1 2012 | © Copyright Euler Hermes The Outlook for the U.S. and Global Economies April 2013 Dan North Euler Hermes Chief Economist, North America

12012 | © Copyright Euler Hermes

The Outlook for the U.S. and Global Economies

April 2013

Dan NorthEuler Hermes Chief Economist, North America


The Outlook April, 2013The Outlook April, 2013• Cautious optimismCautious optimism, but still weak growth, lots of risks, but still weak growth, lots of risks• GlobalGlobal Growth 2.5% in 2013, 3.2% in 2014, most coming Growth 2.5% in 2013, 3.2% in 2014, most coming

from emerging markets, China, India, Latin Americafrom emerging markets, China, India, Latin America• EuropeEurope in recession, severe in some countries due to debt in recession, severe in some countries due to debt

crisis. Risk of disorderly default or exit from EMU low.crisis. Risk of disorderly default or exit from EMU low.• U.S.U.S. growth an anemic 2% in 2013, 2.5% in 2014, due in growth an anemic 2% in 2013, 2.5% in 2014, due in

part to our debt crisispart to our debt crisis• Forces and measuresForces and measures• Government responsesGovernment responses

• U.S. manufacturing rebirthU.S. manufacturing rebirth• ConclusionsConclusions

• Gross Domestic Product (GDP): Everything produced by the Gross Domestic Product (GDP): Everything produced by the economy. It’s the “size” of the economy. Use it to measure the “size” economy. It’s the “size” of the economy. Use it to measure the “size” of other big numbers like budget deficit/debt. $16T, 3.3% ave. growth. of other big numbers like budget deficit/debt. $16T, 3.3% ave. growth. Broadest measure of economic health.Broadest measure of economic health.

EuroEuro


European Debt Crisis European Debt Crisis UncertaintyUncertainty

• This started 3This started 3 yrs yrs ago. ago. Issue is Issue is possiblepossible default of default of government bonds and commercial banks.government bonds and commercial banks.

• Latest plan: ECB says it will buy Spanish, Italian bonds Latest plan: ECB says it will buy Spanish, Italian bonds to keep interest rates down… “whatever it takes to to keep interest rates down… “whatever it takes to preserve the euro”preserve the euro”

• Taxpayer bailouts, debt restructuringTaxpayer bailouts, debt restructuring• 9 changes in government, 10 downgrades,17 countries, 9 changes in government, 10 downgrades,17 countries,

ECB, IMF, EU.ECB, IMF, EU.• Problem is UNCERTAINTY!Problem is UNCERTAINTY!

• Possible effects on US:Possible effects on US:• Exports <2% of our GDPExports <2% of our GDP• Financial contagionFinancial contagion• Fear hurting consumptionFear hurting consumption• Combination is a small drag for nowCombination is a small drag for now

US debtUS debt


U.S. Debt UncertaintyU.S. Debt Uncertainty

• U.S. debt problem is different. In contrast to Europe, U.S. U.S. debt problem is different. In contrast to Europe, U.S. will never have to default because we can do what no will never have to default because we can do what no one else can – print U.S. dollars.one else can – print U.S. dollars.

• U.S. problem is government has no plan to reduce debt U.S. problem is government has no plan to reduce debt that’s so high it hurts the economy.that’s so high it hurts the economy.

• Deficits continue and debt/GDP at 100% for next 10 Deficits continue and debt/GDP at 100% for next 10 years. No entitlement reforms in place. years. No entitlement reforms in place.

• Moody’s warned of credit rating cut because no planMoody’s warned of credit rating cut because no plan• Congress still stuck… budget battles, debt ceiling in Congress still stuck… budget battles, debt ceiling in

May… uncertaintyMay… uncertainty• Uncertainty over taxes, regulation hurting growth. Dodd-Uncertainty over taxes, regulation hurting growth. Dodd-

Frank unfinished and unknown. Costs of Obamacare Frank unfinished and unknown. Costs of Obamacare unknown.unknown.


