The US Economic Outlook

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1 IHS ECONOMICS US Outlook The US Economic Outlook November 2014 ihs.com Rafael Amiel, Director latin America Economics , rafael.amiel.ihs.com 2014 IHS

2 The US economy is gaining momentum Growth will be supported by accelerations in consumer spending and homebuilding, along with continued robust capital spending. An end to above-trend inventory accumulation will be a brief headwind. Consumers will cautiously boost spending in response to gains in employment, income, and household net worth. The recovery in homebuilding is proceeding slowly, as young adults delay household formation and homeownership. Capital spending is supported by global market growth, strong cash flow, replacement needs, and technological advances. Interest rates will rise significantly over the next three years as monetary accommodation is withdrawn IHS 2

3 Annual percent change Percent US real GDP growth will be sufficient to bring further reductions in the unemployment rate Real GDP and unemployment Real GDP growth (Left scale) Unemployment rate (Right scale) 2014 IHS 3

4 Over 50 indicates expansion The Institute for Supply Management s indexes signal solid growth in manufacturing and services ISM indexes Manufacturing index Nonmanufacturing index Source: Institute for Supply Management (ISM) 2014 IHS 4

5 US economic growth by sector Real GDP and its components Percent change Real GDP Consumption Residential investment Business fixed investment Federal government State & local government Exports Imports IHS 5

6 Other key US indicators Key indicators Percent change Industrial production Payroll employment Light-vehicle sales (Millions) Housing starts (Millions) Consumer Price Index Core CPI Brent crude oil price ($/barrel) (88) 102 (86) Federal funds rate (%) year Treasury yield (%) IHS 6

7 Percent Interest rates will rise from exceptionally low levels Interest rates Federal funds 10-year Treasury 30-year mortgage BAA corporate 2014 IHS 7

8 Percent change, 2009 dollars Real GDP growth is outpacing potential growth, contributing to a tightening of labor markets Actual and potential real GDP Actual real GDP Full-employment potential real GDP 2014 IHS 8

9 Services recorded the largest employment increases during the 12 months ended September 2014 Change in payroll employment, thousands Federal government Utilities Information State government Other services Mining Education Local government Financial services Wholesale trade Transportation Manufacturing Construction Retail trade Healthcare Leisure & hospitality Prof. & business services Total change = 2.6 million IHS 9

10 Percent change, annual rate US employment growth will decelerate Payroll employment IHS 10

11 % population aged 16 and over With the population aging, labor-force participation and employment rates will not return to prerecession levels Labor-force participation and employment rates Labor-force participation rate Employment rate (Household survey) 2014 IHS 11

12 Year-over-year percent change Industrial production will decelerate through early 2015 Industrial production All manufacturing Excluding information technologies Real GDP 2014 IHS 12

13 US industrial production growth Industrial production Percent change All manufacturing Motor vehicles & parts Computers & electronics Electrical equip. & appliances Machinery Textiles Furniture Chemicals IHS 13

14 Year-over-year percent change Consumer price inflation will stay mild Inflation rates All-urban CPI Core CPI Employment cost index 2014 IHS 14

15 IHS weekly indexes, 2002:1=1 World Outlook/ October 2014 Industrial materials prices are falling as new supplies are sufficient to meet lackluster demand growth Industrial materials prices All industrial materials Chemicals Nonferrous metals 2014 IHS 15

16 Oil prices have retreated as strong supply growth eclipses geopolitical concerns The continuing boom in US oil production is restraining prices. Weak global oil demand (especially from China) and high Saudi Arabian production have contributed to recent price declines. Our near-term oil price forecast has been revised downward. World Outlook/ October 2014 While North American supply growth remains strong, other potential new sources (Iraq, Brazil, and Kazakhstan) face hurdles. Geopolitical tensions in Iraq, Syria, Libya, Venezuela, Nigeria, and Ukraine could lead to supply disruptions. As supply growth slows in the 2020s, a sustained period of higher prices will be needed to support development of frontier oil resources IHS 16

17 Forces affecting consumer spending Positive forces Employment growth Rising disposable income Rising asset prices Easing credit standards Negative forces Weak wage growth High debt burdens Rising interest rates Aging population 2014 IHS 17

18 The consumer market environment is improving Consumer market indicators Percent change Real consumption Real disposable income Real household net worth Payroll employment Real wage rate Consumption price deflator Light-vehicle sales (Millions) Single-family home sales (Millions) IHS 18

19 Percent change Consumer spending growth depends on disposable income growth, which is strengthening Real consumer spending and disposable income 6 4 Tax increases undermined growth in Real consumer spending Real disposable income 2014 IHS 19

20 Percent change Durable goods lead growth in consumer spending Real consumer spending Durable goods Nondurable goods Services 2014 IHS 20

21 Millions of units, annual rates The recovery in light-vehicle sales is nearing completion Light-vehicle sales Total Cars Light trucks 2014 IHS 21

A delayed recovery in housing markets Job growth will fuel increases in housing demand. Rising mortgage rates will, however, restrain growth in home sales.

