The U.S. Economic Outlook Nigel Gault Chief U.S. Economist, IHS Global Insight FTA Revenue Estimation & Tax Research Conference Charleston, West Virginia October 17, 2011
What Has Happened to the Recovery? The Bad News Growth very weak; usual pattern after a severe financial crisis Commodity price surge and Japan disaster hit H1 growth Confidence in U.S. policy-making has hit new lows The debt-ceiling outcome offered neither short-term fiscal support nor long-term fiscal reforms; huge uncertainty remains Fed running out of options Global growth slowing; Eurozone recession likely Financial fall-out from Eurozone sovereign debt crisis could be severe if policy-makers cannot act more decisively 2
What Has Happened to The Recovery? The Good News Leading indicators don t yet point to U.S. recession Stock market is down but financial stress indicators are nothing like 2008, or even 2007 Japan shock effects receding, commodity price pressures easing The downside to battered sectors like housing is limited Pent-up demand is building Consumer sentiment is at recession levels, but spending hasn t followed sentiment down It would probably take more shocks to make a recession (rather than just weak growth) the most likely outcome 3
Key Leading Indicators Have Slipped, but ISM Indexes Still Above Breakeven 65 60 55 50 45 40 35 (ISM Diffusion Indexes, 50 = breakeven) (NFIB Index, 1986=100) 101 98 95 92 89 86 83 30 2007 2008 2009 2010 2011 ISM Manufacturing Index (L scale) ISM Nonmanufacturing Index (L scale) NFIB Small-Business Optimism Index (R scale) 80 ISM = Institute for Supply Management; NFIB = National Federation of Independent Business 4
No Surge in Initial Claims 525 (Initial unemployment insurance claims, thousands) 500 475 450 425 400 375 350 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 4-Week Moving Average Actual 5
Deep Recession, Slow Recovery (Annualized real rate of growth, Q/Q, percent) 6 4 2 0-2 -4-6 -8-10 2008 2009 2010 2011 2012 2013 October Forecast July Forecast 6
Summary Outlook Tables
U.S. Economic Growth by Sector (Percent change unless otherwise noted) 2010 2011 2012 2013 Real GDP 3.0 1.7 1.4 2.4 Final Sales 1.4 1.9 1.4 2.3 Consumption 2.0 2.1 1.9 1.8 Light Vehicle Sales (Millions) 11.6 12.5 13.2 14.7 Residential Investment -4.3-2.1 4.3 17.9 Housing Starts (Millions) 0.58 0.59 0.67 0.94 Business Fixed Investment 4.4 8.7 4.3 5.8 Federal Government 4.5-1.9-2.7-3.6 State and Local Government -1.8-2.4-2.7-0.9 Exports 11.3 6.7 3.4 7.5 Imports 12.5 4.6 2.4 3.8 8
Other Key Indicators (Percent unless otherwise noted) 2010 2011 2012 2013 Industrial Production (% growth) 5.3 3.6 1.6 3.2 Employment (% growth) -0.7 0.9 0.6 1.3 Unemployment Rate 9.6 9.1 9.3 9.1 CPI Inflation 1.6 3.0 1.3 1.9 Oil Prices (WTI, $/bbl) 79 91 89 98 Core PCE Price Inflation 1.4 1.5 1.4 1.6 Federal Funds Rate 0.18 0.11 0.10 0.11 10-year Government Bond Yield 3.21 2.76 2.32 2.84 Dollar (Major Currencies, 2005=1) 0.90 0.85 0.88 0.86 9
The Housing Cycle: Still At The Bottom
The Homeowner Vacancy Rate Is Little Changed 3.0 (Proportion of homeowner inventory vacant and for sale, percent) 2.5 2.0 1.5 1.0 0.5 1975 1980 1985 1990 1995 2000 2005 2010 Source: Census Bureau 11
A Prolonged Trough for Housing Starts: Prices Not At Bottom Yet 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 230 220 210 200 190 180 170 160 150 Housing Starts (LS, millions of units) FHFA House Price Index (RS, purchase-only index, 1991Q1 = 100) 12
The Consumer: Too Many Negatives
Consumer Sentiment Is In Recession Territory 120 (Reuters/University of Michigan Index, 1966=100) 110 100 90 80 70 60 50 1978 1982 1986 1990 1994 1998 2002 2006 2010 14
Consumer Finances: Too Many Negatives Negative Forces High Unemployment Heavy Wealth Loss Tight Credit Conditions High Debt Burdens Positive Forces Fiscal Stimulus (temporary) Pent-Up Demand Gasoline Prices Should Fall, Food Inflation Should Ease High Prices esp. Gasoline, Food Future Tax Increases Likely 15
Consumer Spending Is Not A Strong Driver of Recovery, But It s Doing Better Than Sentiment 6 (Annualized rate of growth) 4 2 0-2 -4-6 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 16
Business Investment: Are Structures Joining The Recovery?
