The U.S. Economic Outlook Presented to: Maquiladora Industry Outlook Conference September 29 2006 Presented by: Patrick Newport Principal, U.S. Macroeconomic Service 781-301-9125 patrick.newport@globalinsight.com Copyright 2006 Global Insight, Inc.
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
U.S. Economic Growth Has Slowed 8 (Annual percent change, 2000 dollars) (Percent) 7 6 6 4 5 2 4 0 3-2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2 Real GDP Growth Unemployment Rate Copyright 2006 Global Insight, Inc. 3
Residential Construction Is Turning Down 6.5 (Residential fixed investment, percent of GDP) 6.0 5.5 5.0 4.5 4.0 3.5 3.0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 Copyright 2006 Global Insight, Inc. 4
Housing Affordability Has Deteriorated A higher index means homes are more affordable 1.6 1.4 1.2 1.0 0.8 0.6 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 Affordability Index for Existing Single-Family Homes Source: National Association of Realtors Copyright 2006 Global Insight, Inc. 5
And Is Becoming a Major Problem in Some Regions A higher index means homes are more affordable 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 1989 1991 1993 1995 1997 1999 2001 2003 2005 West North East South Mid West Source: National Association of Realtors Copyright 2006 Global Insight, Inc. 6
Single-Family Home Sales Are Plummeting (Millions of units) 8 7 6 5 4 3 2 1 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 New Homes Existing Homes Copyright 2006 Global Insight, Inc. 7
Home Inventory Is Now Rising Sharply Relative to Demand (Months supply at current selling rate, single-family homes) 11 10 9 8 7 6 5 4 3 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 New Homes Existing Homes Copyright 2006 Global Insight, Inc. 8
Home Builder Confidence Drops to 15-Year Low 80 (Diffusion index; 50 is neutral) (Millions of units) 1.9 70 1.7 60 1.5 50 1.3 40 1.1 30 0.9 20 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 0.7 NAHB Housing Market Index (left) Single-Family Housing Starts (right) Copyright 2006 Global Insight, Inc. 9
The Housing Downturn 2.2 2.1 2.0 1.9 1.8 1.7 1.6 (Million units) (Year/year percent change) 12 10 8 6 4 2 0 1.5 2001 2002 2003 2004 2005 2006 2007 2008-2 Housing Starts (Left scale) Average Existing Single-Family Home Price (Right scale) Copyright 2006 Global Insight, Inc. 10
Metro Areas with 34%+ Housing Overvaluation 34% overvaluation is trigger point for major price correction. Copyright 2006 Global Insight, Inc. 11
U.S. Economic Growth by Sector (Percent change) 2005 2006 2007 2008 Real GDP 3.2 3.4 2.2 3.1 Consumption 3.5 3.2 2.5 3.0 Residential Investment 8.6-3.5-11.4-2.9 Bus. Fixed Investment 6.8 8.2 6.3 4.2 Federal Government 1.5 2.2 0.8 0.6 State & Local Govt. 0.5 2.0 1.8 2.0 Exports 6.8 8.9 8.9 8.8 Imports 6.1 5.9 3.7 4.4 Copyright 2006 Global Insight, Inc. 12
Other Key U.S. Indicators (Percent change unless noted) 2005 2006 2007 2008 Industrial Production 3.2 4.3 2.3 2.1 Payroll Employment 1.5 1.4 1.0 1.3 Light Vehicle Sales (Millions) 16.9 16.5 16.3 16.5 Housing Starts (Millions) 2.07 1.87 1.64 1.64 Consumer Price Index 3.4 3.5 2.7 1.9 Core CPI 2.2 2.6 2.7 2.2 Federal Funds Rate (%) 3.2 5.0 5.2 4.8 10-Year Treasury Yield (%) 4.3 4.9 4.9 5.3 Copyright 2006 Global Insight, Inc. 13
Moderate Growth in Payroll Employment 3 (Percent change, annual rate) 2 1 0-1 -2-3 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Copyright 2006 Global Insight, Inc. 14
A Relatively Slow Expansion in Employment 14 12 10 8 6 4 2 0-2 (Percent change from business cycle trough) -24-18 -12-6 0 6 12 18 24 30 36 42 48 54 Months from trough Current Recovery Early 1990s Recovery 6 Previous Recoveries Copyright 2006 Global Insight, Inc. 15
