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The Economy: Getting Better, But…
Itron EFG Meeting
May 10, 2012Ri h d L hRichard LynchManager, Entergy Sales Forecasting
Topics
A brief history of the recovery
Where are we now?
Risk factors
Regional trends Regional trends
1
The Economy as Art
The private sector, marching stalwartly forward in the midst ofchaos, high exogenous risks and persistently goofy monetary
2
g g p y g y yand fiscal policy
It’s Been a Slog
1.15
Length of Economic Recoveries# of Quarters to Regain Lost Real GDP
Source: U.S. Dept. of Commerce Ratio of GDP to Peak
1.00
1.05
1.10
0.85
0.90
0.95
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
It took nearly four years to regain the output lost from the 2007 recession
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
1973 1981 1990 2001 2007
It took nearly four years to regain the output lost from the 2007 recession
Slowest recovery in post WWII era
Unusually steep decline and slow rebound due to financial nature of this downturn
3
downturn
Labor Market Particularly Soft
150,000
Long Term Employment TrendsTotal Nonfarm EmploymentSource: U.S. Dept. of Labor
110,000
120,000
130,000
140,000
Recession1973198119902001
3349
Months to Regain Peak2029
80,000
90,000
100,00020012007 51+
49
Each recession since early 70’s has seen progressively slower recovery in employment
70,000Jan-73 Jun-77 Nov-81 Apr-86 Sep-90 Feb-95 Jul-99 Dec-03 May-08
p y
Four plus years in on this one and counting – still over five million down and not likely to get them back for at least two more years
Structural changes at work – shift to services increased productivity foreign
4
Structural changes at work shift to services, increased productivity, foreign competition and jobs/skills mismatches
Growth Potential is Slowing
6 0%
7.0%
Long Term GDP TrendFive Year CAGRs
Sources: U.S. Commerce Dept and Moody's Analytics.
Decade Starting: Avg GDP Growth
3.0%
4.0%
5.0%
6.0% 19501960197019801990
3.3%3.1%3.2%
4.4%4.2%
0.0%
1.0%
2.0%
1952 1962 1972 1982 1992 2002 2012 2022
200020102020
1.7%2.7%2.0%
The U.S. economy will likely to grow more slowly in the future than the past
1952 1962 1972 1982 1992 2002 2012 2022
Work force is growing more slowly and is aging
Fewer workers supporting more retirees = problems for benefit programs
5
Productivity growth will be the key
Short Term Picture: Muddling Along
5.0
6.0
% of GDP Growth
Sector Contributions to GrowthSource: U.S. Department of Commerce
0.0
1.0
2.0
3.0
4.0
-2.0
-1.0
0.0
Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12
Personal Consumption Private Investment Net Exports & Gvt. Spending
Q1 GDP growth 2.2%, vs. 3.0%, 1.8% and 1.3% in prior quarters
Consumption growth quite strong in Q1 Consumption growth quite strong in Q1
Private investment soft due to expiration of accelerated depreciation tax break (from stimulus package) and deceleration in inventory accumulation
N t t d t di k t lik l t t d
6
Net exports and government spending weak spots – likely overstated
Jobs: Two Steps Forward, One Back
9.8
10.0
500
600 (in %)(in 000's)
Labor Market IndicatorsSource: U.S. Dept. of Labor
8.8
9.0
9.2
9.4
9.6
100
200
300
400
8.0
8.2
8.4
8.6
(300)
(200)
(100)
-
Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12
March payrolls up only 120,000
Change in Non-farm Payrolls Unemployment Rate
Mild winter likely resulted in some job growth borrowed from Spring Average of last four months of 215,000 – good, but not great Looks like we might not have to repeal “Okun’s Law” after all
7
Looks like we might not have to repeal Okun s Law after all
Retail Sales Robust
1.6%
Retail Sales% Change Prior Mo. Seasonally Adjusted
Source: U.S. Census Bureau
0.7%
0 3% 0 3%
0.7%
1.0%0.8%
0.5%
1.2%
0.9%0.8%0.8%
1.2%
0.3% 0.3%0.2%
-0.2%-0.4%
0.0%
0.4%
O t 11 N 11 D 11 J 12 F b 12 M 12
Kicking rear, taking names, three straight months
Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12
Total Retail Total less Autos
Aided by booming car sales Consumers seem to be shrugging off higher gasoline prices, for now Is this sustainable?
