the trump economy - merrill lynch · the trump economy • there is a high degree of uncertainty...

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US Economic Weekly The Trump economy

10 November 2016

Macro viewpoint: The Trump economy There is a high degree of uncertainty regarding the policies that President-elect Trump will implement. In the short-term, the outlook is dependent on financial conditions and confidence, and so far, so good. We are therefore restoring our pre-election day view and now expect the Fed to hike in December.

We think the results of the election will slow growth in the first half of next year, but underpin the economy in the second half and into 2018. We are revising down our 1H GDP growth forecast by 0.5pp/qtr but pushing up our 2H forecast by 0.5pp/qtr. This leaves our annual GDP growth forecast for 2017 at 1.9%.

View from the top: Review The big news this week was the surprising result of the election with Donald Trump wining the White House and Republicans keeping majority of Congress.

Preview Based on strong results from the internal BAC card data, we are forecasting retail sales to increase 0.6% mom in October with core up 0.2% mom. There are multiple Fed speakers including Yellen testifying before the Joint Economic Committee on the 17th.

Tracking Wholesale inventories shaved 0.1pp from 3Q GDP tracking, leaving growth of 3.0%.

Data deck for 14 — 18 November

Date Time Indicator Period BofAML Estimate Consensus Previous

11/15/16 10:00 Business Inventories Sep — 0.2% 0.2% 11/15/16 8:30 Import Price Index (mom) Oct 0.3% 0.4% 0.1% 11/15/16 8:30 Advance Retail Sales Oct 0.6% 0.6% 0.6% 11/15/16 8:30 Retail Sales Less Autos Oct 0.5% 0.5% 0.5% 11/15/16 8:30 Core Control Oct 0.2% 0.4% 0.1% 11/15/16 8:30 Empire Manufacturing Nov -2.0 -3.5 -6.811/16/16 16:00 Net Long-term TIC Flows Sep — — $48.3bn 11/16/16 10:00 NAHB Housing Market Index Nov 63 63 63 11/16/16 9:15 Industrial Production Oct 0.1% 0.2% 0.1% 11/16/16 9:15 Capacity Utilization Oct 75.4% 75.5% 75.4% 11/16/16 9:15 Manufacturing Production Oct 0.3% 0.2% 0.2% 11/16/16 8:30 Producer Price Index (mom) Oct 0.4% 0.3% 0.3% 11/16/16 8:30 PPI Ex Food & Energy (mom) Oct 0.1% 0.2% 0.2%

11/16/16 8:30 PPI Ex Food, Energy, Trade (mom) Oct 0.2% 0.2% 0.3%

11/17/16 8:30 Initial Jobless Claims Nov 12 260k — 254k 11/17/16 8:30 Philadelphia Fed Nov 5.0 8.0 9.7 11/17/16 8:30 Housing Starts Oct 1100k 1162k 1047k 11/17/16 8:30 Building Permits Oct 1175k 1195k 1225k 11/17/16 8:30 Consumer Price Index (mom) Oct 0.5% 0.4% 0.3% 11/17/16 8:30 CPI Ex Food & Energy (mom) Oct 0.2% 0.2% 0.1% 11/18/16 10:00 Leading Indicators Oct — 0.1% 0.2%

Source: BofA Merrill Lynch Global Research, Bloomberg

Economics United States

Table of Contents

Macro viewpoint 2

View from the top 6

Data in the week ahead 7

Upcoming policy speakers 10

FOMC dove-hawk spectrum 10

Economic forecast summary 11

Global economic forecast summary 12

FX rate forecast summary 12

Monthly CPI forecast update 13

Rolling calendar of business indicators 14

Michelle Meyer US Economist MLPF&S

Emanuella Enenajor North America Economist MLPF&S

Lisa C. Berlin US Economist MLPF&S

Alexander Lin US Economist MLPF&S

US Economics MLPF&S

Ethan S. Harris Global Economist MLPF&S

Global Economics Team MLPF&S

Recent publications

Donald Trump victory = greater uncertainty Let’s make a deal? Housing in pictures: life of luxury The Long View: Getting to equilibrium Gasoline seasonality: back to the futures Housing in pictures: downward revision to starts The Fed’s inflation target: a modest proposal Yellen goes to Jackson Hole The US housing market in pictures

Timestamp: 10 November 2016 11:05PM EST

2 US Economic Weekly | 10 November 2016

Macro viewpoint

Lisa C. Berlin US Economist MLPF&S

Michelle Meyer US Economist MLPF&S

The Trump economy

• There is a high degree of uncertainty regarding the policies that President-electTrump will implement, leaving us to provide a range of scenarios for medium-termgrowth.

• Initially we had thought a Trump victory would cause some tightening of financialconditions, delaying the next Fed hike. Instead, markets have reacted favorably, sowe are bringing back our original call for a December rate hike.

• In the medium-term, we assume that across-the-board tax cuts will stimulategrowth. However, this could be partly offset by policies that lead to greater tradetensions. On net, this suggests stronger 2H 2017 growth and continuedacceleration into 2018, which risks a faster Fed hiking cycle in 2018.

The next few hours, days, weeks We believe the outlook for the economy in the short-run will be determined by two related factors: 1) clarity and confidence about the policies to be implemented and 2) health of the financial markets. Prior to the election the markets were signaling a risk-off trade under a Trump victory. Hence we thought the resulting tightness in financial conditions would be a net negative for near-term growth. We also expected business activity to slow a bit until there was clarity about economic policies going forward. Given these assumptions, our initial reaction to the results of the election was to revise down 1H GDP growth (by 0.5pp to each 1Q and 2Q) and assume that the Fed will not be able to deliver a hike in December.

The expected risk-off trade only lasted a few hours and markets have rallied significantly in the last few days under optimism about unified government and fiscal stimulus. This leads us to rethink our forecast. We now think the Fed will go ahead with a hike in December. Given that the Fed had signaled a hike was likely, we believe they would have needed a reason not to hike and financial conditions are not providing that “out.”