Manufacturing Production Growth Will Slow 12 (Percent change, annual rate) 8 4 0-4 -8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 All Manufacturing Excluding Information Technology Copyright 2006 Global Insight, Inc. 16
U.S. Industrial Production Growth by Sector (Percent change) 2005 2006 2007 2008 All Manufacturing 3.9 5.1 2.2 2.5 Motor Vehicles & Parts 3.0-1.6-2.6 0.6 Computers & Electronics 19.9 17.4 11.5 9.6 Elec. Equip. & Appliances 5.0 10.0 2.9 0.7 Textiles 3.4-2.3-5.5-3.8 Apparel -3.9 7.5-1.1-6.4 Furniture -0.8-0.2-1.5-0.6 Chemicals -0.3 2.0 2.5 2.5 Copyright 2006 Global Insight, Inc. 17
Industrial Production Growth--Chemicals (Percent change) 2005 2006 2007 2008 All Chemicals -0.3 2.0 2.5 2.5 Basic Organic Chemicals -10.1 1.1 5.7 2.5 Basic Inorganic Chemicals -1.7 4.1-0.3 0.2 Resins & Synthetic Mat. -5.9 2.4 3.7 2.5 Agricultural Chemicals 1.3 3.0-2.0-3.2 Pharmaceuticals 0.9-1.3 5.0 5.0 Paints & Miscellaneous 2.9 4.4-1.5 0.5 Copyright 2006 Global Insight, Inc. 18
Will Inflation Threaten the Expansion? Inflationary pressures Above-trend growth in the global economy 2003-06 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
Core CPI Inflation Is Moving Well Above 2% 3.0 (Ex-food and energy: percent change from a year earlier) 2.5 2.0 1.5 1.0 2001 2002 2003 2004 2005 2006 2007 2008 Core CPI Core Consumption (PCE) Price Index Copyright 2006 Global Insight, Inc. 20
Homeowners Rent Has Driven Most Of the Pick- Up in Core CPI Inflation 6 (3-month moving average; annualized rate of inflation) 5 4 3 2 1 0 2004 2005 2006 Core CPI Owners Equivalent Rent Other Copyright 2006 Global Insight, Inc. 21
Are Labor Costs Actually Rising Or Not? (Percent change, year-on-year) 6 5 4 3 2 1 0-1 -2 2002 2003 2004 2005 2006 Official Unit Labor Costs Alternative Using the Employment Cost Index Copyright 2006 Global Insight, Inc. 22
The Fed May Have A Bit More Work to Do But We Expect It To Cut Rates in 2007 7 (Percent) 6 5 4 3 2 1 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Federal Funds 10-Year Treasury Yield Copyright 2006 Global Insight, Inc. 23
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
Oil Prices Are A Wild Card 100 90 80 70 60 50 40 30 20 Dollars per barrel, West Texas Intermediate 2002 2003 2004 2005 2006 2007 2008 Base High Low Copyright 2006 Global Insight, Inc. 25
Impact of a $10 Rise in Oil Prices on the U.S. Economy in the Global Insight Model 1.0 0.5 (Percent deviation from baseline) 0.6 0.8 0.8 0.0-0.5-1.0-0.2-0.3-0.4-0.5-0.5-0.6 Year One Year Two Year Three Real GDP Real Consumption CPI Copyright 2006 Global Insight, Inc. 26
After the Bubble: Nasdaq and S&P 500 Stock Market Indexes The S&P 500 s 1995-2005 growth was 8.3%; Nasdaq s was 8.6%. 5000 4000 3000 2000 1000 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 3000 2400 1800 1200 600 0 Nasdaq S&P 500 Copyright 2006 Global Insight, Inc. 27
Expect Smaller Gains in Corporate Profits 25 20 15 10 5 0-5 -10 (Percent change) 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Profits with IVA & CCA GDP Copyright 2006 Global Insight, Inc. 28
Consumer Spending Outlook Copyright 2006 Global Insight, Inc. 29
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
Consumer Spending Is Decelerating and Will No Longer Outpace Income Growth 5 (Percent change) 4 3 2 1 0 2000 2002 2004 2006 2008 2010 Real Consumer Spending Real Disposable Income Copyright 2006 Global Insight, Inc. 31
