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  • Over? Did You Say Over?

    Ryan Sweet, Director of Real-Time Economics,

    Moody’s Analytics

    April 3, 2019

  • Over? Did You Say Over?

    Disclaimer:

    Economics

  • Over? Did You Say Over?

    0

    20

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    60

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    100

    99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

    Financial variables

    Economic variables

    Recession Odds Moved Higher Probability of U.S. recession in 12 mo, %, using only…

    Source: Moody’s Analytics

    Recessions

  • Over? Did You Say Over?

    Recessions Are Almost Nonexistent Status as of Jan 2019 data

    Sources: Moody’s Analytics

    Mid-Expansion

    Recession/ At Risk

    Late Expansion

    Recovery

  • Over? Did You Say Over?

    62

    63

    64

    65

    66

    67

    80

    81

    82

    83

    84

    08 09 10 12 13 14 16 17 18

    Expansion Pulls in Prime-Age Workers

    Sources: BLS, Moody’s Analytics

    Labor force participation rate, %

    Prime-age, 25-54 (L)

    Total (R)

  • Over? Did You Say Over?

    3

    4

    5

    6

    7

    8

    9

    10

    11

    90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20F

    West Northeast

    Midwest South

    New Lows for Regional Joblessness

    Sources: BLS, Moody’s Analytics

    Unemployment rate, %

  • Over? Did You Say Over?

    -0.3

    -0.2

    -0.1

    0.0

    0.1

    75 79 83 87 91 95 99 03 07 11 15

    A Flatter Phillips Curve Slope of the Phillips Curve using 15-yr rolling regressions

    Source: Moody’s Analytics

  • Over? Did You Say Over?

    0 1 2 3 4 5 6 7 8

    Minneapolis San Jose Chicago

    New York City Phoenix

    Dallas Detroit

    Washington Miami

    Philadelphia Boston

    Los Angeles Houston

    Atlanta Seattle

    2017Q3

    2018Q3

    Labor Costs Rise in Many Large Areas

    Sources: BLS, Moody’s Analytics

    Employment cost index, % change yr ago, NSA

    Consolidated metropolitan

    statistical areas

  • Over? Did You Say Over?

    -15

    -10

    -5

    0

    5

    10

    15

    20

    San Francisco New York San Jose Boston Boise Phoenix

    2012 2013 2014

    2015 2016 2017

    Costs Drive Migration Inland

    Sources: Census Bureau, IRS, Moody’s Analytics

    Net domestic migration per thousand residents, #, 2012 to 2017

  • 1 Reasons for Optimism…

  • Over? Did You Say Over?

    200

    300

    400

    500

    600

    700

    01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

    Breakeven level* Actual

    Some Wiggle Room for Initial Claims Initial claims for unemployment insurance benefits, ths

    Sources: BLS, Moody’s Analytics

    *Level consistent with no monthly job growth

  • Over? Did You Say Over?

    1.75

    2.00

    2.25

    2.50

    2.75

    3.00

    3.25

    3.50

    18 19 20 21

    Fed's Dot Plot (Dec-18) Fed's Dot Plot (Mar-19)

    Fed funds futures OIS

    Fed and Markets On Same Page for 2019 Expected path of the fed funds rate, yr-end, %

    Sources: Bloomberg L.P., Moody’s Analytics

  • Over? Did You Say Over?

    2.25

    2.50

    2.75

    3.00

    19Q1 19Q2 19Q3 19Q4

    Baseline forecast

    Expected value of the fed funds rate**

    **Fed funds rate based

    on our subjective odds

    of a hike vs. cut

    Odds Favor No Hikes Fed funds rate, %, end of qtr

    Source: Moody’s Analytics

  • Over? Did You Say Over?

    -0.2

    -0.1

    0.0

    0.1

    0.2

    0.3

    GDP Unemployment rate

    3 mo 6 mo 12 mo

    Making It Count Impact of a Fed pause by duration, ppt, 2020

    Source: Moody’s Analytics

    (0) (0)

    Fed pause occurs in 2019Q1

  • Over? Did You Say Over?

    -1

    0

    1

    2

    3

    4

    5

    6

    7

    0 1 2 3 4

    Housing Will Respond Residential investment response to a 1 ppt drop in mortgage rates

    Sources: Moody’s Analytics

    Real, deviation from the baseline, %

    X-axis is number of quarters from decline in mortgage rates

  • Over? Did You Say Over?

