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Economic OutlookSt. Louis

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October 22, 2015

Grant BlackDirector

Inspire. Inform. Equip.

St. LouisEconomic Outlook

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Alan RobbinsChair, St. Louis Council on Economic Education


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ModeratorKate Warne

Principal and Investment Strategist, Edward Jones


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Past performance is not a guarantee of future returns.

Member SIPC

SpeakerCharles W. Calomiris

Henry Kaufman Professor of Financial Institutions,Columbia School of Business


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Feeless Forecasts

Charles W. CalomirisColumbia University

October 22, 2015

Forecasting Flat Growth Year

Unemployment 4.8%GDP growth 2.5%CPI inflation 1.5%WTI Oil Price $47Dow 17,00010‐year Treasury 2.5%

Why These Numbers?• Begin with a forecast of aggregate demand (nominal

GDP growth), and I assume that it will be flat ingrowth (4%), despite some arguments in favor ofpositive acceleration, and some in favor ofdeceleration.

• Inflation and inflation expectations (medium‐term)are unchanged in near term, in my view, so realgrowth is 2.5%.

• Very low recent CPI inflation reflects the fact thatthe data are noisy and that inflation was reducedtemporarily due to new low level of energy prices.

• Unemployment forecast reflects a modified versionof Okun’s Law.

Why These Numbers? (Cont’d)• Fed will move slowly on interest rate rise, so 10‐year

Treasury will move slowly too, and problems in EMs and Europe and China will keep uncertainty high, which will prop up U.S. Treasury’s prices.

• Energy supply in U.S. is price elastic and efficiency is improving, so oil price will not bounce back.

• Stocks will be flat, which is how they have behaved in the last two Fed rate rising environments. They may be a bit high right now (P/E of 20 for S&P) , but we have already had a correction, from which we are recovering slowly, and there is no reason to expect a collapse.

Stock Returns before and during Fed Tightening Periods

Period Pre‐Period Returns Period Returns

1983‐84 14.7% 5.0%

1987‐89 6.8% 1.2%

1994 21.2% 2.2%

2004‐06 41.1% 0.2%

Digging Deeper: Nominal Growth• Some factors will be pushing nominal growth up

(reactions to low commodity prices in U.S., housingexpansion, acceleration of real personal incomegrowth and consumption, as consumers financeshave recovered), other (global) factors will bepushing nominal growth both down and up, and thetwo pressures will balance with little change.

• Drags that matter most will continue (taxation,regulation policies, political uncertainties that affectconsumer behavior, etc.). An acceleration in growthwill happen in medium term, if those change, butnot this year.

• Other drags that will increase will not make thingsmuch worse for U.S. (China, Europe, EMs, MiddleEast, Geopolitics).

What I’m Rejecting and Why• Upside nominal GDP argument based on

monetarist view about very high Divisia M2 growth (neglects repo effects of QE3.

• Deflation projections (don’t take account of temporary effects of energy price changes).

• Deflation worries about demand (three factors are needed: large size, surprise, and lack of offset by real income – focus should be on nominal demand growth).

• Downside view based on global factors exaggerates their importance and one‐sidedness.

Medium Term• Fed is now behind the curve on rate increases and

will continue that mistake.• After 2016 election, eventually reversion to normalcy

will cause regulatory and tax policy to improve, and risk environment will improve, causing money multiplier to rise.

• We will also see much higher interest rates.• Fed, therefore, will face new political pressures that

will make it harder to tighten quickly (balance sheet effects), and Fed is politicized and adrift, so those factors will aggravate the problem.

• Medium‐term acceleration in nominal demand, real growth, and inflation seem likely.

SpeakerEllen Hughes‐CromwickUniversity of Michigan

former Chief Global Economist, Ford Motor Company


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Perspectives on U.S. Economic Outlook

St. Louis Economic Outlook Forum

Crowne PlazaClayton, MissouriOctober 22, 2015

Ellen Hughes-CromwickRoss School of BusinessUniversity of Michigan

Views expressed in this presentation are those of Ellen Hughes-Cromwick and are in no way attributable to the Ross School of Business at the University of Michigan

• Global economy to pick up next year

• U.S. economy in 7th year of sustained economic expansion,and will likely begin its 8th year of growth by mid-2016

• Federal Reserve to remove modest amount of policystimulus with minimal effect on business conditions

• Inflation to remain well contained in 2016

• Further decline in unemployment rate to below 5%

• Risks and opportunities are balanced this year

Key Points Today

1

2016 Outlook Summary

2

• Strongest sectors of U.S. economy in 2016 likely to be:− Housing, chemicals, business services, and health care− Consumer spending on services

• Oil price decline to provide positive underpinning for net importers – China and India

• Weak currencies among several emerging markets will make their businesses more competitive in U.S. and Europe next year

• Euro area growth to improve from 2015 pace

• U.K. strength to edge down from current near-3% pace

Global GDP

3

Note: Global growth rate, inflation adjusted, at market exchange rates; historical data are IMF World Economic Outlook (October 2015); author’s estimate for 2015-16 outlook

4.1

2.7 3.03.5

-3.0-2.0-1.00.01.02.03.04.05.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Proj.

