moodys analytics us alternative scenarios

8/12/2019 Moodys Analytics US Alternative Scenarios

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ECONOMIC & CONSUMER CREDIT ANALYTICS

FROM MOODYS ANALYTICS

September 2013

U.S. Macroeconomic Outlook

Alternative Scenarios


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U.S. MACROECONOMIC OUTLOOK ALTERNATIVE SCENARIOS Table of Contents

Scenario 1 Stronger Near-Term Rebound

Scenario 2

Scenario 3

Scenario 4

Scenario 5

Scenario 6

1

3

5

7

9

11

13

THE U.S. MACROECONOMIC OUTLOOK ALTERNATIVE SCENARIOS ARE WRITTEN BY EDWARD FRIEDMAN

Slower Near-Term Recovery

Second Recession

Protracted Slump

Below-Trend Long-Term Growth

Oil Price Increase, Dollar Crash Inflation

Forecast Assumptions


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MOODYS ANALYTICS / U.S. Macroeconomic Outlook Alternative Scenarios / September 2013

U.S. MACROECONOMIC OUTLOOK ALTERNATIVE SCENARIOS Baseline Forecast Assumptions

Monetary policy

The Federal Reserve has begun to prepare

financial markets for an end to its quantita-

tive easing policy and an eventual normaliza-

tion of interest rates. According to the Fed,

the key unemployment rate thresholds are

7% for ending QE3 and 6.5% for raising inter-

est rates. Based on the Moodys Analytics

outlook, the Fed will begin tapering QE3 by

years end, and end it by summer 2014. Inter-

est rates will begin to rise by summer 2015.

Normalizing interest rates will take a

while. To be consistent with an economy op-

erating at full employment, the federal fundstarget rate would need to rise near 4%. The

Fed has said it will be slow to increase short-

term rates, implying that a 4% funds rate

is not likely until long after the economy is

back to full employment. If the Moodys An-

alytics forecast holds, monetary policy will

not reach normal levels until summer 2017.

The behavior of bond investors could

complicate the task of normalizing monetary

policy. The outlook is based on a steady but

orderly rise in long-term rates, with 10-year

Treasury yields nearing 2.75% at the endof this year, 3.75% by the end of 2014, and

4.75% by the end of 2015. Ten-year yields

are expected to peak just above 5% in spring

2016, before settling just below 5%the

normalized 10-year Treasury yield consistent

with an economy at full employment. If

interest rates follow this path, the economy

should be able to cope with the increase.

In theory, the Fed should be able to man-

age the transition back to normal monetary

policy, carefully calibrating its balance

sheet to adjust short-term interest rates,and explaining its actions clearly to bond

investors. Empirical evidence from the Feds

management of earlier QE rounds also sug-

gests that long-term rates need not spike as

QE3 winds down. But the recent selloff in

the bond market suggests that this scenario

may be too rosy. Long-term yields could rise

sharply, going to 5% not over three years,

as envisaged in the outlook, but within a

few months. This would be too much for the

economy to bear; housing and stock prices

would wilt, and the road back to full em-

ployment would take much longer.

Fiscal policy

The federal budget deficit is quickly nar-

rowing. This years deficit is expected to

come in close to $625 billion, equal to about

4% of GDP. This is down from $1.1 trillion

in fiscal 2012 and the record $1.4 trillion in

fiscal 2009. Tax revenues are increasing at

almost a double-digit pace given the end

of the payroll tax holiday, and government

spending is flat.The improving deficit reflects the fiscal cliff

deal reached at the start of the year, which

allowed the Bush-era tax cuts to expire for

those taxpayers making more than $450,000

annually, and the expiration of the payroll tax

holiday. It also reflects additional government

spending cuts, including the across-the-board

sequestration cuts. The sequester will reduce

outlays by $58 billion in 2013 and by $1.2 tril-

lion over the next decade.

Fiscal policy will be a significant con-

straint on the economy this year, subtracting1.5 percentage points from 2013 real GDP

growth. For context, this compares with to-

tal fiscal restraint, including state and local

governments, of 1% of GDP in 2012.

Under current fiscal policy, Washington

will come close to the goal of achieving fiscal

sustainabilityfuture budget deficits that

are small enough (near 2% of GDP) that the

nations debt-to-GDP ratio stabilizes, at least

over the next decade. This will be enough

to satisfy financial markets and allow the

recovery to gain traction as anticipated in theMoodys Analytics baseline outlook.

U.S. dollar

The value of the real trade-weighted U.S.

dollar has remained roughly unchanged

since the Great Recession. Despite the fiscal

problems of the U.S., with no obvious alter-

native currency, investors are largely staying

put. From a long-run perspective, the dollar

is close to fair value against the euro ($1.25

per euro) and a bit overvalued against the

British pound ($1.75 per pound). The dollar

will strengthen against these currencies in

the next several years and will not return to

its long-run fair values against them until

the end of the decade.

