us q2 2013 economic outlook
TRANSCRIPT
Bloomberg BRIEF: Economics U.S. Q2’ 2013 Economic Overview and Outlook
Joseph Brusuelas | April 2013
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Executive Summary
Growth Likely to Slow Following Solid Q1’13
• Growth • Q1’13 Growth likely to accelerate above 3 percent.
• Personal consumption tracking near 3 percent for Q1’13
• Capital expenditures and residential investment, manufacturing growth, trade all drivers in Q2’13
• Pace of consumption and government spending to slow in Q2’13.
• Monthly job creation to slow due to sequestration. • What’s driving consumption?
• Income pulled forward to avoid tax hikes • Spending by upper 2 quintile of income earners • Drawing down of savings rate by lower income cohorts
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Bloomberg Consensus: Survey of Forecasters
Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14
Real GDP 2.00% 1.75% 2.35% 2.60% 2.80% 2.90%
CPI 1.70% 1.90% 2.00% 2.00% 2.10% 2.20%
Core PCE 1.30% 1.40% 1.50% 1.70% 1.80% 1.80%
Unemployment 7.80% 7.70% 7.60% 7.50% 7.40% 7.30%
Central Bank Rate 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
2-Year Rate 0.31% 0.31% 0.34% 0.37% 0.41% 0.46%
10-Year Rate 1.85.% 1.99% 2.15% 2.31% 2.48% 2.64%
EUR/USD $1.32 $1.30 $1.30 $1.29 1.27% -
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Jobs and Growth
-10
-8
-6
-4
-2
0
2
4
6
8
-800
-600
-400
-200
0
200
400
600
1996 1998 2000 2002 2004 2006 2008 2010 2012
Qu
arterly A
verage
(Pe
rcen
tage) Q
uar
terl
y A
vera
ge (
Tho
usa
nd
s)
Jobs and Growth
Real GDP Y/Y (RHS) Total Change in Employment (LHS)
Source: Bloomberg R2=.77
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Imbalance Between Income and Spending
35
40
45
50
55
60
65
-8
-6
-4
-2
0
2
4
6
8
10
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Ye
ar O
ver
Ye
ar P
erc
en
tage
Ch
ange
Divergence Between Income and Spending
Nominal Income (RHS)
Nominal Spending (LHS)
Real Disposable Personal Income(LHS)
ISM Non Man (RHS)
Source: Bloomberg
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Upper Income Earners Driving Spending
8.9
12.9
17.1
23.1
38.0
Lowest 20%
Second 20%
Third 20%
Fourth 20%
Highest 20%
Source: BLS Consumer Expenditure Survey
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Sustained Residential Investment Growth in 2013
0
0.5
1
1.5
2
2.5
0
10
20
30
40
50
60
70
80
90
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Millio
ns (A
nn
ualize
d P
ace
Ind
ex
Considerable Room to Grow
Multi-Family Starts (RHS)
Single Family Starts (RHS)
NAHB Housing Market Index (LHS)
Source: Bloomberg USHBMIDX, NHSPS1, NHSPSM INDEX<GO>
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Executive Summary
• Monetary Policy • Pace of asset purchases to remain unchanged • Employment, not inflation primary concern of policy • Fed to remain cautions on tapering purchases due to:
• Prodigious labor slack, output and consumption gaps • External headwinds
• Fiscal Policy restraint and layoffs to restrain growth • What to watch?