We are sticking with our view of slower growth in 1H 17 given a heightened degree of uncertainty, but we have to stay nimble and monitor both business and consumer confidence surveys. It could be that we underestimated the possibility of a confidence boost to the business community given the transition from a period of gridlock in Washington to one of unity, if the Republican Party-controlled Congress cooperates with President-elect Trump.

Things can go so right….and so wrong Before we address the likelihood of the possible policy changes and the impact on the economy, let us first list the various proposals from the Trump campaign:

1. Across the board tax-cuts: Trump’s plan includes income, corporate and internationaltax reform. Estimates for the loss of revenue on a static basis are anywhere from $4tnto $6tn1.

2. Infrastructure and defense/homeland security spending: Trump suggests he would“leverage public-private partnerships and private investments through tax incentives tospur $1 trillion in infrastructure investment over ten years.” He also proposes rebuilding

1 The Committee for a Responsible Federal Budget (CRFB) estimates that Trump’s policies would lower revenue by $4.5tn over a 10-year period. The Tax Foundation (TF) estimates $4.4tn-$5.9tn, and the Tax Policy Center (TPC) estimates $6.2tn. All estimates are on a static basis.

US Economic Weekly | 10 November 2016 3

our military by “eliminating the defense sequester and expanding military investment.” The CRFB had estimated this could cost about $450bn.

3. Anti-free-trade policies: Among other proposals, Trump says he will declare China a“currency manipulator”, renegotiate or withdraw from the North American Free TradeAgreement (NAFTA), and withdraw from the Trans-Pacific Partnership (TPP).

4. Fed changes: Trump has said he would not reappoint Fed Chair Yellen when her termends in February 2018. Trump will also have the opportunity to reappoint Fed Vice ChairFischer in June 2018 and select nominees for two vacancies on the Board, potentiallyleading the Fed to be more hawkish.

5. Repeal and Replace the Affordable Care Act (ACA): Trump proposes fully repealingACA and replacing it with “Health Savings Accounts, the ability to purchase healthinsurance across state lines and [letting] states manage Medicaid funds.” Although wehad written we thought there was a slim chance of comprehensive healthcare reform,we think this policy goal becomes much more possible under a Republican sweep.

6. Immigration: Trump proposes “removing the more than two million criminal illegal immigrants” and “suspend[ing] immigration from terror-prone regions where vetting cannot safely occur.” He also says he will construct a “wall on our southern border with the full understanding that the country of Mexico will be reimbursing the United States for the full cost of such wall”. He has also proposed to introduce many other restrictions on immigration.

We have learned over the years that there is a difference between campaign promises and actual policymaking once elected. However, we also know that many of Trump’s policies have not been detailed beyond broad proposals. We should therefore consider a variety of possible outcomes. In our view, it is very likely that Trump and Congress will agree on tax reform, especially given the similarities between his plan and the House’s Tax Reform Task Force Blueprint released during the summer. However, there is a great deal of uncertainty around trade, immigration, spending, and healthcare policies, which could be generally negative for the economy.

Lower taxation There is a lot of similarity between the tax proposal of Trump and the House, as we summarize in the Appendix. There is consensus around cutting corporate tax rates, consolidating and largely reducing income tax rates, some type of international corporate tax reform, and eliminating the estate and gift taxes. There will likely need to be negotiation over treatment of carried interest, capital gains, and deductions. The House plan also provides a sense of how we could see a tax cut without objection from fiscal conservatives in the House concerned about the deficit. The House plan is estimated by the Tax Foundation at $2.4tn over a decade on a static basis and only $191bn when accounting for the larger economy and broader tax base.

We think an agreement could ultimately be considered deficit-neutral in this way. Note that Trump cut his tax proposal by almost half during his campaign, suggesting he may be open to negotiation. Another question is how a major tax reform plan could avoid a filibuster from Democrats in the Senate. We think Senate Republicans could turn to “reconciliation”. Reconciliation bills can pass with 51 votes and cannot be filibustered, limiting the ability of Senate Democrats to stop passage.

Although there will need to be comprise between Congress and Trump, we think it is likely that we see between $2tn – 3tn in tax cuts over a 10-year period. We think we could see about $200-$300bn in tax cuts in 2017. And even if it isn’t passed until the spring, it is possible that the legislation will retroactively apply the tax cuts to all 2017 income.

The outlook for fiscal spending is much less certain. The new Republican House is very similar to the old House that pushed for fiscal discipline. Going ahead with large spending programs would widen the budget deficit and increase the outstanding level of debt, which becomes particularly problematic in an environment of rising interest rates. Although


infrastructure spending may face a steeper hurdle, we think there could be support for increased defense spending.

Trade tensions Given that anti-free-trade measures were central to Trump’s campaign, we think it is likely that there will be some attempts to restrict trade. Trump may declare China as a “currency manipulator”, but he could go further, putting in place emergency tariffs or starting the renegotiation of NAFTA, either of which could damage confidence and trade. Tariffs would raise the costs of goods for business and consumers. This would reduce profits, generate inflation and result in lower economic growth. One thing that a large majority of economists can agree on, regardless of political party, is that open trade is a positive for economic growth and prosperity.

Immigration & healthcare Policies around immigration could also be a drag to the economy. As we have previously highlighted, Macroeconomic Advisors in conjunction with the Bipartisan Policy Center found that “programs aimed solely at reversing past and discouraging future unauthorized immigration will reduce GDP growth and worsen budget outcomes.” Absent mass deportations his plan is estimated to cost only $50bn by the CRFB. However, attempts to deport large numbers of undocumented immigrants would have much bigger economic and fiscal impacts.

As we have previously written, Trump’s healthcare plan could cost $500bn. Block granting Medicaid could in principal generate budget savings to offset this, but the lack of details makes the proposal difficult to quantify. Trump’s proposal to reform the Veterans’ Affairs Administration is estimated to cost between $500bn and $1tn over the decade. Although these proposals are expensive and people lose insurance coverage, it may be perceived as business-friendly

Fiscal policy effectiveness varies over the business cycle The economic impact of new fiscal action depends on the assumed “multiplier” impact on GDP. Not all multipliers are equal (Table 1). Spending multipliers are higher than tax multipliers given that extra income from lower taxes can be saved instead of consumed. An updated 2015 CBO analysis of the American Recovery and Reinvestment Act estimated a direct government spending multiplier between 0.5 to 2.5, while the corporate tax provision was between 0 and 0.4.2

Moreover, there is a growing body of academic research that finds that estimates of fiscal multipliers depend on the state of the economy, having the strongest effect during recessions and when resources are underutilized. Focusing on the spending multiplier, Auerbach and Gordonichenko3 estimate a spending multiplier between 1.5 and 2.0 during US recessions and only 0.5 in expansion. Baum et al. also looks at tax multipliers, estimating a 0.1 vs -0.1 tax multiplier in the US when the output gap was either negative or positive, respectively, and found similar results across G7 countries4.

