research presentation - handout · general government budget balance source: department of...

Economic Outlook

Jan Hatzius

Chief Economist

[email protected]

212-902-0394

Moving Over the Hump

February 2013 Goldman Sachs Global Economics, Commodities and Strategy Research

GS Global ECS Research 1

1

A Gradual Acceleration in Global Growth

USA 1.8 2.2 1.8 2.9 3.2 3.0

Japan -0.6 2.0 0.9 1.3 0.7 1.2

Euro Area 1.5 -0.4 -0.2 0.9 1.3 1.5

Germany 3.1 0.9 0.7 1.9 2.1 2.2

France 1.7 0.1 0.0 0.6 1.2 1.5

Italy 0.6 -2.0 -0.8 0.6 0.9 1.2

Spain 0.4 -1.3 -1.7 -0.2 1.0 1.8

UK 0.9 0.0 1.4 2.0 2.3 2.6

China 9.3 7.8 8.2 8.4 8.3 8.2

India 7.5 5.4 6.5 7.2 7.2 7.5

Brazil 2.7 1.0 3.5 4.3 4.0 4.0

Russia 4.3 3.4 3.8 4.8 4.3 3.1

Developed Markets 1.7 1.3 1.3 2.2 2.3 2.5

Emerging Markets 6.9 5.5 6.1 6.6 6.5 6.4

World 3.8 3.0 3.3 4.1 4.2 4.3

Source: GS Global ECS Research.

Real GDP Growth

% yoy 2011 2012 2013 2014 2015 2016


2

-6

-4

-2

0

2

4

-6

-4

-2

0

2

4

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

EM

DM

World

Forecast

Percent of GDP Percent of GDP

Output Gaps:


Spare Capacity in DM But Not EM


3

Actual Data Growth consensus from Blue Chip Consensus Forecasts (February 2013)

Inflation consensus from Bloomberg

Fed consensus from Survey of Primary Dealers (December 2012)

Key US Economic Indicators:

GS vs. Consensus

Source: Dept. of Commerce. Bloomberg. FRB New York. GS Global ECS Research.

0.0

0.5

1.0

1.5

2.0

0.0

0.5

1.0

1.5

2.0

2H 1H 2H 1H 2H 1H 2H 1H

2012 2013 2014 2015 2016

Fed Funds Rate

GS

Consensus

Percent Percent

0

1

2

3

4

5

0

1

2

3

4

5

1H 2H 1H 2H 1H 2H 1H 2H

2013 2014 2015 2016

Fed Securities Holdings

GS

Consensus

Trillions of dollars Trillions of dollars

2011 2012 2013 2014

-1

0

1

2

3

4

5

-1

0

1

2

3

4

5

Growth (Real GDP)

Range*GS

Consensus

Ann. % chg. Ann. % chg.

* Top 10 avg - bottom 10 avg.

Forecast

0.5

1.0

1.5

2.0

2.5

3.0

0.5

1.0

1.5

2.0

2.5

3.0

2011 2012 2013 2014

Inflation (Core PCE)

Range*

GS

Consensus

Percent change, year ago Percent change, year ago

Forecast

* Top 10 avg-bottom 10 avg.


4

Temperature Check

Current Activity Indicator Slows in January

Jul Oct Jan Apr Jul Oct Jan

-1

0

1

2

3

4

5

-1

0

1

2

3

4

5

Housing

Employment

Consumer

Industry

Percent change, annual rate Percent change, annual rate

* First principal component of 25 key weekly and monthly US economic indicators.Source: GS Global ECS Research.

Current Activity Indicator (CAI)

2011 2012 2013


5 Temperature Check

Upside Data Surprises Have Stopped

-4

-3

-2

-1

0

1

2

3

-4

-3

-2

-1

0

1

2

3

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar

Standard deviation Standard deviation

US-MAP Surprise Index*

* Weighted index of US economic data surprises, linearly weighted 3-month average.Source: GS Global ECS Research.

2011 2012 2013


6 US Growth Outlook

Private Boost, Public Drag

-12

-9

-6

-3

0

3

6

9

12

-12

-9

-6

-3

0

3

6

9

12

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Private Sector Financial Balance

General Government Budget Balance

Source: Department of Commerce. GS Global ECS Research.


