The U.S. Economic Outlook

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Evangeline Hancock
6 years ago
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2 The U.S. Economy Begins a Mid-Cycle Correction Home-building headed for a hard landing Consumer spending slowed by rising interest rates and a cooling housing market Business investment now leading the expansion Further dollar depreciation will boost exports Core inflation and interest rates topping out Expect below-trend growth through 2007 Copyright 2006 Global Insight, Inc. 2

5 Housing Affordability Has Deteriorated A higher index means homes are more affordable Affordability Index for Existing Single-Family Homes Source: National Association of Realtors Copyright 2006 Global Insight, Inc. 5

6 And Is Becoming a Major Problem in Some Regions A higher index means homes are more affordable West North East South Mid West Source: National Association of Realtors Copyright 2006 Global Insight, Inc. 6

9 Home Builder Confidence Drops to 15-Year Low 80 (Diffusion index; 50 is neutral) (Millions of units) NAHB Housing Market Index (left) Single-Family Housing Starts (right) Copyright 2006 Global Insight, Inc. 9

Metro Areas with 34%+ Housing Overvaluation 34% overvaluation is trigger

12 U.S. Economic Growth by Sector (Percent change) Real GDP Consumption Residential Investment Bus. Fixed Investment Federal Government State & Local Govt Exports Imports Copyright 2006 Global Insight, Inc. 12

13 Other Key U.S. Indicators (Percent change unless noted) Industrial Production Payroll Employment Light Vehicle Sales (Millions) Housing Starts (Millions) Consumer Price Index Core CPI Federal Funds Rate (%) Year Treasury Yield (%) Copyright 2006 Global Insight, Inc. 13

15 A Relatively Slow Expansion in Employment (Percent change from business cycle trough) Months from trough Current Recovery Early 1990s Recovery 6 Previous Recoveries Copyright 2006 Global Insight, Inc. 15

17 U.S. Industrial Production Growth by Sector (Percent change) All Manufacturing Motor Vehicles & Parts Computers & Electronics Elec. Equip. & Appliances Textiles Apparel Furniture Chemicals Copyright 2006 Global Insight, Inc. 17

18 Industrial Production Growth--Chemicals (Percent change) All Chemicals Basic Organic Chemicals Basic Inorganic Chemicals Resins & Synthetic Mat Agricultural Chemicals Pharmaceuticals Paints & Miscellaneous Copyright 2006 Global Insight, Inc. 18

19 Will Inflation Threaten the Expansion? Inflationary pressures Above-trend growth in the global economy surge in commodity prices Accelerating labor costs Countervailing restraints Tightening monetary policies Supply responses in commodity markets Global competition Copyright 2006 Global Insight, Inc. 19

21 Homeowners Rent Has Driven Most Of the Pick- Up in Core CPI Inflation 6 (3-month moving average; annualized rate of inflation) Core CPI Owners Equivalent Rent Other Copyright 2006 Global Insight, Inc. 21

24 Oil Prices Reflect a Tight, Uncertain Market Strong demand growth has driven prices up Periodic supply disruptions, geopolitical risks, and speculation cause price volatility OPEC spare capacity fell to historic lows in 2005 Additions to supply are coming gradually The resource base is not the problem Abundant unconventional energy resources can be developed at competitive costs Conventional oil and gas reserves are holding steady, but they are heavily concentrated in high-risk countries Copyright 2006 Global Insight, Inc. 24

26 Impact of a $10 Rise in Oil Prices on the U.S. Economy in the Global Insight Model (Percent deviation from baseline) Year One Year Two Year Three Real GDP Real Consumption CPI Copyright 2006 Global Insight, Inc. 26

30 Cross-Currents Affecting Consumer Finances Positive Forces Steady Job Growth Accelerating Wages Real Income Growth Rising Net Worth Negative Forces Rising Interest Rates Mounting Debt Burdens Cooling Housing Market Negative Saving Rate High Energy Costs Copyright 2006 Global Insight, Inc. 30

33 The Personal Saving Rate Has Fallen During Periods of Rising Household Net Worth 12 (Percent of disposable income) (Ratio to disposable income) Saving Rate Household Net Worth/Disposable Income Copyright 2006 Global Insight, Inc. 33

34 Mortgage Equity Withdrawal Has Fueled Consumer Spending in Recent Years 8 (Percent of disposable income) Net Home Equity Extraction Sources: Federal Reserve Board, 2005 estimate by Global Insight Copyright 2006 Global Insight, Inc. 34

35 Consumer Spending Growth Will Slow Real consumer spending growth has slowed in response to rising interest rates and a cooling housing market. In a saturated market, light vehicle sales will recover only gradually from their post-hurricane setback. Home furnishings spending will decline in response to falling home sales and construction. An aging population will bring increases in spending on health care, drugs, travel, recreation, and other services. Declining prices will encourage growth in real spending on computers, software, home electronics, and apparel. Copyright 2006 Global Insight, Inc. 35

39 U.S. Construction Growth Shifts from Housing to Nonresidential Structures (Year-over-year percent change, 2000 dollars) Residential Structures Nonresidential Structures Copyright 2006 Global Insight, Inc. 39

40 Growth in Business Equipment Investment 15 (Percent change, 2000 dollars) Total Information Technology Industrial Equipment Transport Equipment Other Equipment Copyright 2006 Global Insight, Inc. 40

46 Trade Imbalances and Global Interdependency The U.S. depends on lending from foreign central banks to finance its trade deficit. Trading partners depend on U.S. consumers for export-led growth. Global imbalances require global solutions: Higher U.S. savings Faster domestic growth in Europe and Asia Dollar depreciation Copyright 2006 Global Insight, Inc. 46

47 The United States Runs Merchandise Trade Deficits with All Major Trading Partners 50 (Merchandise trade balance, billions of dollars) China Japan European Union Canada Mexico Copyright 2006 Global Insight, Inc. 47

50 Conclusion: Slower Growth Ahead The housing market is headed for a hard landing Consumer spending momentum will weaken Business investment will show solid growth The U.S. dollar will depreciate, boosting exports Inflation will subside in 2007, allowing the Federal Reserve to lower interest rates The probability of a recession in 2007 is about 25%. Copyright 2006 Global Insight, Inc. 50

The U.S. Economy How Serious A Downturn? Nigel Gault Group Managing Director North American Macroeconomic Services

The U.S. Economy How Serious A Downturn? Nigel Gault Group Managing Director North American Macroeconomic Services Growth Is Cooling; But a Soft Landing Is Likely (Real GDP, annualized rate of growth)