2 “ Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output in 2014.” Congressional Budget Office. February 2015. 3 Auerbach, Alan and Yuriy Gorodnichenko. “How Powerful are Fiscal Multipliers in Recessions?” NBER Reporter 2015 Number 2: Research Summary. 4 Baum, Anja et al. “Fiscal Multipliers and the State of the Economy.” IMF Working Paper. December 2012.

Table 1: CBO estimates of fiscal multipliers for American Recovery and Reinvestment Act

Multipliers ARRA activity Low estimate High estimate Direct government purchases 0.5 2.5 Transfer payment to state & local infrastructure 0.4 2.2 Other transfer payments to state & local 0.4 1.8 Transfer payment to individuals 0.4 2.1 Transfer payment to retirees 0.2 1.0 Tax cut for lower-middle income 0.3 1.5 Tax cut for upper income 0.1 0.6 Extension of first-time homebuyer credit 0.2 0.8 Corporate tax provisions 0.0 0.4 Source: Congressional Budget Office


In the business of forecasting We have to put pen to paper and come up with the most likely forecast for the economy. We are holding by our decision to lower H1 2017 GDP growth given heightened uncertainty. However, we now think the risks are to the upside for H2 2017 and 2018 growth. We are assuming about $2tn - 3tn in tax cuts over a 10-year period with an average multiplier of 0.3. We are accounting for some negative offset from greater trade tensions which could widen the trade deficit.

We have decided to revise up our GDP growth forecast for 2H 2017 by 0.5pp in each quarter, which leaves our GDP growth forecast at 1.9% in 2017. We have yet to release our forecast for 2018, but we think the risks are for stronger growth in 2018. Inflation will also likely accelerate more quickly given the combination of fiscal stimulus, trade tensions (higher import prices), changes to the Affordable Care Act (ACA) which limit the disinflationary tendencies as well as potential changes to immigration which slow the growth in the labor force. In our view, this means somewhat stronger growth and faster inflation, which should lead to a faster Fed hiking cycle. We are in the business of forecasting, but at this point we admit that our crystal ball is particularly cloudy right now, which suggests we will have to remain nimble in our forecast.

Appendix Table 2: Comparison of Trump vs House GOP tax plans

Trump House Corporate tax rate Cuts to 15% from 35% Cuts to 20% from 35%

International corporate tax reform Deemed repatriation of currently deferred foreign profits, at 10%

Exempts from US tax 100% of dividends from foreign subsidiaries; enacts a deemed repatriation of currently deferred foreign profits at 8.75% for cash profits and 3.5% for other profits; modifies all business income taxes to be border-adjustable, disallowing the deduction for purchases from nonresidents and exempting export profits and foreign-derived profits from taxation

Corporate AMT Eliminates Eliminates

Corporate deductions

Allows firms engaged in manufacturing in the US to choose between the full expensing of capital investment and deductibility of interest paid; eliminates the domestic production activities deduction and all other business credits, except for R&D credit

Eliminates a number of deductions, including the domestic production activities deduction; allows the cost of capital investment to be fully and immediately deductible

Childcare-related business provisions Introduces changes to tax credit for employer-provided day care No changes Pass-through Unclear Maximum tax rate of 25%

Estate & gift taxes Eliminates estate and gift taxes but disallows step-up in basis for estates over $10mn Eliminates

Income tax rates Consolidates current tax brackets into three: 12%, 25%, and 33% Consolidates current tax brackets into three: 12%, 25%, and 33%

Capital gains & dividends Leaves in place Taxes capital gains/dividends as ordinary income and provides 50% exclusion of capital gains, dividends, and interest income

Net investment income tax Eliminates Eliminates Carried interest Taxes carried interest as ordinary income Keeps Head of household filing Eliminates Keeps

Standard deduction Increases standard deduction to $15,000 for singles and $30,000 for married couples

Increases standard deduction to $12,000 for single, $24,000 for married couples, and $18,000 for heads of household

Itemized deductions Caps itemized deductions at $100,000 for singles and $200,000 for married couples

Eliminates all itemized deductions besides the mortgage interest and charitable contribution deductions

Individual AMT Eliminates Eliminates Personal exemption Eliminates Eliminates Child & dependent related provisions Introduces a number of changes Introduces a number of changes

Static estimate $4.4tn - $5.9tn $2.4tn Dynamic estimate $2.6tn - $3.9tn $191bn Source: Tax Foundation


View from the top What’s new Review • We think the results of the election will slow growth in the first half of next

year, but underpin the economy in the second half and into 2018. We arerevising down 1H growth by 0.5pp/qtr but pushing up 2H by 0.5pp/qtr. Thisleaves annual growth of 1.9%.

• The big news this week was the surprising result of the election with Donald Trumpwining the White House and Republicans keeping majority of Congress.

Preview • Based on strong results from the internal BAC card data, we are forecasting retail

sales to increase 0.6% mom in October with core up 0.2% mom.

• There are multiple Fed officials scheduled to speak next week with Janet Yellentestifying before the Joint Economic Committee on November 17th.

Tracking • Wholesale inventories were revised lower, shaving 0.1pp from 3Q GDP tracking,

leaving growth of 3.0%.

Core views Growth • We are currently expecting 1.6% real growth in 2016 and 1.9% growth in 2017. We

look for the unemployment rate to end the year at 4.9% and next year at 4.7%.

• With potential growth of only 1.7%, we think the economy will be able to onceagain grow slightly above trend next year.

