bloomberg brief q3 economic outlook
TRANSCRIPT
Bloomberg Brief: EconomicsU.S. Q3’ 2013 Economic Overview and Outlook
Joseph Brusuelas | July 2013
U.S. Q3’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Executive SummaryGrowth likely to modestly accelerate following sub 2% 1H’13• Growth
• Q3’13 growth in line with 2.2 percent cyclical trend• Keys to growth in second half of 2013 and 2014:
• Is household deleveraging cycle finished?• Will policy decisions result in reduced drag from sequestration?• Will domestic manufacturing rebound?• Will investors change expectations of Fed policy?• Will rising rates impact residential investment?
• Monthly job creation likely to hold near 175,000 per month.• Unemployment rate likely to move toward 7 percent.
U.S. Q3’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Executive Summary• Monetary Policy
• Pace of asset purchases likely to slow following September FOMC meeting. • Any tapering likely to be asymmetrical.
• Tapering of treasuries likely to outweigh mortgage backed securities.• Fed to remain cautions on tapering purchases due to:
• Prodigious labor slack, output and consumption gaps• External headwinds.• Tapering is not tightening.
• Fed will hold off tightening rates until 2015.
U.S. Q3’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Executive Summary• Fiscal Policy
• Fiscal year ends September 30.• FY 2014 needs to be put in place.• Debt ceiling debate to influence FY 2014 policy.
• Likely to determine the pace of sequestration.• Sequestration set to slow in FY 2014
• External Risks• Slower demand for durable and finished goods from Europe and China.• Chinese liquidity crunch.• German election and its aftermath.
U.S. Q3’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Executive Summary• Long Term Future of U.S. Economy Improving
• Natural resource revolution.• U.S. supplying 85% of own energy needs.• U.S. production starting to influence global oil prices.
• Nascent manufacturing renaissance.• 3D printing
• Policy needs to be put in place to support energy and manufacturing revolutions.
• Major Challenges in Near Term• Underutilization of resources
• Output gap of roughly 4%.• 25 million unemployed and underemployed.• Fiscal restraint likely to remain in place.
U.S. Q3’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Bloomberg Consensus: Survey of Forecasters
Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14
Real GDP 1.8% 1.7% 2.3% 2.60% 2.8% 2.9%
CPI 1.70% 1.4% 1.5% 1.5% 1.7% 2.0%
Core PCE 1.28% 1.1% 1.3% 1.45% 1.6% 1.70%
Unemployment 7.7% 7.57% 7.40% 7.35% 7.2% 7.10%
Central Bank Rate 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
2-Year Rate 0.24% 0.36% 0.36% 0.45% 0.55% 0.65%
10-Year Rate 1.85.% 2.49% 2.27% 2.41% 2.59% 2.70%
EUR/USD $1.28 $1.30 $1.28 $1.27 $1.26 $1.25
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Current Recovery Continues to Lag
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 210
5
10
15
20
25
30Quarters After Start of RecoveryQuarters After 1981Quarters After 1990Quarters After 2001Quarters After 2007*
Perc
ent
Chan
ge F
rom
Sta
rt o
f Rec
over
y
file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desktop/BloombergBriefs-com.eps
Source: Minneapolis Fed, Bloomberg
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US Hiring Settles in Near 200,000 Per Month
2007 2008 2009 2010 2011 2012 2013 -975
-875
-775
-675
-575
-475
-375
-275
-175
-75
25
125
225
325
Private Payrolls 12 Month Moving Average 6 Month Moving Average3 Month Moving Average
file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desktop/BloombergBriefs-com.eps
Source: Bloomberg
U.S. Q3’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Growth Drivers• Consumer
• Upper two quintiles of households account for 63% of overall spending.• Falling oil and gasoline prices provide relief to households down the income
ladder. resulting in modestly improved personal disposable income.
• Interest rate sensitive sectors• Housing
• Reduced supply supporting price appreciation.• Lack of supply hindering purchases in some areas.• Shift in buyer preference toward new construction.
