The United States - Economics & Country Risk Solutions ...Percent change annualized rate, real...

Presented by:

Nigel Gault

Chief U.S. Economist

IHS Global Insight

The United States:Fiscal Facts and Fantasies

Subdued Recovery:

Tailwinds Battling Headwinds

Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 3

The U.S. Recovery: Tailwinds

• More sectors contributing; not just an inventory-driven recovery

• Strong manufacturing growth

• Financial markets healing

• Large businesses are flush with cash

• Labor market is improving

• Stimulus from December’s tax package


The U.S. Recovery: Headwinds

• Consumers and businesses remain cautious

• No housing recovery

• Rising commodity prices are squeezing real incomes

• The oil price rise could turn into a major shock

• Japan shock will temporarily disrupt the automotive sector

• State and local budget cuts continue

• Federal fiscal tightening is coming

Growth Indicators Showing Signs

Of Weakening


Key Leading Indicators Show Growth,

But Are Slipping

30

35

40

45

50

55

60

65

2007 2008 2009 2010 2011

80

83

86

89

92

95

98

101

Manufacturing Index

Nonmanufacturing Index

NFIB Small-Business (RS, Optimism Index, 1986=100)

(ISM Diffusion Indexes, 50 = breakeven)


350

375

400

425

450

475

500

525

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11

4-Week Moving Average Actual

Cautionary Sign: Initial Unemployment

Insurance Claims Have Turned Higher

(Initial unemployment insurance claims, thousands)


1.5

2.0

2.5

3.0

3.5

4.0

2010 2011 2012 2013

(Annualized real rate of GDP growth, Q/Q, percent)

2011 Growth Expected to Be Backloaded

The Housing Cycle:

Still at the Bottom


150

200

250

300


4-Week Moving Average Actual

Mortgage Applications for House

Purchase Sank After Tax Credit Expired

(Mortgage applications for purchase, index, Mar.16,1990 =100)


(Millions of households)

Demand Shortfall:

Household Formation Has Plunged

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

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

357,000 households added in year to

March 2010 – a post-World War II low

Source: Census Bureau


0.5

1.0

1.5

2.0

2.5

3.0

1975 1980 1985 1990 1995 2000 2005 2010

(Proportion of homeowner inventory vacant and for sale, percent)

Supply Excess:

The Housing Overhang

Source: Census Bureau


0.0

0.4

0.8

1.2

1.6

2.0

2.4

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

165

175

185

195

205

215

225

Housing Starts (LS, millions of units)

FHFA House Price Index (RS, purchase-only index, 1991Q1 = 100)

Housing Starts Have Hit Bottom:

Prices Not Quite There Yet

The Consumer :

Signs of Life, But Now Threatened

By Another Oil Spike


-100

0

100

200

300


Employment Is Turning

4

6

8

10

12

Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

*Thousands, monthly change, SA; **Percent; ***Hours, SA; ****Nominal, percent year-over-year

Private Payroll Employment* Unemployment Rate**

Length of Workweek*** Average Hourly Earnings Growth****

0

1

2

3

4


33.6

33.8

34.0

34.2

34.4

34.6



Energy and Food Prices Have Climbed...

20

40

60

80

100

120

140

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Oil Price (LS, WTI, $/barrel) PPI Farm Products (RS, index, 1982=1.0)


(Percent change unless otherwise noted)

...Driving the CPI Higher And Hurting The

Consumer’s Purchasing Power

2009 2010 2011

CPI -0.3 1.6 3.0

Components (rates of increase)

Core 1.7 1.0 1.5

Energy -18.1 9.6 15.3

Food 1.8 0.8 3.9

Components (contributions)

Core (77.7%) 1.3 0.7 1.1

Energy (8.6%) -1.7 0.8 1.3

Food (13.7%) 0.2 0.1 0.5

CPI weights as of Dec 2010 in parentheses

Note: The 2011 payroll tax cut is worth 1.0% of disposable income,

so it has been more than offset by higher inflation.


-4

-2

0

2

4

6

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

(Annualized rate of growth)

Consumer Spending Stabilizing,

But Not a Strong Driver of Recovery

Business Investment:

A Mixed Picture


Business Equipment Demand

Recovering

(Non-defense capital goods orders ex-aircraft, 3-mo moving average, $ billions)

45

50

55

60

65

70

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Nonresidential Construction:

Architects’ Billings Just Above Neutral

(Diffusion Index)

30

35

40

45

50

55

60

65

1995 1997 1999 2001 2003 2005 2007 2009

* Source: American Institute of Architects


(Percent change annualized rate, real spending)

Business Capital Spending Cycle:

Construction Lags

-45

-30

-15

0

15

30

45

2007 2008 2009 2010 2011 2012 2013

Software & Equipment Buildings

Foreign Trade:

A Key Driver of Growth


(Percent growth in 12-month-moving average, merchandise exports, Feb 2011)

Export Growth By Destination

0

10

20

30

Total

(100%)

Latin

America

(23%)

Pac Rim

(25%)

Canada

(19%)

Other

(10%)

Europe

(22%)

Export shares are in parentheses. Latin America includes Mexico.