The four forces which started and The four forces which started and ended the recession can help ended the recession can help forecast the outlook:forecast the outlook:

• OilOil• HousingHousing• Fed policiesFed policies• Fear in financial marketsFear in financial markets

62013 | © Copyright Euler HermesMore oilMore oil

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Real Crude Prices (average of Brent, Dubai, WTI spotprices), Y/Y% growth

Real GDP, Y/Y% growth

Source: Dept. of Commerce, Dept. of Labor, World Bank, EHACI

oil price shocks often contribute to recessions

Oil Price Shocks and the Economy

290%

140%

56%38%21% 28% 36%

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1%

72013 | © Copyright Euler Hermeshousnghousng

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Real Crude Prices (average of Brent, Dubai, WTI spotprices), Y/Y% growth

Real GDP, Y/Y% growth

Source: Dept. of Commerce, Dept. of Labor, World Bank, EHACI

oil price shocks often contribute to recessions

Oil Price Shocks and the Economy

290%

140%

56%38%21% 28% 36%

-36%

28%

32%

1%

……with a lag…with a lag…

no headwind no headwind in 2013in 2013


HousingHousing

housnghousng

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U.S. Housing Market

sources: S&P Case Shiller, Census

Real GDP growth (left axis)

housing price (right axis)bubble bursts 2006,

leads recession......but recovers in 2009, helping us out...

...then slowed us down again...

...recovery


HousingHousing

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U.S. Housing MarketFundamental Measures, Seasonally Adjusted Annualized Rates

sources: National Association of Realtors, Census

Existing Sales;+9% y/y, -31% from peak

New Sales;+12%, -70%

Starts;+28%, -60%

Permits;+33%, -59%


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source: Federal Reserve, BEA

Yield spread:10yr-3 mo Treasuries (bps)

The Treasury Yield Spread (Curve) vs. GDP

Fed PolicyFed Policy

112013 | © Copyright Euler Hermeslendinglending

Fed PolicyFed Policy

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source: Federal Reserve, BEA

Yield spread:10yr-3 mo Treasuries (bps)

Real GDP Growth,Y/Y % Change

The Treasury Yield Spread (Curve) vs. GDP


Banks lending to best credits, but risk aversion (fear) still Banks lending to best credits, but risk aversion (fear) still makes credit for small businesses toughmakes credit for small businesses tough

recaprecap

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Commercial and Industrial Loansquarterly annualized % change

source: Federal Reserve

Lending resumed

one reason this recovery has taken so long compared to others


RecapRecap• Four forces caused/ended recessionFour forces caused/ended recession• OilOil has been a drag but improving has been a drag but improving• HousingHousing recovering nicely but small recovering nicely but small• Yield curveYield curve positive positive• LendingLending OK OK• So things are looking up, but…So things are looking up, but…

taxestaxes


RecapRecap• Four forces caused/ended recessionFour forces caused/ended recession• OilOil has been a drag but improving has been a drag but improving• HousingHousing recovering nicely but small recovering nicely but small• Yield curveYield curve positive positive• LendingLending OK OK• So things are looking up, but…So things are looking up, but…• New headwind in town – taxes. Higher rates

on the rich, capital gains, dividends, Medicare, and 77% hit w/ increase in Soc. Sec. tax $1,000 per family

• Total $160 B, 1% of GDP when growth only 2%• Taxes, Debt and Uncertainty are drags

• So what do the measures of the economy say?So what do the measures of the economy say?GDPGDP


GDP weakGDP weak

pcepce

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Real Gross Domestic Product (GDP)annualized quarterly growth rate

source: BEA

still < 3.3% ave

even after explanations, still weak

162013 | © Copyright Euler HermesCorp profCorp prof

The Consumer doing ok, not greatThe Consumer doing ok, not great

-10%

-5%

0%

5%

10%

source: BEA

Personal Consumption Expenditures (PCE) & Disposable Personal Income (DPI) real % growth rate, 3 mos. annualized

consumption <3.3% average

average

temporary leap in income to avoid taxes,

will reverse

172013 | © Copyright Euler Hermesemployemploy

Industry doing ok, profits growing faster than GDPIndustry doing ok, profits growing faster than GDP

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source: BEA

Real Corporate Profits(pre tax w/IVA and CCadj)

quarterly annualized

full year 7.4%

4.7%

182013 | © Copyright Euler Hermesemplymentemplyment

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600Non-Farm Payroll Jobs Created (000's) (left scale)

Jobs Created and the Unemployment Rate

source: Labor Department

UnemploymentRate (right axis)


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600Non-Farm Payroll Jobs Created (000's) (left scale)

Jobs Created and the Unemployment Rate

source: Labor Department

UnemploymentRate (right axis)

5 yrs. later, only 68% recovered, 3M fewer jobs

recaprecap


RecapRecap• Four forces caused/ended recessionFour forces caused/ended recession• OilOil has been a drag but improving has been a drag but improving• HousingHousing recovering but small recovering but small• Yield curveYield curve positive positive• LendingLending OK OK• Taxes, Debt and UncertaintyTaxes, Debt and Uncertainty are drags are drags