2016Proj.

Global GDP% Chg Over Prior Year

• A complete business cycle is:

‒ Expansion in economic activity, followed by a recession period, and then, to complete the cycle, another expansion period

• This is called “peak to peak” – a complete cycle of activity

• 33 cycles since mid-1800s

• Current economic expansion started in June 2009

• Q4 2015 is 26th quarter of U.S. economic expansion

• Only 3 expansions have lasted as long as current one:

‒ 1961 - 1969 35 Quarters

‒ 1982 - 1990 31

‒ 1991 - 2001 40

U.S. Business Cycle

4

• Economic policy mistakes

• “Errors in optimism”

• Unexpected surge in oil prices (“oil price shock”)

Recession Triggers Not Evident Today

5

Expansions do not die of old age

Very positive that this expansion is still going after 6 years

Better to have sustained, somewhat lower growth than recessionary setbacks

U.S. Outlook For 2016

6

Variable Units Forecast Range

Real GDP% Change for

Q2 2015 – Q2 2016 2.5 2.0 – 3.0

CPI% Change for

Sept 2015 – Sept 2016 1.7 1.5 – 2.0

Unemployment Rate % as of Sept 2016 4.3 4.0 – 4.5

10-Year TreasuryBond Yield

% per Annum as of Sept 2016 Average 2.50 2.25 – 3.00

Dow Jones Industrial Average

Index Average for Sept 2016 17,000 16,500 – 17,500

West Texas Intermediate Crude Oil Price

USD per Barrel Average for Sept 2016 60 40 – 80

• Consumer spending growth trending in 3% range

‒ Income growth in 3.0 – 4.0% range (inflation adjusted wage growth of 1.5% PLUS job growth of 2% EQUALS income growth in this range)

• Still low inflation

• Modest build in inventories next year

• Housing investment growth trending around 8%

• Modest contributions from growth in plant and equipment investment

• Bigger trade deficit

• Government spending growth trending under 2%

Behind The GDP Forecast

7

Global Commodity Price Declines

8

127

190

162

135 128

100110120130140150160170180190200

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Proj.

2016Proj.

Source: IMF World Economic Outlook, October 2015; non-fuel, includes food and beverages and industrial

Global Commodity Price Index2005=100

USD Up Cycle

9

• USD bull run may be through initial phase: Expectations adjustmentresulting from improved growth outlook and Fed closer to policy pivot point

• Real trade-weighted USD up 22% since 2011 trough over nearly 4 years

• Two prior USD up cycles shown in chart lasted 6+ years and werecumulative gains of 52% in the early 1980s and 34% in the 1990s

Source: Federal Reserve; averages of daily figures. Series is price adjusted. A weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners. Broad currency index includes the Euro Area, Canada, Japan, Mexico, China, United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile, and Colombia.

125

84

112

81

98

020406080

100120140

1980 1985 1990 1995 2000 2005 2010 2015

Real Trade-Weighted USD Index

U.S. Labor Market And Wage Growth

10

Contribution to Overall Job Gains

Year-Over-YearJob Growth

Professional and Business Services 22% 3.2%Education and Health Care 21% 2.6%Leisure and Hospitality 15% 2.9%Retail Trade 11% 2.0%Construction 7% 3.3%

Top Five Job Creating SectorsContributions to Job Gains by Sector And Year-Over-Year Job GrowthSeptember 2014 – September 2015

• Job growth at 2% with 2.8 million jobs created since September 2014• Wage growth at 2.2% during last 12 months

• The average of 9 prior expansions grew a cumulative 28% from the trough• The current expansion is one-half that pace at 14% gain since Q2 2009• If the current expansion had been at average speed, it would translate into an additional $2 trillion of

real income or over $6,500 per person** Civilian noninstitutional population

U.S. Real GDP

11

Quarters Before and After the Business Cycle Trough

14

28

-5

0

5

10

15

20

25

30

6 3 Trough 3 6 9 12 15 18 21 24

Real GDPCumulative % Change From Trough Quarter

Average of Prior 9 Cycles Compared to Current Cycle

Current

Average $2 TrillionBelow Average

• Consumer spending on durable goods has nearly matched the average pace of expansion• The demand is centered on automotive purchases• But even spending on appliances and furniture have done well• Funding channels are open and wealth effect supports this sector of the economy

