joel prakken april 14,2004
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Dr. Joel L. Prakken, Chairman Macroeconomic Advisers, LLC Presentation for The Global Interdependence Center: Global Issues and the US Outlook April 14, 2004 © Macroeconomic 1 The US Economic Outlook April 2004 For more information about Macroeconomic Advisers write or call us at: 231 South Bemiston Ave, #900, Saint Louis, MO 63105 (314-721-4747) or visit us on the web at www.macroadvisers.com Themes in the Outlook April 2004 April 2004 10000 10200 10400 10600 10800 9600 9800 Q4TRANSCRIPT
April 2004 © Macroeconomic Advisers, LLC 1
Macroeconomic Advisers, LLCMacroeconomic Advisers, LLC
For more information about Macroeconomic Advisers write or call us at: 231 South Bemiston Ave, #900, Saint Louis, MO 63105 (314-721-4747)
or visit us on the web at www.macroadvisers.com
Challenging Transitions:The US Economic OutlookDr. Joel L. Prakken, ChairmanMacroeconomic Advisers, LLC
Presentation forThe Global Interdependence Center:
Global Issues and the US Outlook
April 14, 2004
April 2004 © Macroeconomic Advisers, LLC 2
Themes in the Outlook
• Above-trend (> 3.5%) GDP growth in ’04 and ’05 – Healthy (monthly) profile heading into ’04– Still positive (but waning) fiscal/financial stimulus– Synchronized global recovery, weakened dollar– Capital excesses of the 1990s turned to shortfalls– Lean inventories (outside of vehicle sector)
• Still, only gradual improvement in labor markets• Further, but temporary, disinflation thru mid-’04• First monetary tightening in early ’05• Key transitions: withdrawal of policy stimulus; rotation
to cap ex, net exports; inventory rebound• Biggest imponderables: productivity, terrorism
April 2004 © Macroeconomic Advisers, LLC 3
Monthly Real GDP through January 2004
9600
9800
10000
10200
10400
10600
10800
2000 2001 2002 2003 2004
Bill
ions
of C
hain
ed (2
000)
Dol
lars
Q4
JanJan/Q4 = 3.0% a.r.Did you know that MA’s monthlyGDP is now used by the NBERto date business cycles?!
April 2004 © Macroeconomic Advisers, LLC 4
First-Half Growth: MA vs. Our Own Consensus Panel
10 Nov 8 Dec 5 Jan 2 Feb 1 Mar 29 Mar0
1
2
3
4
5
6First Quarter
Shaded region represents +/- 1 standard deviation
9 Feb 8 Mar 5 Apr0
1
2
3
4
5
6Second Quarter
Survey results reported regularly inMA’s Weekly Economic Commentary.
April 2004 © Macroeconomic Advisers, LLC 5
The Forecast in Summary
-2
-1
0
1
2
3
4
5
6
7
8
9
2000 2001 2002 2003 2004 2005
Ann
ual P
erce
nt /
Per
cent
Cha
nge
GDP GDP Price Unem Rate Fed Funds Rate T-Note Yield
Growth of: '04:H1 '04:H2 '04 '05Real GDP 4.4 4.2 4.3 4.0 GDP Price 1.4 1.1 1.2 1.2
H F