• Rising initial jobless claims • Slower pace of spending • Bloomberg economic surprise index reflects likely slowing • Risk of another spring swoon in fundamental data
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Fed Balance Sheet Swells to $3.2 Trillion
0
0.5
1
1.5
2
2.5
3
3.5
2007 2008 2009 2010 2011 2012 2013
Trill
ion
s ($
)
Fed Balance Sheet Swells To $3 Trillion
Fed Agency Debt Mortgage-Backed Securities Purchases
Liquidity to Key Credit Markets
Lending to Financial Institutions
Long Term Treasury Purchases
Traditional Security Holdings
Source: Bloomberg FED<GO>
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Growth Drivers
• Housing • Reduced supply supporting price appreciation • Shift in buyer preference toward new construction
• Autos • Historically low rates and aggressive discounting by auto dealers • Age of auto fleet supports improved total vehicle sales
• Manufacturing • Rebound following 2012 second half swoon
• Civilian aircraft, domestic auto production and external demand
• Trade • Growing U.S. energy independence
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Housing Supply Dwindles
1
1.25
1.5
1.75
2
2.25
2.5
2.75
3
3.25
3.5 25
50
75
100
125
150
175
200
225
250
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Un
its for Sale
: Millio
ns
Tho
usa
nd
s
Falling Supply Supporting Price Appreciation
Median Price (RHS) Homes for Sale (LHS, Inverted)
Source: Bloomberg EHSLMP, EHSLHAFS INDEX<GO>
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Industrial Production and Growth
-15.0
-10.0
-5.0
0.0
5.0
10.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
1996 1998 2000 2002 2004 2006 2008 2010 2012
Y/Y
Pe
rcen
tage C
han
ge (Q
uarte
rly Average)
Y/Y
Pe
rcen
tage
Ch
ange
GDP CYOY (LHS) Industrial Production (RHS)
Source: Bloomberg IP YOY, GDP CYOY INDEX<GO> R2=.76
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Industrial Production and Growth
45
50
55
60
65
70
-5
0
5
10
15
20
25
30
2010 2011 2012 2013
Ind
ex
Ye
ar o
ver
Ye
ar P
erc
en
tage
Ch
ange
Solid Manufacturing Growth Likely to Continue
Durable Goods Orders (LHS) ISM New Orders (RHS)
DGNOYOY, NAPMNEWO INDEX<GO> Source: Bloomberg
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Less Trade Drag on Growth in 2013
90
95
100
105
110
115
120
125
130
135 -50
-45
-40
-35
-30
-25
-20
-15
-10
-5
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Ind
ex
Bill
ion
s ($
)
Trade Balance Likely to Narrow This Year
US Trade Balance Excluding Petroleum(LHS) Trade Weighted Dollar Index 18 Month Lag(RHS)
Source: Bloomberg
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Less Trade Drag on Growth in 2013
-8.0
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Mill
ion
Bar
rels
Pe
r D
ay (
3-M
on
th A
vera
ge)
Narrowing Gap Between Supply and Demand
US Oil Imbalance: Supply and Demand
Source: Bloomberg DOIDCRUD, DOSUUSA INDEX<GO>
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Financial Conditions Overview
• Global central banks asset purchase supportive of financial conditions.
• Improved financial conditions supportive of U.S.
• Financial easing via asset purchases appropriate and necessary in Europe
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Euro Area Economy Monetary Policy
-4
-3
-2
-1
0
1
2
3
4
5
6
7
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Pe
rce
nt
E.U. Taylor Rules Suggest Aggressive Easing Appropriate
ECB Rate Traditional Taylor Rule Estimate Aggressive Taylor Rule
Source: Bloomberg TAYL<GO>
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Bloomberg Financial Conditions Indices
-6
-5
-4
-3
-2
-1
0
1
2
2010 2011 2012 2013
Ind
ex(
Z-Sc
ore
)
US Financial Conditions Index EU Financial Conditions Index
Source: Bloomberg BFCIUS, BFCIEU INDEX<GO>
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Private Credit Creation Improving
-5%
0%
5%
10%
15%
20%
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
Ye
ar O
ver
Ye
ar P
erc
en
tage
Ch
ange
Private Credit Creation & Nominal Growth
Nominal GDP Total Credit Creation Private Financial Instiutions
Source: Federal Reserve, Bloomberg
Adjusted R2=.64
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Credit Markets Healing, Not Translating to Rising Velocity
1.5
1.6
1.7
1.8
1.9
2
2.1
2.2
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Velocity of Money
M2
Source: Bloomberg VELOM2 INDEX<GO>
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Image page U.S. Rates Overview
Bloomberg consensus forecast indicates higher 10- and 30-year rates.