8
Is this sustainable?
Car Sales Particularly Strong
16 000
Automobile SalesThousands of Units, Seasonally Adjusted Annual Rate
Source: U.S. Dept. of Commerce
13 000
14,000
15,000
16,000
10 000
11,000
12,000
13,000
G ll i i i l i l b hi i
9,000
10,000
Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12
Generally, rising gas prices mean slumping car sales, but not this time Cars are getting so old (>10 year average fleet age) that it may not matter New cars are so much more fuel efficient that high gas prices may be a
lli i t
9
selling point
Consumption Surge Being Financed
4.04.5
Personal Income and Spending% Change Prior Year
Source: U.S. Dept. of Commerce
1.52.02.53.03.54.0
-0.50.00.51.0
Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12
Inflation adjusted spending outstripping incomes
Real Personal Disposable Income Real Spending
Savings rate has plunged to recession-like 3.7% Caveats abound: income data may be understated, car loans are up, etc. Still ?
10
Still…?
Manufacturing Led Recovery to Date
66
ISM Manufacturing ReportSource: Institute for Supply Management
46
50
5458
62
30
34
3842
46
00 0 02 03 0 0 06 0 08 09 0 2Jan‐00 Jan‐01 Jan‐02 Jan‐03 Jan‐04 Jan‐05 Jan‐06 Jan‐07 Jan‐08 Jan‐09 Jan‐10 Jan‐11 Jan‐12
ISM Expanding Economy Expanding Manufacturing
High commodity prices, rising exports, auto industry recovery, need to rebuild inventories all factors driving industrial recovery
Starting to get a little long in the tooth, especially exports
11
But Growth Now Moderating
6 6%9%
% Change
Industrial Output Sources: U.S. Dept. of Commerce
0.3% 0.3%
5.0%
0.7%
6.5%
2.2%
6.6% 5.3%
0%
3%
6%
-0.2% -0.9% -0.5%-1.8%
-0.3%
-2.0%
-6%
-3%
0%
Manufacturing Chemical Petroleum & Coal
Paper Wood Primary Metals
Plastics & Rubber
March industrial production slipped pretty much across the board
Coal Metals Rubber
vs. Prior Month vs. Prior Year
Positives – autos still strong and a modest revival in construction Negatives – exports fading, refining fundamentals weak and cyclical
recovery about spent
12
Baton is passing to consumers and service sector – up to the challenge?
Services Are Picking Up Pace
65
ISM Services ReportSource: Institute for Supply Management
>50 Indicates Service Sector Expansion
45
50
55
60
65
30
35
40
45
Jan‐00 Jan‐01 Jan‐02 Jan‐03 Jan‐04 Jan‐05 Jan‐06 Jan‐07 Jan‐08 Jan‐09 Jan‐10 Jan‐11 Jan‐12
Last three months above 56 consistent with strong growth
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
Services ISM Expanding Economy
Last three months above 56, consistent with strong growth Employment component indicates hiring is picking up Broad-based improvement: 16 of 18 industries are expanding
13
Natural Gas – Getting Ridiculous
4,000Tcf
Natural Gas StorageSource: Energy Information Administration
Working Inventories Compared to Five-Year Range
40
PetroChem Competitiveness RatioRatio of Oil to Natural Gas Prices
Source: American Chemistry Council and Moody's Analytics
2,000
2,500
3,000
3,500
15
20
25
30
35
1,000
1,500
,
Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12
Min Max Avg Current Year
0
5
10
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
PetroChem Competitiveness Ratio Line of Doom (>7 is good)
Mild weather and bodacious production are causing inventories to swell and prices to plunge
Drillers pulling back on pure-play gas by switching to oils and liquids plays; isn’t helping because “associated” gas flowing abundantly
Regionally, good news for consumers and industrials, E&P companies and service providers feeling the pinch
14
service providers feeling the pinch
Low NatGas Prices Stimulating Usage
6 3% 5 6%6 1%8%
% Change from Prior Year
Natural Gas Usage by SectorSource: U.S. Energy Information Administration
Natural Gas Usage by Sector% of 2011 Full Year
3.3%
6.3% 5.6%
0.0%-1.1%
1.9%3.9% 2.9%
6.1%
2.5%
-2%
0%
2%
4%
6%Res
19.4%
Power
Other8.6%
-9.9%
-4.6%
-12%
-10%
-8%
-6%
-4%
Res Comm Ind Power Other Total
Comm13.0%
Ind27.8%
31.2%
Q4 YTD
Residential and commercial usage soft in 2011 due to very mild weather But drop in prices has been good news for industrial and utility users
15
Energy Exploration Booming, But…
2,900
North American Oil & Gas Rig CountsSource: Baker Hughes Inc.