The Slowdown in Real Consumer Spending Is Concentrated in Goods 8 (Percent change, chained 2000 dollars) 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 Durable Goods Nondurable Goods Services Copyright 2006 Global Insight, Inc. 32
The Personal Saving Rate Has Fallen During Periods of Rising Household Net Worth 12 (Percent of disposable income) (Ratio to disposable income) 10 8 6 4 2 0-2 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 6.4 6.0 5.6 5.2 4.8 4.4 4.0 3.6 Saving Rate Household Net Worth/Disposable Income Copyright 2006 Global Insight, Inc. 33
Mortgage Equity Withdrawal Has Fueled Consumer Spending in Recent Years 8 (Percent of disposable income) 6 4 2 0-2 1991 1993 1995 1997 1999 2001 2003 2005 Net Home Equity Extraction Sources: Federal Reserve Board, 2005 estimate by Global Insight Copyright 2006 Global Insight, Inc. 34
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
Light Vehicle Sales Hit a Plateau 20 (Millions of units) 16 12 8 4 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 Cars Light Trucks Copyright 2006 Global Insight, Inc. 36
Business Investment Will Help Drive the Expansion Forward Copyright 2006 Global Insight, Inc. 37
Unfilled Orders for Capital Goods Are Still Rising 170 (Billions of dollars) 160 150 140 130 120 1998 1999 2000 2001 2002 2003 2004 2005 2006 Nondefense Capital Goods Excluding Aircraft Copyright 2006 Global Insight, Inc. 38
U.S. Construction Growth Shifts from Housing to Nonresidential Structures 18 12 (Year-over-year percent change, 2000 dollars) 6 0-6 -12-18 -24 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Residential Structures Nonresidential Structures Copyright 2006 Global Insight, Inc. 39
Growth in Business Equipment Investment 15 (Percent change, 2000 dollars) 12 9 6 3 0-3 Total Information Technology Industrial Equipment Transport Equipment Other Equipment 2005 2006 2007 2008 Copyright 2006 Global Insight, Inc. 40
Fiscal Policy Outlook Copyright 2006 Global Insight, Inc. 41
The Federal Spending Spree Is Over: Growth in Government Purchases of Goods & Services 9 (Year-over-year percent change) 6 3 0-3 -6 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Federal State & Local Copyright 2006 Global Insight, Inc. 42
The Federal Budget Deficit: No Easy Fix 300 (Billions of dollars, fiscal years) (Percent of GDP) 3.0 150 1.5 0 0.0-150 -1.5-300 -3.0-450 -4.5-600 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016-6.0 Unified Budget Deficit Deficit as % of GDP Copyright 2006 Global Insight, Inc. 43
Foreign Trade on an Unsustainable Path Copyright 2006 Global Insight, Inc. 44
Exports and Imports as a Percent of GDP 18 (Percent of GDP) 16 14 12 10 8 6 4 1970 1975 1980 1985 1990 1995 2000 2005 2010 Exports Imports Copyright 2006 Global Insight, Inc. 45
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
The United States Runs Merchandise Trade Deficits with All Major Trading Partners 50 (Merchandise trade balance, billions of dollars) 0-50 -100-150 -200-250 1990 1992 1994 1996 1998 2000 2002 2004 China Japan European Union Canada Mexico Copyright 2006 Global Insight, Inc. 47
A Record U.S. Current Account Deficit 200 (Billions of dollars) (Percent of GDP) 2 0 0-200 -2-400 -4-600 -6-800 -8-1000 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016-10 Current Account Deficit Deficit as % of GDP Copyright 2006 Global Insight, Inc. 48
The U.S. Dollar Will Depreciate Further 1.3 (Real Trade-Weighted Dollar Index, 2000=1.0) 1.2 1.1 1.0 0.9 0.8 0.7 1977 1981 1985 1989 1993 1997 2001 2005 2009 Industrial Countries Developing Countries Copyright 2006 Global Insight, Inc. 49
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
Thank You! Visit our Web site at www.globalinsight.com Copyright 2006 Global Insight, Inc. 51