• GDP anemic, consumer and industry OKGDP anemic, consumer and industry OK• Employment situation still terribleEmployment situation still terrible• To fix it, the government has been To fix it, the government has been

causing two big problems:causing two big problems:Debt & Potential InflationDebt & Potential Inflation


FISCAL POLICYFISCAL POLICY

Congress, AdministrationCongress, AdministrationSpending, taxing, borrowingSpending, taxing, borrowing

deficits/debt, budgets…deficits/debt, budgets…

mathmath


• Year 1: spent $80Year 1: spent $80• Original budget for year 2: spend $110Original budget for year 2: spend $110• Final budget for year 2: spend $90Final budget for year 2: spend $90

• In most places spending $10 more the second In most places spending $10 more the second year would be an year would be an increaseincrease in spending. in spending.

• Not in Washington. This is what they call a $20 Not in Washington. This is what they call a $20 ““cutcut”; they wanted to spend $110 but only get to ”; they wanted to spend $110 but only get to spend $90.spend $90.

• Both sides do this every time.Both sides do this every time.

Budget Math in WashingtonBudget Math in Washington

Dfct crtdDfct crtd


Gov’t spendsGov’t spends $10 $10

Gov’t gets tax revenue Gov’t gets tax revenue $7$7

DeficitDeficit $3$3

Treas. gets loan, issues $3 notes/bondsTreas. gets loan, issues $3 notes/bonds

More defMore def

Spending, Deficits and DebtSpending, Deficits and Debt


Spending, Deficits and DebtSpending, Deficits and Debt

Gov’t spendsGov’t spends $10 $10

Gov’t gets tax revenue Gov’t gets tax revenue $7$7

DeficitDeficit $3$3

Treas. gets loan, issues $3 notes/bondsTreas. gets loan, issues $3 notes/bonds

This $3 is a TAX our kids will have to pay This $3 is a TAX our kids will have to pay (and we’re not paying enough tax?)(and we’re not paying enough tax?)

How big is $3T? Don’t know - measure How big is $3T? Don’t know - measure against size of the economy - GDPagainst size of the economy - GDP

debtdebt


1991-2007U.S. 63%Italy 110%Germ. 58%UK 42%

Accumulated deficits become debt…Accumulated deficits become debt…

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Federal Debt as a % of GDP


1991-2007U.S. 63%Italy 110%Germ. 58%UK 42%

Debt>90% = -1% GDPDebt>90% = -1% GDP

Accumulated deficits become debt…Accumulated deficits become debt…

Smp BwlsSmp Bwls

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Federal Debt as a % of GDP


The Simpson - Bowles Deficit Reduction The Simpson - Bowles Deficit Reduction Commission finally said it out loud:Commission finally said it out loud:

We must touchWe must touch the “third rails” of the “third rails” of • Social Security, Medicare, entitlementsSocial Security, Medicare, entitlements

If we don’t we will never be able to balance If we don’t we will never be able to balance the budget - entitlements will become the the budget - entitlements will become the entireentire budget budget

The rest is whistling past the graveyard…The rest is whistling past the graveyard…


2012 Outlays, $3.5T2012 Outlays, $3.5THUD, Labor, Edu. Ag., HUD, Labor, Edu. Ag., State, Justice, Trans. , State, Justice, Trans. , Energy, Homeland Sec, Energy, Homeland Sec, Treasury, Commerce, Treasury, Commerce,

Interior, EPAInterior, EPA

defctdefct

Health, 23%

Social Security, 22%

Income Security, 15%

Interest, 6%

Defense, 19%

Discretionary, 14%

292013 | © Copyright Euler Hermesseqstrseqstr



deficitdeficit

Health, 23%



Interest, 6%

Defense, 19%

Discretionary, 14%


Health, 23%



Interest, 6%

Defense, 19%

Discretionary, 14%

entltmtsentltmts



sequestersequester

Even w/sequester, total outlays Even w/sequester, total outlays still risestill rise: 2012 = 3.54, 2013 = 3.55, 2014 = 3.62: 2012 = 3.54, 2013 = 3.55, 2014 = 3.62


EntitlementsEntitlements• Entitlement spending, particularly Medicare or Entitlement spending, particularly Medicare or

some other form of national healthcare, will be some other form of national healthcare, will be the the issue issue for our time.for our time.

• One generation will not be getting the benefits One generation will not be getting the benefits they think are owed.they think are owed.

