Bad Times to Buy StockSP 500
P/E Ratio Date 10 Year Annual Return 27 1929
- 5 24 1966 -
1 23 1965 1 22 1930 -
3 21 1964 3 21 1968 2
Source Federal Reserve Bank of Kansas City
Economic Review Fourth Quarter, 2000
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The Impact of the New Economy

• innovations in computer and communications
  technologies are competitions friends.
• They enable swift searches that reveal the prices
  and qualities of every single producer, while, in
  the past, such information could only be acquired
  by a lengthy, costly, painful process.

Source J. Bradford DeLong and Lawrence Summers
The New Economy Background, Historical
Perspective, Questions and Speculations K.C.
Federal Reserve, Economic Review, 4Q, 2001.
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The Impact of the New Economy

• Competitive edges based on past reputations, or
  brand loyalty, or advertising footprints will
  fade away. .
• profit margins will fall
• competition will become swifter, stronger and
  more pervasive and more nearly perfect

Source J. Bradford DeLong and Lawrence Summers
The New Economy Background, Historical
Perspective, Questions and Speculations K.C.
Federal Reserve, Economic Review, 4Q, 2001.
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The Impact of the New Economy

• Consumers will gain and shareholders will lose.
• Those products that can be competitively supplied
  will be at very low margins.
• The future of technology is bright
• The future of profit margins of businesses..is
  dim.

Source J. Bradford DeLong and Lawrence Summers
The New Economy Background, Historical
Perspective, Questions and Speculations K.C.
Federal Reserve, Economic Review, 4Q, 2001.
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The Wealth Effect

• Household wealth fell 4.5 in the 3Q
• to its lowest level since 1995. Suggests that
  consumers may have to rein in their spending to
  rebuild their balance sheets.

Source WSJ 12/6/02
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Gross Private Savings
Source Department of Commerce
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Two-Tiered Office Market
Boston Properties paid 630 per SF in Manhattan.
The average price on deals closed this year is
449, compared with 273 for all of 2001. WSJ
10/1/02
NortelNetworks sold a 359,000 sf campus on 16
acres for 65 per square foot. Lucent
Technologies sold a 500,000 sf complex in
Marlboro (near Boston) this summer for about 55
per square foot. WSJ 10/29/02
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Strength in US Economy

• Children go to college
• Kids want computers/phones/video games
• Women have babies and people get sick
• Everyone likes to eat out
• Government grows relentlessly
• New families need housing
• Everyone wants a mortgage loan
• People still like to sue each other

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The Outlook

• Corporate spending continues sluggish
• Corporate downsizing not finished
• Corporate profits starting to rebound
• Small business strongest source of demand for
  commercial real estate services

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The Outlook

• Interest rates low through end of the year
• Pressure for higher insurance premiums
• Continued flight to quality investing
• Strong investment demand for quality real estate

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Voices from the Past
Some may try and tell us that this is the end of
an era. But what they overlook is that in
America, every day is a new beginning. For this
is the land that has never become, but is always
in the act of becoming. -- Ronald
Reagan Presidential Medal of Freedom Ceremony,
the White House, January 13, 1993
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Voices from the Past

• The fact that our econometric models at the Fed,
  the best in the world, have been wrong for
  fourteen straight quarters does not mean that
  they will not be right in the fifteenth
  quarter.
• - Alan Greenspan , 1999 speech to the IMF

Source Martin Mayer, The Fed , 2001.