Economic Review & Outlook:What You Don’t Know Can Hurt You

Itron EFG Meeting

May 6, 2015

Richard Lynch

Entergy Sales & Load Forecasting

1

Topics

� Today’s theme: Beware unintended consequences

� Update on the Godfather recovery

� We pick on the Fed

� What’s this all mean for 2015?

� Coping mechanisms for bad times

2

P&G Messed With the Wrong Face

Today’s Theme: It’s the things policymakers don’t know they don’t know that’s the problem

3

Failure to Launch

� Slowest recovery in post WWII era continues

� 1982: now that was a recovery. Bodacious to start, then a mellow afterglow

� Today: a majority of Americans still think we’re in a recession

-1.9%

4.6%

7.3%

4.2%3.5% 3.5% 4.2%

-0.3%

-2.8%

2.5%1.6% 2.3% 2.2%

2.4%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Yr1 Yr2 Yr3 Yr4 Yr5 Yr6 Yr7

GDP Growth Comparison1982 Recession Recovery vs. Today

Source: BEA

1982 Today

4

The Godfather Recovery

� Every time we think we’re getting out, we fall back down

� Where are autoregressive terms when you need them – definite repeating pattern of faster then slower

� So, Why?

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Quarterly GDP Growth% Annualized Rate from Prior Quarter

Source: BEA

5

Is This All There Is?

� Lower economic growth is part of long-term trend

� Work force is growing slowly, aging and productivity growth is sagging

� Fewer workers supporting more retirees = problems for benefit programs

� “Secular Stagnation” is the new “New Normal”?

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1934 1944 1954 1964 1974 1984 1994 2004 2014

Long Term GDP Trend5 Yr CAGRsSource: BEA

1930

1940

1950

1960

1970

1980

1990

2000

2010 2.2%

4.5%

3.2%

3.1%

Decade Starting: Avg GDP Growth

1.3%

6.0%

4.3%

3.2%

1.8%

6

Here’s Where the Theme Comes In

� A major contributor to the sad sack recovery: well-intended policymaking that sometimes goes awry

� Focus will be on monetary policy, although we could just as easily spend an hour on fiscal or regulatory policies

� Looser money ≠ faster economic growth necessarily, and there’s usually collateral damage

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

Federal Reserve Balance Sheet Assets$ Billions

Source: The Fed Reserve

7

Feeding the Bubble

� Home sales are highly correlated to lower interest rates

� Fed’s loose monetary policy in the early 2000s, along with regulatory and policy initiatives to increase home ownership, drove housing bubble

� Quantitative Easing (QE) in three post-crisis waves: QE1 (Q4 ‘08) and QE2 (Q4 ‘10) more successful than QE3 (Q3 ‘12)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Jan-99 Nov-00 Sep-02 Jul-04 May-06 Mar-08 Jan-10 Nov-11 Sep-13

SA Annual Rate, Mill

Home Sales & Interest RatesSources: Census Bureau, Nat Assoc of Realtors & The Fed

Total 10 Yr T Bond Rate

QE 1

QE 2

QE 3

8

It’s Been Hard on the Poor

� Fed easing has contributed to higher commodity prices

� Policy is deliberately inflationary and drives down dollar

� Biggest impact was on consumers at lower end of the economic stratum who also have been struggling with lower real wages and sluggish job creation

QE 1

QE 2

QE 3

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

100

120

140

160

180

200

220

Jan-99 Nov-00 Sep-02 Jul-04 May-06 Mar-08 Jan-10 Nov-11 Sep-13

Index

Commodity Prices & Interest RatesSources: St Louis Fed and The Federal Reserve Board

PPI Indus 10 Yr T Bond Rate

9

Transition Will Be the Key

� QE 3 has ended and rates will be going up – what now?

� Most of QE went into banks’ reserve balances, where still it sits. Where it goes and how fast will determine how QE is judged

� C&I lending inhibited by a post-crisis regulatory crack-down and low rate environment. Better in 2014 as economy gained traction

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

0

500

1,000

1,500

2,000

2,500

3,000

Jan-08 Nov-08 Sep-09 Jul-10 May-11 Mar-12 Jan-13 Nov-13 Sep-14

% PYin $ Bill

Bank C&I Lending Growth & Reserve BalancesSources: St Louis Fed

Reserve Balances C&I Loans

10

The Godfather Recovery Part II

� The economy roared back in Q2 and Q3 ‘14 after being paralyzed by the Polar Vortex in Q1