• Transportation• Historically low rates and aggressive discounting by auto dealers.• Age of auto fleet supports improved total vehicle sales.• Auto sales settles in above 15 million on annualized pace• Civilian aircraft orders on pace double that of 1H’12 2012
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U.S. Home Price Appreciation
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-25
-20
-15
-10
-5
0
5
10
15
20
Case-Shiller Home Price Index FHFA Home Price Index
Inde
x
Source: Bloomberg SPCS20Y%, HPIMYOY% INDEX<GO>
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Falling Supply Supports Home Price Appreciation
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 20131
1.25
1.5
1.75
2
2.25
2.5
2.75
3
3.25
3.5
Hom
es F
or S
ale:
Mill
ions
Source: Bloomberg EHSLMP, EHSLHAFS INDEX<GO>
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Improving Employment Picture Supports Rising Auto Purchases
3765237680377113774137772378023783337864378943792537955379863801738046380773810738138381683819938230382603829138321383523838338411384423847238503385333856438595386253865638686387173874838776388073883738868388983892938960389903902139051390823911339141391723920239233392633929439325393553938639416394473947839507395383956839599396293966039691397213975239782398133984439872399033993339964399944002540056400864011740147401784020940237402684029840329403594039040421404514048240512405434057440602406334066340694407244075540786408164084740877409084093940968409994102941060410904112141152411824121341243412744130541333413644139441425
4
5
6
7
8
9
10
11 8
10
12
14
16
18
20
22
U.S. Unemployment Rate Total Vehicle Sales
file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desktop/BloombergBriefs-com.eps
Source: Bloomberg SAARTOTL, USURTOT INDEX<GO>
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Global Oil Pricing Starting to Reflect U.S. Production
2010 2011 2012 2012 -5
0
5
10
15
20
25
30Brent/WTI Spread
Spre
ad P
er B
arre
l
file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desktop/BloombergBriefs-com.eps
Source: Bloomberg
U.S. Q3’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Condition of the Consumer• Are Households Ready to Drive Growth• Cash flow following tax hike still an issue for lower income groups.• Modest wage growth.
• Inflation adjusted 1.1% on a year ago basis.• June 0.4% M/M increase in average hourly and average weekly earnings very
encouraging. • Inflation adjusted spending 1.8% on a year ago basis.
• Income gains still asymmetrically tilted toward wealthy.• Household deleveraging.
• Household debt as a percentage of GDP still near danger level of 85%.• Financial obligations ratio to 15.5%.• Debt service ratio 10.3%.
U.S. Q3’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Upper Income Earners Driving Spending8.9
12.9
17.1
23.1
38.0
Lowest 20% Second 20%
Third 20% Fourth 20%
Highest 20%
Source: BLS Consumer Expenditure Survey
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US Household Deleveraging
03:Q1
03:Q3
04:Q1
04:Q3
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
08:Q3
09:Q1
09:Q3
10:Q1
10:Q3
11:Q1
11:Q3
12:Q1
12:Q3
13:Q1
4
5
6
7
8
9
10
11
12
13
85
90
95
100
105
110
115
Other Student Loan Credit Card Auto Loan HE Revolving
Mortgage Household Debt % of PI
Trill
ions
Percentage
Source: New York Fed, Bloomberg
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Inflation Adjusted Spending Remains Muted
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -4
-3
-2
-1
0
1
2
3
4
5
Real Personal Consumption Expenditures
file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desktop/BloombergBriefs-com.eps
Source: Bloomberg PCE CHY& INDEX<GO>
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US Household Deleveraging
Q1'09 Q2'09 Q3'09 Q4'09 Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'1275
80
85
90
95
100
105US Household Debt to GDP Ratio
file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desktop/BloombergBriefs-com.eps
Source: St. Louis Fed
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Financial Conditions Overview• Financial conditions narrowing in aftermath of June FOMC
• Remain supportive of U.S. growth.
• Financial easing via asset purchases appropriate and necessary in Europe.
• Conditions tightening in Asia.
• Tapering is not tightening.
