US and Global Economy: Expansion gains pace in late Gregory Daco, Senior Principal US Economist April 2013

Transcription

1 US and Global Economy: Expansion gains pace in late 2013 Gregory Daco, Senior Principal US Economist April 2013

2 A risky global environment still Eurozone Sovereign Debt Crisis The Eurozone recession continues Austerity and bail-outs prescription Tail-risks of Eurozone break-up have diminished China looks like a soft landing Growth seems to have stabilized but not clear if it s picking up Japan Injecting huge monetary and fiscal stimulus will it work? Oil shock risk ever-present But fundamentals suggest the oil price should fall 2

3 Manufacturing purchasing managers indexes show improvement in major markets 65 (Purchasing Managers Diffusion Indexes, 50 = breakeven) U.S. Eurozone China 3

4 The Eurozone economy is stabilizing Actions by the European Central Bank (ECB) and European Union governments bolstered financial markets, but significant growth is not yet in sight. Italian election results depth of unhappiness about austerity will complicate the ECB s crisis management. Contractions in the southern periphery will extend through mid-2014 tough austerity programs, tight credit, and a strong euro. Some Northern European countries (Germany, Sweden, Norway) are doing better. Political uncertainty in Germany, Italy, Spain, and Greece is fostering caution. Necessary structural reforms to improve competitiveness on the periphery will gradually produce long-term benefits. 4

5 Real GDP growth in Western Europe 2 (Annual percent change) Germany France United Kingdom Italy Spain Eurozone

6 China s economy begins a fragile rebound Beginning a mild rebound, with output and prices accelerating. Fixed investment solid gains, as housing construction revives. Property markets are heating up, particularly along the coast. Growth but risks a sharp correction-inducing policy response. New government s policy agenda: Urbanization drive and consolidation of sectors that are energy-intensive. LT risks: rising debt of local governments, banking-sector leverage, and loss of momentum on reforms. China s export-oriented growth model has reached its limits need to cultivate domestic demand and move up the value chain. 6

7 China outlook summary Real GDP growth (%) Consumer price inflation (%) Exchange rate per USD* Current-account balance** *Annual average, **Billions of US dollars 7

8 Central banks either on hold or easing more Central banks over the past 1-2 years = aggressive easing Growth prospects in many of the world s key economies start to look better Central banks to a more neutral stance A little more easing (rate cuts and/or quantitative easing) by the Fed, the Bank of Japan, Bank of England is likely. Other central banks more cautious while watching for signs of renewed weakness ECB will probably cut its policy rate again. 8

9 Global real GDP growth will strengthen 6 (Quarter-on-quarter percent change, annual rate) % 2.6% 2.6% 3.5% 9

10 U.S. slow recovery

11 The U.S. outlook Momentum is modest. Hiring, capital spending both cautious. Foreign weakness has dampened export growth Fiscal cliff deal removed stimulus, didn t fix the sequester, and didn t cut the long-term deficit much Worst-case fiscal cliff and debt ceiling bomb were avoided Credit conditions and demand for credit gradually improving Vehicles demand rising pent-up demand coming through Housing activity and prices rising 2013: Continued modest growth 2014: Faster growth 11

12 ISM indexes softer in March but still in expansion mode small-business sentiment remains depressed (ISM Diffusion Indexes, 50 = breakeven) (NFIB Index, 1986=100) Manufacturing Index (L) Nonmanufacturing Index (L) NFIB Small-Business (R) ISM = Institute for Supply Management; NFIB = National Federation of Independent Business 12

13 Weekly initial claims bump up in early April an Easter holiday distortion 475 (Initial unemployment insurance claims, thousands) Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 4-Week Moving Average Actual 13

14 U.S. fundamentals are gradually improving

15 Credit conditions gradually loosening, except for home mortgage credit (Percent of banks reporting tightening credit conditions) Comm. & Ind. Credit Consumer Loans Large & Med. Firms Small Firms Credit Cards Autos Source: Diffusion Indexes from Fed Senior Loan Officer Survey Commercial Mortgage Credit Home Mortgage Credit Prime Loans

16 Single-family housing indicators: also improving 5.5 Existing Home Sales* 1.0 New Home Sales* Housing Permits* *Millions, SA Housing Starts*

17 Recovery should gradually gain momentum barring major policy blunders 5 (Real GDP, annualized real rate of growth, Q/Q, percent) Defense and Inventories Defense and Inventories Sequester 17

18 The housing cycle: turning up at last

19 Housing is moving off the floor Positives Housing affordability is at record highs Pent-up demand has built up, as household formation has been running well below trend Single-family indicators now improving too Negatives Credit access still much harder than before Foreclosure mess means huge backlogs remain Overhang of empty homes is not gone Employment growth still not robust 19

20 Demand shortfall: household formation is reviving (Millions of households) Mar 01- Mar 02 Mar 02- Mar 03 Mar 03- Mar 04 Mar 04- Mar 05 Mar 05- Mar 06 Mar 06- Mar 07 Mar 07- Mar 08 Mar 08- Mar 09 Mar 09- Mar 10 Mar 10- Mar 11* Mar 11- Mar 12 *The latest revised 2011 figures show 2.4 million extra households, but are distorted by the introduction of new population controls. The table shows the original 2011 estimate. Source: Census Bureau 20