    -0.9

    -1.6

    -0.5 -0.3 -0.8

    -2.5

    -2.0

    -1.5

    -1.0

    -0.5

    0.0

    0.5

    United States

    China Japan Euro Area World

    + Market reaction

    + Confidence effect

    + Vehicles with retaliation

    + 25% Chinese tariffs with retaliation

    Current tariffs

    Total

    Trump’s Trade War Could End % difference in 2019 GDP with no trade war scenario

    Sources: IMF, Moody’s Analytics

  • 2 …And Concern

  • Over? Did You Say Over?January 2019

    -80

    -60

    -40

    -20

    0

    20

    40

    60

    80

    05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

    Present conditions Expectations

    % difference between positive and negative responses

    Source: Moody’s Analytics

    Businesses Are Anxious

  • Over? Did You Say Over?

    Can’t Find the Exit Difference in Real GDP in 2020Q4, No deal vs. May proposal

    Source: Moody’s Analytics

    Lower by less than half a ppt

    Lower by half to one ppt

    Lower by more than one ppt

  • Over? Did You Say Over?January 2019

    600

    700

    800

    900

    1,000

    1,100

    1,200

    1,300

    1,400

    08 09 10 11 12 13 14 15 16 17 18

    Leveraged Firms Leverage Up Leveraged loans, $ bil

    Sources: IMF, Moody’s

    Note: 2018 issuance is YTD annualized

  • Over? Did You Say Over?

    Trade War Hurts Northwest, South Most Peak % difference in real GDP, trade conflagration vs. no tariff

    Sources: BEA, Moody’s Analytics

    >-1.2

    -1.2 to -2.2

  • Over? Did You Say Over?

    New Tax Law Hits the Northeast Hardest Change in real GDP growth over the next decade due to tax plan

    Sources: BEA, JCT, IRS, Moody’s Analytics

    Larger GDP gain

    Moderate GDP gain

    Similar GDP Lower GDP

  • 3 What to Watch

  • Over? Did You Say Over?

    200

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    400

    500

    600

    700

    01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

    Breakeven level* Actual

    Some Wiggle Room for Initial Claims Initial claims for unemployment insurance benefits, ths

    Sources: BLS, Moody’s Analytics

    *Level consistent with no monthly job growth

  • Over? Did You Say Over?

    Only Some Are Flashing Red

    Source: Moody’s Analytics

    Indicator Type Tim e to recession, m os Threshold Recession Risk

    Hours worked for production workers Leading 1 to 10 year-over-year decline Low

    Net % of banks tightening lending standards on C&I Leading 1 to 5 >20% Low

    ISM m anufacturing index Leading 3 to 6 43.2 Low

    S&P 500 Leading 3 to 9 20% correction Medium

    Jobless claim s Leading 4 to 5 >253 Low

    Consum er confidence Leading 5 to 10 30 point decline from peak Low

    TED spread Leading 7 to 8 >100 basis points Low

    Yield curve 10-yr m inus 2-yr Leading 8 to 14 0 Medium

    Yield curve 10-yr m inus 3-m o Leading 8 to 15 0 Medium

    Housing perm its Leading 10 to 12 year-over-year decline Low

    Financial stress index Leading 11 to 15 >1 Low

    Unem ploym ent rate-NAIRU Leading 30 to 36 High

    Core capital goods orders Coincident 0 year-over-year decline Low

    Unem ploym ent rate Coincident 0 Increase of 25-35 basis points Low

    Industrial production Coincident 0 year-over-year decline Low

    ISM nonm anufacturing index Lagging 1 49 Low

    Em ploym ent Lagging 2 to 4 year-over-year decline Low

    Real GDP Lagging 3 to 6

  • Over? Did You Say Over?

    0

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    100

    04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

    Recession

    Next Recession

    Recession Garnering More Interest U.S. Google search term, 100=peak popularity

    Sources: Google Trends, Moody’s Analytics

  • moodysanalytics.com

    United States

    121 North Walnut Street

    Suite 500

    West Chester PA 19380

    +1.610.235.5299

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    Canary Wharf

    London E14 5FA

    +44.20.7772.5454

    Australia

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    Sydney, NSW, 2000

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    +61.2.9270.8111

    Prague

    Washingtonova 17

    110 00 Prague 1

    Czech Republic

    +420.22.422.2929

  • Over? Did You Say Over?

    © 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors

    and affiliates (collectively, “MOODY’S”). All rights reserved.

    CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES

    (“MIS”) ARE

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