Current Rates:
• 2-Year: .25 percent
• 10-year: 1.85 percent
• 30-year: 3.17 percent
Fourth Quarter Consensus Survey Rate Forecast: Rising Appetite for Risk Assets • 2-Year: .46 percent
• 10-year: 2.31 percent
• 30-year: 3.46 percent
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Projected Path of Long- and Short-Term Rates
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Pe
rce
nt
US 10-Year (LHS) 3-Month, 2-Year Forward (RHS)
Source: Bloomberg USGG10YR INDEX, G0025 2Y3M BLC2CURNCY<GO>
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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U.S. Economic Surprise Index & 10-Year Treasury Yields
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-1.2
-0.8
-0.4
0.0
0.4
0.8
1.2
2010 2011 2012
U.S. Economic Surprise Index US 10-Yr Yield (6-Mo. Basis Point Chg.)
Source: Bloomberg ECSURPUS, USGG10YR Index<GO>
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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U.S. Economic Surprise Index & U.S. Equity Markets
-60%
-40%
-20%
0%
20%
40%
60%
-1.2
-0.8
-0.4
0.0
0.4
0.8
1.2
2010 2011 2012
Ind
ex (P
erce
ntage
Ch
ange
)
Z Sc
ore
U.S. Economic Surprise Index S&P 500 (6-mo. % chg.)
U.S. Economic Surprise Index & the U.S. Equity Market
Source: Bloomberg ECSURPUS, SPX INDEX<GO>
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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FX Overview
Investors Likely to Favor Risk Assets in Q2’13
• Flight to quality likely to dominate given EU economic and financial issues.
• Favors USD and CAD
• Yen to benefit from flight to quality in short-term and times of Euro stress
• Further depreciation ahead contingent on BOJ policy
• Short term rally in Euro likely to fade as fundamentals to asset themselves.
• Contraction in real economy
• Rising unemployment
• Country risk
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Economic Fundamentals Favor EUR/USD Depreciation
1.15
1.2
1.25
1.3
1.35
1.4
-100
-80
-60
-40
-20
0
20
40
60
80
100
2012 2013
EUR
/USD
In
de
x
Citigroup European Economic Surprise Index EUR/USD
Source: Bloomberg EUR Curncy, CESIER INDEX<GO>
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Central Bank Policy Outlook and Overview
Fed will likely remain on hold throughout 2013
• Forward guidance to remain unchanged.
• Aggressive action to unclog monetary transmission mechanism to remain in place through 2013, then slow 2014.
• Balance sheet likely to expand to $4 trillion by end early 2014.
.
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Central Bank Policy Outlook and Overview
Fed will likely remain on hold throughout 2013
• Policy made for economy stuck in liquidity trap
• Labor slack, consumption and employment gaps drive Fed policy
• If policy does not gain traction, Fed will begin to create conditions for targeting of nominal GDP.
.