The sharp depreciation of the yen to

nearly 100 per dollar puts the Japanese

currency back closer to its fair value. Further

yen depreciation is not expected in the near

term but, longer run, it is more likely given

the ongoing struggles of the Japanese econ-

omy. The dollar is expected to depreciate

slowly and unevenly against the currenciesof most emerging economies, especially the

Chinese yuan. Over the long run, the broad

trade-weighted dollar is expected to depre-

ciate modestly in value.

Energy prices

Oil prices, as measured by the cost of

a barrel of West Texas Intermediate crude,

have recently risen to more than $100 per

barrel. Brent oil is trading near $115 per bar-

rel. WTI will remain near $100 per barrel this

year, assuming that tensions with Iran willnot boil over into an overt conflict, and that

continued investment in the U.S., Canada

and Iraq will underpin an increase in global

crude oil production.

Longer run, oil and gasoline prices are

expected to trend higher, just outpacing the

overall rate of inflation, as global oil produc-

tion struggles to keep pace with increasing

demand from faster-growing, less energy-

efficient emerging economies. However, this

view is challenged by the recent substantive

gains in technologies used to extract oiland natural gas from shale. Given the large

deposits of shale in the U.S. and many other

parts of the world, this could temper the rise

in long-term oil prices.

Natural gas prices will remain low, par-

ticularly compared with oil prices, for the

next decade. A glut of natural gas has de-

veloped, as demand has not fully recovered

from the recession and supply has increased

given the surge in shale gas production.

Forecast AssumptionsBY MARK ZANDI


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MOODYS ANALYTICS / U.S. Macroeconomic Outlook Alternative Scenarios / September 2013 2

U.S. MACROECONOMIC OUTLOOK ALTERNATIVE SCENARIOS Baseline Forecast Summary

U.S. MACRO BASELINE FORECAST SUMMARY

Units 13Q3 13Q4 14Q1 14Q2 2013 2014 2015 2016 2017

Gross Domestic Product bcw$ 15,754.4 15,861.3 15,978.6 16,127.6 15,720.1 16,216.9 16,846.8 17,327.9 17,747.2Change %AR 1.9 2.7 3.0 3.8 1.6 3.2 3.9 2.9 2.4

Federal Budget $ bil -262.6 -312.9 -381.1 71.5 -792.0 -834.8 -734.6 -674.4 -672.0Total Employment mil 136.2 136.8 137.3 138.0 136.0 138.4 141.7 144.6 146.4

Change %AR 1.7 1.6 1.6 2.0 1.7 1.8 2.4 2.1 1.2

Unemployment Rate % 7.3 7.2 7.1 6.9 7.5 6.9 6.3 5.7 5.4

Light Vehicle Sales mil, SAAR 15.7 15.9 16.1 16.5 15.6 16.6 16.6 15.6 15.5Residential Housing Starts mil, SAAR 0.98 1.09 1.22 1.39 0.98 1.51 2.01 2.01 1.88Median Existing-House Price $ ths 203.2 203.7 204.2 204.8 197.7 205.2 209.1 213.1 217.7

Change %YA 14.0 12.9 9.7 3.4 12.6 3.7 1.9 1.9 2.2

Consumer Price Index %AR 2.4 1.8 1.9 1.9 1.5 1.9 2.3 2.5 2.5

Federal Funds Rate % 0.1 0.1 0.1 0.1 0.1 0.1 0.7 3.0 4.0Treasury Yield: 10-Yr Bond % 2.74 2.88 3.02 3.23 2.39 3.35 4.18 4.98 4.85Baa Corp. - 10-Yr Treasury DIFF 2.8 2.8 2.8 2.8 2.8 2.7 2.6 2.5 2.5

Corporate Profits With IVA & CCA $ bil 2,035.5 2,073.2 2,117.2 2,165.3 2,057.0 2,183.1 2,329.2 2,461.1 2,521.6Change %YA 1.2 1.3 4.8 3.2 2.4 6.1 6.7 5.7 2.5

S&P 500 1941=10 1,660.1 1,657.1 1,652.9 1,666.7 1,610.4 1,654.8 1,640.4 1,665.3 1,720.0Change %YA 18.4 16.8 9.1 3.5 16.7 2.8 -0.9 1.5 3.3


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U.S. MACROECONOMIC OUTLOOK ALTERNATIVE SCENARIOS Scenario 1

Stronger Near-Term Rebound (S1) Scenario

This above-baseline scenario is de-

signed so that there is a 10% probability

that the economy will perform better

than in this scenario, broadly speak-

ing, and a 90% probability that it will

perform worse.

The upside scenario, Stronger Near-

Term Rebound, is based on the assumption

that increased household wealth as a result

of cumulative stock market gains since fall

2012 lifts consumer spending more than

expected. Further, the euro zone recovers

faster than expected, boosting exports, busi-

ness sentiment, and therefore nonresidential

investment. Faster than expected federal

tax collections reduce the deficit morequickly, decreasing the pressure for added

near-term fiscal contraction. As a result,

payroll employment accelerates faster than

in the baseline.