22 A delayed recovery in housing markets Job growth will fuel increases in housing demand. Rising mortgage rates will, however, restrain growth in home sales. After a surge, house price increases are moderating. A shortage of well-placed buildable lots is holding back construction. Multifamily units will account for about one-third of housing starts. Young adults are delaying homeownership. Baby boomers are starting to downsize IHS 22

23 Housing affordability is deteriorating as home prices and mortgage rates rise Housing affordability index* * A value of 1.00 indicates a household earning the median income can afford a median-priced single-family home IHS 23

24 Millions Household formation has surprisingly downshifted Change in number of occupied housing units Why are households not forming? Weak wage growth Slower immigration Lower marriage rates Limited access to credit Less mobility Student loan burdens IHS 24

25 Millions A setback in household formation is delaying the recovery in housing starts Housing starts and formation Housing starts Household formation 2014 IHS 25

26 Millions of units Millions of units Single-family home sales and construction are not expected to reach 2005 peaks Single-family housing starts and sales Housing starts (Left scale) Home sales (Right scale) 2014 IHS 26

27 3-month moving avg., bill. USD Orders and shipments of core capital goods are rising Nondefense capital goods excluding aircraft New orders Shipments 2014 IHS 27

28 Year-over-year percent change Business fixed investment growth is led by equipment Real business fixed investment Equipment Structures Intellectual products 2014 IHS 28

29 Percent change Industrial equipment has led the pickup in real business equipment investment; IT is gaining Real business equipment investment Total Information technology Industrial equipment Transportation equipment Other equipment 2014 IHS 29

30 Billions of 2009 dollars Real private investment in industrial structures is dominated by energy-related projects Investment in structures Manufacturing Mines & wells Utilities 2014 IHS 30

31 US real construction growth by sector Real investment in structures Percent change Total construction Residential Commercial Manufacturing Mines & wells Healthcare Public utilities Highways & streets Public education IHS 31

32 Percent of GDP The gap between federal expenditures and revenues has narrowed but will not close Federal revenues and expenditures* Federal revenues Federal expenditures * Fiscal years, unified budget 2014 IHS 32

33 Percent of GDP Government spending on Social Security and healthcare will increase as the population ages Government spending Social Security Medicare State & local medical 2014 IHS 33

34 Percent of GDP Federal government debt is stabilizing relative to GDP Publicly held federal debt IHS 34

35 Year-over-year percent change Synchronized growth in real goods and services trade US exports and imports Real US exports Real US imports 2014 IHS 35

36 The US current-account deficit will eventually narrow as oil imports decrease and export growth strengthens Current-account balance , Current-account balance (Left scale, billion US dollars) Balance as percent of GDP (Right scale) 2014 IHS 36

37 Bottom line for the US economy Real GDP growth is projected to pick up in 2015 and 2016, led by strengthening private-sector investment. Homebuilding will rise as household formation recovers. Consumer spending will be supported by gains in employment, personal income, and household wealth. Real business fixed investment will increase 5 6% annually. Net exports will restrain US economic growth in and support growth in Interest rates will rise through mid Inflation will stay relatively mild IHS 37

38 IHS Customer Care: Americas: IHS CARE ( ); Europe, Middle East, and Africa: +44 (0) ; Asia and the Pacific Rim: ; 2014 IHS. No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent, with the exception of any internal client distribution as may be permitted in the license agreement between client and IHS. Content reproduced or redistributed with IHS permission must display IHS legal notices and attributions of authorship. The information contained herein is from sources considered reliable but its accuracy and completeness are not warranted, nor are the opinions and analyses which are based upon it, and to the extent permitted by law, IHS shall not be liable for any errors or omissions or any loss, damage or expense incurred by reliance on information or any statement contained herein. For more information, please contact IHS at Customer Care (see phone numbers and addresses above). All products, company names or other marks appearing in this publication are the trademarks and property of IHS or their respective owners.

US Economic Outlook IHS ECONOMICS. Paul Edelstein, Director NA Financial Economics, ,

US Economic Outlook IHS ECONOMICS. Paul Edelstein, Director NA Financial Economics, , IHS ECONOMICS US Outlook US Economic Outlook How long will the ride last? September 2014 ihs.com Paul Edelstein, Director NA Financial Economics, +1 781 301 9014, paul.edelstein@ihs.com The US economy