Inflation • Core inflation should edge higher with core PCE at 1.7% by year-end and core CPI

of 2.3%. We expect 1.9% and 2.4%, respectively, at the end of next year.

• Headline inflation is set to accelerate, peaking in the mid-2% range in 1Q17. Thisincrease is due to base effects from the gain in energy prices.

Federal Reserve • We expect the Fed to hike in December with 1 additional hike in 2017. We think the

risks are for a faster hiking cycle to start in 2018.

• We think President-elect Trump will look to replace Chair Yellen when her term is upin early 2018 and fill the two vacant spots on the board with more hawkish officials.

Chart of the Week: From bad to good (%)

Note: Shaded region represents when state by state election results were announced Source: Bloomberg

• As election night progressed and the likelihood of a surpriseTrump presidency increased, markets reacted negativelywith 10-year Treasuries rallying almost 15bp. When the VIXopened around 3:15am, there was an opening spike to 20.9from 18.5.

• After digesting the results of a Republican sweep, it seemsthat the prospect of the passage of a significant stimulus in the US resulted in a huge swing in a positive direction. The10-year yield has surged and the curve steepened (at thepoint of this publication, 10yr rates were 2.15%).

• The stock market has rallied strongly the past two days,contributing to the risk-on trade. This helps to offset thetightening of financial conditions created by the rise ininterest rates.

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Data in the week ahead Tuesday, November 15 Import Price Index, October — 8:30am

Exp Cons Range History Import Price Index 0.3% 0.4% -1.0% to 1.0% Sep = 0.1% vs. Aug = -0.2% Source: BofA Merrill Lynch Global Research, Bloomberg

Import prices likely rose by 0.3% mom in October, helped by a pop in petroleum prices. Ex-petroleum import costs likely fell by 0.1%, with consumer import prices down by that clip. On a year-on-year basis, that would leave the trend in import prices down by 0.4% -- the best reading in roughly two years.

Empire Manufacturing, November — 8:30am

Exp Cons Range History Empire Manufacturing -2.0 -3.5 -6.4 to 2.0 Oct = -6.8 vs. Sep = -2.0 Source: BofA Merrill Lynch Global Research, Bloomberg

We look for a rebound in the Empire manufacturing index back to -2.0 in November, following the decline to -6.8. While we saw a drop in the headline index last month, there was broad improvement in the components of the report. This raised the ISM-adjusted index to 46.5 from 45.0. Given that business conditions may be slightly better than they seem, albeit still weak, we anticipate some recovery in the index this month. That said, uncertainty around the presidential election is a downside risk.

Retail Sales, October — 8:30am

Exp Cons Range History Retail Sales 0.6% 0.6% 0.2% to 0.8% Sep = 0.6% vs. Aug = -0.2% Retail Sales ex Autos 0.5% 0.5% 0.3% to 0.8% Sep = 0.5% vs. Aug = -0.2% Core Control 0.2% 0.4% 0.2% to 0.7% Sep = 0.1% vs. Aug = -0.1% Source: BofA Merrill Lynch Global Research, Bloomberg

We look for strong retail sales in October, gaining 0.6% mom, following a strong 0.6% mom gain in September. Strong auto sales in the month likely boosted the headline. Controlling for autos, we think retail sales ex autos increased 0.5% mom, also in line with the prior month’s gain. Gasoline spending and building materials spending were likely strong. Controlling for these along with food services & drinking places, we look for a softer gain in core retail sales of 0.2% mom, following 0.1% mom in the prior month.

Wednesday, November 16 Producer Prices, October — 8:30am

Exp Cons Range History PPI 0.4% 0.3% -0.2% to 0.5% Sep = 0.3% vs. Aug = 0.0% Core PPI 0.1% 0.2% 0.1% to 0.3% Sep = 0.2% vs. Aug = 0.1% Core core PPI 0.2% 0.2% 0.2% to 1.1% Sep = 0.3% vs. Aug = 0.3% Source: BofA Merrill Lynch Global Research, Bloomberg

Producer prices likely rose by 0.4%, propelled higher by rising energy costs. That should lift the PPI index to 1.2% yoy– the fastest pace in two years. Excluding food and energy, producer prices likely rose by 0.1%, a much more modest pace. Core-core PPI, which excludes food, energy and volatile retail/wholesale margins, likely rose by 0.2% mom, taking the yoy rate up to 1.8%, a clear sign that producer price inflationary pressure is picking up.


Industrial Production, October — 9:15am

Exp Cons Range History Industrial Production 0.1% 0.2% -0.1% to 0.5% Sep = 0.1% vs. Aug = -0.5% Capacity Utilization 75.4% 75.5% 75.2% to 77.6% Sep = 75.4% vs. Aug = 75.3% Source: BofA Merrill Lynch Global Research, Bloomberg

We expect only a 0.1% gain in industrial production in October, the same pace as in September. This would leave capacity utilization unchanged at 75.4%. Manufacturing production likely picked up by 0.3% mom, but this was offset by declines in both mining and utilities production.

NAHB Housing Market Index, November — 10:00am

Exp Cons Range History NAHB HMI 63 63 62 to 64 Oct = 63 vs. Sep = 65 Source: BofA Merrill Lynch Global Research, Bloomberg

The NAHB housing index should hold steady at 63 in November, suggesting solid homebuilder confidence. While we have seen some volatility in the recent construction figures, it has mostly been attributed to multifamily. Single-family starts actually popped up 8.1% mom in September—the latest data point. Furthermore, demand continues to trend higher, as evidenced by the new home sales data, alongside a tightening labor market and growing economy.

Thursday, November 17 Initial Jobless Claims, week ending 11/12/2016 — 8:30am

Exp Cons Range History Initial Jobless Claims 260k — — Nov 05 = 254k vs. Oct 29 = 265k Source: BofA Merrill Lynch Global Research, Bloomberg

We look for initial jobless claims of 260,000 for the week ending November 12, in line with the recent four-week moving average of 260,000 and slightly above 254,000 in the prior week. If our forecast proves true, the four-week moving average which inch ever lower to 259,500 from 259,750.