April 2004 © Macroeconomic Advisers, LLC 6
Growth of Real GDP in 2004: MA vs Blue Chip
3.0
3.5
4.0
4.5
5.0
Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04
Per
cent
Cha
nge,
Yea
r / Y
ear
MA
Blue Chip
April 2004 © Macroeconomic Advisers, LLC 7
The Forecast in Summary
2003Q4 Q1 Q2 Q3 Q4 03 04 05
Real GDP, PCAR 4.1 4.4 4.3 4.2 4.1 4.3 4.3 4.0CIPI (Contribution) 0.9 1.1 0.5 0.0 0.1 -0.1 0.5 0.0Final Sales, PCAR 3.4 3.3 3.8 4.2 4.0 4.4 3.8 4.0 Consumption 3.2 3.6 4.0 3.6 3.3 4.0 3.6 3.7 Nonres Fixed Inv 10.9 7.4 11.9 13.4 13.1 7.4 11.4 9.2 Residential Inv 7.9 -0.6 -4.2 -4.8 -9.5 9.5 -4.8 -8.9 Exports 20.5 0.7 11.8 12.0 12.1 6.4 9.0 11.8 Imports ( - ) 16.4 3.2 12.3 6.4 4.9 4.5 6.6 4.0 Govt C&GI -0.1 2.2 3.5 1.9 1.8 2.1 2.3 1.1Dom Demand, PCAR 3.6 3.5 4.2 3.8 3.3 4.2 3.7 3.2
Unem Rate (%) 5.9 5.6 5.6 5.5 5.4 6.0 5.5 5.2Core CPI, PCAR 1.0 1.4 1.3 1.3 1.4 1.1 1.3 1.7Fed Funds Rate (%) 1.0 1.0 1.0 1.0 1.0 1.0 1.1 2.010-Yr T-Note Yld (%) 4.3 4.0 4.0 4.3 4.5 4.0 4.2 5.3
Foreign GDP, PCAR 4.9 3.0 3.3 3.4 3.1 2.6 3.2 3.3Exchange Rate 115.6 113.3 113.8 113.7 113.5 119.3 113.6 112.3
Equity Wealth, % Chg 12.2 0.4 2.4 1.7 2.0 30.1 6.7 10.3Corp Profits, PCAR 32.3 10.2 10.2 9.5 8.2 29.1 9.5 6.0
2004 4/4 or Yr Avg
April 2004 © Macroeconomic Advisers, LLC 8
Qualitative Features of the Forecast
• Steady growth in final sales (~ 4% ) punctuated by a sharp increase ($49 bil) in inventory inv during ’04
• Gradual deceleration of domestic final demand offset by robust recovery of net exports, especially in ’05
• Household expenditures, government C&GI under-mined by the withdrawal of policy stimulus– PCE, govt C&GI grow slower than GDP– Residential construction declines in ’04 and ’05
• Partial offset from a sharp acceleration of capital expenditures, especially E&S
• Trade benefits from recovery of global growth, deceleration of domestic demand, weaker dollar
April 2004 © Macroeconomic Advisers, LLC 9
Qualitative Features of the Forecast
• Gradual improvement in labor markets– Trailing edge of recent productivity surge– Modest cyclical rebound in labor force participation
rate, average workweek– Lethargic employment not a threat to recovery…– …or even very mysterious!
• Despite high oil prices, lower dollar, little inflation risk– Labor market slack: modest growth in wages– Productivity surge: falling unit labor costs
• Fed is patient, but long rates eventually edge up in anticipation of first tightening.
April 2004 © Macroeconomic Advisers, LLC 10
Fiscal Policy Assumptions
• Provisions assumed to expire on schedule– Emergency unem benefits (“soft” expiration Dec 03)– 50% expensing “bonus” (Dec 04): impact on BFI?
