Economic & Market Assessment

Transcription

1 Economic & Market Assessment The Big Disconnect Middle Market Conference Robert Podorefsky May 6,

2 Many questions about US growth US Real GDP $16.3 Tn Q Percent of US Total Net exports, -3% Private investment, 17% Gov't spending, 18% Personal spending, 68% Data source: BEA - New England, 5.4% - Mideast, 18.1% - Great Lakes, 13.9% - Plains, 6.7% - Southeast, 21.5% - Southwest, 12.5% - Rocky Mountain, 3.5% - Far West, 18.5% 2

3 Has the business cycle peaked? $ Bn's $170 $117 US Durable Goods Orders ex-transportation Dec '88 June '00 June '08 Sept '14 Since Sept $63 Aug '74 June '81 $10 Recession time frame shaded Data source: Census Bureau Mar-70 Jun-81 Sep-92 Dec-03 Mar-15 3

4 Unlikely Average Weekly Hours Worked in Manufacturing for production & nonsupervisory employees 42 = peak in business cycle Mar-51 Dec-66 Sep-82 Jun-98 Mar-14 Data source: Bureau of Labor Statistics - quarterly averages 4

5 Is flatter yield curve a warning? yr minus 2-yr UST Yield in bps Fed shows QE appetite Taper Talk Fed tapers Jun-11 Jun-12 May-13 May-14 May-15 QE ECB announces large QE 155 bps Data source: Federal Reserve Bank of St. Louis 5

6 US milestones set best data in 6+ yrs Full time employment (Mar) Temp/contract workers (Mar) Unemployment rate (Feb/Mar) Job openings (Feb) Leading indicators (Mar) Consumer confidence (Jan) Small business optimism (Dec) Rail demand (Dec) Capacity utilization (Nov) ISM services gauge (Nov) Homebuilder index (Sep) Auto sales (Aug) Architecture billings (Jul) Capacity utilization Fed funds target (right axis) in percent Jan-00 Feb-05 Mar-10 Apr-15 Date sources: FRB, BLS, Conference Board, American Institute of Architects, Assoc of American Railroads, American Staffing Assoc, Wards Automotive, and GE IRM 76 months Architecture billings index Leading indicator index - right Dec-05 Jan-09 Feb-12 Mar

7 Regional highlights Fed s Beige Book, April 15, 2015 Favorable / Unfavorable 1. Boston retail, manuf, service firms, commercial R/E, weather, FX 2. New York loan demand, some wage & cost pressure, weather 3. Philly retail x-auto, summer bookings, loan volume, weather 4. Cleveland residential R/E, job opening, bus. credit, shale gas prod 5. Richmond tourism, loan demand, labor mkt, weaker mfg, weather 6. Atlanta tourism, commercial R/E, manuf, lending activity, weather 7. Chicago autos, recreational vehicles, excess steel & crops, weather 8. St. Louis residential R/E, restaurants, metals, chemicals, weather 9. Minneap. consumer spending, construction, R/E, energy, mining, ag 10. K.C. solid loan demand, R/E, wage pressure, energy sector 11. Dallas autos, consumer lending, R/E, energy sector, weather 12. San Fran autos, R/E, wage pressures, DOD spending, energy Data source: World Bank, January

8 Retail inventory levels higher US Inventory-to-Sales Ratio number of months Business inventory Retail inventory - right axis Q1 '09, worst of the recession Highest since mid-' Feb-04 Nov-06 Aug-09 May-12 Feb-15 Data source: US Com m erce Dept 8

9 More confident consumers US vehicle sales, annual pace - left axis US consumer confidence index - right axis Vehicles: 8-yr high in Aug Confidence: 7-yr high in Jan Jul-07 Feb-10 Sep-12 Apr Data sources: Federal Reserve Bank of St. Louis & The Conference Board 9

10 Spending less on gasoline 4% % of US Consumer Spending on Gasoline 1% now equals $120 Bn/yr 3% 2% '90s '00s Data source: BEA '11 '12 '13 J F M A M J J A S O N D J F M '14 '15 10

11 And will for a while, large supply $115 WTI Price/bl - left axis Crude Inventory (mn's bls) - right axis $ weakness 491 $ $ $40 $ strength Feb-09 Mar-11 Apr-13 May-15 Data source: DOE & NYMEX

12 Government steps away $11.2 US personal spending: 68% of GDP - left axis US gov't purchases & investment: 18% of GDP in trillions $3.2 $8.7 $6.3 Vs. Q Gov't is minus 0.5% Consumer % $2.7 $2.1 $3.8 Data source: BEA Mar-84 Dec-91 Sep-99 Jun-07 Mar-15 $1.6 12

13 Business investment stalled in Q1 Business Investment: 13% of US GDP Real investment (left axis in Tn's) Equipment & software portion (right axis in Bn's) $2.1 $1.9 Fixed investment in structures fell 23%, subtracting 0.75% from Q1 GDP $1,030 $890 $1.6 $750 $1.4 Mar-03 Mar-07 Mar-11 Mar-15 Data source: BEA $610 13