The Federal Reserve slowly begins to end

quantitative easing and to raise the federal

funds rate in the fourth quarter of 2013, a

year and a half earlier than in the baseline.

However, the gradual nature of these chang-

es in 2014 is accommodative to growth, and

the expansion of credit supports the above-

baseline recovery.

As a result, house prices rise somewhat

faster than in the baseline in the rest of

2013 and 2014. Consequently, in both

the baseline and S1, the trough in house

prices was in the third quarter of 2011,

based on the National Association of Real-tors median sale price measure, and the

peak-to-trough decline from 2006 to 2011

was 27.5%. In S1, stronger demand and

improving confidence raise the pace of

new housing permits above the baseline

pace in the fourth quarter of 2013 and

throughout 2014.

The stronger near-term growth in GDP

results in enough additional hiring compared

with the baseline that the unemployment

rate declines faster. Whereas the unemploy-

ment rate falls to 6.6% by the end of 2014,

it drops to 5.7% in S1.

Over calendar 2014, real GDP rises ap-

proximately 1.5 percentage points faster

than in the baseline. On an annual average

basis, real GDP growth rates in 2014 and

2015 are 4.2% and 4.3%, respectively, com-pared with 3.2% and 3.9%, respectively, in

the baseline.


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U.S. MACRO S1 SCENARIODIFFERENCE FROM BASELINE

Units 13Q3 13Q4 14Q1 14Q2 2013 2014 2015 2016 2017

Gross Domestic Product bcw$ 5.3 20.6 76.3 140.1 6.5 165.6 245.1 115.4 7.7Change %AR 0.1 0.4 1.4 1.6 0.0 1.0 0.4 -0.8 -0.6

Federal Budget $ bil 0.1 1.6 7.7 14.8 1.7 66.6 100.0 55.1 5.5Total Employment mil 0.0 0.2 0.4 0.7 0.1 0.7 0.7 0.2 0.1

Change %AR 0.1 0.4 0.8 0.6 0.0 0.5 0.0 -0.4 -0.1

Unemployment Rate % -0.0 -0.1 -0.3 -0.5 -0.0 -0.6 -0.7 -0.3 -0.0

Light Vehicle Sales mil, SAAR 0.1 0.4 0.2 0.2 0.1 0.1 0.1 0.3 0.0Residential Housing Starts mil, SAAR 0.02 0.05 0.06 0.06 0.02 0.07 0.05 0.04 0.00Median Existing-House Price $ ths 0.1 0.6 2.7 3.5 0.2 4.5 3.8 1.2 -0.0

Change %YA 0.1 0.3 1.4 1.8 0.1 2.2 -0.4 -1.2 -0.6

Consumer Price Index %AR 0.2 0.2 0.6 0.5 0.0 0.4 0.0 -0.3 -0.1

Federal Funds Rate % 0.1 0.3 0.7 0.8 0.1 0.9 1.0 0.2 0.0Treasury Yield: 10-Yr Bond % 0.00 0.18 0.40 0.44 0.05 0.44 0.39 0.10 0.00Baa Corp. - 10-Yr Treasury DIFF -5.4 -5.7 -6.0 -6.5 -4.7 -6.7 -8.2 -9.9 -9.7

Corporate Profits With IVA & CCA $ bil 0.0 1.8 7.9 15.9 0.5 23.9 52.7 10.3 -0.1Change %YA 0.0 0.1 0.4 0.8 0.0 1.1 1.2 -1.9 -0.4

S&P 500 1941=10 0.4 2.4 25.4 18.4 0.7 40.2 96.6 40.2 0.3Change %YA 0.0 0.2 1.7 1.1 0.1 2.5 3.3 -3.3 -2.4

U.S. MACRO S1 SCENARIOFORECAST SUMMARY

Units 13Q3 13Q4 14Q1 14Q2 2013 2014 2015 2016 2017


Federal Budget $ bil -262.5 -311.2 -373.4 86.3 -790.3 -768.2 -634.7 -619.2 -666.5

Total Employment mil 136.3 136.9 137.8 138.7 136.0 139.2 142.4 144.9 146.4Change %AR 1.8 1.9 2.5 2.7 1.7 2.3 2.4 1.7 1.1Unemployment Rate % 7.3 7.1 6.8 6.4 7.4 6.3 5.6 5.4 5.4


Change %YA 14.0 13.2 11.2 5.2 12.7 5.9 1.6 0.7 1.6




S&P 500 1941=10 1,660.5 1,659.5 1,678.3 1,685.1 1,611.1 1,695.0 1,737.1 1,705.6 1,720.3Change %YA 18.4 17.0 10.8 4.7 16.8 5.2 2.5 -1.8 0.9


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Slower Near-Term Recovery (S2) Scenario

In this slow-growth scenario, there is

a 75% probability that economic condi-

tions will be better, broadly speaking, and

a 25% probability that conditions will

be worse.