• JGTRRA provisions assumed not to expire in Dec 04– Expanded 10% bracket (JCT: $4.3 bil in FY05)– Child credit at $1000 ($2.6 bil)– Relief from “marriage penalty” ($5.4 bil)– Increased AMT exemption amount ($6.9 bil)
• $48 bil decline in net nonwithheld taxes in 2004– $30 bil as refunds (BEA: $26 bil; OTA: $36 bil)– $18 bil as reduced final settlements (OTA)
• Late-year Iraq supplemental, smaller than last two
April 2004 © Macroeconomic Advisers, LLC 11
Other Key Forecast Assumptions
• Monetary policy (more from Larry, next)– First tightening in Jan ’05– Fed funds rate hits 3% by Dec ’05
• Oil prices remain high in ’04, decline modestly in ’05 • Uncertainty that has restrained both businesses and
investors gradually lifts – Further rise in stock prices– Businesses willing to rebuild inventories, re-hire labor– And resume accumulating fixed capital
• Recent, rapid productivity growth is unsustainable• US leads, but global recovery in phase• No significant terrorist acts in the US
April 2004 © Macroeconomic Advisers, LLC 12
Notes on the Implementation of Fiscal Stimulus
• There is a lot a tax money hitting the economy in the first half of 2004, but overall stimulus is modest
• Refunds of over-withholdings from first half of 2003 are a one-time event with a “temporary” MPC
• The decline in final settlements is mostly against estimated taxes on dividends and capital gains– We do assume this is permanent (not sunset in ’08)– But expectation of tax cut already working via wealth effect– With little extra kick when lower settlements realized
• Tax stimulus partly offset by impact of the expiration of emergency unemployment benefits in Dec
• Discretionary outlays will slow (relative to trend)
April 2004 © Macroeconomic Advisers, LLC 13
MA's Fiscal Conditions Index
-3
-2
-1
0
1
2
3
4
1999 2000 2001 2002 2003 2004 2005
Per
cent
age
Poi
nts
of G
DP
Gro
wth
H F
Transition from fiscalstimulus to restraint
April 2004 © Macroeconomic Advisers, LLC 14
MA's Monetary & Financial Conditions Index
-3
-2
-1
0
1
2
3
4
1999 2000 2001 2002 2003 2004 2005
Per
cent
age
Poi
nts
of G
DP
Gro
wth
From Rates/Yields
TotalH F
Transition from monetary / financialacceleration to deceleration
April 2004 © Macroeconomic Advisers, LLC 15
MA's Combined Fiscal/Financial Conditions Index
-3
-2
-1
0
1
2
3
4
1999 2000 2001 2002 2003 2004 2005
Per
cent
age
Poi
nts
of G
DP
Gro
wth
H F
The gradual withdrawalof combined stimulus.
For more see “A Combined Monetary, Financial, andFiscal Conditions Index”, Economic Outlook (Sept 2003)
April 2004 © Macroeconomic Advisers, LLC 16
Surprise! Refiners' Cost of Oil Imports
0
5
10
15
20
25
30
35
1989 1991 1993 1995 1997 1999 2001 2003 2005
Dol
lars
per
Bar
rel
H F
July 2003Forecast
2003 2004 2005 $28 $31 $27
For more, see “Are High Oil Prices a Threat”,US Economic Outlook (March 20, 2004)
April 2004 © Macroeconomic Advisers, LLC 17
Growth of Labor Productivity
-1
0
1
2
3
4
5
6
1989 1991 1993 1995 1997 1999 2001 2003 2005
4-Q
uarte
r Per
cent
Cha
nge
H F
Actual
Potential
April 2004 © Macroeconomic Advisers, LLC 18
Phased Global Slowdown…& Recovery
-2
-1
0
1
2
3
4
5
6
1989 1991 1993 1995 1997 1999 2001 2003 2005
4-Q
uarte
r Per
cent
Cha
nge
H F
U.S. Real GDP
36-country GDPexcl US (OEF)
GulfWar
AsianCrisis
April 2004 © Macroeconomic Advisers, LLC 19
FRB Broad, Real, Trade-Weighted Dollar
80
85
90
95
100
105
110
115
120
125
130
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Inde
x (M
arch
197
3 =
100)
H F
Dollar reversal tohelp spur trade
April 2004 © Macroeconomic Advisers, LLC 20
Equity Wealth & S.E. Band Around "Fair" Value
0
2
4
6
8
10
12
