John Silvia Presentation March 0805
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![Page 1: John Silvia Presentation March 0805](https://reader031.fdocuments.in/reader031/viewer/2022020209/568c34281a28ab02358f6033/html5/thumbnails/1.jpg)
John Silvia – Chief Economist
March 8, 2005
Translating Trends into Actions
Presentation to: The 2005 Global Economic Outlook
Conference
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Economic Transition
• Traditional Business Cycle• Not the Sky is Falling
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200420032002200120001999
8%
6%
4%
2%
0%
-2%
8%
6%
4%
2%
0%
-2%Quarter/Quarter Percent Change, Seasonally Adusted Annual Rate
SUSTAINED GROWTH: ABOVE TREND BIASReal GDP
4th Quarter 2004@ 3.8%
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Mid-Cycle Economics: Real GDP
2.90%
2.95%
3.00%
3.05%
3.10%
3.15%
3.20%
3.25%
3.30%
3.35%
Phase 1 Phase 2
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0403020100999897
15%
10%
5%
0%
-5%
-10%
15%
10%
5%
0%
-5%
-10%
INVESTMENT RECOVERY MODERATESFINAL DOMESTIC DEMAND COMPONENTS
Blue Line = Consumer SpendingRed Line = Government Spending
Green Line = Business Fixed Investment(Year-on-Year Growth)
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Mid-Cycle Economics: Housing Starts
0%
5%
10%
15%
20%
25%
Phase 1 Phase 2
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Where are we going?• Outlook – Growth: But Slower• Not Your Father’s Economic Recovery.
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2005200420032002
500
450
400
350
300
250
500
450
400
350
300
250
FEWER CLAIMS SIGNAL RECOVERYInitial Jobless Claims, In Thousands
Blue Line = 4-Week Moving Average @ 307.00
February 26
Green Line = Weekly Figure @ 310.00
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050403020100999897
65
60
55
50
45
40
35
65
60
55
50
45
40
35
MANUFACTURING RECOVERYISM COMPOSITE INDEX
February @ 55.3Diffusion Index
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050403020100999897
140
130
120
110
100
90
140
130
120
110
100
90
DURABLES VS NONDURABLE GOODS MANUFACTURINGIndustrial Production, Index
January
Blue Line = Durable Goods @ 137.0
Green Line = Nondurable Goods @ 101.7
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050403020100999897
70
65
60
55
50
45
40
35
70
65
60
55
50
45
40
35
SERVICE SECTOR GAINS CONTINUEISM NON-MANUFACTURING INDEXBUSINESS ACTIVITY INDEX
February@ 59.8
Seasonally Adjusted
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A Hybrid WorldClues for Change
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04030201
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
CONSUMER PRICE INDEXYear-over-Year Percent Change
Blue Line = CPIGreen Line = Core CPI
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CanadaRussiaU.K. EurozoneJapanU.S.
8%
7%
6%
5%
4%
3%
2%
1%
8%
7%
6%
5%
4%
3%
2%
1%
G8 Real GDP Growth RatesYear-on-Year % Change
2Q 20043Q 2004
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200520042003
105
100
95
90
85
80
75
105
100
95
90
85
80
75
WHAT DOLLAR IS IN YOUR WALLET?
Blue Line = Major Currency Index
Green Line = OITP Index
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04020098969492
12%
10%
8%
6%
4%
2%
0%
-2%
12%
10%
8%
6%
4%
2%
0%
-2%
ACCOMODATIVE FED POLICY CONTINUESREAL FEDERAL FUNDS RATE VS. M2 MONEY GROWTH
Green Line = Real Fed Funds Rate*,
Blue Line = M2 Growth, Yr/Yr % Change, January @ 5.6%
* Fed Funds Rate minus "Core" Consumer Price Index
January @ 0.0%
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05030199979593918987
23%
22%
21%
20%
19%
18%
17%
16%
15%
23%
22%
21%
20%
19%
18%
17%
16%
15%
FEDERAL BUDGET IMBALANCESpending & Revenue As Percent of GDP
January '05
16.1%
SPENDING
REVENUE
19.3%
Latest 12 months:
Spending $2,333 TrillionRevenue $1,943 Trillion
(Blue Line)
(Green Line)
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20052004200320022001200019991998
$30
$20
$10
$0
$-10
$-20
$-30
$-40
$-50
$30
$20
$10
$0
$-10
$-20
$-30
$-40
$-50
FEDERAL BUDGET SURPLUS OR DEFICIT12 month moving average
January 2005 @ -$32.6 Billion
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Social Security, Medicare, and Medicaid Spending
as a Percent of GDP
0
5
10
15
20
25
30
2000 2010 2020 2030 2040 2050 2060 2070 2080
Percent of GDP
Social Security
Medicaid
Medicare
Note: Social Security and Medicare projections based on the intermediate assumptions of the 2004 Trustees’ Reports. Medicaid projections based on CBO’s January 2004 short-term Medicaid estimates and CBO’s December 2003 long-term Medicaid projections under mid-range assumptions.