The downside 25% scenario, Slower

Near-Term Recovery, is based on the as-

sumption that concern that the Federal

Reserve will end quantitative easing abruptly

causes interest rates to rise almost as fast as

in the baseline, reducing business sentiment

and causing business investment to deceler-

ate in 2014. Additionally, worries about U.S.

fiscal policies, including the national debt

ceiling, deficit reduction, and the costs as-

sociated with healthcare reform, preventimprovement in private sector confidence.

Further, the euro zone recovery is weaker

than expected, causing U.S. exports to level

off in the first half of 2014. As a result, the

economy grows more slowly in 2014 than in

the baseline, though it avoids recession. The

stock market declines moderately during this

time, and corporate bond spreads rise above

baseline levels. Federal fiscal contraction as a

result of sequestration causes growth in con-

sumer spending to slow more than expected.

Additionally, though they are a bit lower than

in the baseline, gasoline prices remain elevat-

ed, keeping consumer confidence low.

The deceleration in GDP growth causes

the unemployment rate to remain above

7.5% next year, leaving it more than a full

percentage point above the baseline by theend of 2014. As a result, house prices are

essentially flat in 2014 and below baseline

levels. Lower consumer confidence, em-

ployment and income than in the baseline

cause the recovery in unit car sales to pause

around 15.5 million units in 2014, 1 million

units lower than in the baseline.

Over calendar 2014, real GDP rises by

just 2.3%, compared with 4.4% in the base-

line. To support the economy, the Fed does

not begin to tighten monetary policy signifi-

cantly until the fourth quarter of 2015, six

months later than in the baseline.

The economy begins to recover more

strongly in 2015 as financial markets adjust

to the end of quantitative easing, the Eu-

ropean recovery gains traction, and fiscal

policy issues begin to resolve. On an annualaverage basis, real GDP growth is 1.7% in

2014 and 3.1% in 2015.


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Units 13Q3 13Q4 14Q1 14Q2 2013 2014 2015 2016 2017

Gross Domestic Product bcw$ -6.9 -14.9 -106.1 -176.0 -5.5 -231.9 -372.8 -170.7 -13.5Change %AR -0.2 -0.2 -2.3 -1.8 -0.0 -1.4 -0.8 1.3 0.9

Federal Budget $ bil -0.4 -1.7 -7.8 -16.2 -2.1 -83.0 -163.1 -76.2 2.1Total Employment mil -0.0 -0.2 -0.4 -0.6 -0.1 -0.8 -2.0 -1.2 0.0

Change %AR -0.1 -0.5 -0.5 -0.8 -0.0 -0.6 -0.8 0.5 0.9

Unemployment Rate % 0.0 0.0 0.3 0.6 0.0 0.8 1.2 0.5 -0.0

Light Vehicle Sales mil, SAAR -0.1 -0.1 -0.7 -1.0 -0.1 -1.1 -1.0 -0.1 -0.0Residential Housing Starts mil, SAAR -0.04 -0.05 -0.10 -0.18 -0.02 -0.21 -0.25 -0.04 -0.00Median Existing-House Price $ ths -0.1 -0.2 -0.5 -1.4 -0.1 -1.1 -2.7 -0.9 -0.0

Change %YA -0.1 -0.1 -0.3 -0.7 -0.0 -0.5 -0.7 0.9 0.4

Consumer Price Index %AR -0.2 -0.4 -0.6 -1.0 -0.0 -0.5 -0.2 0.3 0.4

Federal Funds Rate % 0.0 0.0 0.0 0.0 0.0 -0.0 -0.5 -1.3 -0.2Treasury Yield: 10-Yr Bond % 0.00 -0.04 -0.21 -0.16 -0.01 -0.20 -0.24 -0.23 0.00Baa Corp. - 10-Yr Treasury DIFF -5.4 -5.6 -5.7 -6.1 -4.7 -6.3 -8.1 -9.9 -9.7

Corporate Profits With IVA & CCA $ bil 0.0 -3.0 -31.6 -59.2 -0.8 -66.6 -83.6 -40.2 -0.5Change %YA 0.0 -0.1 -1.6 -2.8 -0.0 -3.2 -0.6 2.1 1.7

S&P 500 1941=10 -0.4 -0.9 -9.0 -67.5 -0.3 -54.5 -49.2 -7.0 -0.2Change %YA -0.0 -0.1 -0.6 -4.2 -0.0 -3.4 0.3 2.7 0.4


Units 13Q3 13Q4 14Q1 14Q2 2013 2014 2015 2016 2017





Change %YA 13.9 12.8 9.5 2.7 12.5 3.2 1.2 2.8 2.6




S&P 500 1941=10 1,659.7 1,656.2 1,643.9 1,599.1 1,610.0 1,600.3 1,591.2 1,658.3 1,719.8Change %YA 18.4 16.8 8.5 -0.7 16.7 -0.6 -0.6 4.2 3.7


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Second Recession (S3) Scenario

In this recession scenario, there is

a 90% probability that the economy

will perform better, broadly speak-


perform worse.