U.S. Consumer Spending onDurable Goods

12

Current

Average

05

101520253035404550

6 3 Trough 3 6 9 12 15 18 21 24

Real Consumer Spending on Durable GoodsCumulative % Change From Trough Quarter


• The big hole in GDP in current cycle is demand for consumer services• As of Q2 2015, $1 trillion below average• Represents 60% of the below-average GDP performance

U.S. Consumer Spending on Services

13

Current

Average

10

26

-10

-5

0

5

10

15

20

25

30

6 3 Trough 3 6 9 12 15 18 21 24

Real Consumer Spending on ServicesCumulative % Change From Trough Quarter


$1.1 Trillion Shortfall

• In the aggregate, nonresidential investment spending is growing at historical average rate• First half 2015 setback• Business spending on equipment is the outperformer among all major end markets• This lays substantive groundwork for productivity growth in the years ahead

U.S. Capital Spending

14

Current

Average35

39

-5

0

5

10

15

20

25

30

35

40

45

6 3 Trough 3 6 9 12 15 18 21 24

Nonresidential Investment SpendingCumulative % Change From Trough Quarter


67 66

48

0

10

20

30

40

50

60

70

80

6 3 Trough 3 6 9 12 15 18 21 24

Equipment Investment SpendingCumulative % Change From Trough Quarter


Current Expansionary Pace ExceedsCyclical Average

Current ExpansionSince Q2 2009

Average of 9 Prior Expansions

• Consumer spending on health care services is well below historical average• If this grew at the historical pace, it would represent $226 billion in demand • Health care services spending growth is below average due to two forces at play: a positive

supply shock (health care reform) and some trimming of discretionary purchases

U.S. Consumer Spending onHealth Care Services

15

Current

Average 15

29

-10-505

101520253035

6 3 Trough 3 6 9 12 15 18 21 24

Consumer Spending on Services --- Health CareCumulative % Change From Trough Quarter


$226 Billion Shortfall

• Global economy entering period well beyond financial crisis and 7 years ofexpansion in the U.S.

• Expect global GDP gains to improve in the next 12 – 24 months

• U.S. economic growth projected at 2.5% (year-over-year) by mid-2016 andabove its long-run sustainable trend of 2.0%

• U.S. businesses have several strengths centered in energy, manufacturing,capital goods, IT, and healthcare

In Closing

16

SpeakerRonald J. Kruszewski

Chairman of the Board of Directors, Stifel Financial Corporationand Stifel, Nicolas & Company Incorporated


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St. Louis Economic Outlook Forum

Ron KruszewskiChairman and Chief Executive Officer

30 Years of Steady Growth

16,000

14,000

12,000

10,000

8,000

6,000'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06

Real GDP Trend (1980-2007)

How Did The U.S. EconomySlip Off Track?

U.S. Real Gross Domestic Product

1980-2007 Trend Growth = 3.3%

Off Track?

20,000

16,000

12,000

8,000

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

Real GDPTrend (2007-2015)Trend (1980-2007)

How Did The U.S. EconomySlip Off Track?

U.S. Real Gross Domestic Product

1980-2007 Trend Growth = 3.3%

New Trend = 1.5%

Structural Factors Driving Growth

Trend Annual Growth Rate

Factor 1980-2007 2007-Today

========== ===========

Labor Hours 1.4% 0.3% Down

Capital Investment 5.6% 2.4% Down

Productivity 1.6% 1.1% Down

========== ===========

Total Output 3.3% 1.5% Down

What Changed?

Immigration

Other Keys to Turning the Ship Around

1. Sound fiscal policy a must

2. Minimal intrusion by public sector on the private sector

3. Competition is encouraged

4. Support investment in infrastructure and human capital

5. Maintain sound tax policies

China and the U.S. Industrial Revolution

1850‐1900 U.S. IndustrialRevolution

ChinaToday

China’s Amazing Growth1/3 of World’s GDP Growth Since 2009

China Grew $5 Trillion

Rest of World Grew $13 Trillion

Total World Grew $18 Trillion

$59 TrillionWorld GDP

2009

$77 TrillionWorld GDP

2014

China’s Borrowing Binge

China CreditBillions USD (Non-Financial Sector)

Sector Fourth Quarter 2009

First Quarter2015

Change(Billions $)

Total% Change

Annualized % Change

Households $1,195 $3,838 +$2,643 221% 25%

Corporations 6,216 16,745 +10,529 169% 21%

Government 1,829 4,376 +2,547 139% 18%

===== ===== =====

Total Credit $9,240 $24,959 +$15,719 170% 21%

Total GDP $5,100 $10,400 +$5,300 104% 15%

Source: Bank of International Settlements

Credit growing 3x faster than GDP is not sustainable.

