Can the US Consumer Keep the World Economy Afloat?

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1 Can the US Consumer Keep the World Economy Afloat? January 2016 Robert Johnson, CFA Director of Economic Analysis (312) Morningstar, Inc. All rights reserved.

2 U.S. Is Only One Part of the World Economy World Share of Nominal GDP (2014) 34.3% 23.9% 22.4% European Union U.S. Japan China Other 13.5% 6.0% Source; IMF 2

3 U.S. Imports Are Important, but Not Enough to Save the World World Share of the Largest Importers 49.4% 15.2% 16.4% European Union (Extra-Trade) U.S. Japan China Other 5.6% 13.4% Source: World Trade Orgnization 3

4 So Just How Well Is The U.S. Economy Doing? Volatile and Below the 3.1% Average GDP Growth Rate Quarter Source: Bureau of Economic Analysis, Morningstar Calculations 4 Growth From Quarter 1 Year Ago Annualized Growth From Previous Quarter Annualized Growth From Previous Year Annual (Full Year) Q % 0.1% 2.2% Q % 1.9% Q % 1.1% Q % 3.0% Q % 3.8% 1.5% Q % -0.9% Q % 4.6% Q % 4.3% Q % 2.1% 2.4% Q % 0.6% Q % 3.9% Q % 2.0% Q4 2015E 2.0% 1.6% 2.4%

5 Why Has GDP Growth Been so Erratic? Limited Time Factors: /Weather /Port Strike /Tax Law Changes Recurring: /Faulty Seasonal Factors /Energy Issues /Inventory Calculations 5

6 Why Has GDP Growth Been so Slow? /Demographics of an Aging Population /Slower Population Growth /Limited Growth in Government Spending /De-Leveraging of Government and U.S. Consumers /More Cash Flowing to Households that pend a Smaller Percentage of Their Incomes /Slow Housing Recovery 6

7 U.S. Economy, Steady as She Goes The Outlook for 2016 /Real U.S. GDP Growth of 2.0%-2.5% /CPI Inflation 2.5% /Employment Growth Steady at 220,000 Per Month /Unemployment Rate Drops to 4.6%-4.8% /Ten-Year Treasury Increases to 3.0%-3.5% /Home Prices Increase 5.8%-6.2% 7

8 Economic Drivers /Consumer Spending Up More Than 2% /Less Fiscal Drag, Government Spending Stabilizes /Housing Market Poised for Slow but Consistent Growth /Low Commodity Inflation, Helping Consumers, Hurting Businesses /Business Spending and Exports Stabilize 8

9 Consumption Drives 70% of the US Economy 4% Real Consumption, Year-Over-Year Growth 3% 2% 1% 0% Bureau of Economic Analysis 9

10 Employment Growth Drives Spending 3% Employment Growth Since 2010, Year-Over-Year, 3-Month Average Private Sector 2% Total Nonfarm 1% 0% -1% -2% Source: Bureau of Labor Statistics 10

11 Along With Hourly Wage Growth 2.0% Real Hourly Wages, Year-Over-Year Growth, 3-Month Average 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% Source: Bureau of Labor Statistics 11

12 Wages Higher as the Job Market Is Tighter Than Most Believe 0.5% Claims as a Percentage of Covered Employment 0.4% 0.3% 0.2% 0.1% Source: Bureau of Labor Statistics, Morningstar Calculations 12

13 Wage, Total Income and Consumption Beginning to Line Up Real Disposable Personal Income, Consumption, and Wages, Year-Over-Year Growth 6% 4% Real disposable income Real consumption Real wages 2% 0% -2% -4% Source: Bureau of Economic Analysis 13

14 Commodities Drive Inflation Lower, Aiding U.S. Consumers Consumer Price Index, Year-over-Year Change Shaded areas represent recessions 8% All Items CPI 6% Core CPI 4% 2% 0% -2% -4% Source: U.S. Bureau of Labor Statistics, Morningstar Calculations 14

15 Consumer Net Worth at a Record High, However Growth Has Slowed 20.0% Households and Nonprofits Net Worth, Year-Over-Year Growth 10.0% 0.0% -10.0% -20.0% Source: Bureau of Economic Analysis 15

16 However, Slow Debt Growth Limiting Consumer Spending 20.0% Households and Nonprofits Liabilities, Year-Over-Year Growth 15.0% 10.0% 5.0% 0.0% -5.0% Source: Census Bureau, Department of Labor Statistics 16

17 Industrial Production Stumbling Along in Industrial Production Index Manufacturing Source: Federal Reserve 17

18 Commodities Fall, but for How Much Longer? Global Commodity Prices 100% 80% 60% Energy Livestock Precious metals Industrial metals Grains 40% 20% 0% -20% -40% -60% -80% -100% Source: Morningstar Direct, Bloomberg Commodity Indexes 18