1960-2011

Avg = 1.9%


7 US Growth Outlook

Fiscal Drag Peaks in Mid-2013

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

Tax

Spending (Ex Sequester)

Sequester

Impact of Federal Fiscal Policy on

Real GDP Growth:

Percentage points Percentage points

2012 2013 2014



8

0

1

2

3

4

5

6

2

3

4

5

6

7

8

1950 1960 1970 1980 1990 2000 2010

Profit Margin, Domestic Industries (left)

Growth Rate of Real Private Capital Stock (right)

Percent Percent

Source: Department of Commerce.

US Growth Outlook

Capital Spending Looks Very Profitable


9 US Growth Outlook

Homebuilding Has a Long Way to Rise

0

400

800

1200

1600

2000

2400

2800

0

400

800

1200

1600

2000

2400

2800

86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Household Formation

Housing Starts

Thousands Thousands

* Assumed demolition rate of 300,000 per year. Source: Department of Commerce. GS Global ECS Research.

Household

Formation

Forecast

Housing Starts

Demolitions*


10 US Growth Outlook

Excess Housing Supply Has Fallen Sharply

1.0

1.5

2.0

2.5

3.0

1.0

1.5

2.0

2.5

3.0

1980 1985 1990 1995 2000 2005 2010

Homeowner Vacancy Rate*

Percent Percent

* Vacant homes for sale in percent of housing stock for owner occupation. Source: Department of Commerce.

1980-2005

Average = 1.6%


11

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

-6

-5

-4

-3

-2

-1

0

1

2

3

-6

-5

-4

-3

-2

-1

0

1

2

3

Unemployment Gap

Percent of labor force Percent of labor force

Participation Gap

Source: Department of Labor. GS Global ECS Research.

Labor Market Slack and Its Implications

Employment Still Far Below Potential


12

-5

0

5

10

15

-5

0

5

10

15

1975 1980 1985 1990 1995 2000 2005 2010

Average Hourly Earnings

Employment Cost Index*

Unit Labor Costs**


* Private industry workers. ** Nonfarm business sector.Source: Department of Labor.

Labor Market Slack and Its Implications

Wages and Unit Labor Costs Still Weak


13 Labor Market Slack and Its Implications

Implication #1: Profit Margins Expand

3

4

5

6

7

8

9

10

11

3

4

5

6

7

8

9

10

11

70 75 80 85 90 95 00 05 10 15

Actual

Forecast

Percent Percent

** After-tax adjusted profits as percent of GDP.Source: Department of Commerce. GS Global ECS Research.

Corporate Profit Margins*:


14 Labor Market Slack and Its Implications

Implication #2: Low Core Inflation

0

1

2

3

4

5

0

1

2

3

4

5

90 92 94 96 98 00 02 04 06 08 10 12 14

Actual

Fed Forecast

GS Forecast

Source: Department of Commerce. Federal Reserve Board.


Core PCE Inflation:

Fed Inflation Target = 2.0%


15

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0 2 4 6 8 10 12

Unemployment (%)

Liftoff from Funds Rate = 0


Inflation (%) Inflation (%)

December 2012

Optimal Control Approach

Current Threshold Guidance

Pre-CrisisTaylor Rule

Fed Policy Stays Easy

Visualizing the Shifts in Fed Policy


16

1

2

3

4

5

6

7

8

-1

0

1

2

3

4

5

6

2000 2002 2004 2006 2008 2010 2012

10-year Term Premium (left)*

10-year Yield (right)

Percentage points Percentage points

*As estimated by the Kim-Wright Term Structure Model.

Source: Federal Reserve Board. GS Global ECS Research.

A Gradual Increase in Bond Yields

The Bond Term Premium…


17

Mar Sep Mar Sep Mar Sep Mar Sep

-160

-140

-120

-100

-80

-60

-40

-20

0

-160

-140

-120

-100

-80

-60

-40

-20

0

QE3+Mid-2015

Twist 2

2014 Fwd Guidance

Twist

2013 Fwd Guidance

QE2

Reinvest MBS

QE1

Basis points Basis points

2009 2010 2011 2012

Note: Assumes no change in expectations between announcements.Source: GS Global ECS Research.

Total Portfolio Balance Effect on

10yr Yield Term Premium:

A Gradual Increase in Bond Yields

…Is Unlikely to Rise Quickly as QE Persists


18 The Truth about the Deficit

Deficit Should Decline in Coming Years

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

-12

-10

-8

-6

-4

-2

0

-12

-10

-8

-6

-4

-2

0

Actual

GS Forecast


US Federal Budget Deficit:

Source: CBO. GS Global ECS Research.