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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The Long Road Ahead
Slow Grind Back To Full Employment
Scenario 1: Structural Break
Scenario 2: Cyclical Recovery
6.5% NAIRU 6.5% NAIRU 5.5% NAIRU 5.5% NAIRU
Monthly Job Gains 200,000 200,000 200,000 200,000
Labor Force Participation Rate 63.50% 63.50% 63.50% 63.50%
Average Annual Population Growth 0.92% 0.50% 0.92% 0.50%
Years to Full Employment 2 Years 1 Years 4 Years 2 Years
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Monetary Policy at the Zero Bound
-10
-8
-6
-4
-2
0
2
4
6
8
2007 2008 2009 2010 2011 2012 2013 2014 2015
Pe
rcen
tage
Taylor Rule & Evans Rule Estimates of the Fed Funds Rates
Source: Bloomberg USFEDL01, PCE CYOY, USURTOT INDEX<GO>
Taylor Rule Estimates
Evans Rule Estimates
Fed Funds Rate
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Significant Output Gap Remains
7
8
9
10
11
12
13
14
15
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Trill
ion
s (2
00
5 C
hai
ne
d $
)
US Retains Substantial Output Gap
Real GDP Real Potential Output
Source: Bloomberg
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Labor Market Slack Persists
3
4
5
6
7
8
9
10
11 58
59
60
61
62
63
64
65
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Pe
rcent
Pe
rce
nt
Employment to Population Ratio (LHS) Unemployment Rate (RHS, Inverted)
Source: Bloomberg USERTOT , USURTOT INDEX<GO>
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Real Consumption on Lower Trend
8000
8500
9000
9500
10000
10500
11000
2005 2006 2007 2008 2009 2010 2011 2012
Bil
lio
ns
(Ch
ain
ed
20
05
$)
Real PCE Trend Prior to Recession
Source: Bloomberg US.HHSPNR BEA INDEX<GO>
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Negative and Near Negative Equity Still A Policy Challenge
20
22
24
26
28
30
32
Q4'09 Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12
Pe
rce
nt:
Fir
st M
ort
gage
s
First Mortgages in Negative and Near Negative Equity Positions
Near Negative Equity Negative Equity
Negative Equity 22%
Near Negative Equity 4.8%
Source: Bloomberg NESHNATI, NNSHNATI INDEX<GO>
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Low Wage Bias in Hiring
-50
-25
0
25
50
75
100
125
150
2010 2011 2012
Tho
usa
nd
s
Leisure and Hospitality Health Care and Social Assistance Temp Retail Trade
Source: Bloomberg USRTTOT, USESTEMP, USEETOTS, USEHTOTS INDEX<GO>
U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
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Labor Slack Sustained
-4 -3 -2 -1 0 1 2 3 4
Lower-Wage Occupations
Mid-Wage Occupations
Higher-Wage Occupations
Net Change in Occupational Employment (millions)
Jobs Lost in the Recession and Gained in the Recovery
Recession (Q1 2008 - Q1 2010)
Recovery (Q1 2010 - Q1 2012)
Source: National Employment Law Project analysis of CPS data
22% of Job Growth during Recovery
58% of Job Growth during Recovery
21% of Job Losses during Recession
60% of Job Losses during Recession
19% of Job Losses during Recession
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Mortgage Backed Primary Secondary Spread
-20
0
20
40
60
80
100
120
140
160
2005 2006 2007 2008 2009 2010 2011 2012 2013
Bas
is P
oin
ts:
30
Day
Mo
vin
g A
vera
ge
Mortgage Backed Primary-Secondary Spread
Start Dates of Fed MBS Purchase Programs
QE 1 QE 3
Source: Bloomberg
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Labor Slack Sustained
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Occ
up
atio
nal
Gro
wth
Rat
e
Occupational Growth Rates since 2001
Lower-Wage Occupations Mid-Wage Occupations Higher-Wage Occupations
Source: National Employment Law Project analysis of CPS
Lower-Wage
Mid-Wage
Higher-Wage
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Labor Slack Sustained
0 50 100 150 200 250 300 350 400
Waiters and Waitresses
Food Preparations Workers
Personal and Home Care Aides
Retail Salespersons
Grounds Maintenance Workers
Laborers and Freight, Stock & Material Movers
Office Clerks
Miscellaneous Assemblers and Fabricators
Customer Service Representatives
Construction Laborers
Occupational Growth Rate
Net Employment Growth of Low-Wage Occupations
Source: National Employment Law Project analysis of CPS
Lower-Wage
Higher-Wage
Source: National Employment Law Project analysis of CPS
Lower-Wage
Mid-Wage
Higher-Wage
Joseph Brusuelas, Senior Economist Bloomberg, LP [email protected]
Bloomberg
Joseph Brusuelas is an economist who writes for the Bloomberg Economic Brief. The observations he makes
are his own. Bloomberg is a leading source of data, news, and analytics for financial and legal professionals,
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