the u.s. economic outlook nigel gault chief u.s. economist, ihs global insight jackson, mississippi...
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The U.S. Economic The U.S. Economic OutlookOutlook
Nigel GaultChief U.S. Economist, IHS Global Insight
Jackson, MississippiSeptember 14, 2010
Copyright © 2010 IHS Global Insight. All Rights Reserved.
2
The U.S. Recovery: Uneven and Subpar
• Growth boost from fiscal stimulus and inventories is fading
• Headwinds are blowing from consumer and business caution
• No underlying housing improvement
• Non-residential construction remains a drag; stimulus is propping up state and local spending
• Exports, business spending on equipment and software remain the main growth areas
• Inflation is a long way off; deflation is the immediate threat
Copyright © 2010 IHS Global Insight. All Rights Reserved.
3
0.98
1.00
1.02
1.04
1.06
1.08
1.10
-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8
Quarters from TroughCurrent Recovery* Post-1950 Average Recovery
(Real GDP compared with recession trough)
Deeper Recession, Slower Recovery:The Damage from the Financial Crisis Lingers
* Assumes 2009Q2 trough
Copyright © 2010 IHS Global Insight. All Rights Reserved.
5
ISM Indicators Off Their Highs, But Show Growth:Small Business Still Lagging Behind
30
35
40
45
50
55
60
65
2007 2008 2009 2010
80
83
86
89
92
95
98
101
Manufacturing Index Nonmanufacturing Index NFIB Small-Business
(ISM Diffusion Indexes, 50 = breakeven) (NFIB Optimism Index,1986=100)
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6
-1,000
-750
-500
-250
0
250
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Employment Is Turning, But Not Rapidly
4
6
8
10
12
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
*Thousands, monthly change, SA; **Percent; ***Hours, SA
Private Payroll Employment*Private Payroll Employment* Unemployment Rate**Unemployment Rate**
Length of Workweek***Length of Workweek*** Temporary Employment*Temporary Employment*
-100
-50
0
50
100
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
33.5
34.0
34.5
35.0
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
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7
-8
-6
-4
-2
0
2
4
6
2008 2009 2010 2011 2012
GDP Final Sales
(Annualized real rate of growth, Q/Q, percent)
Inventory Cycle Support For Growth Has Peaked
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8
(Percent change unless otherwise noted)
U.S. Economic Growth by Sector
2009 2010 2011 2012
Real GDP -2.6 2.6 2.2 3.1
Final Sales -2.1 1.2 2.3 3.0
Consumption -1.2 1.5 2.2 2.2
Light Vehicle Sales (Millions) 10.4 11.4 12.8 14.8
Residential Investment -22.9 -3.9 7.5 32.9
Housing Starts (Millions) 0.55 0.59 0.79 1.24
Business Fixed Investment -17.1 4.9 6.6 8.5
Federal Government 5.7 3.8 -0.7 -3.7
State and Local Government -0.9 -1.2 0.5 0.2
Exports -9.5 11.9 7.6 7.3
Imports -13.8 12.3 6.2 5.3
Copyright © 2010 IHS Global Insight. All Rights Reserved.
9
(Percent unless otherwise noted)
Other Key Indicators
2009 2010 2011 2012
Industrial Production (% growth) -9.3 5.3 2.8 3.3
Employment (% growth) -4.3 -0.5 0.9 2.2
Unemployment Rate 9.3 9.7 9.6 9.0
CPI Inflation -0.3 1.6 1.5 1.8
Oil Prices (WTI, US$/bbl) 62 77 83 89
Core PCE Price Inflation 1.5 1.4 1.2 1.4
Federal Funds Rate 0.16 0.16 0.14 1.27
10-year Government Bond Yield 3.26 3.13 2.51 3.14
Dollar (Major Currencies, 2005=1) 0.93 0.91 0.92 0.90
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11
0.8
0.9
1.0
1.1
1.2
1.3
1975 1980 1985 1990 1995 2000 2005 2010
(FHFA house price index* divided by average labor compensation, 2000 = 1.0)
House Price Adjustment Has Gone a Long Way:Probably Not Complete
* Purchase-only index from 1991 onwards
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12
0.5
1.0
1.5
2.0
2.5
3.0
1975 1980 1985 1990 1995 2000 2005 2010
(Proportion of homeowner inventory vacant and for sale, percent)
Housing Supply Overhang Still Severe
Source: Census Bureau
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13
Key Single-Family Housing Indicators:No Underlying Improvement Yet
4
6
8
10
12
14
2007 2008 2009 2010
New Existing
0.2
0.4
0.6
0.8
1.0
2007 2008 2009 2010
3
4
5
6
2007 2008 2009 2010
*Millions, SA; **Single-Family Homes for sale divided by monthly selling rate
Existing Home Sales*Existing Home Sales* New Home Sales*New Home Sales*
Months’ Supply of Homes**Months’ Supply of Homes** Housing Starts*Housing Starts*
0.25
0.50
0.75
1.00
1.25
2007 2008 2009 2010
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14
0.0
0.4
0.8
1.2
1.6
2.0
2.4
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
165
175
185
195
205
215
225
Housing Starts (Left scale) FHFA House Price Index (Right scale)
(Million units)
Housing Starts Have Hit Bottom:Prices Not Quite There Yet
(Purchase-only index, 1991Q1 = 100)
Copyright © 2010 IHS Global Insight. All Rights Reserved.