Housing Starts and Permits, October — 8:30am

Exp Cons Range History Housing Starts 1100k 1,162k 1100k to 1210k Sep = 1047k vs. Aug = 1150k Building Permits 1175k 1,195k 1172k to 1200k Sep = 1225k vs. Aug = 1152k Source: BofA Merrill Lynch Global Research, Bloomberg

Housing starts likely rebounded 5.1% in October to 1,100k, reversing some of the 9% decline in September. Multifamily starts collapsed 38% in the prior month, so we do expect a significant payback. On the flip side, we may see some reversal in single-family following an 8.1% pop previously. Also supporting a rebound is the fact that total starts are running well below permits, which strengthened in September to 1,225k. Permits should come in at a solid 1,175k.

Consumer Price Index, October — 8:30am

Exp Cons Range History CPI 0.5% 0.4% -0.3% to 0.4% Sep = 0.3% vs. Aug = 0.2% Core CPI 0.2% 0.2% 0.1% to 0.3% Sep = 0.1% vs. Aug = 0.3% Source: BofA Merrill Lynch Global Research, Bloomberg

Consumer prices likely rose by 0.5% mom, boosted by a solid increase in energy costs. Food prices may have fallen slightly, consistent with the recent trend. We expect core prices to have risen by 0.2%, rebounding from the unusually weak print last month. That would hold the year-on-year rate at 2.2%.


Philadelphia Fed Survey, November — 8:30am

Exp Cons Range History Philly Fed 5.0 8.0 2.0 to 12.0 Oct = 9.7 vs. Sep = 12.8 Source: BofA Merrill Lynch Global Research, Bloomberg

We expect the Philly Fed index drop to 5.0 in November, down from 9.7 in October. New orders, shipments, delivery time, inventories, and employee indices all saw gains last month, but the ISM-adjusted index still remains slightly below breakeven at 49.8. Thus manufacturing conditions in the Philly Fed district still look soft. Like the Empire index, risks may be skewed to the downside given uncertainty around the presidential election.


Upcoming policy speakers

Key speaking engagements and news events* Monday, November 14 1:20pm Dallas Fed President Kaplan (non-voter) to speak in Wichita Falls, TX

5:00pm Richmond Fed President Lacker (non-voter) to speak in Chestertown, MD

6:30pm San Francisco Fed President Williams (non-voter) to speak in San Francisco, CA

Tuesday, November 15 7:30am Boston Fed President Rosengren (voter) to speak in Portland, ME 1:30pm Fed Vice Chair Fischer to speak in Washington, DC

Wednesday, November 16 3:00am St. Louis Fed President Bullard (voter) to speak in London 7:45am Minneapolis Fed President Kashkari (non-voter) to speak in New York,

NY 5:30pm Philadelphia Fed President Harker (non-voter) to speak in Philadelphia,

PA Thursday, November 17 No events scheduled at this time

Friday, November 18 5:30am St. Louis Fed President (voter) to speak in Frankfurt 9:30am Kansas City Fed President George (voter) to speak in Dallas, TX

*All listed times are Eastern times. Dates and times are subject to change. Source: BofA Merrill Lynch Global Research, Bloomberg, Market News

FOMC dove-hawk spectrum FOMC dove-hawk spectrum

Source: BofA Merrill Lynch Global Research Note: NY Fed President (Dudley) is always a voter.

