US Economy: Coming Strength or Weakness? Sam D. Kahan ACT RESEARCH Co., LLC Sept. 29, 2016

Transcription

1 US Economy: Coming Strength or Weakness? Sam D. Kahan ACT RESEARCH Co., LLC Sept. 29, 2016

2 US economy: OVERVIEW Strong Q3, and then a return to trend Headwinds that depressed past growth are abating Bi-furcated economy: Weak goods; Strong services Inflation: Stability of energy and commodities reduces volatility Services push prices up while commodities rein-in prices Movement to the 2% area continues Interest Rates: Short-term rate increases will be measured and moderate 2

3 U.S. Real GDP ( ) (% change, annualized) Strong: Consumption and residential investment Weak: Trade deficit 3

4 Real GDP Components Consumption Positives: solid employment and real income growth, increased net worth, access to borrowing, expectations high, higher saving rate Negatives: uncertainty, wages still at 2% pace Investment Residential construction: Fundamentals look good. Sales volatile but rising, prices firming, and pent-up demand. Non-residential: Negative effect of energy sector is ending. Other sectors positive but sluggish. Inventories High relative to sales but has been pared in recent quarters. Trade Positives: Export stronger than past history suggests. Oil imports down. Negatives: Strong dollar, economies of emerging markets slowing. Competitive devaluations possible. 4

5 Risks: Up and Down US election outcome Uncertainty as to policy stance particularly with regard to economics Financial disruption More likely to occur overseas and spread to US Oil bonus (lower prices) Saving from lower prices encourages spending and keeps lid on inflationary pressures Currency Dollar fails to ease in a timely manner Devaluations especially in emerging markets as a way of stimulating their economies Increased protectionist moves via legislation also possible Geo-political threats 5

6 Recession Recession is not two consecutive negative quarters of real GDP Recessions do not occur of old age Recessions in US post WWII history caused by the Fed Recessions could occur if there are imbalances or shocks 6

7 GDP Components and Transportation Consumption Drivers: Positive for transportation Housing: Positive for transportation Housing growth has been positive but slower than past recoveries Upside surprise possible: Millennial household formation accelerates Inventories: Less negative Businesses have begun to pare the high I/S ratio Commodities: Spike in commodity markets occurs when GDP is strong and above trend Seems unlikely in the foreseeable future 7

8 U.S. Real PCE ( ) (% change, annualized) Trend PCE growth has been approximately 2.5% Goods share has been rising about 1% every two years since 2007and now stands at 35% Near-term PCE growth below trend, due to uncertainty, until early

9 Residential Investment ( ) (% change, annualized) Housing share of GDP: Fell to 3%, half of average Starts: Total 1.2 million; average was 1.8 million Potential surprise: Millennials 9

10 Home Ownership and Millennials Millennials: Add 4 million units if ownership rate rises to 60% 10

11 Inventory Levels ( ) Inventory levels are being pared but still appear high Retail sector excess: Department stores and motor vehicles Manufacturing excess: Machinery and trucks 11

12 Inventory Investment ( ) (% change, annualized) Rate of accumulation is projected to be slowing Inventory pace will remain positive as long as growth is anticipated 12

13 OIL Supply exceeds demand and inventories levels are high Non-market attempts to affect supply not effective Rumored effort of capping production is a test (fail) Several nations are still increasing their output US rig count rising Prices Fluctuation in $40 to $50 range seems likely to continue Diesel and gasoline prices fluctuate in the $2.00 to $2.50 range Shift to alternative fuels and technologies will continue but at a slower pace Geo-political threats remain 13

14 Oil: Prices, Rigs, and Output 14 Production has started to decline Number of rigs has risen by 100 since end of May WTI prices have fluctuated in the $40 to $50 range

15 DOLLAR: Will it go down? Dollar foreign exchange rate has been firming It rose by 15% against a broad-based of other currencies in It fell by less than 2% in first half of 2016 and has stayed steady since Stronger dollar hurts exports and encourages imports The manufacturing sector is especially vulnerable The US trade deficit is likely to widen in the next two years depressing GDP Works with a lag of one to two years US exports have not slowed as much as past relation would suggest Potential reactions Protectionist legislation and less trade themed treaties Competitive devaluations especially by emerging economies Financial stress Globalization of capital flows might send stress from overseas to USA 15

16 US Imports and Trade-weighted Dollar ( ) Lag of a year to two in adjustment to FX moves Reduced oil imports is not a major 16

17 US Exports and Trade-weighted Dollar ( ) 17

18 Industrial Production (Total and Manufacturing) ( ) 18

19 ISM INDICES Manufacturing and Non-Manufacturing ( ) Manufacturing sector is struggling to recover after weakness Non-manufacturing more robust than manufacturing, slowed in first half of

20 Global Activity and Commodity Prices (1980 to present) 20

21 PCE Inflation (Total, Core) (% Change, Q/Q) 21

22 Consumer Price Index (Total, Core) (% Change, Q/Q) 22

23 CPI Components (2009 to 216Q1) (% Change, Q/Q) 23

24 Federal Reserve Policy Moves ( ) Fed decisions will be data-driven, well advertised, and moderate. Fed decisions are conflicted between fear of inflation, and fear of financial dislocation,. 24

25 BACKGROUND SLIDES

26 Non-Farm Payroll Employment ( , monthly change) Rate of job growth slows to the 100k to 125k as pool of available workers diminishes 26

27 Unemployment Rate (U-3 and U-6) Unemployment rate, at 4.9%, is on the cusp of full employment It is projected to decline toward the 4.5% by 2017 Rise in labor force participation should slow pace of drop in the unemployment rate 27

28 Unemployment Rate (U-3 and U-6) The expanded unemployment rate, U-6, is about 0.5 percentage points above its historical level of 9.3% 28

29 Net Trade Deficit ( ) US trade deficit widens from current -$540 to -$650 billion by end of As percent of GDP, trade deficit rises to 3.6% as imports move to 16% of real GDP while exports stay at 13% 29

30 Crude Oil Prices Nominal and Real ( ) Since early 2016, WTI prices have moved largely in the $40 to $50 range Rumors that OPEC might institute a production freeze have kept prices firm In real terms, at $20, prices are just slightly above average 30

31 Housing Starts and Residential Investment Housing expenditures slowed in early 2016 but should rebound as income, wealth and household formations improve Starts, still below replacement, but projected to rise with single units taking over leadership role 31

32 Inflationary Expectations (5yr, 5yr forward rate) Market-based measures of inflationary expectations, TIPS, signaled a downshift. Survey based measures have been steady to slightly lower 32

33 Indices of Financial Stress ( ) More comprehensive measure than individual spread relations No signal of risking stress at the moment 33

34 Uncertainty Measure ( ) 34

35 US BUDGET DEFICIT (Total and per GDP) 35