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 is gaining momentum US Outlook/ September 2014 Third-quarter economic growth remains strong, supported by a pickup in homebuilding, a drop in imports, and robust capital spending. An end to above-trend inventory accumulation will be a headwind to growth in late 2014 and early 2015. Consumers will cautiously boost spending in response to gains in employment, income, and household net worth. Homebuilding will rise in 2014 16 as supply catches up with demand. Capital spending will accelerate in 2014 15 in response to global market growth, replacement needs, and technological advances. Interest rates will rise significantly over the next three years as monetary accommodation is withdrawn. 2
Looking forward, we will still be counting on consumer spending to drive the bulk of economic growth Contributions to real GDP growth Annualized percentage change 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5 1.6 3.1 2.9 2.3 2.2 2.2 2011 2012 2013 2014 2015 2016 Real GDP Consumer spending Fixed investment Housing Inventories Exports Imports Government 3
The Institute for Supply Management s indexes signal growth in manufacturing and services ISM indexes 65 Over 50 indicates expansion 60 55 50 45 40 35 30 2000 2002 2004 2006 2008 2010 2012 2014 Source: Institute for Supply Management (ISM) 4
Is the labor market getting tight enough to drive wage pressures? Job creation and the unemployment rate Number of new jobs (000s) 600 500 400 300 200 100 0-100 -200 2010 2011 2012 2013 2014 11 10 9 8 7 6 5 4 3 Unemployment rate (%) Employment growth Unemployment rate 5
The big question: Is the labor market loose or tight? Why do we need to know? Will drive timing and magnitude of Fed actions. Is the current condition of the labor market due to either: Structural issues mismatches between labor supply and demand (TIGHT) Cyclical issues inadequate economic growth (LOOSE) Structural Issues Aging labor force Inadequate skills Poor mobility Cyclical Issues Disillusionment with job search prospects Poor job growth in manufacturing and construction sectors Inadequate wages 6
About 3% of the working age population has dropped out of the labor force since the end of the recession Employment and labor Number of Workers (Millions) 160 150 140 130 120 110 68 67 66 65 64 63 Percent of labor force 100 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Employment (Left) Labor force (Left) Participation rate (Right) 62 7
Two problems: (1) Participation rates are falling. (2) More people are moving into age cohorts with generally lower participation rates. Working age population by age cohort (Millions) 300 250 200 150 100 Labor force participation rates 2009 2014 (est.) 17% 65% 82% 84% 18% 64% 80% 82% 65+ 55-64 45-54 35-44 25-34 20-24 16-19 50 83% 81% 73% 71% 0 38% 34% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 8
Layoffs are down, but labor market lacking in dynamism. Labor market mobility characteristics 4.5 700 % of private labor force/month 4.0 3.5 3.0 2.5 2.0 1.5 600 500 400 300 200 100 Thousands of workers 1.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 0 Hires (left) Quits (left) Jobless claims (right) 9
Structural unemployment? More unemployed workers per job opening Beveridge Curve (2001-2014) 5500 5000 Job openings (thousands) 4500 4000 3500 3000 2000-20009 2010-2014 2500 2000 4 8 12 16 Unemployed (millions of workers) 10
There s still a cadre of workers looking to add hours. Part-timers for economic reasons (000s) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 11
No discernible inflation pressures here Average hourly earnings Percent change vs. year-ago 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 2007 2008 2009 2010 2011 2012 2013 2014 Why are wages not rising? Sector mix a disproportional amount of jobs created in lowerpaying fields Skills displacement improved tools enabling lower paid employees to work at levels formerly held by higher paid staff Pent up wage deflation sticky wages prevented full wage adjustments from occurring during the recession Labor market slack many facets of the labor market still face excess supply issues 12