Powell GovernorsBrainard Tarullo Yellen Fischer

Dovish HawkishDudley

2016 Voters Bullard Rosengren Mester GeorgeRegional Fed

2017 Voters Evans Kaplan Kashkari Harker Presidents

2018 Voters Lockhart Williams Mester Lacker

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Economic forecast summary

Real Economic Activity, % SAAR 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 3Q 17 4Q 17 2014 2015 2016 2017 Real GDP 2.6 2.0 0.9 0.8 1.4 3.1 2.0 1.5 1.5 2.3 2.3 2.4 2.6 1.6 1.9 % Change, Year Ago 3.0 2.2 1.9 1.6 1.3 1.5 1.8 2.0 2.0 1.8 1.9 Final Sales 3.2 2.5 1.2 1.3 2.6 2.3 1.9 1.4 1.4 2.0 2.0 2.5 2.4 2.0 1.8 Domestic Demand 3.2 3.1 1.7 1.3 2.4 1.5 2.4 1.7 1.7 2.8 2.8 2.6 3.1 2.0 2.0 Consumer Spending 2.9 2.7 2.3 1.6 4.3 2.1 2.0 2.0 2.0 2.7 2.7 2.9 3.2 2.5 2.3 Residential Investment 14.8 12.6 11.5 7.8 -7.8 -5.7 1.0 2.0 2.0 6.0 6.0 3.5 11.7 4.1 0.9 Nonresidential Investment 1.6 3.9 -3.3 -3.4 1.0 2.1 4.4 1.3 1.3 4.2 4.2 6.0 2.1 -0.2 2.5 Structures -2.7 -4.3 -15.2 0.1 -2.1 9.6 6.0 1.0 1.0 5.0 5.0 10.3 -4.4 -2.7 3.5 Equipment -0.3 9.1 -2.6 -9.5 -3.0 -2.5 4.0 1.0 1.0 4.0 4.0 5.4 3.5 -2.5 1.4 Intellectual Property 8.0 2.1 4.5 3.8 9.0 4.0 4.0 2.0 2.0 4.0 4.0 3.9 4.8 5.0 3.4 Government 3.2 1.9 1.0 1.6 -1.7 0.9 1.3 0.5 0.5 0.5 0.5 -0.9 1.8 0.9 0.6 Exports 2.8 -2.8 -2.7 -0.7 1.8 10.4 0.0 1.0 1.0 0.5 0.5 4.3 0.1 0.7 1.9 Imports 2.9 1.1 0.7 -0.6 0.2 2.0 4.0 3.0 3.0 6.0 6.0 4.4 4.6 0.8 3.4 Net Exports (Bil 09$) -525 -547 -567 -566 -559 -519 -545 -560 -575 -612 -651 -426 -540 -547 -599 Contribution to growth (ppts) && -0.1 -0.5 -0.5 0.0 0.2 0.8 -0.5 -0.3 -0.3 -0.8 -0.8 -0.1 -0.7 0.0 -0.3 Inventory Accumulation (Bil 09$) 93.8 70.9 56.9 40.7 -9.5 10.5 26.9 31.9 36.9 46.9 56.9 57.7 84.0 17.2 43.2 Contribution to growth (ppts) () -0.5 -0.6 -0.4 -0.4 -1.2 0.6 0.3 0.1 0.1 0.2 0.2 -0.1 0.2 -0.4 0.2Nominal GDP (Bil $, SAAR) 17998 18142 18223 18282 18450 18651 18835 19000 19164 19362 19553 17393 18037 18555 19270 % SAAR 4.9 3.2 1.8 1.3 3.7 4.4 4.0 3.6 3.5 4.2 4.0 4.2 3.7 2.9 3.9Key Indicators Industrial Production (% SAAR) -2.7 1.5 -3.4 -1.8 -0.8 1.8 0.2 1.1 1.2 2.1 2.4 2.9 0.3 -1.0 1.1 Capacity Utilization (%) 76.7 76.6 75.8 75.4 75.2 75.5 75.5 75.6 75.7 76.0 76.4 78.2 76.7 75.4 75.9 Nonfarm Payrolls (Avg mom change, 000s) 251 192 282 196 146 206 167 170 165 163 160 251 229 179 165 Civilian Unemployment Rate (%) 5.4 5.1 5.0 4.9 4.9 4.9 4.9 4.9 4.8 4.8 4.7 6.2 5.3 4.9 4.8 Civilian Participation Rate (%) 62.7 62.5 62.5 62.9 62.7 62.9 62.8 62.9 62.9 62.9 62.9 62.9 62.7 62.8 62.9 Productivity (% SAAR) 1.2 2.0 -2.4 -0.6 -0.2 3.1 0.5 0.1 0.4 1.2 1.1 0.8 0.9 0.1 0.8 Personal Savings Rate (%) 5.7 5.9 6.1 6.1 5.7 5.7 5.6 5.5 5.5 5.4 5.4 5.6 5.8 5.8 5.5 Light Vehicle Sales (Millions SAAR) 17.2 17.7 17.9 17.3 17.1 17.5 17.6 17.6 17.7 17.8 17.9 16.4 17.4 17.4 17.7 Housing Starts (Thous. SAAR) 1156 1156 1135 1151 1159 1138 1150 1189 1213 1237 1262 1001 1108 1150 1225 Current Account (% of GDP) -2.3 -2.6 -2.9 -3.0US Budget Balance ($bn, Fiscal Year) -483 -439 -587 -610Inflation GDP Price Index (% SAAR) 2.2 1.2 0.9 0.5 2.3 1.5 1.7 2.0 1.9 1.9 1.7 0.5 1.1 1.3 1.9 % Change, Year Ago& 1.1 1.0 1.1 1.2 1.2 1.3 1.5 1.9 1.8 1.9 1.9 PCE Chain Prices (% SAAR) 1.8 1.1 0.4 0.3 2.0 1.4 1.4 2.3 2.1 2.0 1.4 1.5 0.3 1.0 1.9 % Change, Year Ago$* 0.3 0.3 0.4 0.9 1.0 1.0 1.3 1.8 1.8 1.9 1.9 Core PCE Chain Prices (% SAAR) 1.8 1.4 1.2 2.1 1.8 1.7 1.4 2.1 2.1 1.8 1.6 1.6 1.4 1.7 1.8 % Change, Year Ago$ 1.4 1.3 1.4 1.6 1.6 1.7 1.7 1.8 1.8 1.8 1.9 CPI, Consumer Prices (% SAAR) 2.4 1.4 0.8 -0.3 2.5 1.6 4.2 1.5 1.7 2.1 1.9 1.6 0.1 1.3 2.2 % Change, Year Ago! 0.0 0.1 0.4 1.1 1.1 1.1 2.0 2.5 2.3 2.4 1.8 CPI ex Food & Energy ( % SAAR) 2.3 1.8 2.2 2.7 2.1 1.9 2.4 2.4 2.3 2.3 2.3 1.7 1.8 2.2 2.3 % Change, Year Ago@ 1.8 1.8 2.0 2.3 2.2 2.2 2.3 2.2 2.2 2.3 2.3 Shaded regions represent BofA Merrill Lynch US Economics Research forecast Source: BofA Merrill Lynch US Economics Research

To view our long-run forecasts, see US Economic Watch: The Long View: Getting to equilibrium 05 October 2016.


Global economic forecast summary

GDP growth, % CPI inflation, % Short-term interest rates, % 2014 2015 2016F 2017F 2014 2015 2016F 2017F Current 2015 2016F 2017F

Global 3.4 3.2 3.0 3.5 2.9 2.6 2.6 2.9 3.58 3.72 3.83 3.89 Global ex US 3.6 3.4 3.3 3.8 3.2 3.1 2.9 3.1 4.28 4.45 4.53 4.49 Euro Area 1.1 1.9 1.5 1.1 0.4 0.0 0.2 1.1 0.00 0.05 0.00 0.00 UK 3.1 2.2 2.0 0.9 1.5 0.0 0.7 2.5 0.25 0.50 0.25 0.10 Japan -0.1 0.6 0.6 0.9 2.7 0.7 -0.2 1.0 -0.10 0.10 -0.10 -0.10Canada 2.5 1.1 1.1 1.6 1.9 1.1 1.6 2.0 0.50 0.50 0.50 0.50Emerging EMEA 2.0 0.9 1.3 2.2 5.8 8.7 6.4 6.0 7.15 6.91 6.95 6.39Latin America 1.0 -0.3 -1.1 1.8 5.0 6.0 6.0 4.2 10.37 11.42 14.04 14.11 Brazil 0.1 -3.8 -3.5 1.0 6.3 9.0 8.8 5.1 14.00 14.25 13.50 11.25Emerging Asia 6.4 6.2 6.2 6.3 3.2 2.4 2.7 2.9 4.50 4.63 4.33 4.44 China 7.3 6.9 6.7 6.6 2.0 1.4 2.0 1.6 4.35 4.35 4.35 4.35Shaded regions represent BofA Merrill Lynch Global Economics Research forecast. Source: BofA Merrill Lynch Global Economics Research