U.S. Forecasts

.2

.3

.4

.5

.6

IV I II III IV I II III IV I II III IV I II III IV2012 2013 2014 2015

Brazilian Real / USD

.07

.08

.09

.10

.11

.12

.13

.14


South African Rand / USD

.010

.015

.020

.025

.030

.035


Russian Ruble / USD

.22

.24

.26

.28

.30

.32

.34


Malaysian Ringgit / USD

.014

.015

.016

.017

.018

.019

.020

.021


Indian Rupee / USD

.055

.060

.065

.070

.075

.080

.085


Mexican Peso / USD

STRONG DOLLAR WEIGHS ON EMERGING MARKETS

Down 50%

Down 50%

Down 60%

Down 30%

Down 25%

Down 30%

EMPLOYMENT AND INFLATION

In economics, the Phillips Curve is a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result in an economy.

Over the past sixty years, the relationship between employment and inflation is weak.

-4%

0%

4%

8%

12%

16%

2%3%4%5%6%7%8%9%10%11%

UNEMPLOYMENT RATE

INFL

ATIO

N RA

TE

PHILLIPS CURVEA GOOD PREDICTOR OF INFLATION?

U.S. Forecasts(Third Quarter 2016)

Indicator Q3 2016Forecast

Rationale

GDP +2.1% Slow Growth ContinuesInflation (CPI) +1.0% Excess Capacity Remains / Deleveraging

ContinuesUnemployment Rate 5% Employment Gains Continue as Labor

Force Growth Picks Up10-Year Treasury Yield 2% No Big Move Higher Yet as Growth and

Inflation Remain Below TrendDow Jones 18,100 Better return than bonds or cash.

Multiples and margins above average. Lower returns than recent years.

Oil (West Texas Intermediate)

$40 Struggles with slower global growth and demand. Oversupply takes time to clear.

Benefits to consumer and energy intensive industries / net energy

importers.

Forecast #1: GDP RISES 2.1%

-6%

-4%

-2%

0%

2%

4%

6%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

U.S. Domestic Production (GDP)% Change, Adjusted for Inflation

2.1%Estimate

Recessions Shaded

Forecast #2:Inflation Remains Near 1%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

U.S. Inflation (CPI)% Change

1%Estimate

Recessions Shaded

Forecast #3:Unemployment Rate at 5%

3%

4%

5%

6%

7%

8%

9%

10%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

U.S. Unemployment Rate

5%Estimate

Recessions Shaded

Forecast #4:Interest Rates Remain Near 2%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Interest Rates10 Year U.S. Treasury Bond Yield

2%Estimate

Recessions Shaded

Forecast #5:Dow Rises to 18,100

20,000

16,00014,00012,000

10,000

8,000

6,000

4,000

2,0001990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016


Recessions Shaded

Forecast18,100

Forecast #6:Oil Remains Under Pressure

$0

$20

$40

$60

$80

$100

$120

$140

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Oil PriceWest Texas Crude

$40Estimate

Recessions Shaded

Risks to Forecast

1. Debt brinksmanship

2. Fed tightens too soon

3. Global deflation

Thank you.

ExpertProjections

PercentChange in Gross

Domestic Product (GDP)

Percent Change

Growth in Consumer Price Index

(CPI) Ten‐Year Treasury


U.S. Unemployment Rate Crude Oil

Mickey Levy 2.75% ‐3.00% 2.4% 2.8% 17,700 5.4% $85 bbl

Laurence Meyer 2.8% 2.0% 3.6% 17,400 5.6% $82 bbl

Yong Yang 2.9% 2.0% 3.25%Likely moving sideways

5.6% Weak

Actuals 2.4% 0% 2.1% 17,100 5.1% $45

What the Experts Expected by October, 2015 (actuals in red)


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ExpertProjections

PercentChange in Gross

Domestic Product (GDP)

Percent Change

Growth in Consumer Price Index

(CPI) Ten‐Year Treasury


U.S. Unemployment Rate Crude Oil

Charlie Calomiris 2.5% 1.5% 2.5% 17,000 4.8% $47

Ellen Hughes‐Cromwick

2.5% 1.7% 2.5% 17,000 4.3% $60

Ron Kruszewski 2.1% 1.0% 2.0% 18,100 5.0% $40

What the Experts Expect by October, 2016


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