The downside 10% scenario, Second

Recession, is based on a number of as-

sumptions. First, financial market concern

that the Feds quantitative easing will

end sooner rather than later causes inter-

est rates to rise nearly as much as in the

baseline through the end of 2013, reducing

business sentiment. Second, uncertainty

about whether U.S. policymakers will suc-

cessfully address the national debt ceiling

rises significantly and the still-large deficitresults in additional fiscal contraction.

Third, the euro zone drops back into reces-

sion. Greece leaves the euro zone, causing

investors to worry that other high-debt

countries such as Portugal and Spain might

follow. U.S. exports decline significantly,

and U.S. banks suffer from their exposure

to European banks, reducing credit avail-

ability in the U.S. The economy sinks into

a second recession in early 2014. The stock

market falls sharply and corporate bond

spreads rise above the baseline trend,

lowering business investment. Moreover,

disagreements in Congress over priorities

prevent initiatives that might soften the

second downturn.

The recession is less severe than

the 2008-2009 downturn, but lasts

through the third quarter of 2014.

Though oil and gasoline prices fall below

the baseline levels, the declines do not

provide an offsetting improvement in

consumer confidence.

Rising unemployment during the reces-

sion causes the housing market to weakenagain. Reduced federal support to housing

relative to that in the 2008-2009 reces-

sion contributes to the weakness. House

prices, as measured by the NAR median sale

price, decline cumulatively by 11% from the

fourth quarter of 2013 through the second

quarter of 2015. However, the trough is

above the trough in 2011. Housing starts

decline throughout much of 2014, falling a

cumulative 49%, back to approximately the

2009 trough.

The decline in real GDP causes the labor

market to contract throughout 2014, and

another wave of consumer retrenchment

ensues. Unit auto sales decline starting in

early 2014, and are continuously below 14

million units from mid-2014 to 2015. Low

capacity utilization in manufacturing and

weak demand cause business investment to

fall significantly throughout 2014.

The recovery begins in the fourth quarter

of 2014 but proceeds slowly over the next

year. With the economy weak, the Fed keeps

the fed funds target rate near 0% until the

second quarter of 2016, nearly a year laterthan in the baseline. The cumulative peak-

to-trough decline in real GDP is 2.8%. The

percentage change in real GDP, on an annual

average basis, is -1.4% in 2014 and 0.8% in

2015. The contraction in the labor market

causes the unemployment rate to hit a peak

of 10.6% in early 2015. Because of weakness

in consumer spending, inflation is slightly

negative for most of 2014.


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Units 13Q3 13Q4 14Q1 14Q2 2013 2014 2015 2016 2017


Federal Budget $ bil -0.4 -2.4 -26.8 -65.7 -2.8 -313.3 -634.7 -665.4 -481.2Total Employment mil -0.1 -0.3 -1.5 -3.0 -0.1 -3.3 -6.0 -6.6 -5.4

Change %AR -0.2 -0.7 -3.7 -4.4 -0.1 -2.4 -1.9 -0.4 0.9


Light Vehicle Sales mil, SAAR -0.2 -0.3 -1.4 -2.6 -0.1 -2.9 -3.1 -1.0 -0.3Residential Housing Starts mil, SAAR -0.06 -0.16 -0.34 -0.73 -0.05 -0.84 -1.20 -0.52 0.09Median Existing-House Price $ ths -0.2 -0.4 -3.0 -12.1 -0.2 -14.8 -27.7 -24.1 -17.0

Change %YA -0.1 -0.2 -1.6 -6.1 -0.1 -7.4 -6.7 2.3 4.0

Consumer Price Index %AR -0.3 -0.5 -2.7 -3.0 -0.1 -1.8 -1.2 0.3 1.1

Federal Funds Rate % 0.0 0.0 0.0 0.0 0.0 -0.0 -0.6 -2.2 -0.9Treasury Yield: 10-Yr Bond % 0.00 -0.06 -0.31 -1.17 -0.01 -1.14 -1.81 -1.25 -0.09Baa Corp. - 10-Yr Treasury DIFF -5.2 -5.3 -5.3 -5.3 -4.6 -5.6 -7.2 -9.2 -9.4


S&P 500 1941=10 -0.8 -1.5 -94.9 -311.5 -0.6 -281.6 -310.4 -202.3 -113.7Change %YA -0.1 -0.1 -6.3 -19.4 -0.0 -17.5 -2.3 8.5 6.5


Units 13Q3 13Q4 14Q1 14Q2 2013 2014 2015 2016 2017

Gross Domestic Product bcw$ 15,746.9 15,811.2 15,657.6 15,502.4 15,705.8 15,483.4 15,603.6 16,242.0 16,990.3Change %AR 1.7 1.6 -3.8 -3.9 1.5 -1.4 0.8 4.1 4.6

Federal Budget $ bil -263.0 -315.3 -407.9 5.9 -794.8 -1,148.2 -1,369.4 -1,339.8 -1,153.2

Total Employment mil 136.2 136.5 135.8 135.0 135.9 135.1 135.8 138.0 140.9Change %AR 1.5 0.9 -2.0 -2.3 1.6 -0.6 0.5 1.6 2.1Unemployment Rate % 7.4 7.3 7.8 8.7 7.5 9.1 10.4 9.5 8.0