21 are mortgage applications for house purchase finally turning higher? 300 (Mortgage applications for purchase, index, Mar.16,1990 =100) Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 4-Week Moving Average Actual 21

22 Housing starts beginning a long climb; prices have probably hit bottom now Housing Starts (LS, millions of units) FHFA House Price Index (RS, purchase-only index, 1991Q1 = 100)

23 The consumer : lacking income support

24 Consumer finances: not all negatives any more Negative Forces High unemployment Weak employment and income gains Heavy wealth loss Debt burdens still high Taxes up in 2013, and future tax increases likely Positive Forces Pent-up demand Some easing in credit conditions House prices beginning to rise Debt burden has fallen 24

25 Consumer sentiment well off the floor but still subdued by historical standards 120 (Reuters/University of Michigan Index, 1966=100)

26 Employment growth slowed sharply in March 350 (Payroll employment, monthly change, thousands of jobs) Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan Q1 2012Q2 2012Q3 2012Q4 2013Q1 +262k +108k +152k +209k +168k 26

27 Consumer spending is not a strong driver of recovery 6 (Annualized rate of growth)

28 Business investment: mid-2012 swoon appears temporary

29 Corporate cash flow has been strong, but share of output likely to decline 13 (Net corporate cash flow, excluding net capital transfers, percent of GDP)

30 Business equipment orders have revived; shipments beginning to follow 40 (Non-defense capital goods orders ex-aircraft, annualized rate of change of 3-month moving average) Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Orders Shipments 30

31 Foreign trade: export momentum lost

32 Export orders just above breakeven again 65 (Export Orders Index, ISM diffusion index, 50 = breakeven) ISM = Institute for Supply Management 32

33 No net boost from foreign trade in prospect (Percent change annualized rate, volumes) Real U.S. Exports Real U.S. Imports 33

34 Current account deficit steady 200 (Billions of dollars) (Percent of GDP) , Current Account Deficit Deficit as a % of GDP 34

35 Inflation and the Fed

36 Energy prices: some easing in oil should help Oil Price (Left scale, Brent, $/barrel) 36

37 Inflation easing (Percent change from a year earlier) All-Urban CPI Core PCE Price Index 37

38 The Fed September 2012: $40 billion/month open-ended MBS purchases December 2012: $45 billion/month open-ended long-term Treasury purchases Interest rate effects on growth likely to be small but the Fed has moved into whatever it takes mode it now says there ll be no rate hike before unemployment hits 6.5% (as long as inflation is well-behaved) if it can succeed in inspiring confidence, the Fed s moves will have a bigger effect than the rate impact alone 38

39 No change in the federal funds rate before the unemployment rate reaches 6.5% (Percent) Federal Funds Unemployment Rate 39

40 Fiscal policy: The cliff crisis is over, but much remains undecided

41 Fiscal policy assumptions We assume the sequester is triggered through September reducing spending $44 billion FY 2013, and $57 billion CY 2013 Sequester drag down real GDP growth by 0.4 pct pt in CY2013 Then, replaced by a package of spending cuts and tax increases phased in beginning in 2014: Spending cuts $500 billion: Entitlement and nondefense discretionary spending Tax increases $500 billion: Mostly through limiting deductions Debt Ceiling should not be a major policy hurdle in July/August 41

42 Sequester implications for GDP growth in (Percent) Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 Baseline (Partial Sequester) Full Sequester No Sequester Real GDP growth Baseline Full Sequester No Sequester* % 1.9% 2.4% 42

43 The federal budget gap: we expect action on both sides of the ledger 26 (Percent of GDP) Revenues Expenditures 43

44 Federal deficit projected path 500 (Billions of dollars, fiscal years) (Percent of GDP) , , Unified Budget Deficit (Left scale) Deficit as % of GDP (Right scale) 44

45 Implications and bottom line The most likely outlook is continued, moderate growth in Early momentum hurt by loss of payroll tax cut, likelihood of more Washington drama Faster growth in 2014 and 2015 helped by housing revival and more clarity on some of today s uncertainties Some risks Europe, oil shocks, China are largely out of US control domestic fiscal policy is a crisis made at home which can be fixed given the political will But the process will continue to be messy, sapping the private sector s momentum 45

46 U.S. economic growth by sector (Percent change unless otherwise noted) Real GDP Final Sales Consumption Light Vehicle Sales (Millions) Residential Fixed Investment Housing Starts (Millions) Business Fixed Investment Federal Government State and Local Government Exports Imports

47 Other key indicators (Percent unless otherwise noted) Industrial Production (% growth) Employment (% growth) Unemployment Rate CPI Inflation Oil Price (Brent, $/bbl) Natural Gas (Henry Hub, $/mmbtu) Core PCE Price Inflation Federal Funds Rate year Government Bond Yield Dollar (Major Currencies, 2005=1)

48 Thank you! Gregory Daco, Senior Principal U.S. Economist