The ABA Advantage: Economic Issues Update & ABA Resources

The ABA Advantage: Economic Issues Update & ABA Resources aba.com 1-800-BANKERS

Meet the team Jim Chessen Chief Economist Curtis Dubay Senior Economist Brittany Kleinpaste Vice President of Economic Policy & Research Robert Strand Senior Economist Stephen Newton Research Associate Jack McCabe Research Associate

Meet today s speaker Brittany Kleinpaste Vice President Economic Policy & Research 202-663-5356 I bkleinpaste@aba.com

Major Economic Trends Affecting Banking May 21, 2018 Brittany Kleinpaste VP, Economic Policy & Research aba.com 1-800-BANKERS

More of the Same? Jobs Consumer Spending Housing Capital Spending Manufacturing Global Expansion Tax Relief

Economic Advisory Committee Forecast 2018 2019 Real GDP 2.4% 2.0% Personal Consumption 2.4% 2.0% New Home Sales 681k 730k Core PCE 1.7% 2.0% New Jobs/Month 156k 125k Unemployment Rate 3.9% 3.8% Source: ABA Economic Advisory Committee, January 2018

Steady GDP Growth Continues 6% 5% 4% 3% ABA EAC Forecast 2% 1% 0% -1% -2% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bureau of Economic Analysis

Sluggish Expansion Y/Y percent change 15 Recession Real GDP Expansion Average 10 5 Avg: 4.4% Avg: 4.2% Avg: 3.6% Avg: 2.8% Avg: 1.9% 0 Avg: 4.9% -5 1948 1958 1968 1978 1988 1998 2008 2018 Source: Bureau of Economic Analysis

Consumers Continue to Drive Growth Contribution to GDP Growth 6% Total GDP Growth 3% 1% -2% 2012 2013 2014 2015 2016 2017 2018 Source: Bureau of Economic Analysis

Consumer Confidence Remains Strong Index Value 100 90 80 70 60 50 2010 2012 2014 2016 2018 Source: University of Michigan

On the Domestic Watch List 1. Inconsistent business investment 2. Lacking labor force participation 3. Tight housing supply 4. Future rate hikes

1. Inconsistent Business Investment Percentage points 6 5 4 3 2 1 0-1 Nonresidential Fixed Investment GDP -2 2010 2011 2012 2013 2014 2015 2016 2017 Source: Bureau of Economic Analysis

Business Investments Weak? Business Investment as a Share of GDP 16 Recessions 14 12 10 8 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 Source: Bureau of Economic Analysis

Small Businesses Millions 6.0 5.5 Number of businesses <500 employees Pre-2007 trend line 5.0 4.5 2015: 690,000 missing small businesses 4.0 3.5 3.0 1982: 133,000 missing small businesses 1979 1985 1991 1997 2003 2009 2015 Source: U.S. Census Bureau, Goldman Sachs Global Investment Research

Single Most Important Problem for Small Businesses 30% 25% 20% 27% Taxes Government Regulation and Red Tape Quality of Labor 21% 15% 10% 11% 13% 13% 14% 5% 0% October 2007 March 2018 Source: National Federation of Independent Business

Borrowing Needs Satisfied Percent of All Businesses Last Three Months Satisfied Percent of All Businesses Last Three Months Not Satisfied 40 30 20 10 0 2012 2013 2014 2015 2016 2017 Source: National Federation of Independent Business

Percent 68 66 64 62 2. Lacking Labor Force Participation 60 58 LFPR Working Age Population 56 1960 1970 1980 1990 2000 2010 Source: U.S. Bureau of Labor Statistics, World Bank

Payroll Change 000 s 1000 Consistently Strong Job Growth 10.45 Million Jobs Added over the Last 4 Years 900 800 700 ABA EAC Forecast 600 500 400 300 200 100 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Bureau of Labor Statistics

