Hopes and Worries in an Election Year. Gregory Daco Principal US Economist April 2012

Transcription

1 Economic Outlook: Hopes and Worries in an Election Year Gregory Daco Principal US Economist April 2012

2 Global Perspective: Bright Spots in Clouds of Uncertainty

3 Global Economy US growth: on a better track but still sluggish Emerging markets: slower growth but mostly doing well China soft landing is the most likely scenario Europe is in a mild recession meltdown risks have diminished Geopolitical tensions and social unrest in MENA Risk from oil prices has increased

4 The Global Expansion Is Likely to Remain Intact 10 (Real GDP, percent change) World Advanced Countries Emerging Markets

5 Oil Prices A Growing Threat? Fundamentals weaker world growth, but little spare capacity US consumers have some offsets: employment, income, natural gas not so in Europe Growing Iran risk premium Accidental escalation of hostilities in the Gulf Some factors will limit oil price increases in medium-term A hard landing in China is a downside risk for all commodities Implication: Current oil prices = not a big threat to the recovery Temporary spike (say to $200) could do real damage

6 OPEC Spare Crude Oil Production Capacity 8 (Millions of barrels per day) 6 Range of Spare Capacity Source: IHS CERA

7 Debt A Report Card The United States has made significant progress on reducing private sector leverage Europe has not Poor growth + high debt + weak banks = highly toxic cocktail for Europe US growth is stronger, the population is aging more slowly, and the tax burden is lower than Europe Implications: The US has a political crisis Europe s crisis is both political and structural

8 Deleveraging Has Only Just Begun in the Ten Largest Developed Countries Japan France Spain United Kingdom Canada Italy Germany Australia United States South Korea (Total debt 1, percentage point change) Q Includes all loans and fixed-income securities of households, corporations, financial institutions, and government; 2. Or latest available Sources: National central banks; McKinsey Global Institute 2

9 Government Underlying Primary Balances, 2011 Greece Italy Sweden Switzerland Germany Iceland Estonia South Korea Luxembourg Belgium Israel Austria Eurozone Finland Denmark France Australia Czech Republic Netherlands Portugal Slovenia New Zealand Spain Hungary Norway Poland Ireland Canada United Kingdom United States Japan (Surplus or deficit as a percent of nominal GDP) Source: OECD

10 Eurozone Sovereign Debt Financial tensions have eased thanks to the ECB s long-term repo operations Banks used funds to buy sovereign debt pushing yields lower Structural reforms progress in Italy and Spain has also helped ease tensions Greek restructuring was a non-event But Eurozone sovereign debt crisis far from resolved Greece, Portugal may need further assistance Italy and Spain need to continue structural reforms can they? Firepower of ESM/EFSF is being raised, but is it enough? ECB has hinted that it has done its part in solving the crisis, really?

11 Eurozone Outlook Short Term: Further contraction in first half of 2012 Real GDP contracting 0.5% in 2012 Austerity + Rising unemployment + Squeezed consumer purchasing power Eased sovereign debt tensions, better global growth, and lower inflation will support a second half recovery Medium Term: Growth limited over the medium term by need for extended fiscal tightening Structural reforms hurt growth in the near-term, but will lift potential growth over the long-term Weak demographics Risk: Failure(s) to meet fiscal targets and/or lack of progress on structural reforms

12 Real GDP Growth in Western Europe: Another Recession 4 (Annual percent change) Germany France United Kingdom Italy Spain

13 Real GDP Growth in the Eurozone s Trouble Spots 4 (Annual percent change) Eurozone Greece Portugal Ireland

14 Asian Growth Outlook Still Resilient Growth outlook remains resilient despite the EU recession, helped by continued US recovery and modest rebound in Japan While Chinese economic growth is expected to moderate in 2012, a soft landing is expected Inflationary pressures having declined, some easing of monetary policies The medium-term outlook for consumer spending remains bright, supported by the rising incomes of a growing Asian middle class Risk: Hard landing in China is a major risk to the medium-term regional growth

15 Real GDP Growth in Asia-Pacific: Still the Star Region 12 (Annual percent change) China India Japan South Korea Indonesia Taiwan