Source: GAO analysis based on data from the Office of the Chief Actuary, Social Security Administration, Office of the Actuary, Centers for Medicare and Medicaid Services, and the Congressional Budget Office.
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039893888378
20%
15%
10%
5%
0%
-5%
20%
15%
10%
5%
0%
-5%
FEDERAL GOVERNMENT SPENDING, Ex. INTEREST PAYMENTSYear to Year Percent Change, 12 Month Moving Average
Blue Line = Gov't Spending ex. Interest Payments @ 5.8%Red Line = Nominal GDP, Yr/Yr @ 5.6%
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050403020100999897
9%
8%
7%
6%
5%
4%
3%
9%
8%
7%
6%
5%
4%
3%
10-YEAR TREASURY VS. BAA CORPORATE BOND YIELD
Green Line = BAA Yield
February
Blue Line = 10-Yr Treasury
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Traditional Model
• Fed Raises Rates
• Inflation Up
• Sustained Economic Growth
• Persistent Fiscal Deficits
• Declining Dollar
• Yet Treasury Rates Fall
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040302010099989796
8%
7%
6%
5%
4%
3%
2%
8%
7%
6%
5%
4%
3%
2%
NOMINAL GDP VS. 10-YR TREASURYBlue Line = Nominal GDP, Yr/Yr % ChangeGreen Line = 10-Yr Treasury Yield
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2005200420032002
2.00%
1.80%
1.60%
1.40%
1.20%
2.00%
1.80%
1.60%
1.40%
1.20%
AA and BAA Corporate Bond Yield Spreads(Over 10-Year Treasury)
World Com - March 2002Enron - Oct 2001
Sarbannes-Oxley - July 2002
Red Line = Baa Spread
Blue Line = Aa Spread
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04020098969492908886848280
35%
30%
25%
20%
15%
10%
35%
30%
25%
20%
15%
10%
CORPORATE INTEREST EXPENSEAS A PERCENT OF CASH FLOW
3Q 2004@ 13.5%
Nonfinancial Corporate Business
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Traditional Model
Managed Exchanged Rates
China, JapanProfit Motive
Central BankDirected Capital Flows
Preferred Habitat
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Managed Exchange Rates
• Domestic, Foreign Bonds not Perfect Substitutes.• Buy UST to Manage Exchange Rate Even if Adjusted for Exchange Rate Risk and if Below Other Sovereign Debt Expected Rates of Return.
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05040302010099989796
$1100
$1000
$900
$800
$700
$600
$500
$1100
$1000
$900
$800
$700
$600
$500
FED CUSTODY HOLDINGS OF U.S. TREASURYSECURITIES FOR FOREIGN CENTRAL BANKS
In Billions of Dollars
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Total Net Foreign Purchases of U.S. Treasurys by World Region
-100,000
-50,000
0
50,000
100,000
150,000
200,000
Net For
eign
Pur
chas
es of U
.S. T
reas
urys
($ M
illions
)
Japan Europe Latin America & Caribbean ChinaSource: Dept. of U.S. Treasury
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Total Net Foreign Purchases of U.S. Corporate and Agency Bonds by World Region
-50,000
0
50,000
100,000
150,000
200,000
250,000
Net Foreign
Purch
ases
of U
.S. C
orpo
rate and
Age
ncy Bon
ds ($
Millions
)
Japan Europe Latin America & Caribbean ChinaSource: US Dept. of Treasury
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Why Euro so Strong if U.S. Growth Stronger Than Euro Community?• Only Trade the Euro.
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200520042003200220012000
7%
6%
5%
4%
3%
2%
1%
0%
$1.40
$1.30
$1.20
$1.10
$1.00
$0.90
$0.80
Centr
al B
ank P
olic
y R
ate
s$ p
er E
uro
Eurozone vs U.S. Policy Ratesversus Euro/Dollar Echange Rate
ECB RateFed Funds Rate$ per Euro
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20042003200220012000
10%
8%
6%
4%
2%
0%
-2%
$1.30
$1.20
$1.10
$1.00
$0.90
$0.80
GD
P G
row
th R
ate
s$ p
er E
uro
Real Growth at a Quarterly Annualized Change
Eurozone GDP vs U.S. GDP Growthversus Euro/Dollar Echange Rate
Eurozone GDPU.S. GDP$ per Euro
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Profit MotiveCentral Banks of Japan, China
not mark to marketnot quarterly report
to shareholdersTherefore Buy Treasuries Even if Expected Rate of Return Lower and Exchange Risk Higher.