(2005=1.0, inflation-adjusted)

The U.S. Dollar: Secular Weakness

Against Emerging Market Currencies

0.6

0.8

1.0

1.2

1.4

1.6

1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

Major Currency Index Other Important Trading Partners Index


(Percent change annualized rate, volumes)

Exports Expected to Outpace Imports

-40

-20

0

20

40

2008 2009 2010 2011 2012 2013

Real U.S. Exports Real U.S. Imports

Inflation and Interest Rates


(Percent change from a year earlier)

Core Inflation Is Bottoming Out: Oil and

Food Driving Headline Inflation Higher

-2

-1

0

1

2

3

4

5

6

2006 2007 2008 2009 2010 2011 2012 2013

All-Urban CPI Core PCE Price Index


(Percent)

Federal Funds Rate to Stay Near Zero Until 2012:

Long Rates Rise But Only Gradually at First

0

1

2

3

4

5

6

7

1999 2001 2003 2005 2007 2009 2011 2013

Federal Funds 10-Year Treasury Yield

Fiscal Facts and Fantasies


Will The U.S. Ever Stabilize the Public

Debt?

“You can always count on Americans to do

the right thing - after they've tried

everything else.”

Winston S. Churchill


Fiscal Facts

• The federal fiscal trajectory is wholly unsustainable

• Spending is high, revenues are low

• S&P has issued a downgrade warning, but markets have not panicked –

10-year Treasury yields are not far above 3%

• Politicians are now getting more serious; they know something must be

done

• There is a huge philosophical divide over how to cut the deficit

• There are elections in 2012 (isn’t that the place to argue things out?)

• There is a looming flashpoint before 2012:

―The debt ceiling must be raised. “Drop-dead” date currently August 2.


Fiscal Fantasies

• The deficit can be stabilized just by cutting spending

• Tax cuts can “pay for themselves”

• Only the “rich” need pay more taxes

• Spending can be cut just by getting rid of waste and inefficiency

• Medicare can continue as is

• Defense can’t be touched

• Austerity in current conditions is expansionary

Everybody must give a little ground on their fantasies to allow a

comprehensive deficit-reduction plan. Unlikely before the elections.


The Federal Budget Gap

(Percent of GDP)

14

16

18

20

22

24

26

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

Revenues Expenditures


Federal Debt Projections

(Percent of GDP)

50

55

60

65

70

75

80

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

IHSGI (May) Ryan (Apr) Obama (Feb) Bowles-Simpson (Dec)


Federal Deficit Projections

(Percent of GDP)

0

2

4

6

8

10

12

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021



Federal Spending Projections

(Percent of GDP)

19

20

21

22

23

24

25

26

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021



Federal Revenue Projections

(Percent of GDP)

14

15

16

17

18

19

20

21

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021



(IHSGI May Baseline, percent of GDP)

Entitlements and Interest Make It Hard to

Cut Federal Spending

0

5

10

15

20

25

2000 2003 2006 2009 2012 2015 2018 2021

Defense Medicare/Medicaid

Social Security Interest

Nondefense Goods & Services Other

Summary Tables and Implications


(Percent change unless otherwise noted)

U.S. Economic Growth by Sector

2010 2011 2012 2013

Real GDP 2.9 2.7 2.9 2.8

Final Sales 1.4 2.7 2.9 3.0

Consumption 1.7 2.8 2.4 1.9

Light Vehicle Sales (Millions) 11.5 12.7 14.6 15.8

Residential Investment -3.0 0.4 24.0 27.9

Housing Starts (Millions) 0.59 0.63 1.02 1.42

Business Fixed Investment 5.7 8.3 8.1 5.8

Federal Government 4.8 0.1 -3.2 -3.3

State and Local Government -1.4 -1.9 -1.4 0.3

Exports 11.7 7.5 9.5 8.3

Imports 12.6 4.8 6.4 4.0


(Percent unless otherwise noted)

Other Key Indicators

2010 2011 2012 2013

Industrial Production (% growth) 5.3 5.3 3.6 2.6

Employment (% growth) -0.7 1.2 1.8 1.8

Unemployment Rate 9.6 8.8 8.3 7.8

CPI Inflation 1.6 3.0 1.8 2.0

Oil Prices (WTI, $/bbl) 79 102 104 108

Core PCE Price Inflation 1.3 1.2 1.6 1.7

Federal Funds Rate 0.18 0.16 1.28 3.43

10-year Government Bond Yield 3.21 3.53 3.86 4.66

Dollar (Major Currencies, 2005=1) 0.90 0.83 0.86 0.88


Implications

• Recovery muted by historical standards; growth stays just below 3%

• Higher oil and food prices are offsetting the payroll tax cut stimulus

• Core inflation has bottomed but won’t rise rapidly

• Fed will stay the course on QE II; no QE III

• Fiscal tightening on the way, but the big issues (entitlements, taxes)

probably won’t be tackled soon

• Key Risks:

• Middle East turmoil / renewed commodity price spike

• Housing

• Federal Deficit — is it ok to wait till after 2012 for the “big fix”?

Presented by:

Nigel Gault

Chief U.S. Economist

IHS Global Insight

Thank You for Your Participation!

The United States - Economics & Country Risk Solutions ...Percent change annualized rate, real...

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