16 China: A Challenging Soft Landing Risks of a double squeeze downturn remain External demand weakness remains due to slowing exports to Eurozone Construction downturn is weighing down on house prices Declining house prices are exerting pressure on the banking sector Moderate domestic inflation is another sign of domestic demand weakness In the short-term, a soft landing is more likely Slowdown so far still much milder than the 2009 downturn Eurozone crisis should not have the same impact as the Great Recession Housing demand softness still mainly due to government tightening policies Easing inflation has provided more leeway for Beijing to relax monetary policy Risks for China are higher over the longer term Local debt bubble highlights inadequacies of China s state controlled banking sector Major export markets of the US and EU will undergo protracted demand consolidation Boost to China s exports due to its 2001 WTO entry will diminish over time

17 US Economic Outlook: Hopes and Worries in an Election Year

18 Looking Up Leading indicators showing clear improvements Bank lending rising to businesses and consumers Employment growth has improved Some pent-up demand is coming through, especially for vehicles Housing activity has bottomed - multifamily sector looks better Business capital spending continues to support growth

19 Employment Growth Catching Up With GDP Growth (Year-on-year percent growth) GDP Payroll Employment

20 A Few Caveats Data Quirks Have Helped Some Indicators, Notably Employment An exceptionally mild winter has helped recent data to run better than the seasonal adjustment procedures expect and the late-2008/early-2009 economic collapse has distorted seasonal adjustment patterns, flattering recent data External Risks Haven t Disappeared $4/gallon gasoline is a modest drag on growth; $5/gallon gasoline would derail the expansion Eurozone, China risks Domestic Risk: Too Much Fiscal Tightening Too Soon Without action, a major fiscal contraction is set for Jan 1, 2013 automatic spending cuts, expiry of Bush tax cuts, expiry of payroll tax cut and emergency unemployment benefits

21 Consumers: Some Momentum Building

22 Consumer Sentiment Off the Floor 120 (Reuters/University of Michigan Index, 1966=100)

23 Household Net Worth: Climbing Out of a $16 Trillion Hole 70 (Trillions of U.S. dollars)

24 Household Deleveraging: Are We Done Yet? (Household liabilities, percent of disposable income)

25 Gasoline Burden: No Relief In Prospect, But Not Much Higher Than Every 10 cents on the pump price costs consumers $11 billion per year (0.10% of disposable income) Consumer Spending on Gasoline and Motor Oil (Left scale, bil. of US$, annual rate) Pump Price of Gasoline, all grades (Right scale, dollars per gallon)

26 Consumption Has An Income Problem (Percent growth, real) Real Consumption Real Disposable Income

27 Business Sector: Cautious Optimism

28 Key Leading Indicators Have Improved 65 (ISM Diffusion Indexes, 50 = breakeven) (NFIB Index, 1986=100) ISM Manufacturing (L) ISM Non-Manufacturing (L) ISM = Institute for Supply Management; NFIB = National Federation of Independent Business 28

29 Business Capital Spending Cycle: Construction Lags 30 (Percent change annualized rate, real spending) Software & Equipment Buildings

30 The Housing Cycle: Beginning to Turn

31 Multi-Family Housing Activity: Turning Higher 0.4 (Multi-family housing starts, millions, annual rate)

32 Low Home Prices and Mortgage Rates Push Housing Affordability to a New High 2.5 (Index, higher values=better affordability*) * An index above 1.0 indicates that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20% down payment. January 2012: Median income of $60,900; median-priced existing single-family home of $154,000; down payment Copyright 2012 of 20%, IHS Inc. All or Rights $32,000 Reserved. Affordability Index at

33 Housing Starts Beginning A Long Climb: Prices Bumping Along The Bottom Now Housing Starts (LS, millions of units) FHFA House Price Index (RS, purchase-only index, 1991Q1 = 100)

34 Foreign Trade: Small Drag in 2012

35 Export Growth Cools as Trading Partner Growth Cools (Percent growth year-on-year) Export Growth (Left Scale) Trade-Weighted World GDP Growth (Right Scale)

36 The U.S. Dollar: Secular Weakness Against Emerging Market Currencies 1.6 (2005=1.0, inflation-adjusted) Major Currency Index Other Important Trading Partners Index