Only the services areas are materially adding jobs Employment before and after the recession (millions) Local Government State Government Federal Government Leisure & Hospitality Healthcare Transportation Education Other Services Information Wholesale Financial Services Retail Prof. & Bus. Services Losses from recession: 7.4 million Changes since recession end: 8.2 million Utilities Mining Construction Manufacturing -2.5-2.0-1.5-1.0-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 *=Recession period: December 2007 through June 2009 Change during recession * Change since end of recession * 13
Do we exclude the long-term unemployed when looking at how a tight labor market may drive wage pressures? Number of unemployed in the labor force (000s) US Outlook/ September 2014 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total number of unemployed Long-term unemployed Short-term unemployed 14
Here s what the Fed is looking at to identify inflation. Personal consumption deflators 5 Percent change vs. year-ago 4 3 2 1 0-1 -2 2007 2008 2009 2010 2011 2012 2013 2014 All goods and services Excluding food and energy 15
Are inflation expectations well anchored? US Outlook/ September 2014 5-year TIPS spread 2.6 2.4 2.2 2 1.8 1.6 1.4 1.2 1 1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014 16
Consumer spending: Positives beginning to outweigh the negatives. Slow wage growth Debt burdens still high Negative Forces Student loan debt on the rise Low fertility rates and population growth rates Real median household income flat, income inequality up Poverty rates elevated Food prices creeping up Positive Forces Pent-up demand for durable goods (autos) Jobs growth picking up House prices rising Debt burdens lower Household asset values surpassed pre-crisis levels (for some) E-commerce retail sales gaining share of retail trade Back-to-school retail sales looking solid but not as strong as last year 17
Household median and mean incomes have been stagnant for more than a decade. 2012 dollars $80,000 $75,000 $70,000 $65,000 $60,000 $55,000 $50,000 $45,000 US OUTLOOK US Outlook/ / SEPTEMBER September 2014 $40,000 1980 1984 1988 1992 1996 2000 2004 2008 2012 Median Mean Source: US Census: Income, Poverty and Health Insurance Coverage in the United States 18
Households still deleveraging, though more slowly Mortgage and non-mortgage debt as percent of disposable income 130 125 120 115 110 105 100 95 90 85 80 2000 2002 2004 2006 2008 2010 2012 2014 19
Households only willing to accumulate certain types of debt. Percent of disposable income 20 18 16 14 12 10 8 6 US OUTLOOK US Outlook/ / SEPTEMBER September 2014 4 2006 2007 2008 2009 2010 2011 2012 2013 2014 Non-revolving Revolving 20
US light-vehicle sales hold at near pre-recession sales rates. Light-vehicle sales 20 Millions of units, annual rates 16 12 8 4 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 Total Cars Light trucks 21
The housing recovery should be here, but US Outlook/ September 2014 Pluses Reasonable mortgage rates Decent job creation Consumer deleveraging helps affordability Recent history of price appreciation Rental markets tight, helping spur multi-family starts Minuses Adverse household formation among under-35 and 35-44 y.o. households. Greater perceived risk of holding real estate Higher input prices for builders squeezing margins Shortage of buildable lots Very stringent lending standards for builders and buyers Job mobility stuck at recession levels Significant student loan burden Lack of distressed properties for sale, especially impacting investor demand Household formation has slowed again 22
Single-family housing indicators: Also improving, but slowly Existing Home Sales* 5.5 New Home Sales* 1.0 4.5 0.8 0.6 3.5 2.5 2007 2008 2009 2010 2011 2012 2013 2014 0.4 0.2 2007 2008 2009 2010 2011 2012 2013 2014 Housing Permits* 1.25 1.00 0.75 0.50 0.25 2007 2008 2009 2010 2011 2012 2013 2014 Housing Starts* 1.25 1.00 0.75 0.50 0.25 2007 2008 2009 2010 2011 2012 2013 2014 *Millions, SA 23