14
16
18
20
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Trill
ions
of D
olla
rs (E
nd o
f Qua
rter)
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
1987 Correction
Gulf War
Irrational Exuberance
Ruble Collapse
Tech Bubble
Ratio of NASDAQto Wilshire (Right)
H F
Geopolitical Uncertainties
April 2004 © Macroeconomic Advisers, LLC 21
Contribution of Equity Wealth to GDP Growth
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Ann
ualiz
ed P
erce
ntag
e P
oint
s
H F
April 2004 © Macroeconomic Advisers, LLC 22
Consumer Durables & Residential Investment:Contr to 4-Qtr % Chg in Real GDP
-3
-2
-1
0
1
2
3
4
1979 1982 1985 1988 1991 1994 1997 2000 2003
Per
cent
age
Poi
nts
of A
nnua
lized
Gro
wth
H F
Usually negativein recessions
This time itwas positive
April 2004 © Macroeconomic Advisers, LLC 23
Nonfarm, Nonvehicle Inventories
15
16
17
18
19
20
21
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Per
cent
-120
-80
-40
0
40
80
120
Bill
ions
of C
hain
ed (2
000)
Dol
lars
I / S Ratio (Left)
Inventory Investment (Right)
Record LowI /S Ratio
H F
April 2004 © Macroeconomic Advisers, LLC 24
Investment in Equipment & Software
-20
-10
0
10
20
30
40
50
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
4-Q
uarte
r Per
cent
Cha
nge
Other Equipment
Computers & Software
H FFor more, see “What Happens when the Expensing BonusExpires”, Economic Outlook (February 19, 2004)
April 2004 © Macroeconomic Advisers, LLC 25
Capital Excess/Shortfall: Computers & Software
0
100
200
300
400
500
600
700
800
900
1000
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Bill
ions
of C
hain
ed (2
000)
Dol
lars
-20
-16
-12
-8
-4
0
4
8
12
16
20
Per
cent
of C
apita
l Sto
ck
Co-integrating Equation:log(K) = 2.95 + 1.00*log(Q) – 1.36*log(R)
Error (right)
Predicted (left)
Actual (left)
April 2004 © Macroeconomic Advisers, LLC 26
Capital Excess/Shortfall: Other Equipment
2000
2200
2400
2600
2800
3000
3200
3400
3600
3800
4000
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Bill
ions
of C
hain
ed (2
000)
Dol
lars
-5
-4
-3
-2
-1
0
1
2
3
4
5
Per
cent
of C
apita
l Sto
ck
Error (right)
Predicted
Actual
Co-integrating Equation:log(K) = 4.60 + .80*log(Q) – 1.17*log(R)
April 2004 © Macroeconomic Advisers, LLC 27
Contributions to PNF Price Inflation
-2
-1
0
1
2
3
4
5
1991 1993 1995 1997 1999 2001 2003 2005
4-Q
uarte
r Per
cent
Cha
nge
H FFrom "Unit Labor Costs"
Actual Inflation
From unemploymentand exchange rates
April 2004 © Macroeconomic Advisers, LLC 28
Interest Rates & the Term Spread
-2
-1
0
1
2
3
4
5
6
7
8
9
10
1989 1991 1993 1995 1997 1999 2001 2003 2005
Per
cent
per
Ann
um
H F
Fed Funds Rate
10-Yr Note Yield
Term Spread
April 2004 © Macroeconomic Advisers, LLC 29
Unemployment Rate & the NAIRU
0
2
4
6
8
10
12
1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Per
cent
H F
Initial conditions matter! Historically small unemploy-ment gap is consistent with slow employment growth.
Unemployment Rate
NAIRU
90% Confidence Interval:Full Employment
April 2004 © Macroeconomic Advisers, LLC 30
Elasticity of Pvt Nonfarm Estab Employment with Respect to MA's Index of Monthly GDP
0.00
0.20
0.40
0.60
0.80
1.00
1.20
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Months
0.00
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
0.10
Cumulative (Left)
Incremental (Right)
April 2004 © Macroeconomic Advisers, LLC 31
Private Nonfarm Establishment Employment
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
2001 2002 2003 2004
Mon
thly
Per
cent
Cha
nge
H F+/- 1 Std. Err
For more see “Can Sluggish Employment Growth Scuttlethe Expansion?”, Economic Outlook (March 10, 2004)