IHS ECONOMICS US Outlook The US Economic Outlook November 2014 ihs.com Rafael Amiel, Director latin America Economics +1 215 789 7405, rafael.amiel.ihs.com 2014 IHS
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 Interest rates will rise significantly over the next three years as monetary accommodation is withdrawn. 2014 IHS 2
Annual percent change Percent US real GDP growth will be sufficient to bring further reductions in the unemployment rate Real GDP and unemployment 6 10.0 3 8.8 0 7.6-3 6.4-6 5.2-9 2006 2008 2010 2012 2014 2016 4.0 Real GDP growth (Left scale) Unemployment rate (Right scale) 2014 IHS 3
Over 50 indicates expansion The Institute for Supply Management s indexes signal solid growth in manufacturing and services ISM indexes 65 60 55 50 45 40 35 30 2000 2002 2004 2006 2008 2010 2012 2014 Manufacturing index Nonmanufacturing index Source: Institute for Supply Management (ISM) 2014 IHS 4
US economic growth by sector Real GDP and its components Percent change 2013 2014 2015 2016 Real GDP 2.2 2.3 2.7 2.9 Consumption 2.4 2.3 2.8 3.1 Residential investment 11.9 3.1 11.6 10.3 Business fixed investment 3.0 6.2 5.5 5.0 Federal government -5.7-2.5-0.7-0.9 State & local government 0.5 0.9 1.2 1.0 Exports 3.0 3.1 3.6 4.2 Imports 1.1 3.4 4.2 5.6 2014 IHS 5
Other key US indicators Key indicators Percent change 2013 2014 2015 2016 Industrial production 2.9 3.9 2.8 3.6 Payroll employment 1.7 1.8 1.8 1.5 Light-vehicle sales (Millions) 15.5 16.4 16.7 17.0 Housing starts (Millions) 0.93 0.99 1.19 1.36 Consumer Price Index 1.5 1.8 1.4 1.6 Core CPI 1.8 1.8 1.9 1.9 Brent crude oil price ($/barrel) 109 105 104 (88) 102 (86) Federal funds rate (%) 0.1 0.1 0.4 1.6 10-year Treasury yield (%) 2.4 2.6 3.2 3.6 2014 IHS 6
Percent Interest rates will rise from exceptionally low levels Interest rates 12 10 8 6 4 2 0 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Federal funds 10-year Treasury 30-year mortgage BAA corporate 2014 IHS 7
Percent change, 2009 dollars Real GDP growth is outpacing potential growth, contributing to a tightening of labor markets Actual and potential real GDP 8 6 4 2 0-2 -4 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Actual real GDP Full-employment potential real GDP 2014 IHS 8
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 -100 0 100 200 300 400 500 600 700 800 2014 IHS 9
Percent change, annual rate US employment growth will decelerate Payroll employment 4 2 0-2 -4-6 -8 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2014 IHS 10
% 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 66 64 62 60 58 56 54 52 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 2020 Labor-force participation rate Employment rate (Household survey) 2014 IHS 11
Year-over-year percent change Industrial production will decelerate through early 2015 Industrial production 8 6 4 2 0-2 -4 2011 2012 2013 2014 2015 2016 2017 2018 All manufacturing Excluding information technologies Real GDP 2014 IHS 12
US industrial production growth Industrial production Percent change 2013 2014 2015 2016 All manufacturing 2.9 3.7 3.2 3.5 Motor vehicles & parts 7.8 8.4 4.9 1.4 Computers & electronics 6.9 5.2 8.4 9.5 Electrical equip. & appliances 2.9 3.4 4.3 5.2 Machinery 1.8 6.3 4.7 5.0 Textiles -0.9 1.2 0.4-0.9 Furniture 3.3 6.4 5.3 3.8 Chemicals 1.3 1.8 3.0 3.3 2014 IHS 13
Year-over-year percent change Consumer price inflation will stay mild Inflation rates 6 5 4 3 2 1 0-1 -2 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 All-urban CPI Core CPI Employment cost index 2014 IHS 14
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 6 5 4 3 2 1 0 2002 2004 2006 2008 2010 2012 2014 All industrial materials Chemicals Nonferrous metals 2014 IHS 15
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. 2014 IHS 16
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
The consumer market environment is improving Consumer market indicators Percent change 2013 2014 2015 2016 Real consumption 2.4 2.3 2.8 3.1 Real disposable income -0.2 2.6 2.8 3.6 Real household net worth 10.3 6.9 1.3 1.8 Payroll employment 1.7 1.8 1.8 1.5 Real wage rate 0.7 0.4 1.1 1.2 Consumption price deflator 1.2 1.4 1.3 1.5 Light-vehicle sales (Millions) 15.5 16.4 16.7 17.0 Single-family home sales (Millions) 4.90 4.81 5.34 5.65 2014 IHS 18
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 2013 2 0-2 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Real consumer spending Real disposable income 2014 IHS 19
