Post on 03-Apr-2018
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US Economic Outlook 2012-13
Dimitri Delis, Ph.D.
DirectorStrategic Analytics Group
Fixed Income U.S. Strategy
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2
The wimpy recovery
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3
The weakest recovery by far
0.95
1.00
1.05
1.10
1.15
1.20
0 2 4 6 8 10 12 14 16
Time (quarters)
2007
1982
2001
1990
Consumption growth during
recessions & recoveries
start of recessions
Source: BEA
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4
Lower confidence should lead to lower spending
Source: BEA
-5%
-3%
-1%
1%
3%
5%
7%
9%
50
60
70
80
90
100
110
120
Jan-81 Jan-86 Jan-91 Jan-96 Jan-01 Jan-06 Jan-11
Consumer Spending
Consumer Confidence
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5
US economic activity is dropping
Average of ISM (Chicago), Empire Manufacturing, Philadelphia and Richmond Index
US Manufacturing Index
Source: ISM, Bloomberg
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
Jul-01 Nov-02 Mar-04 Jul-05 Nov-06 Mar-08 Jul-09 Nov-10 Mar-12
2010 2011
2012
Reccessions
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6
Employment conditions have been improving
Source: BLS
100
200
300
400
500
600
700
Jan-67 Jan-73 Jan-79 Jan-85 Jan-91 Jan-97 Jan-03 Jan-09
Thousand
s
Initial jobless claims have been
steadily dropping
360K
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0.92
0.94
0.96
0.98
1.00
1.02
1.04
1.06
1.08
0 10 20 30 40 50Months
1982
average ( past 9 recessions)
2001
current -2007
employment growth during
recessions & recoveries
start of recessions
but the job recovery has been lackluster as
Source: BLS, BMO
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key labor metrics are not participating in the recovery
Source: BLS
54
56
58
60
62
64
66
Jan-48 Jul-60 Jan-73 Jul-85 Jan-98 Jul-10
employment/population ratio (%)
0
10
20
30
40
50
Jan-48 Jul-60 Jan-73 Jul-85 Jan-98 Jul-10
average duration ofunemployment (in weeks)
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The US labor market has recovered 50% of the jobs lostduring the recession
Source: BLS, BMO
137
139
141
143
145
147
Jun-07 Apr-08 Feb-09 Dec-09 Oct-10 Aug-11 Jun-12
millions
US employment level
lost
8.6MM
gained4.4MM
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A bleak job recovery for the 25-55 age group
10
Cumulative changes in employmentduring the recession
Cumulative changes in employmentduring the recovery
-8
-6
-4
-2
0
2
Dec-07 Jul-08 Feb-09 Sep-09
millions
between 25 years and 55 years
older than 55 years
younger than 25 years
Source: BLS
-1
0
1
2
3
4
Jan-10 Aug-10 Mar-11 Oct-11 May-12
millions
between 25 years and 55 years
older than 55 years
younger than 25 years
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Pulling its weight at last, but
Source: US Census Bureau
0
200
400
600
800
1000
1200
1400
Jan-68 Jan-79 Jan-90 Jan-01 Jan-12
('000s)
rising from low levels
new home sales
0
500
1000
1500
2000
2500
Jan-68 Jan-79 Jan-90 Jan-01 Jan-12
('000s)
housing starts
rising from low levels
11
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Source: Bloomberg/ National Association of Realtors
additional pressure on home prices is likely
0
2
4
6
Mar-79 Mar-85 Mar-91 Mar-97 Mar-03 Mar-09
millions
shadow inventory
12
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How low can home prices go?
Source: Irrational Exuberance, Robert Shiller
13
60
80
100
120
140
160
180
200
1890 1910 1930 1950 1970 1990 2010
real home rice index
another10%drop ?
41% drop thusfar
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An explosion in the monetary base
The monetary base M0 is the narrowest definition of money supply. The monetary base M0 consists of coins, notes and commercial banks reserves with
the central bank.
Source: Federal Reserve
0
500
1,000
1,500
2,000
2,500
3,000
Jan-59 Jan-68 Jan-77 Jan-86 Jan-95 Jan-04 Jan-13
$billi
ons
monetary base M0
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has not led to an explosion in the money supply
M2 consists of : M0 + demand deposits + savings accounts + money market accounts +retail money market mutual funds + time deposits under $100K
Source: Federal Reserve
0
2,000
4,000
6,000
8,000
10,000
12,000
Apr-59 Jan-67 Oct-74 Jul-82 Apr-90 Jan-98 Oct-05 Jul-13
$billio
ns
money supply M2
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Source: Federal Reserve
% change M2 + % change velocity= % change GDP
and money velocity keeps on dropping
1.5
1.6
1.7
1.8
1.9
2
2.1
2.2
2.3
Jan-59 Sep-65 May-72 Jan-79 Sep-85 May-92 Jan-99 Sep-05 May-12
money velocity = GDP/M2
Recessions
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The European sovereign debt crisis has receded fornow
Source: Bloomberg
0
100
200
300
400
500
600
700
Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12
5-yr CDS spreads (bps)
France Germany
Italy Spain
USA
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but may soon resurface since negative growth is
expected for 2012
Source: Bloomberg
-4
-2
0
2
4
2010 2011 2012 2013 2014
GDP(%)
EURO ZONE Germany France
Italy Spain Portugal
A worsening Euro crisis will hurt the US through less
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A worsening Euro-crisis will hurt the US through lessexports
33%
25%
23%
12%
2%5%
0%
10%
20%
30%
40%
Canada/Mexico
Pacific Rim Europe South/CentralAmerica
Africa Other Countries
In 2011 total US exports to the world were about $2 trillion In 2011 total US exports to the Eurozone were about $280 billion or 14% of total
exports
Source: Department of Commerce
14%
4%5%
0%
5%
10%
15%
