u.s. economic outlook: back to the goldilocks economy? · u.s. economic outlook: back to the...

U.S. Economic Outlook:Back to the Goldilocks Economy?

Sara JohnsonManaging Director, Global Macroeconomics

Global Insight

Copyright © 2007 Global Insight, Inc.

Goldilocks and the Three Bears

Is Growth Too Cold?

Is Inflation Too Hot?

Will Our Forecast Have a Fairy-Tale Ending?

http://upload.wikimedia.org/wikipedia/commons/e/ef/The_Three_Bears_-_Project_Gutenberg_eText_17034.jpg


A Bearish U.S. Outlook in 2007

• Housing Market Recession Deepens

• Business Investment Stumbles

• Consumer Spending Likely to Slow

• Inventory Correction

• Strength in Exports

Among the G7, the United States’real GDP growth ranking will slip from 1st in 2004-06 to 5th in 2007

Among the G7, the United States’real GDP growth ranking will slip from 1st in 2004-06 to 5th in 2007


-2

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20102

3

4

5

6

7

Real GDP Growth Unemployment Rate

(Annual percent change) (Percent)

U.S. Economic Growth Has Cooled

Below-trend growth leads to rising unemploymentBelow-trend growth leads to rising unemployment


-10

-5

0

5

10

15

20

25

1995 1997 1999 2001 2003 2005 2007 2009

"Economic" Profits with IVA & CCA GDP

(Percent change)

The Corporate Profits Boom Is Over


Once-Hot Housing Markets Slide into Deep Freeze

• Easy credit and speculation fueled price bubbles

• Affordability deteriorated, reducing demand

• Prices are falling, mortgage delinquencies rising

• Builders are cutting production

• Credit availability is tightening

• Home-building, sales, and prices will fall further


0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 20101

2

3

4

5

6

7

8

Housing Starts Home Sales

(Millions of units) (Millions of units)

Cycles in the Single-Family Housing Market


2007 2008Housing SupplyIncrease in Foreclosure Inventory 125,000 102,000

Housing DemandDisqualified Borrowers -110,000 -110,000Disintermediation* -84,000 -84,000

(Housing units)

Impacts of Mortgage Credit Problems

* Reduced funding, bankruptcies, and exits by lenders

More homes for sale and fewer buyers declining home prices

More homes for sale and fewer buyers declining home prices


Metro Areas with Extreme (35%+) Housing Overvaluation

35% overvaluation is the trigger point for a major home price correction35% overvaluation is the trigger point for a major home price correction(Fourth quarter, 2006)


(Year-over-year percent change)

-10

-5

0

5

10

15

20

1970 1975 1980 1985 1990 1995 2000 2005 2010

Average Existing Single-Family Home Price

Home Prices Will Decline in 2007 and 2008A 5% price decline would reduce housing wealth by $1.0 trillion. With a wealth effect of .06, consumption would be cut by $60 billion, or 0.6%.

A 5% price decline would reduce housing wealth by $1.0 trillion. With a wealth effect of .06, consumption would be cut by $60 billion, or 0.6%.


Cross-Currents Affecting Consumer Finances

Positive Forces• Steady Job Growth

• Accelerating Wages

• Moderating Inflation

Negative Forces• Declining Housing Wealth

• Declining Home Sales

• Mounting Debt Burdens

• Negative Saving Rate


0

1

2

3

4

5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Real Consumer Spending Real Disposable Income

(Percent change)

Consumer Spending and Disposable Income Growth

The household saving rate will turn positive in 2009.The household saving rate will turn positive in 2009.


0

2

4

6

8

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Durable Goods Nondurable Goods Services

(Percent change, chained 2000 dollars)

Real Consumer Spending on Durables Is Cyclical


-24

-18

-12

-6

0

6

12

18

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Equipment and Software Structures

(Year-over-year percent change, 2000 dollars)

Business Fixed Investment Cycles Diverge


-9-6-30369

1215

Total InformationTechnology

IndustrialEquipment

TransportEquipment

OtherEquipment

2006 2007 2008 2009

(Percent change, 2000 dollars)

Growth in Business Equipment InvestmentWeak spots: engines and turbines, heavy trucks, rail cars, construction equipment, oil- and gas-field machinery

Weak spots: engines and turbines, heavy trucks, rail cars, construction equipment, oil- and gas-field machinery


Business Fixed Investment’s Share of GDP

0

2

4

6

8

10

12

14

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Structures Non-IT Equipment Information Equipment

(Percent of nominal GDP)1960-2006 average = 10.9%, 2007 estimate = 10.5%1960-2006 average = 10.9%, 2007 estimate = 10.5%


-12

-8

-4

0

4

8

12

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Real Exports Real Imports


Export Growth Outpaces Import Growth


-1,000

-800

-600

-400

-200

0

200

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016-10

-8

-6

-4

-2

0

2

Current Account Deficit Deficit as % of GDP

(Billions of dollars) (Percent of GDP)

The Current Account Deficit Peaked in 2006


Is U.S. Inflation Too Hot?

• Inflationary Pressures– Strong global economy– Accelerating wages– Decelerating productivity– Depreciating dollar

• Countervailing Restraints– Cautious monetary policy– Global competition– Supply responses in commodity markets


0

1

2

3

4

5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Consumption Deflator Core Employment Cost Index


Core Inflation Exceeds the Preferred 1-2% Range


-2

-1

0

1

2

3

4

5

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Private Nonfarm Labor Productivity

Productivity Growth Has Slowed Recently

1960-2006 average = 2.1%1960-2006 average = 2.1%(Percent change)


(Percent)

0

2

4

6

8

10

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Federal Funds 10-Year Treasury

Interest Rates on a Steady Course

Yield curve inversion will end in spring 2008.Yield curve inversion will end in spring 2008.


Federal Government Policy in Run-Up to 2008 Election

• Gridlock means no spending acceleration

• Tax decisions postponed, except AMT fix

• Harsher rhetoric on trade policy

• Immigration reform now has a chance

• Push for federal environmental regulation

• Pressure for lower drug prices

• Federal minimum wage increase


-600

-450

-300

-150

0

150

300

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016-6.0

-4.5

-3.0

-1.5

0.0

1.5

3.0

Unified Budget Deficit Deficit as % of GDP

(Billions of dollars, fiscal years) (Percent of GDP)

Federal Budget Deficits Will Persist


-2

0

2

4

6

8

2001 2002 2003 2004 2005 2006 2007 2008 2009

Baseline (55%) Pessimistic (25%) Optimistic (20%)

(Percent change, annual rate)

Real GDP Growth in Alternative Scenarios

Key Risks: housing markets, energy shock, labor productivity and costs, dollar, Fed policy

Key Risks: housing markets, energy shock, labor productivity and costs, dollar, Fed policy


-2

0

2

4

6

8

10

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Real GDP GDP Deflator

(Percent change)

The Great Moderation: Growth and Inflation


Employment Growth Volatility Has Decreased (Percent decrease in volatility from 1956-83 to 1984-2002*)

* Gerald A. Carlino, “The Great Moderation in Economic Volatility: A View from the States, Federal Reserve Bank of Philadelphia Business Review, 2007 Q1.


Back to the Goldilocks Economy—by 2008

• Below-trend economic growth through 2007• Strengthening growth in 2008-09 as housing

markets begin to recover• Core inflation still too hot but cooling• Profits boom subsiding• Interest rates steady• Trade balance improving• Risks from bears

Thank You!Sara Johnson

Managing Director, Global MacroeconomicsGlobal Insight

u.s. economic outlook: back to the goldilocks economy? · u.s. economic outlook: back to the...

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