Housing picks up, but not back to last decade s peaks; share of multi-family increases. Housing starts 2.5 2.0 Millions of units 1.5 1.0 0.5 0.0 2000 2002 2004 2006 2008 2010 2012 2014 Single Family Multi-family 24
We expect the decline in rental vacancy rates to spur building activity Rental vacancy rates 12 11 Percent of total units 10 9 8 7 6 5 2000 2002 2004 2006 2008 2010 2012 2014 2016 25
Over the past ten years, 4% of all households have sold their homes without buying anew Homeownership rates 70 69 Percent of households 68 67 66 65 64 63 62 61 1980 1984 1988 1992 1996 2000 2004 2008 2012 26
Homeownership rates are dropping for all age cohorts except maybe 65+ Homeownership rates by age cohort 90 80 % of households 70 60 50 40 30 20 1994 1996 1999 2001 2004 2006 2009 2011 2014 US Under 35 35-44 45-54 55-64 65 and up 27
Household formation has slowed sharply Household formation year-on-year change Millions of households 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2001 2003 2005 2007 2009 2011 2013 28
Purchasing managers indexes for manufacturing give mixed signals Purchasing (Index, managers over 50 indicates indexes expansion) Index, over 50 signals expansion 60 55 50 45 40 35 30 25 2006 2007 2008 2009 2010 2011 2012 2013 2014 United States Eurozone China Japan Sources: Institute for Supply Management (US), Markit, National Bureau of Statistics (China) GPS/October 2014 29
Destinations of US merchandise exports US Outlook/ September 2014 Merchandise exports Percent of total, 2013 Pacific Rim 24.6% All other 9.7% China 7.7% Japan 4.1% Canada 19.0% Europe 20.7% Other Americas 11.7% Mexico 14.3% 30
Interest rate lift-off in June 2015. US Outlook/ September 2014 Interest rates 6 5 4 3 2 1 0 2004 2006 2008 2010 2012 2014 2016 Fed Funds Rate 10-year Treasury 31
Fed will tighten with a big balance sheet US Outlook/ September 2014 Fed assets 5,000 4,000 Billions $ 3,000 2,000 1,000 0 2007 2008 2009 2010 2011 2012 2013 2014 MBS Treasury securities Agency debt 32 32
Bond market conundrum flight-to-safety theory Decomposition of 10-year Treasury yield (percent) 3.5 3 2.5 2 1.5 1 0.5 0 1/2/2013 7/2/2013 1/2/2014 7/2/2014 10-year yield term premium short-rate expect. 33 33
Bond market conundrum secular stagnation theory Treasury yields (percent) 3.5 3 2.5 2 1.5 1 0.5 0 1/1/2013 7/1/2013 1/1/2014 7/1/2014 5-year forward 10-year rate 5-year rate 34 34
The secret isn t out yet in Washington: The federal budget deficit is unproblematic Federal budget balance sheet 30% 25% 20% Percent of GDP 15% 10% 5% 0% -5% -10% -15% Cessation of stimulus Repeal of Bush tax cuts Spending sequester cuts 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Revenues Expenditures Deficit 35
Federal debt to stabilize at around 70% of GDP. US Outlook/ September 2014 Publically held federal debt 80 70 60 Percent of GDP 50 40 30 20 10 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 36
Most federal spending growth that will occur over the next decade will involve transfer payments Federal budget expenditures Billions of USD 7,000 6,000 5,000 4,000 3,000 2,000 04-14 CAGRs 1.2% 7.7% 5.1% 1,000 0 1.5% 1.5% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Defense Spending Nondefense Spending Transfer Payments Interest Payments Subsidies 37
Stock prices are reaching new peaks: S&P 500 US Outlook/ September 2014 S&P 500 stock price index Index level 2500 2000 1500 1000 500 0 140 120 100 80 60 40 20 0 $s per share (ann. 4-quarter MA) SP500 (LEFT) SP500 EPS (RIGHT) 38
Stock prices are looking overvalued on some measures. Robert Shiller s Cyclical-Adjusted PE Ratio (S&P500) 45 40 35 30 25 20 15 10 5 0 39
Increases in interest rates lead to turning points in the equity market. Relationship between S&P 500 and Fed policy Percent change 50 7 40 30 6 20 5 10 4 0-10 3-20 2-30 -40 1-50 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Percent yield S&P500 (Left scale) Fed Funds Rate (Right scale) 40
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