Percent change Durable goods lead growth in consumer spending Real consumer spending 9 6 3 0-3 -6 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Durable goods Nondurable goods Services 2014 IHS 20
Millions of units, annual rates The recovery in light-vehicle sales is nearing completion Light-vehicle sales 20 16 12 8 4 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 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. 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. 2014 IHS 22
Housing affordability is deteriorating as home prices and mortgage rates rise Housing affordability index* 2.00 1.75 1.50 1.25 1.00 0.75 0.50 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 * A value of 1.00 indicates a household earning the median income can afford a median-priced single-family home. 2014 IHS 23
Millions Household formation has surprisingly downshifted Change in number of occupied housing units 3.0 2.5 2.0 1.5 1.0 0.5 Why are households not forming? Weak wage growth Slower immigration Lower marriage rates Limited access to credit Less mobility Student loan burdens 0.0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2014 IHS 24
Millions A setback in household formation is delaying the recovery in housing starts Housing starts and formation 2.1 1.8 1.5 1.2 0.9 0.6 0.3 0.0 1980 1985 1990 1995 2000 2005 2010 2015 2020 Housing starts Household formation 2014 IHS 25
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 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 8 7 6 5 4 3 2 1 Housing starts (Left scale) Home sales (Right scale) 2014 IHS 26
3-month moving avg., bill. USD Orders and shipments of core capital goods are rising Nondefense capital goods excluding aircraft 75 70 65 60 55 50 45 2000 2002 2004 2006 2008 2010 2012 2014 New orders Shipments 2014 IHS 27
Year-over-year percent change Business fixed investment growth is led by equipment Real business fixed investment 30 20 10 0-10 -20-30 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Equipment Structures Intellectual products 2014 IHS 28
Percent change Industrial equipment has led the pickup in real business equipment investment; IT is gaining Real business equipment investment 14 12 10 8 6 4 2 0-2 Total Information technology Industrial equipment Transportation equipment 2013 2014 2015 2016 Other equipment 2014 IHS 29
Billions of 2009 dollars Real private investment in industrial structures is dominated by energy-related projects Investment in structures 175 150 125 100 75 50 25 0 1990 1995 2000 2005 2010 2015 2020 Manufacturing Mines & wells Utilities 2014 IHS 30
US real construction growth by sector Real investment in structures Percent change 2013 2014 2015 2016 Total construction 5.7 5.3 7.5 7.2 Residential 12.0 3.0 11.7 10.3 Commercial 8.0 10.2 11.4 18.0 Manufacturing -1.3 11.2 5.5-2.2 Mines & wells 0.5 7.3-1.3-1.0 Healthcare -9.0-8.5 9.4 22.3 Public utilities -7.0 13.5-2.6-9.9 Highways & streets -1.8 1.9 2.5 0.9 Public education -11.4 0.6 4.9 2.4 2014 IHS 31
Percent of GDP The gap between federal expenditures and revenues has narrowed but will not close Federal revenues and expenditures* 26 24 22 20 18 16 14 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Federal revenues Federal expenditures * Fiscal years, unified budget 2014 IHS 32
Percent of GDP Government spending on Social Security and healthcare will increase as the population ages Government spending 14 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Social Security Medicare State & local medical 2014 IHS 33
Percent of GDP Federal government debt is stabilizing relative to GDP Publicly held federal debt 75 60 45 30 15 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2014 IHS 34
Year-over-year percent change Synchronized growth in real goods and services trade US exports and imports 20 15 10 5 0-5 -10-15 -20 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Real US exports Real US imports 2014 IHS 35
The US current-account deficit will eventually narrow as oil imports decrease and export growth strengthens Current-account balance 200 0-200 -400-600 -800-1,000 1980 1985 1990 1995 2000 2005 2010 2015 2020 1.5 0.0-1.5-3.0-4.5-6.0-7.5 Current-account balance (Left scale, billion US dollars) Balance as percent of GDP (Right scale) 2014 IHS 36
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 2014 18 and support growth in 2019 24. Interest rates will rise through mid-2017. Inflation will stay relatively mild. 2014 IHS 37
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