37 Inflation Interest Rates Federal Reserve

38 Inflation Expected to Ease 6 (Percent change from a year earlier) All-Urban CPI Core PCE Price Index

39 What Will the Fed Do? Opinions differ at the Fed on how much slack remains in the economy but the opinions that really matter think plenty The Fed is waiting to see whether growth accelerates to match the recent improvements in the labor market QE3 is not likely, but it may still try sterilized MBS purchases to try to help housing Federal funds rate probably near zero till early-2015 Continued sharp labor-market improvements would mean no further easing and (eventually) a re-think on the low rates horizon

40 Federal Funds Rate to Stay Near Zero Until 2015: Long Rates Stay Low 7 (Percent) Federal Funds 10-Year Treasury Yield

41 Fiscal Policy: The Cliff is Approaching

42 Key Fiscal Deadlines Approaching September 30, 2012: Continuing Resolution needed if no budget is in place for FY2013 November 6, 2012: Election Day January 1, 2013: Spending sequester kicks in; Bush tax cuts expire; payroll tax cut / emergency unemployment benefits will expire again A fiscal contraction of around 2.5% of GDP will hit if nothing is done January 2013: New Congress, Presidential inauguration First half 2013 (probably): Debt ceiling will need to be raised again

43 The 2013 Fiscal Cliff $ Billions Percent of GDP Spending Cuts - Sequestration Bush Tax Cuts Expiry Payroll Tax Cut Expiry Emergency Unemployment Insurance Expiry Total Expiry of AMT Relief Extreme Total Source: IHS calculations based on OMB and CBO estimates

44 Our Fiscal Policy Assumptions Politicians are not foolish enough to take us over the fiscal cliff After November elections Compromise Discretionary spending caps from debt-ceiling agreement No automatic spending cuts replaced by entitlement savings and tax increases determined after the 2012 elections beginning in 2014 not 2013 Payroll tax cut and emergency UI benefits extended in 2013 later phased out, not suddenly removed These assumptions stabilize the debt-to-gdp ratio by mid-decade

45 The Federal Budget Gap: We Expect Action On Both Sides of the Ledger 26 (Percent of GDP) Revenues Expenditures

46 Sufficient to Stabilize the Federal Debt Burden 80 (Federal debt in the hands of the public, percent of GDP)

47 The Economy and the Presidential Election: Presidential Election: What Does the IHS Global Insight Election Model Say?

48 Presidential Election Model Drivers Election Model forecasts incumbent party s share of 2-party vote Key Election Model Drivers and Projections: Unemployment in Q (8.2%) Real per capita disposable income growth Q (0.4% y/y) Election Model delivers Obama vote share 44.5% Every 1% off unemployment adds 2.1% to Obama vote Every 1% on income adds 1.6% to Obama vote Obama vote hits breakeven (50%) with unemployment 7.5%, income growth 3.0%

49 The Election Model Says the President Should Be Facing an Uphill Battle 65 (Percentage of 2-party presidential vote for incumbent party) Actual Predicted

50 Risks and Alternatives

51 GDP Growth Outlook 6 (Annualized rate of growth) Baseline (60%) Pessimistic (20%) Optimistic (20%) 51

52 Unemployment Outlook 10 (Percent) Baseline (60%) Pessimistic (20%) Optimistic (20%) 52

53 Business Implications

54 Implications and Bottom Line Recent signals are encouraging Most likely outcome: Continued but Moderate growth Annual growth doesn t beat 3% until 2014 (helped, at last, by a vigorous housing revival) Fed may still try to do more to help Immediate Risks = Oil + Europe Huge fiscal uncertainty key January 1 deadlines loom US elections will present choices on the size and role of government but may not deliver a clear verdict

55 U.S. Economic Growth by Sector (Percent change unless otherwise noted) Real GDP Final Sales Consumption Light Vehicle Sales (Millions) Residential Fixed Investment Housing Starts (Millions) Business Fixed Investment Federal Government State and Local Government Exports Imports

56 Other Key Indicators (Percent unless otherwise noted) Industrial Production (% growth) Employment (% growth) Unemployment Rate CPI Inflation Oil Prices* (Refiners, $/bbl) Core PCE Price Inflation Federal Funds Rate year Government Bond Yield Dollar (Major Currencies, 2005=1) *Oil Price is the Average Refiner Acquisition Price of Crude Oil

57 Thank You for Your Participation! Gregory Daco Principal US Economist IHS Global Insight