Forecast


19

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Social Security

Healthcare

Other Noninterest

Spending

Percent of GDP Percent of GDPCBO's Long-Term Alternative Fiscal Scenario

Actual Projected

Source: Congressional Budget Office.

Total Primary

Spending Revenues

The Truth about the Deficit

Healthcare Holds the Key


20 Where Shale Matters

Energy Supply Gets More Elastic


21

0

1

2

3

4

5

6

0

1

2

3

4

5

6

Saudi A

rabia

('6

9 -

'74)

Saudi A

rabia

('8

7 -

'92)

US

('1

1 -

'16)

Russia

('9

9 -

'04)

Iran (

'68 -

'73)

Saudi A

rabia

('7

5 -

'80)

US

('6

5 -

'70)

Lib

ya('65 -

'70)

Iraq

('9

4 -

'99)

Kuw

ait (

'91 -

'96)

Mexic

o (

'77 -

'82)

Nig

eri

a (

'68 -

'73)

Saudi A

rabia

('9

9 -

'04)

Iraq

('8

3 -

'88)

UK

('7

5 -

'80)

Iraq

('7

4 -

'79)

Iran (

'86 -

'91)

Norw

ay('91 -

'96)

UA

E (

'86 -

'91)

UA

E (

'69 -

'74)

Ang

ola

('0

3 -

'08)

5 year Increase in Oil Production


Millions of barrels per day Millions of barrels per day

Where Shale Matters

A Big Supply Boost in Absolute Terms…


22

0

25

0

25

Kuw

ait (

'91 -

'96)

Ang

ola

('0

3 -

'08)

Saudi A

rabia

('6

9 -

'74)

Saudi A

rabia

('8

7 -

'92)

Saudi A

rabia

('7

5 -

'80)

UA

E (

'86 -

'91)

Russia

('9

9 -

'04)

Iran (

'86 -

'91)

Norw

ay('91 -

'96)

Saudi A

rabia

('9

9 -

'04)

Mexic

o (

'77 -

'82)

UA

E (

'69 -

'74)

UK

('7

5 -

'80)

US

('1

1 -

'16)

5-year Increase in Oil Production

131 84 78 35 27



Where Shale Matters

…But a Much Smaller One Relative to US GDP


23

Fiscal

Crisis

Economic

Crisis

Banking

Crisis

Bank Solvency

& Liquidity

Concerns

Fiscal

Austerity

Reduced

Loan Supply

Lower Tax

Receipts

Expected

Bailout Costs

Loan Losses

The European Crisis

ECB Addresses Part of the Vicious Cycle

LTRO

ESM & OMT


24

0.75

0.80

0.85

0.90

0.95

1.0099.0

99.2

99.4

99.6

99.8

100.0

100.2

100.4

100.6

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr

GSFCI* (left)

Euro Risk** (right, inverted)

2010 2011 2012

Worse

* Wt avg of riskless int rates, spreads, equities, FX and house prices, based on ef fects on1-yr fwd US GDP growth.** First principal component of European bank stocks, bank CDS, svrgn CDS, and EUR/USD cross-currency basis spread.Source: GS Global ECS Research.

Index Index

2013

The European Crisis

ECB Has Reduced Spillover Risk


25

94

96

98

100

102

104

106

108

94

96

98

100

102

104

106

108

05 06 07 08 09 10 11 12 13

Germany

France

Italy

Spain

Tighter

Financial Conditions Index:


Index (2007=100) Index (2007=100)

The European Crisis

Periphery FCIs Only a Bit Easier


26

Germany France Italy Spain

-1.8

-1.6

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

-1.8

-1.6

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

Percentage points

2012

2013

2014

Percentage points


Fiscal Drag on Real GDP Growth:

The European Crisis

Fiscal Drag Intensifies in Spain and France


27

90

100

110

120

130

140

150

90

100

110

120

130

140

150

00 01 02 03 04 05 06 07 08 09 10 11 12

Germany

France

Ireland

Italy

Spain

Greece

Portugal

Unit Labor Costs:

Index (2000Q1=100) Index (2000Q1=100)

Source: National Statistics. Haver Analytics. GS Global ECS Research.