FX rate forecast summary

Spot 16-Dec 17-Mar 17-Jun 17-Sep 17-DecG3 EUR-USD 1.09 1.08 1.08 1.10 1.15 1.15 USD-JPY 107 105 108 112 114 115 EUR-JPY 116 113 117 123 131 132 Dollar Bloc USD-CAD 1.35 1.34 1.33 1.32 1.31 1.30 AUD-USD 0.76 0.72 0.68 0.68 0.68 0.68 NZD-USD 0.72 0.68 0.63 0.61 0.61 0.61 Europe EUR-GBP 0.87 0.88 0.94 0.94 0.92 0.92 GBP-USD 1.25 1.23 1.15 1.17 1.25 1.25 EUR-CHF 1.07 1.09 1.09 1.10 1.12 1.12 USD-CHF 0.99 1.01 1.01 1.00 0.97 0.97 EUR-SEK 9.85 9.50 9.40 9.30 9.20 9.15 USD-SEK 9.05 8.80 8.70 8.45 8.00 7.96 EUR-NOK 9.10 9.00 8.90 8.80 8.70 8.60 USD-NOK 8.36 8.33 8.24 8.00 7.57 7.48 Note: Spot exchange rate as of day before publishing. The left of the currency pair is the denominator of the exchange rate. Forecasts for end of period. Source: BofA Merrill Lynch Global FX Rates & Commodities Research


Monthly CPI forecast update

Non-seasonally Adjusted Seasonally Adjusted Total CPI Energy Total CPI Core CPI

Level mom yoy Level mom yoy mom yoy mom yoy 2015: Jul 238.65 0.01 0.2 219.85 -0.46 -14.8 0.13 0.2 0.15 1.8 2015: Aug 238.32 -0.14 0.2 213.25 -3.00 -15.0 -0.01 0.2 0.12 1.8 2015: Sep 237.95 -0.16 0.0 201.64 -5.44 -18.4 -0.09 0.0 0.19 1.9 2015: Oct 237.84 -0.04 0.2 194.50 -3.54 -17.1 0.19 0.1 0.20 1.9 2015: Nov 237.34 -0.21 0.5 189.27 -2.69 -14.7 0.15 0.4 0.18 2.0 2015: Dec 236.53 -0.34 0.7 183.38 -3.11 -12.6 -0.11 0.7 0.15 2.1 2016: Jan 236.92 0.17 1.4 180.17 -1.75 -6.5 0.03 1.3 0.29 2.2 2016: Feb 237.11 0.08 1.0 172.06 -4.50 -12.5 -0.17 1.0 0.28 2.3 2016: Mar 238.13 0.43 0.9 179.02 4.04 -12.6 0.09 0.9 0.07 2.2 2016: Apr 239.26 0.47 1.1 185.65 3.71 -8.9 0.41 1.1 0.19 2.1 2016: May 240.23 0.40 1.0 192.67 3.78 -10.1 0.21 1.1 0.20 2.2 2016: Jun 241.02 0.33 1.0 200.04 3.82 -9.4 0.21 1.0 0.16 2.2 2016: Jul 240.63 -0.16 0.8 195.94 -2.05 -10.9 -0.04 0.9 0.09 2.2 2016: Aug 240.85 0.09 1.1 193.52 -1.23 -9.2 0.20 1.1 0.26 2.3 2016: Sep 241.43 0.24 1.5 195.85 1.20 -2.9 0.29 1.5 0.11 2.2 2016: Oct 242.20 0.32 1.8 197.91 1.05 1.8 0.55 1.8 0.22 2.2 2016: Nov 242.12 -0.04 2.0 196.12 -0.91 3.6 0.31 2.0 0.22 2.3 2016: Dec 241.91 -0.09 2.3 194.30 -0.93 6.0 0.17 2.3 0.21 2.3 2017: Jan 242.37 0.19 2.3 195.64 0.69 8.6 0.07 2.3 0.20 2.2 2017: Feb 243.42 0.44 2.7 198.71 1.57 15.5 0.19 2.7 0.20 2.2 2017: Mar 244.71 0.53 2.8 205.45 3.39 14.8 0.13 2.7 0.20 2.3 2017: Apr 245.20 0.20 2.5 206.19 0.36 11.1 0.13 2.5 0.20 2.3 2017: May 246.06 0.35 2.4 211.69 2.67 9.9 0.16 2.4 0.20 2.3 2017: Jun 246.71 0.27 2.4 216.48 2.26 8.2 0.18 2.4 0.20 2.3 2017: Jul 246.92 0.08 2.6 215.64 -0.39 10.1 0.20 2.6 0.20 2.4 2017: Aug 247.18 0.11 2.6 213.29 -1.09 10.2 0.21 2.6 0.20 2.4 2017: Sep 247.49 0.13 2.5 210.30 -1.40 7.4 0.17 2.5 0.20 2.5 2017: Oct 247.31 -0.07 2.1 202.37 -3.77 2.3 0.15 2.1 0.20 2.5 2017: Nov 246.84 -0.19 1.9 196.70 -2.80 0.3 0.16 1.9 0.20 2.4 2017: Dec 246.63 -0.08 2.0 196.10 -0.30 0.9 0.17 1.9 0.20 2.4

NSA: Not seasonally adjusted, SA: seasonally adjusted. MoM is monthly percent change; YoY is year-over-year percent change. Source: BofA Merrill Lynch Global Research


Rolling calendar of business indicators Monday Tuesday Wednesday Thursday Friday 14 November 15 November

8:30 am: Import Price Index – Oct Oct .............................................. 0.3%* Sep ............................................. 0.1% Aug ............................................ -0.2%

8:30 am: Empire Manufacturing – Nov

Nov ............................................ -2.0* Oct ............................................. -6.8 Sep ............................................ -2.0

8:30 am: Retail Sales – Oct Oct .............................................. 0.6%* Sep ............................................. 0.6% Aug ............................................ -0.2%

8:30 am: Retail Sales ex. Autos – Oct

Oct .............................................. 0.5%* Sep ............................................. 0.5% Aug ............................................ -0.2%