1 900
2,100
2,300
2,500
2,700
1,100
1,300
1,500
1,700
1,900
900Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
Shale gas revolution now rolling over into oil Gas glut will lead to shakeout in that industry Offshore finally recovering from Deepwater Horizon fallout
16
Offshore finally recovering from Deepwater Horizon fallout
Gasoline Prices Coming Off Boil
3 30
3.40
109
111($/Gallon)($/Barrel)
Daily Oil and Wholesale Gasoline PricesSource: Moody's Analytics
2.90
3.00
3.10
3.20
3.30
101
103
105
107
109
2.50
2.60
2.70
2.80
95
97
99
101
Jan
Jan
Jan
Jan
Jan
Feb
Feb
Feb
Feb
Mar
Mar
Mar
Mar
Apr
Apr
Apr
Both oil and gasoline prices have dropped over the past month
3‐ 10‐J
17‐J
24‐J
31‐J
7‐F
14‐F
21‐F
28‐F
6‐M
13‐M
20‐M
27‐M 3‐A
10‐A
17‐A
Oil (WTI) Wholesale Gas
g p pp p Soft demand in U.S., ongoing European crisis and slowdown in China are
principal factors, offsetting geopolitical issues Refining margins tightening again after respite
17
g g g g g p
Probably A Good Thing, Too
4.0%
30%
40%
Retail SalesGasoline
Gasoline Prices vs. Retail Sales% Change 3- Month Rolling Avg
Source: Moody's Analytics
0.0%
1.0%
2.0%
3.0%
-10%
0%
10%
20%
30%
-4.0%
-3.0%
-2.0%
-1.0%
-60%
-50%
-40%
-30%
-20%
Jan-02 Feb-03 Mar-04 Apr-05 May-06 Jun-07 Jul-08 Aug-09 Sep-10 Oct-11
Gasoline (U.S. Avg. Retail) Retail ex. Autos & Gas Stations
Gas price go up, retail sales not so good, and visa versa May not be quite so negative an impact this time around due to low utility bills
this winter (less stress on consumers)
18
Refining Industry Getting Tough
3 100
Vehicle Miles TraveledSource: U.S. Bureau of Transportation Statistics
12-month Rolling Sum in Billions of Miles
2,950
3,000
3,050
3,100
2 750
2,800
2,850
2,900
2,700
2,750
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
People are driving less and cars are more efficient Gasoline usage nationally likely dropping 3-4% over prior year When combined with tighter margins – not good news for refining industry
19
When combined with tighter margins – not good news for refining industry
Housing Has Bottomed
6.0
6.5
Total Home SalesSeasonally Adjusted Annual Rate in Thousands
Sources: U.S. Dept. of Commerce and The National Assoc. of Realtors
4 0
4.5
5.0
5.5
11.0
Mortgage Deliquency Rate% at Least 30 Days Past Due
Source: Mortgage Bankers' Association
3.0
3.5
4.0
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
7.0
8.0
9.0
10.0
4.0
5.0
6.0
Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11
Mortgage delinquencies are falling and sales are rising Still a long and rocky road, but the worst is likely past
F l ill till lik l i i i th d t b kl
20
Foreclosures will still likely rise in coming months due to backlog
Housing Bust Wasn’t Equal
1.6%
% Change Entering
Foreclosure TrendsSource: Mortgage Bankers Assoc. And Moody's Analytics
0 8%
1.0%
1.2%
1.4%
1.6%
0.2%
0.4%
0.6%
0.8%
0.0%Q1'06 Q1'07 Q1'08 Q1'09 Q1'10 Q1'11 Q1'12
Entergy States US
Housing never got as crazy in some areas even during bubble years Foreclosure rates are expected to slowly fall within Entergy region for the
rest of the year even as national rates rise
21
The Fed’s ‘70’s Tribute Show
3500
Federal Reserve Banks' Consolidated Balance SheetTotal Assets