The European Crisis

ULCs Have Only Adjusted Partially


28

Key Numbers in the US Economic Outlook

2011 2012 2013 2014 2015 2016 2012 2013

(f) (f) (f) (f) (f) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

OUTPUT AND SPENDING

Real GDP 1.8 2.2 1.8 2.9 3.2 3.0 2.0 1.3 3.1 -0.1 2.8 1.5 2.0 2.5

Consumer Expenditure 2.5 1.9 1.7 2.5 2.7 2.5 2.4 1.5 1.6 2.2 1.2 1.5 2.0 2.0

Residential Fixed Investment -1.4 11.9 13.7 14.8 13.4 12.5 20.6 8.4 13.6 15.3 13.9 12.5 15.0 15.0

Business Fixed Investment 8.6 7.7 5.7 9.0 7.5 5.8 7.5 3.6 -1.8 8.4 5.0 6.5 8.6 9.3

Structures 2.8 9.6 2.5 7.0 5.9 5.0 12.8 0.6 0.0 -1.1 3.4 4.0 5.0 7.5

Equipment & Software 11.0 6.9 6.9 9.8 8.1 6.1 5.4 4.8 -2.6 12.5 5.6 7.5 10.0 10.0

Federal Government -2.8 -2.2 -5.3 -5.9 -2.5 -1.2 -4.2 -0.2 9.5 -15.0 2.5 -12.5 -10.0 -5.0

State and Local Government -3.4 -1.3 0.1 1.2 1.8 2.0 -2.2 -1.0 0.3 -0.7 0.1 0.0 1.0 1.0

Net Exports ($bn, '05) -408 -406 -393 -411 -433 -445 -416 -407 -395 -404 -393 -389 -392 -396

Inventory Investment ($bn, '05) 31 45 42 49 57 57 57 41 60 20 38 45 43 43

Industrial Production, Mfg 4.3 4.1 0.9 2.8 3.7 3.1 9.8 0.7 -0.8 0.0 1.0 2.0 2.0 2.0

INFLATION (% ch, yr/yr)

Consumer Price Index (CPI) 3.1 2.1 1.7 1.8 2.0 2.1 2.8 1.9 1.7 1.9 1.5 1.8 1.8 1.7

Core CPI 1.7 2.1 1.7 1.8 1.9 2.1 2.2 2.3 2.0 1.9 1.8 1.6 1.7 1.7

Core PCE* 1.4 1.7 1.3 1.5 1.6 1.8 1.9 1.8 1.6 1.5 1.2 1.2 1.3 1.5

Unit Labor Costs 1.9 0.6 1.2 1.5 1.7 2.1 0.2 0.4 0.0 1.9 0.4 1.1 2.1 1.4

LABOR MARKET

Unemployment Rate (%) 8.9 8.1 7.7 7.3 6.7 6.3 8.2 8.2 8.0 7.8 7.8 7.8 7.7 7.6

FINANCIAL SECTOR

Federal Funds** (%) 0.00 0.00 0.13 0.13 0.13 1.25 0.00 0.00 0.00 0.00 0.06 0.13 0.13 0.13

3-Month LIBOR (%) 0.07 0.16 0.30 0.30 0.30 1.50 0.13 0.16 0.14 0.16 0.23 0.30 0.30 0.30

Treasury Yield Curve** (%)

2-Year Note 0.56 0.31 0.40 0.60 1.50 2.00 0.47 0.47 0.39 0.31 0.30 0.30 0.35 0.40

5-Year Note 0.26 0.26 1.20 1.75 2.50 3.00 0.34 0.29 0.26 0.26 0.58 0.90 1.00 1.20

10-Year Note 0.89 0.70 2.20 2.75 3.25 3.75 1.02 0.71 0.67 0.70 1.35 2.00 2.10 2.20

30-Year Bond 1.98 1.72 3.25 3.65 4.00 4.25 2.17 1.62 1.72 1.72 2.39 3.05 3.05 3.25

FOREIGN SECTOR

Current Account (% of GDP) -3.1 -3.0 -2.9 -3.2 -3.5 -3.8 -3.5 -3.0 -2.7 -2.9 -2.9 -2.9 -3.0 -3.0

Euro ($/€)** 1.32 1.31 1.40 1.40 1.35 1.25 1.32 1.25 1.29 1.31 1.36 1.40 1.40 1.40

Yen (¥/$)** 78 84 87 87 100 110 82 79 78 84 85 87 87 87

* PCE = Personal consumption expenditures. ** Denotes end of period. *** Profits are after taxes as reported in the national income.

and product accounts (NIPA), adjusted to remove inventory profits and depreciation distortions.

NOTE: Published figures are in bold.


29

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