16
The Personal Saving Rate Has Risen
0
2
4
6
8
10
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
(Personal savings rate, percent of disposable income)
Microsoft DividendMicrosoft Dividend
9/119/11
Post 9/11 vehicle incentivesPost 9/11 vehicle incentives
Stimulus Stimulus PaymentsPayments
Economic Economic Recovery Recovery PaymentsPayments
Copyright © 2010 IHS Global Insight. All Rights Reserved.
17
Consumer Sentiment Off the Floor But Still Weak
50
60
70
80
90
100
110
120
1978 1982 1986 1990 1994 1998 2002 2006 2010
(Reuters/University of Michigan Index, 1966=100)
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18
-4
-2
0
2
4
6
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
(Annualized rate of growth)
Consumer Spending Stabilizing, But Not a Strong Driver of Recovery
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20
Business Equipment Demand Recovering
(Non-defense capital goods ex-aircraft, 3-mo moving average, US$ billions)
45
50
55
60
65
70
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Orders Shipments
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21
Nonresidential Construction: Architects’ Billings Still Soft, But Off the Floor
(Diffusion Index)
30
35
40
45
50
55
60
65
1995 1997 1999 2001 2003 2005 2007 2009
* Source: American Institute of Architects
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22
(Percent change annualized rate, real spending)
Business Capital Spending Cycle:Construction Lags
-40
-30
-20
-10
0
10
20
30
2007 2008 2009 2010 2011 2012
Software & Equipment Buildings
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24
(Percent growth, merchandise exports, YTD, as of June 2010)
Export Growth By Destination:All Strong Except for Europe
0
10
20
30
40
Total(100%)
Pac Rim(25%)
Europe(23%)
LatinAmerica(22%)
Canada(20%)
Other(10%)
Export shares are in parentheses. Latin America includes Mexico.
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25
(Percent change annualized rate, volumes)
We Expect Exports to Outpace Imports
-45
-30
-15
0
15
30
45
2007 2008 2009 2010 2011 2012
Real U.S. Exports Real U.S. Imports
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26
(2005=1.0, inflation-adjusted)
The U.S. Dollar: Secular Weakness Against EMG Currencies
0.6
0.8
1.0
1.2
1.4
1.6
1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Major Currency Index Other Important Trading Partners Index
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28
(Percent change from a year earlier)
Headline CPI Inflation Is Positive Again;But Core Inflation Is Still Easing
-2
-1
0
1
2
3
4
5
6
2006 2007 2008 2009 2010 2011 2012
All-Urban CPI Core PCE Price Index
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29
(Percent)
Federal Funds Rate to Stay Near Zero Until 2012:More Quantitative Easing Is Probable
0
1
2
3
4
5
6
7
1999 2001 2003 2005 2007 2009 2011
Federal Funds 10-Year Treasury Yield
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31
Federal Fiscal Policy Assumptions
• Long-run tightening essential......but immediate tightening risky...and markets are not demanding it
• We assume
– Bush tax cuts extended for one more year (1.1% of GDP in CY 2011)
– Making Work Pay tax credit extended one more year (0.3% of GDP in CY 2011)
• Upper-income tax cuts (0.3% of GDP) and Making Work Pay tax credit (0.3% of GDP) assumed to expire in 2012
• Further income-tax increases in 2013 and beyond
Copyright © 2010 IHS Global Insight. All Rights Reserved.
32
The Federal Budget Gap
(Percent of GDP)
14
16
18
20
22
24
26
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020
Revenues Expenditures
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33
(percent of GDP)
Federal Spending Shares in GDP
0
5
10
15
20
25
Defense Medicare/MedicaidSocial Security InterestNondefense goods & services Other
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34
Taxes Must Rise For Everybody
(Effective federal personal income tax rate, percent)
14
16
18
20
22
24
26
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020
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35
Implications
• Growth boost from the inventory cycle and stimulus is fading
• Employment and consumption improving, but slowly
• Exports, business equipment spending moving higher
• Nonresidential construction still declining; no sustainable residential construction recovery yet
• Inflation trend is down; Fed to stay loose
• “Double-dip” risk: 25%
• The question is not whether taxes will rise but when and how
• A deficit reduction plan is needed—but not yet action