over? did you say over? - 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...

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

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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)

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4

5

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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, %

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-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

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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

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-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…

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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

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-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

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1

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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

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-0.9

-1.6

-0.5 -0.3 -0.8

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

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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

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-60

-40

-20

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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

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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

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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

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Recession

Next Recession

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

Sources: Google Trends, Moody’s Analytics

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Over? Did You Say Over?

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