Change %YA 13.9 12.6 8.1 -2.7 12.5 -3.6 -4.7 4.2 6.2

Consumer Price Index %AR 2.0 1.4 -0.8 -1.0 1.4 0.1 1.0 2.8 3.6


Corporate Profits With IVA & CCA $ bil 2,035.5 2,069.2 1,986.8 1,850.2 2,056.1 1,826.3 1,762.1 1,937.0 2,200.1Change %YA 1.2 1.1 -1.7 -11.8 2.3 -11.2 -3.5 9.9 13.6

S&P 500 1941=10 1,659.3 1,655.6 1,558.0 1,355.2 1,609.8 1,373.1 1,330.1 1,463.1 1,606.3Change %YA 18.3 16.7 2.9 -15.8 16.7 -14.7 -3.1 10.0 9.8


12/19



Protracted Slump (S4) Scenario

In this recession scenario, there is a

96% probability that the economy will

perform better, broadly speaking, and a

4% probability that it will perform worse.

The downside 4% scenario, Protracted

Slump, is caused by multiple factors. Ini-

tially, financial markets worry that quanti-

tative easing will end abruptly. This causes

interest rates to rise nearly as much as in

the baseline through the end of 2013, limit-

ing growth in business investment. Second,

worries intensify that policymakers will fail

to address the national debt ceiling, long-

term deficit reduction, and the burden of

healthcare costs. Third, the euro zone drops

back into a deep recession and Greece has adisorderly departure from the euro zone. The

risk that other countries such as Portugal or

Spain would also leave rises significantly. As

a result, U.S. exports decline sharply, causing

business confidence and hiring to fall. The

U.S. banking system is strained as a result of

its ties to the European banks, leading credit

availability to shrink significantly.

The stock market and business sentiment

decline sharply, and a second recession

develops in the first quarter of 2014. Just

as in S3, the impasse among policymakers

prevents a response to stem the downturn.

Consumer sentiment and spending decline

much more sharply than expected. Reduced

household wealth and high unemploy-

ment cause consumers to pull back further

on their spending. Unit auto sales decline

steadily from the fourth quarter of 2013

through the first quarter of 2015 to a trough

of fewer than 12 million, compared with the

baseline pace of well more than 16 million.Corporate bond spreads rise significantly

above baseline levels, causing business in-

vestment to decline throughout 2014. As a

result, the second downturn in real GDP is

protracted, lasting from the first quarter of

2014 through the first quarter of 2015.

Foreclosures rise again, and federal sup-

port to housing is more limited than in the

2008-2009 recession. The result is another

cycle of house price declines. The overall

decline during the second dip, from the third

quarter of 2013 through the fourth quarter

of 2015, is 21%. The cumulative decline from

the 2006 peak is 29%. Housing starts also

decline, falling 58% from the second quarter

of 2013 through the first quarter of 2015.

The recovery is slow until 2016.

In this deep slump, real GDP declines a

cumulative 4.4% peak to trough. On an an-

nual average basis, the percentage change

in real GDP is -2.3% in 2014 and -0.9% in

2015. The unemployment rate reaches ahigh of 12.2% in the third quarter of 2015

and remains in double digits until mid-2017.

Inflation is negative throughout 2014. To

prevent the economy from sliding further,

the Fed keeps interest rates near 0% for

most of 2016.


13/19




Units 13Q3 13Q4 14Q1 14Q2 2013 2014 2015 2016 2017



Change %AR -0.3 -0.8 -4.0 -4.9 -0.1 -2.9 -2.8 -0.5 0.6



Change %YA -0.2 -0.3 -2.3 -8.2 -0.1 -10.1 -14.4 -1.4 2.6

Consumer Price Index %AR -0.4 -0.5 -3.2 -3.6 -0.1 -2.2 -2.4 -0.3 1.1



S&P 500 1941=10 -1.3 -2.1 -120.4 -351.2 -0.8 -373.8 -532.7 -496.0 -371.3Change %YA -0.1 -0.2 -7.9 -21.8 -0.1 -23.2 -12.7 4.0 12.1


Units 13Q3 13Q4 14Q1 14Q2 2013 2014 2015 2016 2017

Gross Domestic Product bcw$ 15,732.4 15,773.3 15,590.8 15,408.0 15,692.7 15,336.6 15,192.0 15,639.1 16,366.3Change %AR 1.3 1.0 -4.5 -4.6 1.4 -2.3 -0.9 2.9 4.6

Federal Budget $ bil -263.2 -316.2 -415.0 -9.4 -795.9 -1,219.8 -1,581.1 -1,658.8 -1,562.5

Total Employment mil 136.2 136.4 135.6 134.6 135.8 134.4 133.9 135.9 138.3Change %AR 1.4 0.8 -2.4 -2.8 1.6 -1.0 -0.4 1.5 1.8Unemployment Rate % 7.4 7.3 8.1 9.1 7.5 9.6 12.0 11.3 10.0