8:30 am: Core Control – Oct Oct .............................................. 0.2%* Sep ............................................. 0.1% Aug ............................................ -0.1%

10:00 am: Business Inventories – Sep

Aug ............................................. 0.2% Jul ................................................ 0.0%

16 November MBA Mortgage Applications -(week ending 11/11/16) 8:30 am: Producer Price Index – Oct

Oct .............................................. 0.4%* Sep ............................................. 0.3% Aug ............................................. 0.0%

8:30 am: Core PPI – Oct Oct .............................................. 0.1%* Sep ............................................. 0.2% Aug ............................................. 0.1%

8:30 am: Core Core PPI – Oct Oct .............................................. 0.2%* Sep ............................................. 0.3% Aug ............................................. 0.3%

9:15 am: Industrial Production – Oct

Oct .............................................. 0.1%* Sep ............................................. 0.1% Aug ............................................ -0.5%

9:15 am: Capacity Utilization – Oct Oct ........................................... 75.4%* Sep .......................................... 75.4% Aug .......................................... 75.3%

10:00 am: NAHB Housing Market Index – Nov

Nov .......................................... 63* Oct ........................................... 63 Sep .......................................... 65

17 November 8:30 am: Initial Jobless Claims -(week ending 11/12/16) 8:30 am: Housing Starts – Oct

Oct ..................................... 1,100k* Sep .................................... 1,047k Aug .................................... 1,150k

8:30 am: Building Permits – Oct Oct ..................................... 1,175k* Sep .................................... 1,225k Aug .................................... 1,152k

8:30 am: Consumer Price Index – Oct

Oct .............................................. 0.5%* Sep ............................................. 0.3% Aug ............................................. 0.2%

8:30 am: Core CPI – Oct Oct .............................................. 0.2%* Sep ............................................. 0.1% Aug ............................................. 0.3%

8:30 am: Philly Fed – Nov Nov ............................................. 5.0* Oct .............................................. 9.7 Sep .......................................... 12.8

18 November 10:00 am: Leading Indicators – Oct

Sep ............................................. 0.2% Aug ............................................ -0.2%

21 November 22 November 10:00 am: Richmond Fed – Nov

Oct ............................................. -4 Sep ............................................ -8

10:00 am: Existing Home Sales – Oct

Sep ............................................. 5.47M Aug ............................................. 5.30M

23 November MBA Mortgage Applications -(week ending 11/18/16) 8:30 am: Durable Goods Orders – Oct

Sep ............................................ -0.3% Aug ............................................. 0.2%

8:30 am: Durables ex. Trans. – Oct Sep ............................................. 0.1% Aug ............................................. 0.0%

8:30 am: Core Capital Goods Orders – Oct

Sep ............................................ -1.3% Aug ............................................. 1.2%

8:30 am: Core Capital Goods Shipments – Oct

Sep ............................................. 0.4% Aug ............................................. 0.1%

24 November US Thanksgiving Day –markets closed

25 November 8:30 am: Advance Goods Trade Balance – Oct

Sep ...................................... -$56.1B Aug ...................................... -$59.1B

8:30 am: Initial Jobless Claims -(week ending 11/19/16) 10:00 am: New Home Sales – Oct

Sep ........................................ 593k Aug ........................................ 575k

10:00 am: U. of Michigan Consumer Sentiment – Nov (F)

Oct ........................................... 87.2 Sep .......................................... 91.2

2:00 pm: FOMC Minutes

28 November 10:30 am: Dallas Fed – Nov

Oct ............................................. -1.5 Sep ............................................ -3.7

29 November 8:30 am: GDP qoq ann. – 3Q (S)

3Q (A) ........................................ 2.9% 2Q ............................................... 1.4%

8:30 am: Personal Consumption – 3Q (S)

3Q (A) ........................................ 2.1% 2Q ............................................... 4.3%

8:30 am: GDP Price Index – 3Q (S) 3Q (A) ........................................ 1.5% 2Q ............................................... 2.3%

8:30 am: Core PCE qoq – 3Q (S) 3Q (A) ........................................ 1.7% 2Q ............................................... 1.8%

9:00 am: Case-Shiller HPI yoy – Sep Aug ............................................. 0.6% Jul ................................................ 0.4%

10:00 am: Consumer confidence – Nov

Oct ........................................... 98.6 Sep ........................................ 103.5

30 November MBA Mortgage Applications -(week ending 11/25/16) 8:15 am: ADP Employment – Nov

Oct ......................................... 147k Sep ........................................ 203k

8:30 am: Personal Income – Oct Sep ............................................. 0.3% Aug ............................................. 0.2%

8:30 am: Personal Spending – Oct Sep ............................................. 0.5% Aug ............................................ -0.1%

8:30 am: PCE Core – Oct Sep ............................................. 0.1% Aug ............................................. 0.2%

9:45 am: Chicago PMI – Nov Oct ........................................... 50.6 Sep .......................................... 54.2

10:00 am: Pending Home Sales – Oct

Sep ............................................. 1.5% Aug ............................................ -2.5%

2:00 pm: Fed’s Beige Book

01 December 8:30 am: Initial Jobless Claims -(week ending 11/26/16) 10:00 am: Construction Spending – Oct

Sep ............................................ -0.4% Aug ............................................ -0.5%

10:00 am: ISM manufacturing – Nov Oct ........................................... 51.9 Sep .......................................... 51.5

All day: Vehicle Sales – Nov Oct ........................................... 17.9M Sep .......................................... 17.7M

02 December 8:30 am: Nonfarm Payrolls – Nov

Oct ......................................... 161k Sep ........................................ 191k

8:30 am: Private Payrolls – Nov Oct ......................................... 142k Sep ........................................ 188k

8:30 am: Unemployment Rate – Nov

Oct .............................................. 4.9% Sep ............................................. 5.0%

8:30 am: Avg. Hourly Earnings – Nov

Oct .............................................. 0.4% Sep ............................................. 0.3%

8:30 am: Avg. Weekly Hours – Nov Oct ........................................... 34.4 Sep .......................................... 34.4

*Projections— subject to revision as additional data become available during the month. P – preliminary reading , S – second reading, T – third reading, F – final reading


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