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Bloomberg Financial Conditions Indices
2010 2011 2012 2013-6
-5
-4
-3
-2
-1
0
1
2
3
BFCIAXJ Index US Financial Conditions Index BFCIAXJ Index EU Financial Conditions Index
BFCIAXJ Index Asian Financial Conditions Index
file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desk-top/BloombergBriefscom.eps
Source: Bloomberg BFCIUS, BFCIEU, BFCIAXJ INDEX<GO>
U.S. Q3’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Private Credit Creation Improving
1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 -5%
-3%
-1%
1%
3%
5%
7%
9%
11%
13%
15%
Total Private Credit Creation & Nominal GDP
Nominal GDP Total Credit Creation Private Financial Instiutions
Year
Ove
r Ye
ar P
erce
ntag
e Ch
ange
Source: Federal Reserve, Bloomberg
Adjusted R2=.64
file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desktop/BloombergBriefs-com.eps
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Image pageU.S. Rates OverviewBloomberg consensus forecast indicates higher 10- and 30-year rates.
Current Rates:• 2-Year: .37 percent.• 10-year: 2.63percent.• 30-year: 3.64 percent.
End of Fourth Quarter Consensus Survey Rate Forecast • 2-Year: .45 percent.• 10-year: 2.51 percent.• 30-year: 3.49 percent.
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Projected Path of Long- and Short-Term Rates
2007 2008 2009 2010 2011 2012 2013 2014 2015 1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
-0.5
0.5
1.5
2.5
3.5
4.5
5.5US 10-Year (LHS) U.S. 3-Mo. 2-Years Forward
Perc
ent
Perc
ent
Source: Bloomberg
USGG10YR INDEX, G0025 2Y3M BLC2CURNCY<GO>
Forward Market Estimate of 10-Year Yields in 2-Years' Time
file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desktop/BloombergBriefs-com.eps
FOMC Implied Forecast of 3-Mo. Rates in 2-Years' Time
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Long-Term Rates During Era of Quantitative Easing
2008 2009 2010 2011 2012 20131.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Long Run Asset Purchase Programs US 10-Year Yield
Perc
enta
ge
Source: Bloomberg
QE 1 QE 2 Op Twist 1 & 2
QE 3
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U.S. Long Term Yields Likely to Decline In Near Term
2012 2013 40
50
60
70
80
90
100
110
120
1.40
1.60
1.80
2.00
2.20
2.40
2.60
Merrill Lynch Option Volatility Index US 10-Year Yield
file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desktop/BloombergBriefs-com.eps
Source: Bloomberg
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U.S. Economic Surprise Index & 10-Year Treasury Yields
2010 2011 2012 2013-1.2
-0.8
-0.4
0.0
0.4
0.8
1.2
-2
-1.5
-1
-0.5
0
0.5
1
1.5
Bloomberg Economic Surprise Index(LHS)US 10-Year Yield(RHS, 6-Mo. Basis Point Change)
Z-Sc
ore
Percentage
Source: Bloomberg ECSURPUS, USGG10YR INDEX<GO>
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U.S. Economic Surprise Index & U.S. Equity Markets
2010 2011 2012 2013-1.2
-0.8
-0.4
0.0
0.4
0.8
1.2
-20%
-10%
0%
10%
20%
30%
40%
Bloomberg Economic Surprise Index(LHS) S&P 500 (RHS,6-mo. % chg.)
Z-Sc
ore
Index (Percentage Change)
Source: Bloomberg ECSURPUS, SPX INDEX<GO>
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Central Bank Policy Outlook and Overview• Reduction of asset purchases likely in September or December
• Why reduce pace of purchases?• Disruption to asset markets.• Costs outweigh marginal benefit of further purchases.• Improving economy.
• Risks• Economy remains stuck in liquidity trap producing 2 percent growth amidst
substantial labor and economic slack.• Asymmetry in Pace of Reduction
• Continue to purchase mortgage backed securities at a faster pace than treasuries.
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Central Bank Policy Outlook and Overview• U.S. policy rate to remain effectively at zero until 2015.• 6.5 percent employment threshold likely to be achieved in 9-12 months.• Inflation expectations remain well behaved.
• ECB and Japan Likely to Become More Aggressive
• Japan: Debt-Deflation, growth and structural.
• Europe: Post German election, asymmetrical business cycle, labor crisis.
.