Change %YA 13.8 12.5 7.4 -4.8 12.5 -6.3 -12.5 0.5 4.7

Consumer Price Index %AR 1.9 1.3 -1.3 -1.6 1.4 -0.3 -0.1 2.1 3.6


Corporate Profits With IVA & CCA $ bil 2,035.5 2,068.8 1,949.0 1,769.3 2,055.9 1,740.2 1,569.1 1,664.7 1,811.3Change %YA 1.2 1.1 -3.5 -15.7 2.3 -15.4 -9.8 6.1 8.8

S&P 500 1941=10 1,658.9 1,655.0 1,532.5 1,315.4 1,609.5 1,281.0 1,107.7 1,169.4 1,348.8Change %YA 18.3 16.7 1.2 -18.3 16.7 -20.4 -13.5 5.6 15.3


14/19



Below-Trend Long-Term Growth (S5) Scenario

With this low-performance long-term

scenario, there is a 96% probability that

the economy will perform better, broadly

speaking, and a 4% probability that it will

perform worse.

In the downside 4% scenario, Below-

Trend Long-Term Growth, the U.S. recovery

continues throughout 2013, but the growth

rate is below the baseline pace because of

financial market concerns over quantitative

easing ending too soon and causing interest

rates to rise further than expected, the slow-

er than expected euro zone recovery, and

the debt ceiling and further fiscal contrac-

tion. There are also private sector concerns

about healthcare costs.However, whereas other downside sce-

narios feature a subsequent demand-driven

recovery back to the baseline trend, supply-

side constraints prevent that outcome in S5.

The economy grows more slowly in 2014

than in the baseline, and the pace remains

below that of the baseline for an extended

time for several reasons. Households engage

in relatively more precautionary saving and

therefore less spending. Less risk-taking re-

flects in higher yield spreads and lower stock

prices than in the baseline. Capital accumu-

lation and productivity gains are lower than

in the baseline, owing to the higher cost of

borrowing and lower business investment.

Real GDP growth is lower than in the

baseline over much of the decade, al-

though the gap in the GDP growth ratesubsequently closes and the rate ultimately

matches the baseline pace. The level of real

GDP, however, is permanently lower than

in the baseline. On an annual average basis,

real GDP increases 2.2% in 2014 and 2.5%

in 2015.

The unemployment rate stays higher

than in the baseline by nearly a percentage

point and remains above 7% throughout

2014 and 2015. Although the jobless rate

ultimately declines to the baseline level,

this occurs only slowly, and full convergence

does not occur until after 2020. The long

dislocation in the labor market hampers the

typical long-term pattern of advances in

worker productivity, as employees find fewer

opportunities to develop their skills while

on the job. The result is productivity growththat is below the long-run trend for the

entire decade.


15/19




Units 13Q3 13Q4 14Q1 14Q2 2013 2014 2015 2016 2017

Gross Domestic Product bcw$ 4.5 -5.4 -52.1 -107.0 -0.2 -150.0 -376.7 -413.8 -413.8Change %AR 0.1 -0.3 -1.2 -1.4 -0.0 -1.0 -1.4 -0.2 0.1


Change %AR -0.1 -0.2 -0.2 -0.4 -0.0 -0.2 -0.4 -0.3 -0.1



Change %YA -0.1 -0.1 -0.3 -0.6 -0.1 -0.6 -1.3 -0.7 -0.7

Consumer Price Index %AR -0.2 -0.3 -0.2 -0.6 -0.0 -0.3 -0.3 -0.2 -0.1


Corporate Profits With IVA & CCA $ bil 0.0 -32.7 -41.8 -54.6 -8.2 -57.9 -89.9 -126.8 -151.1Change %YA 0.0 -1.6 -2.1 -2.6 -0.4 -2.4 -1.3 -1.4 -0.9

S&P 500 1941=10 -0.4 -0.9 -9.0 -41.6 -0.3 -31.1 -42.9 -59.8 -62.2Change %YA -0.0 -0.1 -0.6 -2.6 -0.0 -1.9 -0.7 -1.0 -0.0


Units 13Q3 13Q4 14Q1 14Q2 2013 2014 2015 2016 2017


Federal Budget $ bil -400.7 -451.0 -519.2 -66.6 -1,068.2 -1,387.2 -1,287.0 -1,226.7 -1,224.4



Change %YA 13.9 12.7 9.5 2.8 12.5 3.2 0.6 1.2 1.5



Corporate Profits With IVA & CCA $ bil 2,035.5 2,040.6 2,075.4 2,110.8 2,048.9 2,125.3 2,239.3 2,334.3 2,370.5Change %YA 1.2 -0.3 2.7 0.6 2.0 3.7 5.4 4.2 1.6

S&P 500 1941=10 1,659.7 1,656.2 1,643.9 1,625.1 1,610.0 1,623.7 1,597.5 1,605.6 1,657.8Change %YA 18.4 16.8 8.5 0.9 16.7 0.8 -1.6 0.5 3.3


16/19



Oil Price Increase, Dollar Crash Inflation (S6) Scenario

In this stagflation scenario, there is

a 90% probability that the economy

will perform better, broadly speak-


perform worse.