Euro Zone UK Rest of Europe
19
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but more worrisome is the exposure of the US banking
system to Euro debt
7%
26%
49%
5%2%
11%
0%
10%
20%
30%
40%
50%
60%
Canada/Mexico Pacific RimCountries
Europe South/CentralAmerica
Africa Offshore/Other
In 2011 US banks held about $3.1 trillion in foreign debt In 2011 total exposure by US banks to Eurozone debt was about $750 billion Total exposure by US banks to UK debt was about $629 billion
752
629
172
0
200
400
600
800
EuroZone
UK Rest of Europe
Billions
($)
Source: Department of Commerce
20
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A sizeable fiscal cliff
21
-1.60
-1.20
-0.80
-0.40
0.00
0.40
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
$trillions
actual
forecasted
$560bn
fiscal cliff
US deficit
Source: CBO
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Understanding the fiscal cliff
Source: CBO, BMO
Revenues $bn %GDP
Payroll Tax cuts 100 0.7%
Bush tax cuts & AMT indexing 230 1.6%
Other expiring provisions 78 0.5%
Spending
Emergency unempl. benefits 30 0.2%
Medicare payments to Physicians 11 0.1%
Mandatory sequestration 65 0.4%
Other 46 0.3%
Total change 560 3.8%
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The debt limit poses significant headwinds tofurther spending
5
7
9
11
13
15
17
Sep-00 Aug-02 Jul-04 Jun-06 May-08 Apr-10 Mar-12
$trillions
debt limit
US debt outstanding
Source: Bloomberg
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US federal debt /GDP ratio (%)
Averting the fiscal cliff under the alternativescenario may be possible, but.
Source: CBO
0
20
40
60
80
100
120
1940 1950 1960 1970 1980 1990 2000 2010 2020 2030
Alternative Fiscal Scenario
CBO's Baseline Projection
actual forecasted
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the future of public debt is daunting and
unsustainable
Source: BIS,Cecchetti et al.March 2010
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the future of public debt is daunting and
unsustainable (continued)
Source: BIS,Cecchetti et al.March 2010
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How low can we go?
Nominal rate = Real rate + Inflation
Source: Bloomberg
0
1
2
3
4
5
Oct-07 Jan-09 Apr-10 Jul-11 Oct-12
%
Nominal 10-yr Treasury rate (%)
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Can we get negative nominal yields?
+
Nominal rate = Real rate + Inflation1.84% = -0.70% + 2.54%
Source: Bloomberg
-2
-1
0
1
2
3
4
Oct-07 Jan-09 Apr-10 Jul-11 Oct-12
10-yr Treasury real rate (%)
-1
0
1
2
3
Oct-07 Jan-09 Apr-10 Jul-11 Oct-12
10-yr Treasury inflation
expectations (%)
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29
3
4
5
6
1873 1877 1881 1885 1889 1893
US 10-year rate(1873-1893)
0
2
4
6
8
1990 1994 1998 2002 2006 2010
Japenese 10-year rate
(1990-2011)
1.5
2.0
2.5
3.0
3.5
4.0
1928 1933 1938 1943 1948
US 10-year rate
(1928-1952)
12 years to hitthe low
12 years to hitthe low
13 years to hitthe low
Rates can stay low for many many years
Source: Bloomberg
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An unnerving comparison
30
Source: Bloomberg
0
2
4
6
8
10
3
4
5
6
0 5 10 15 20Years since crisis
US 10-Yr(%) (1873-1894)
Japan 10-Yr(%) (1990-2011)
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
0
1
2
3
4
5
0 5 10 15 20Years since crisis
US 10-Yr(%) (2007-2012)
US 10-YR (1873-1894)
Japan 10-Yr (1990-2011)
QE3 h th 10 t hi h th t
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31
1
2
3
4
5
Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12
QE 1 QE 2
QE 3
forecasted
10-yr Treasury rate (%)
QE3 may push the 10-yr rate higher over the nextseveral months
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European CDS spreads suggest that the 10-yrshould be closer to 2.5%
32
Source: Bloomberg
1
2
3
450
150
250
350
450
Jan-11 Jul-11 Jan-12 Jul-12
average 5-yr CDS spread (bps)
(Spain, France, Italy)
10-yr Treasury(%)
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Conclusion
The current economic recovery has been the weakest over the past 60 years.
A recent run of weaker than expected economic data illustrates that the economy has lost a fair amount ofmomentum. Currently manufacturing activity across the US has dropped at an alarming pace and is approachinglevels last seen in 2009.
Employment growth is following one of the lowest growth trajectories over the past 9 recessions. While job growthhas been weak, the economy has recovered about 50% of the jobs lost during the recession. But the job recoveryhas been asymmetrical as most jobs have gone to those 55 years and older.
Housing has stabilized at lower levels but the large shadow inventory may cause further declines in home prices of10-15%.
The velocity of money will continue to drop over the next year as deleveraging continues. This means that M2growth will not necessarily translate into higher GDP even after the Feds latest round of more quantitative easing.
The crisis in the Eurozone can be transmitted to the US via two channels, i.e. trading and banking. The far more
detrimental channel of transmission would be through the banking system.
Despite the 1873 US financial crisis and the 1990 Japanese bubble being separated by 117 years and 6,000 milesthe path of the 10-yr rate after both crises follows eerily an identical trajectory. The 10-yr rate is currently following asimilar path suggesting that rates may hit the 1% level over the next few years.
The latest measures adopted by the ECB and the Fed have created the perfect environment for rates to movehigher over the near term. Our analysis suggest that the 10-yr may move closer to 2.3% over the next severalmonths.