19 Business Investment Spending Remains in a Funk 15.0% Real Private Nonresidential Fixed Investment, Year-Over-Year Growth 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% Source: Federal Reserve 19

20 Lack of Government Spending Has Held Back Overall Economic Growth Real Government Expenditures and Gross Investment, Year-Over-Year Growth 7.0% 5.0% 3.0% 1.0% -1.0% -3.0% -5.0% Source: Federal Reserve 20

21 And Exports Aren t Helping Either 20.0% Real Exports of Goods and Services, Year-Over-Year Growth 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% Source: Federal Reserve 21

22 Russia, Middle East, China, Shale Oil Remain Worrisome Source: The Nation, Children s Healthcare Knowledge Repository, CBS Sacramento, SodaHead, Accendo Markets, AIMS.org, AP/Canadian Press 22

23 Housing Market Moving Up, Still Aiding to Recovery 23

24 Residential Spending Has Upside Potential 8% Residential Spending as a Percentage of GDP 6% Average 4% 2% 0% Source: Bureau of Economic Analysis, Morningstar Calculations 24

25 Existing Home Sales Limited by Small Inventories and High Prices Existing Home Sales Statistics Existing Home Sales, Y/Y 3-Month Average 35% Existing Home Inventory, Y/Y 3-Month Average 25% 15% 5% -5% -15% -25% -35% Source: Bureau of Economic Analysis, Morningstar Calculations 25

26 Housing Starts Continue to Grow at a Sustainable Pace Housing Starts SAAR, Thousands 2,000 1,800 Single-Family Starts Multi-Family Starts 1,600 1,400 1,200 1, Source: Bureau of Economic Analysis, Morningstar Calculations 26

27 The Home Price Increases on the Rise Again, Not Great News FHFA Home Prices Index, Annual Change, 3-Month Average 8% 4% 0% -4% -8% Source: Federal Housing Finance Agency 27

28 World Growth Rates Stagnate and Converge % Growth E 2016F 2016F United States Euro Area Japan Brazil Russia India China High Income Emerging World (2010 PPP) Source: World Bank 28

29 China s Slowdown Marks New Era, Contributes to Low Commodity Prices 16 China Annual Real GDP Growth Since 1980 (%) Source: International Monetary Fund 29

30 Falling World Interest Rates Help Keep U.S. Rates Low World Interest Rates, 10-Year Treasury Yields (%) Germany France Italy Spain United Kingdom United States Source: Eurostat, Federal Reserve 30

31 U.S. Dollar Strength Back after a Brief Pause 130 Broad Trade-Weighted Dollar Index Source: Federal Reserve, Morningstar Calculations 31

32 Still, U.S. s Dependence on Exports Remains Fairly Limited U.S. Exports as a Percentage of Gross Domestic Product 14% 12% 10% Exports as a % of GDP Europe 26.5% China 13.6% Japan 17.0% U.S % 6% 4% 2% Source: World Bank, Bureau of Economic Analysis 32

33 Shifting U.S. Demographics Change Economic Beneficiaries 33

34 Birth Cohorts Drive Economic Cycles Live Births, Thousands 4,500 Average Life Expectancy - 81 Social Security Eligibility - 62 Near Highest Spending Age - 50 First-Time Home Buyer - 31 Enter Work Force ,000 3,500 3,000 2,500 2, Source: Bureau of Economic Analysis 34

35 Slowing Population Growth Means Diminished GDP Prospects Population Growth 2.0% Population Growth versus Real GDP Growth, Trailing 5-Year Averages Real GDP Growth 6.0% Population Growth (Lagged 5 Years) Real GDP Growth 1.8% 5.0% 1.6% 4.0% 1.4% 3.0% 1.2% 2.0% 1.0% 1.0% 0.8% % Source: Bureau of Economic Analysis 35

36 Population Growth Population Growth 3.0% 2.5% World Developed Developing 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% Source: United Nations 36

37 Working Age Population Beginning to Shrink Net Change in U.S. Born Working Age Population 1,200 1, Source: Bureau of Economic Analysis 37

38 Older Consumers Who Spend Less, Growing the Fastest Projected Population Growth Rates 20% Under 18 years 18 to 64 years 16% 65 years and over 12% 8% 4% 0% Source: Census Bureau, Updated May

39 Older Consumers Who Spend Less Growing the Fastest 70 Average Annual Household Spending by Age Group, Thousands of Dollars under Source: Bureau of Labor Statistics, Morningstar Calculations 39

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