14 A one time adjustment? US Crude Oil Rig Count 1600 Oct 2014: 1,609 peak Rig count has declined by over 900 to a 4.5-yr low 400 Down 21 straight weeks Jan-10 May-11 Aug-12 Dec-13 Apr-15 Data source: Baker Hughes 14

15 A better year ahead for residential 900 GDP, Residential Investment - $'s Bn's (left axis) New Home Inventory - in 000's (right axis) '15 so far Data sources: Bureau of Economic Analysis & US Census Bureau 15

16 Sales pace now above year-ago levels mn's of units 5.8 New & Existing Home Sales Combined annual pace compared 2014/2015 year-ago Apr '14 May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar '15 Nat'l Assoc. of Realtors & Census Bureau 16

17 Low rates a factor ECB contributes US 3.1% 10-yr UST yield 10-yr Bund yield German 2.1% 2.1% 1.1% 1.1% Apr-13 Dec-13 Aug-14 May-15 Data source: Bloomberg 0.0% 17

18 Could US rates go negative? Highly unlikely. Fed s on a different path limit risk of financial instability Europe faces unusual challenges. ECB deposit rate: -0.20% ECB monthly QE: 60 Bn Swiss target rate: -0.75% Danish deposit rate: -0.75% Sweden s repo rate: -0.25% Swiss Denmark Germany Netherl. Sweden Finland Austria Belgium France Ireland Japan maturity Negative Sovereign Yields # of years as of May 4 Data source: Bloomberg

19 Watch the dollar DXY US $ Index From Aug '14 Jackson Hole Fed Conference to mid-mar: DXY $ index up ~ 22% Aug-11 Nov-12 Feb-14 May-15 Data source: St. Louis Fed Data sources: GE MI, GE IRM & ICE Futures 19

20 Economic consequences being felt 30% 20% Relative Growth in US Exports Total European Union Pacific Rim S. & Central America YOY 10% 0% -10% -20% 2015 so far Jan - Mar Data source: US Census Bureau, For Goods Only - Not Seasonally Adjusted 20

21 Fed has fewer excuses to hold rates 3.5% Average Hourly Earnings annual gain 10% US unemployment rate (left axis) Labor force participation rate 66% 2.5% March '15: 2.1% YOY 8% 6% 65% 64% 1.5% Sep-08 Nov-10 Jan-13 Mar-15 4% Dec-06 Sep-09 Jun-12 Mar-15 62% 5 Job openings - mn's (left axis) Voluntary quit rate (right axis) 2.3% 122 Full-time workers (left axis) Part-time workers (right axis) in millions % % May-04 Dec-07 Jul-11 Feb % Sep-04 Mar-08 Sep-11 Mar-15 Source: Bureau of Labor Statistics, Social Security Administration and GE IRM 21

22 Exuberance makes a comeback Ratio of US Public Equity Market Cap to Nominal GDP 1.4 Q Q Mar-71 Mar-82 Mar-93 Mar-04 Mar-15 Data sources: Wilshire 5k & BEA Data sources: GE MI, GE IRM & ICE Futures 22

23 The credit cycle is still expanding 6.2% 4.4% 2.5% Delinquency rate for C&I loans (left axis) Commerical & Industrial loans at US banks ($ Tn's) Deliquency rates - end '14 Residential R/E 6.6% Credit cards 2.2% CRE 1.6% C&I loans 0.72% Leases 0.67% Fed tightening cycle began Since Q4 '10 low, up $675 Bn $1.9 $1.4 $ % Fed tightening cycle began Jun-91 Jun-97 Jun-03 Jun-09 Apr-15 Data source: Federal Reserve $0.5 23

24 Inflation shifts, expectations hold 4% PCE price index (YOY) US inflation expectations (*) 3% 2% 2% inflation target 1% 0% -1% Jul-08 Oct-10 Jan-13 Apr-15 (*) Per 10-yr TIPS/UST spread Data sources: BEA & FRB St. Louis 24

25 Big capacity to impact the yield curve 4.5 Federal Reserve's Balance Sheet - Total Assets in trillions of dollars post QE3 QE After Lehman failure QE2 April 2015 includes: UST Holdings: $2.46 Tn 1-5 yrs = $1.1 Tn 6-10 yrs = $0.6 Tn > 10 yrs = $0.7 Tn + MBS Holdings $1.72 Tn Jul-07 Jun-09 May-11 May-13 Apr-15 Data source: w w w.federalreserve.gov/releases/h41/current/ 25

26 Watch the 2-yr UST 3.0% 2-Year US Treasury Yield 2.3% 1.5% 0.8% Recent high, 0.74% Post-crisis low, 0.15% 0.0% Mar-08 Dec-09 Oct-11 Jul-13 May-15 Data source: Federal Reserve Bank of St. Louis 26

27 What does this mean for risk markets More volatility Investors are long and have been for a long time crowded trades Moderate growth ahead, inflation to rise Global markets priced for QE & disinflation to continue Fed desires some rate normalization & will accept some wealth give-back 27

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