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The Long Road Ahead
Slow Grind Back To Full Employment
Scenario 1: Structural Break Scenario 2: Cyclical Recovery
6.5% Full
Employment6.5% Full
Employment 5.5% Full
Employment5.5% Full
Employment
Monthly Job Gains 200,000 200,000 200,000 200,000
Labor Force Participation Rate 63.50% 63.50% 63.50% 63.50%
Average Annual Population Growth 0.92% 0.50% 0.92% 0.50%
Years to Full Employment 2 Years 1 Years 4 Years 2 Years
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Long Term Inflation Expectations Remain Soft
2008 2009 2010 2011 2012 20131.75
2.00
2.25
2.50
2.75
3.00
3.25
3.50
3.75
Fed 5 Year Forward 200-2012 Average
Perc
ent
Source: Bloomberg FED5YEAR INDEX<GO>file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desktop/BloombergBriefs-com.eps
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Mortgage Backed Primary Secondary Spread
2005 2006 2007 2008 2009 2010 2011 2012 2013-20
0
20
40
60
80
100
120
140
160
Basis
Poi
nts:
30
Day
Mov
ing
Aver
age
Start Dates of Fed MBSPurchase Programs
QE 1 QE 3
Source: Bloomberg
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Global Money Supply Set to Rapidly Accelerate
Q1'04Q3'04
Q1'05Q3'05
Q1'06Q3'06
Q1'07Q3'07
Q1'08Q3'08
Q1'09Q3'09
Q1'10Q3'10
Q1'11Q3'11
Q1'12Q3'12
Q1'1320
30
40
50
60
70
80
Global Money Supply: Q1'13 $63 Trillion
M2
Trill
ions
Source: Bloomberg
Q2'07:Fed Begins Response to Finan-cial Crisis
ECB 3-Yr Term LTRO
BOJ Liquidity Operations to Support Abenomics
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Europe: Monetary Policy at the Zero Bound
19981999
19992000
20002001
20012002
20022003
20032004
20042005
20052006
20062007
20072008
20082009
20092010
20102011
20112012
2012-6
-4
-2
0
2
4
6
8
10
ECB Rate Core Euro Area Non-Core Euro Area
Polic
y Ra
te (P
erce
nt)
Source: Bloomberg
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Expansion of Monetary Base Carries Long Term Inflation Risk
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Ratio of Monetary Base to GDP (Euro Area)
Ratio of Monetary Base to GDP (U.S.)
Source: Bloomberg
file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desk-top/BloombergBriefscom.eps
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Economic Challenges Targeted by Policymakers• Substantial Output Gap.
• Labor Market Slack.
• Low Wage Bias in Hiring.
• Consumption Gap.
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Significant Output Gap Remains
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20127
8
9
10
11
12
13
14
15US Retains Substantial Output Gap
Real GDP Real Potential Output
Trill
ions
(200
5 Ch
aine
d $)
Source: Bloomberg
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Labor Slack and the American Economy
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
58
59
60
61
62
63
64
65 3
4
5
6
7
8
9
10
11Employment to Population Ratio (LHS, Inverted)Unemployment Rate (RHS)
Perc
ent Percent
Source: Bloomberg USERTOT , USURTOT INDEX<GO>
11.7 Million Unemployed12.7 Million Underemployed
file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desktop/BloombergBriefs-com.eps
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Low Wage Bias in Hiring
2010 2011 2012 2013-50
-25
0
25
50
75
100
125
150
175Low Wage Bias Driving Hiring
Leisure and Hospitality Health Care and Social Assistance Temp Retail Trade
file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desktop/BloombergBriefs-com.eps
Source: Bloomberg
USRTTOT, USESTEMP, USEETOTS, USEHTOTS INDEX<GO>
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Real Consumption on Lower Trend
2005 2006 2007 2008 2009 2010 2011 2012 20138000
8500
9000
9500
10000
10500
11000
Billi
ons
(Cha
ined
200
5 $)
Real PCE Trend Prior to Recession
Source: Bloomberg US.HHSPNR BEA INDEX<GO>
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Joseph Brusuelas is an economist who writes for the Bloomberg Economic Brief. The observations he makes are his own. Bloomberg is a leading source of data, news, and analytics for financial and legal professionals, corporations, media organizations and private individuals around the globe. The BLOOMBERG PROFESSIONAL® service and Bloomberg’s media services provide real-time and historical pricing, indicative data, reporting, research, estimates, analytics, portfolio management tools, electronic trading and order management systems, multimedia events and electronic communications to Bloomberg clients in more than 150 countries, 24 hours a day.
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