The downside 10% scenario, Oil Price

Increase, Dollar Crash Inflation, assumes

geopolitical tensions in energy-producing

countries worsen significantly and result

in sharp cutbacks in global oil supplies. Oil

prices rise sharply and hit $165 per barrel

in mid-2014. Pressures on core consumer

prices begin to build as the higher oil prices

push up the costs of delivering goods and

services, and the beginnings of a wage-price

spiral emerge. Additional inflation pressures

develop as the dollar falls sharply as foreign

investors cut back on purchases of U.S. Trea-

sury securities because of a lack of progress

on long-run fiscal problems.

The Fed abruptly shifts gears to fight

inflation and increases the fed funds rate

from nearly 0% in mid-2013 to 4.65% in

the fourth quarter of 2014. Yields on 10-year

Treasury securities rise to 6.6% in the second

quarter of 2014 as a result of inflationary ex-

pectations and Fed tightening. The economy

weakens substantially and drops into reces-

sion in the third quarter of 2014. Forced to

make a choice in the stagflation environment,

the Fed keeps interest rates high to fight in-

flation, and as a result the downturn persists

through the second quarter of 2015. The job-

less rate rises to 10.5% by mid-2015.

The crisis begins to resolve when oil

prices decline and progress on addressing

the fiscal crisis begins. Inflation expectations

start to decline, and the economy recovers

back to baseline levels over the next several

years. However, the level of real GDP is

ultimately lower than in the baseline by a

small amount.

On an annual average basis, the change

in real GDP is 1.1% in 2014 and -2.5% in

2015. Inflation, as measured by the CPI, rises

to nearly 5% over calendar 2014, 3 percent-

age points above the baseline, before begin-

ning to decelerate.


17/19




Units 13Q3 13Q4 14Q1 14Q2 2013 2014 2015 2016 2017

Gross Domestic Product bcw$ 25.2 33.9 -3.2 -64.9 14.8 -314.9 -1,341.7 -1,227.6 -711.6Change %AR 0.7 0.2 -1.0 -1.6 0.1 -2.1 -6.4 1.0 3.4

Federal Budget $ bil -44.4 -40.4 -35.3 -30.3 -84.8 -115.3 -62.7 -36.0 0.0Total Employment mil -0.0 -0.1 -0.1 -0.3 -0.0 -1.2 -5.5 -6.5 -5.0

Change %AR -0.0 -0.2 -0.1 -0.7 -0.0 -0.9 -3.1 -0.6 1.2



Change %YA -0.1 -0.1 -0.2 -0.5 -0.0 -2.4 -11.5 -0.1 3.4

Consumer Price Index %AR 0.2 2.0 4.0 3.4 0.1 2.4 -0.0 -1.4 -0.8

Federal Funds Rate % 0.5 1.9 3.4 4.2 0.6 4.2 1.6 -1.4 -0.3Treasury Yield: 10-Yr Bond % 0.00 1.03 3.44 3.40 0.26 2.81 -0.48 -0.33 0.02Baa Corp. - 10-Yr Treasury DIFF -5.3 -5.5 -5.6 -5.9 -4.7 -5.9 -7.1 -9.3 -9.6


S&P 500 1941=10 -0.4 -0.9 -2.8 -46.6 -0.3 -108.5 -321.6 -246.3 -166.6Change %YA -0.0 -0.1 -0.2 -2.9 -0.0 -6.7 -13.8 6.1 6.2


Units 13Q3 13Q4 14Q1 14Q2 2013 2014 2015 2016 2017

Gross Domestic Product bcw$ 15,779.5 15,895.2 15,975.5 16,062.7 15,734.9 15,902.0 15,505.1 16,100.3 17,035.6Change %AR 2.5 3.0 2.0 2.2 1.7 1.1 -2.5 3.8 5.8


Total Employment mil 136.2 136.7 137.2 137.7 135.9 137.2 136.2 138.1 141.4Change %AR 1.6 1.4 1.5 1.4 1.6 1.0 -0.8 1.4 2.4Unemployment Rate % 7.3 7.2 7.1 7.2 7.5 7.7 10.2 9.9 8.6


Change %YA 13.9 12.8 9.5 2.8 12.5 1.3 -9.6 1.8 5.6



Corporate Profits With IVA & CCA $ bil 2,035.5 2,040.6 2,075.4 2,082.5 2,048.9 2,013.4 1,759.1 1,865.0 2,084.9Change %YA 1.2 -0.3 2.7 -0.8 2.0 -1.7 -12.6 6.0 11.8

S&P 500 1941=10 1,659.7 1,656.2 1,650.1 1,620.1 1,610.1 1,546.3 1,318.8 1,419.1 1,553.4Change %YA 18.4 16.8 9.0 0.6 16.7 -4.0 -14.7 7.6 9.5


18/19

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