� Personal consumption drove growth in ’14; private investment and exports not so much

� On balance, we are optimistic about ’15, with a couple of cautions

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14

Sector % Contributions to GDP GrowthSource: BEA

Personal Consumption Private Investment Gvt. Spending Net Exports

11

Job Creation Picked Up in 2014

� Job creation picked up noticeably in 2014 – just as QE 3 was winding down. Q1 was a little bit soft, but that’s mostly Boston’s fault

� Government budget deal at the end of 2013 and implementation of Affordable Care Act removed regulatory and fiscal uncertainties

� Budget deal also ended extended unemployment benefits

50

100

150

200

250

300

Jan_11 Jul_11 Jan_12 Jul_12 Jan_13 Jul_13 Jan_14 Jul_14 Jan_15

Job Creation12 Mo Moving Average

Source: Labor Dept

12

Jobs Should Bolster Spending

� Spending roared back from Polar Vortex early in ‘14

� Lately, income gains outpacing consumers’ willingness to spend

� Weak patch in early ‘15 likely due to Polar Vortex the Sequel

1.7%

2.2%

2.7%

3.2%

3.7%

4.2%

4.7%

Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15

Real Personal Disposable Income and Spending% Change Prior Year

Source:BEA

Income Spending Spending ex Food & Energy

13

Dollar is Strengthening

� US economy is strong vs major trading partners

� The rest of the world has discovered the “virtues” of QE

� Having a profound impact on net exports and corporate profits

1.000

1.100

1.200

1.300

1.400

1.500

1.600

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Dollar vs Euro Exchange RateSource: St Louis Fed

-5%

0%

5%

10%

15%

20%

25%

Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13 Feb-14 Sep-14

Monthly Exports% Change Prior Year

Source: Census Bureau

14

The Downside of Lower Oil Prices

� The recent weakness in investment spending driven by drop in energy exploration & production

� The positive impacts of lower energy prices on other types of consumer spending really haven’t kicked in yet because of winter slump

1.18 1.21

1.10

0.14

0.63

-0.12

0.10

-0.03

0.61

0.72

0.60

0.17

0.04

0.31

0.12

-0.10-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Total Fixed Nonres Structures Equip IP Res Inventories

GDP Investment Details% Contribution

Source: BEA

Q3'14 Q4'14

15

US Retains a Competitive Advantage

� The domestic chemical industry is being renewed by the low price of domestic natural gas

� Global competitors use oil as feedstock and often have higher electricity costs

� Margin eroded by fall in oil prices: some projects now uneconomic

0

10

20

30

40

50

60

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

Ratio of Oil to Natural Gas PricesWTI vs Henry Hub

Sources: American Chemistry Council, US EIA and St Louis Fed

Henry Hub Balance Pt (>7 is good)

16

Manufacturing vs Services

� Manufacturing suffering from drop in exports and drilling

� Services drooped a little in Q4/Q1 but still at robust levels

� Services a larger part of the economy, so we’ve got that going for us

40

44

48

52

56

60

64

Mar-11 Oct-11 May-12 Dec-12 Jul-13 Feb-14 Sep-14

ISM Manufacturing Report Source: Institute for Supply Management

ISM Expanding Economy Expanding Manufacturing

45

47

49

51

53

55

57

59

61

63

65

Mar-11 Oct-11 May-12 Dec-12 Jul-13 Feb-14 Sep-14

ISM Services ReportSource: Institute for Supply Management>50 Indicates Service Sector Expansion

Services ISM Expanding Economy

17

Regional Growth Shifting

� Since last June energy rich states – PA, WV, TX, OK, ND – have seen growth dialed back

� West Coast picking up steam, likely due to strong tech sectors

� Manufacturing heartland a mixed bag – IL, IN weaker, OH, MI and WI holding their own

18

Leading Indices Generally Strong

� It stinks to be PA and WV – the Marcellus giveth and it taketh away

� OR and CO offer a strong economic endorsement for the legalization of certain recreational herbal relaxants

19

Summary

� Recovery was accelerating until cold winter and falling oil prices mucked things up

� Still, strong job growth and positive impacts from lower energy prices support a reacceleration of growth in ‘15

� Major threats:

� Negative impacts of falling oil prices offset positive

� Strong dollar whacks exports

� Fed fumbles tricky transition to tighter monetary policy

� Economic growth shifting to West Coast from energy producing states

20

In Case Things Get Tough

Go to Your Happy Place

21

And These Are My Azaleas

Just Because