Source: U.S. Federal Reserve Board
12
Real Short Term Interest RatesFederal Funds Rate Minus Inflation
2000
2500
3000
3500
2
4
6
8
10
12
0
500
1000
1500
-6
-4
-2
0
1970Q2 1976Q2 1982Q2 1988Q2 1994Q2 2000Q2 2006Q2
Fed Board Policy has been exceptionally loose since financial crisis
2007‐01‐03 2007‐10‐10 2008‐07‐16 2009‐04‐22 2010‐01‐27 2010‐11‐03 2011‐08‐10
First wave of “Quantitative Easing” (QE1) probably saved financial system Second wave (QE2) has been less successful and likely is setting stage for
inflationary surge
22
Then There is Europe
6 0
7.0
8.0
Ten Year Government Bond Yields
2.0
3.0
4.0
5.0
6.0in Percent
0.0
1.0
1‐Jan‐09
1‐Mar‐09
1‐May‐09
1‐Jul‐0
9
1‐Sep‐09
1‐No
v‐09
1‐Jan‐10
1‐Mar‐10
1‐May‐10
1‐Jul‐1
0
1‐Sep‐10
1‐No
v‐10
1‐Jan‐11
1‐Mar‐11
1‐May‐11
1‐Jul‐1
1
1‐Sep‐11
1‐No
v‐11
1‐Jan‐12
1‐Mar‐12
Europe in “when, not if” mode. Central bank easing at end of year pushed reckoning back some
Spain Germany US
Market got by “orderly” Greek default; Spain now focus of worries Federal Reserve Board leaning towards QE3 – may not have a choice This won’t end well
23
This won t end well
Moody’s Analytics Regional Outlook
8.0%
% ChangeEntergy vs. U.S. Long Term
Source: Moody's Analytics
2.0%
4.0%
6.0%
-4.0%
-2.0%
0.0%
1997 1999 2001 2003 2005 2007 2009 2011 2013
Moody’s estimates that Entergy region has outperformed nation eight of the past nine years; likely to continue over next few years
Entergy US
past nine years; likely to continue over next few years Not that we’re bragging or anything Moody’s expectation for 2012 regional growth 3.3% and for 2013 to 3.7%
% %
24
National outlook 2.4% and 2.8%, respectively
Location, Location, Location
% Change f rom Prior Year
Weather Adjusted Electricity Output Sources: Edison Electric Institute and Entergy Sales Forecasting
3.3%
1.9%
0.5%0.3%0.1%
2.7%
1.8%1.1% 0.5%
1.0%
2.0%
3.0%
4.0%Prior Year
-0.4%-0.9%
-2.1%
-0.1%
0.1%
-1.0%
-3.0%
-2.0%
-1.0%
0.0%
New Central Southeast South Rocky Pacific NW Total U. S.England and Mid-Atlantic
Industrial & West
Central
Centraly
Mountain and SW
Current Quarter YTD
Electricity growth during 2011 varied widely depending on location Strongest areas had limited exposure to real estate bubble and associated
industries and larger exposure to commodities
25
Bet This Happened to You
6.0%
% Change from Prior Year
Retail Electricity Usage by SectorSource: U.S. Energy Information Administration
1.2%
4.0%
0 0%
2.0%
4.0%
6.0%
-5.2%
-2.5% -2.4%-1.4% -1.8%
-0.2%
-6 0%
-4.0%
-2.0%
0.0%
-6.0%Residential Commercial Industrial Total
Q4 YTD
It was mild all over this year, leading to flat as reported sales Anecdotally, utilities across the country were reporting weak sales on a
weather adjusted basis – was it the economy? overcompensating for th ? I t f ffi i i ?
26
weather? Impact of efficiencies?
Summary It’s not your imagination – recovery has been slow
But national economy is slowly improving But national economy is slowly improving
Major threats hovering:G i Gas prices
European and U.S. financial problems
W til t d th h War, pestilence, assorted other horsemen
Economic growth and electricity sales trends differ across regions producers trumping consumersacross regions – producers trumping consumers
27