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Directed Capital Flows
• Preferred Habitat• Global Demand is the Marginal Buyer• Imperfect Capital Mobility
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Net Foreign Purchases of U.S. Debt Products
10%
20%
30%
40%
50%
60%
1998 1999 2000 2001 2002 2003 2004
Foreigne
rs P
urch
ases
as a Perce
ntag
e of U
.S. D
ebt F
inan
cial Ass
ets
Source: Flow of Funds and U.S. Dept. of Treasury
Note: Total debt created represents the sum of government, household and non f inancial corporate sector net borrow ing.
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Tax Reform Fundamentals
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Top 20% of Taxpayers Pay More in Taxes Than Their Share of Income
3% 7% 12%20%
58%
0% 2% 5%12%
81%
0%
20%
40%
60%
80%
100%
Bottom 20% Second 20% Middle 20% Fourth 20% Top 20%
Percentage of Total Income (AGI) Percentage of Income Taxes Paid
Source: Tax Foundation Individual Tax Model, does not include refundable portion of EITC or Child Tax Credit
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Tale of Two Americas
Payers-Rising Number of Dual-Income Working Professional Couples in Urban Areas- Growing Class of Entrepreneurs & Business Owners (Sole Proprietors, Partnerships, S-Corporations)
Non-Payers- Growing Class of Tax Filers Who Have No Tax Liability
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The Number of Non-Paying Filers Has Exploded Since 2000
26.729.2 29.9
44.2
05
101520253035404550
1995 1998 2000 2004 Est.
Millions of Tax Returns
Source: Tax Foundation Individual Tax Model based on IRS and Census Data
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Who are the Non-Payers?
• Low-Income: 97% Earn Less Than $40,000• Young: 36% below Age 25, 56% below 35• Women and Unmarried: 54% are single Women or Female-Headed Households• Part-Time Workers: 42% Work Part-Time, 20% Work Full-Time but less than 50 weeks• Benefit from Credits: 34% Claim EITC, 50% Claim Child Credit
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Who are the Payers?
• They are married, dual-income professionals;• They are entrepreneurs and business owners;• They tend to live in high-cost areas;• They are educated;• They are older; and • They pay the lion’s share of income taxes
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Married? Then You Are Most Likely "Rich"
84%
71%
57%
31%
14%16%
29%
43%
69%
86%
0%10%20%30%40%50%60%70%80%90%
100%
Poorest 20% 0$ -- $14,415
2nd 20% Middle 20% $25,500 --$41,640
4th 20% Richest 20% $68,296+
Singles Married
Source: Tax Foundation Calculations based on IRS Data
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College Educated? You Are Most Likely "Rich"
63%56%
44%37%
20%
90%
14%
25%33%
55%
0%10%20%30%40%50%60%70%80%90%
100%
Bottom 20% Second 20% Middle 20% Fourth 20% Top 20%
High School or Less Bachelor or Above
Source: Tax Foundation Individual Tax Model based on IRS and Census data
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What Does This Mean For Tax
Reform?• Tax reform must recognize changing demographics of American taxpayers – Today’s “middle-class” is not our father’s middle-class.• Traditional distributional tables are of little value to good tax policy – no two tax returns are the same.• Broadening the base could put people back on the tax rolls – difficult politically.• Cutting rates will be perceived as “tax cuts for the rich” – difficult politically.• Adhering to a progressive rate structure will continue to put tax burden on urban professional families, educated Americans, older workers, and business owners.
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Economic Forecast*(Qtr/Qtr% Change, Annual Rate)
2002 2003 2004 2005
Real GDP* 1.9% 3.0% 4.4% 3.7%
Personal Consumption*
3.1% 3.3% 3.8% 3.3%
Equipment & Software*
-5.5%
6.4% 13.6%
11.9%
CPI (YoY) 1.5% 2.3% 2.7% 2.8%
Corporate Profits (YoY)
14.0%
16.8%
14.5%
10.4%
10-Yr T-Note
4.30%
3.89%
4.21%
4.54%
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www.wachovia.com/economics