Business Capital Spending Cycle: Construction Dawn Premature? 30 (Percent change annualized rate, real spending) 20 10 0-10 -20-30 -40 2007 2008 2009 2010 2011 2012 2013 Software & Equipment Buildings 18
Foreign Trade: Still A Plus For Growth, Though Export Prospects Have Dimmed
Exports Expected to Outpace Imports 30 (Percent change annualized rate, volumes) 20 10 0-10 -20-30 -40 2008 2009 2010 2011 2012 2013 Real U.S. Exports Real U.S. Imports 20
Fiscal Policy
Our Fiscal Policy Assumptions Discretionary spending caps implemented, as agreed under debtceiling deal Supercommittee fails......but sequester is replaced by entitlement savings and tax increases to be determined after the 2012 elections 2% payroll tax cut and emergency UI benefits extended into 2012, and later phased out, not suddenly removed But nothing on top of that from the President s jobs plan These assumptions stabilize (but do not cut) the debt-to-gdp ratio 22
The Federal Budget Gap: We Expect Action On Both Sides of the Ledger 26 (Percent of GDP) 24 22 20 18 16 14 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 Revenues Expenditures 23
Big Squeeze on Discretionary Spending Defense and Non-Defense 30 25 (IHSGI September Baseline, percent of GDP) 20 15 10 5 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Defense Social Security Nondefense Goods & Services Medicare/Medicaid Interest Other 24
Recession Risks
Will We Fall Back Into Recession? Why? An economy near stall speed is vulnerable to shocks Fed can t help much Risks of policy mistakes Premature fiscal tightening Policy paralysis Eurozone is the immediate risk Oil shocks a perennial threat Why Not? U.S. banks in better shape than 2008 Nonfinancial corporations balance sheets are strong Exposures to Eurozone sovereign debt are better understood than exposures to sub-prime debt were Europe unlikely to allow a major institution to collapse 26
GDP Growth Outlook 6 (Annualized rate of growth) 4 2 0-2 -4 2010 2011 2012 2013 Baseline (50%) Pessimistic Scenario (40%) Optimistic Scenario (10%) 27
Unemployment Outlook 11 (Percent) 10 9 8 7 6 5 4 2007 2008 2009 2010 2011 2012 2013 Baseline (50%) Pessimistic Scenario (40%) Optimistic Scenario (10%) 28
Implications and Bottom Line Most likely outcome is anemic growth, not recession Recovery very muted; growth doesn t beat 3% until 2014 (helped, at last, by a housing revival) Fed powers are limited; no panaceas Fiscal stimulus; the question is how fast it s withdrawn, not whether it will be ramped up Still huge fiscal uncertainty; supercommittee task looks impossible January 1, 2013 could be another crisis deadline Growth at around stall speed leaves the economy highly vulnerable to recession risks (40% odds) 29
Thank you! Nigel Gault Chief U.S. Economist nigel.gault@ihsglobalinsight.com