Wage Growth Improving Year/Year Growth Averaged 3.4% over Last Two Years 3-Month Moving Average (% Y/Y) 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 2010 2012 2014 2016 2018 Source: Federal Reserve Bank of Atlanta

Job Growth by Sector Jobs added since 2009, millions 5 4.41 4 3 3.09 3.47 2 1 0.99 1.05 1.38 1.46 0 Transportation and Warehousing Manufacturing Construction Retail Trade Leisure and Hospitality Education and Health Professional and Business Source: U.S. Bureau of Labor Statistics

Prime Age Men Not in Labor Force Taking Pain Medication Type of Medication: Prescription OTC 20% Both No Medication 53% 11% 16% Source: Princeton Pain Survey (571 respondents), Alan Krueger

Manufacturing Employment Millions 15 Employees Job Openings Thousands 450 14 350 13 250 12 150 11 50 2007 2009 2011 2013 2015 2017 Source: U.S. Bureau of Labor Statistics

Manufacturing Employment Millions 15 Employees Job Openings Thousands 450 14 350 13 250 12 150 11 50 2007 2009 2011 2013 2015 2017 Source: U.S. Bureau of Labor Statistics

3. Tight Housing Supply Months Supply 14 Recessions 12 10 8 6 4 2 0 1963 1970 1977 1984 1991 1998 2005 2012 Source: U.S Census Bureau

Housing Starts Millions of Units 3 Recession 1963-2010 Average 2 1 0 1963 1970 1977 1984 1991 1998 2005 2012 Source: U.S Census Bureau

Tight Supply Driving Housing Inflation Index 1991 = 100 280 House Price Index, Purchase Only 230 180 130 80 1991 1994 1997 2000 2003 2006 2009 2012 2015 Sources: U.S. Federal Housing Finance Agency

But is it a bubble? Index 1991 = 100 280 House Price Index, Purchase Only 230 Average Hourly Earnings Procution, Nonsupervisory Employees 180 130 80 1991 1994 1997 2000 2003 2006 2009 2012 2015 Sources: U.S. Federal Housing Finance Agency

4. Future Rate Hikes Fed Will Raise Rates Financial conditions remain loose Inflation forecast to read 2% this year Home sales seem unaffected by rate increases Global recovery will reduce risk of large divergence in rates Tax reform and government spending stimulus

FOMC Participants 2018 Projections December 2017 Number of Rate Hikes in 2018 5 4 10 3 2 1 6 0 0 1 2 3 4 5 6 7 Source: FOMC (December 2017) FOMC Participants

FOMC Participants 2018 Projections March 2018 Number of Rate Hikes in 2018 5 4 13 3 2 1 2 0 0 1 2 3 4 5 6 7 Source: FOMC (March 2018) FOMC Participants

Mortgage Rates Not Impacting Home Sales Millions 6.0 5.5 Existing Home Sales Percent 5.0 4.5 5.0 4.0 4.5 30-year Mortgage 3.5 4.0 2014 2015 2016 2017 2018 3.0 Source: Fannie Mae, National Association of Realtors

Inflation Makes a Return Y/Y percent change 3% PCE Core PCE FOMC 2% Target 2% 1% 0% 2011 2012 2013 2014 2015 2016 2017 2018 Source: U.S. Bureau of Economic Analysis

Eurozone Inflation in Line with U.S. Percent 3 Germany France U.S. 2 1 0-1 2011 2012 2013 2014 2015 2016 2017 Source: OECD, U.S. Bureau of Economic Analysis

1.5 Fed Moves while the World Waits Central Bank Policy Rates (%) 1 0.5 0-0.5 Switzerland ECB BOE Japan United States -1 2010 2012 2014 2016 Source: Federal Reserve, BoE, BoJ, ECB, SNB

Outlook Economic fundamentals are very positive Tax reform and infrastructure spending can boost short term growth but may drive debt and inflation higher Geopolitical turmoil will present unexpected challenges Wages, demographics, and weak productivity will limit potential growth

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