• Another generation will be taxed to exhaustion to Another generation will be taxed to exhaustion to try to provide them.try to provide them.

• 2024 Medicare fund exhausted, can only pay 87% 2024 Medicare fund exhausted, can only pay 87% of costs.of costs.

• 2033 Social Security trust fund exhausted, can 2033 Social Security trust fund exhausted, can only pay 75% of benefits.only pay 75% of benefits.

• But it is not hopeless, the math is simple, legal But it is not hopeless, the math is simple, legal immigration could help.immigration could help.

• No political will to fix it.No political will to fix it.Bdgt compsBdgt comps

322013 | © Copyright Euler HermesBdgt compsBdgt comps

Budget Comparison Budget Comparison current policy/baseline is what will happen if no changecurrent policy/baseline is what will happen if no change

Source: Washington PostSource: Washington Post

332013 | © Copyright Euler Hermesreviewreview

Budget Comparison Budget Comparison

President: $1T in new taxes, small entitlement reforms, undoes sequester, President: $1T in new taxes, small entitlement reforms, undoes sequester, ramps up spending and deficits in '14 and '15 and gets savings lateramps up spending and deficits in '14 and '15 and gets savings lateHouse: bigger entitlement reforms, sharp cuts to discretionary spending, no House: bigger entitlement reforms, sharp cuts to discretionary spending, no new taxes, balances budget in 10 yearsnew taxes, balances budget in 10 years

2023 in $T Spending Revenue Deficit DebtBaseline $5.9 $5.0 $0.9 $19.9President $5.7 $5.2 $0.4 $19.0House $5.0 $5.0 $0.0 $14.0

as % of GDPBaseline 23% 19% 4% 77%President 22% 20% 2% 73%House 19% 19% 0% 54%

Annual growthvs. Baseline $5.9 $5.0 $0.9 $19.9President -0.4% 0.4% -6.3% -0.4%House -1.6% -0.1% -100% -3.2%

vs. 2012 $3.5 $2.4 $1.1 $11.3President 4.5% 7.3% -8.0% 4.8%House 3.2% 6.8% -100% 2.0%

342013 | © Copyright Euler HermesMon polMon pol

Fiscal Policy ReviewFiscal Policy Review

•We need CLARITY, CERTAINTY, a plan, instead we have:We need CLARITY, CERTAINTY, a plan, instead we have:

•No budget in 2011, ’12, ‘13 and probably not ‘14. Budget No budget in 2011, ’12, ‘13 and probably not ‘14. Budget Control Act of 2011 (sequester) did nothing to reduce debt, Control Act of 2011 (sequester) did nothing to reduce debt, did nothing to reform Medicare and Social Security.did nothing to reform Medicare and Social Security.

•Upcoming ugly battles over budget and debt ceiling.Upcoming ugly battles over budget and debt ceiling.

•Moody’s threatens rating downgrade - no plan.Moody’s threatens rating downgrade - no plan.

•Borrowing more every day - 11:30 am $45,000,000,000, Borrowing more every day - 11:30 am $45,000,000,000, yesterday $65,000,000,000, - this week $176,000,000,000yesterday $65,000,000,000, - this week $176,000,000,000

•Would you spend a lot more than you have and then stick Would you spend a lot more than you have and then stick your kids with the bill? It’s not politics, it’s just bad policy your kids with the bill? It’s not politics, it’s just bad policy to burden the next generation with debt that’s not even to burden the next generation with debt that’s not even theirs.theirs.


MONETARY POLICYMONETARY POLICY

The Federal Reserve Bank,The Federal Reserve Bank,Ben BernankeBen Bernanke

Fed fndsFed fnds


MONETARY POLICYMONETARY POLICY• Lowering the Lowering the short termshort term Fed Funds interest rate usually Fed Funds interest rate usually

worksworks

Need QENeed QE


MONETARY POLICYMONETARY POLICY• Lowering the Lowering the short termshort term Fed Funds interest rate usually Fed Funds interest rate usually

worksworks• But this time needed an extra boost, lowering But this time needed an extra boost, lowering long termlong term

interest rates.interest rates.• Quantitative easing:Quantitative easing:• Fed prints new $ billsFed prints new $ bills• Buys Treasury/MBS bonds in open marketBuys Treasury/MBS bonds in open market• Raises bond prices, lowering interest rates (they move Raises bond prices, lowering interest rates (they move

in opposite directions)in opposite directions)• Puts $ into financial systemPuts $ into financial system• And creates inflationary pressuresAnd creates inflationary pressures• QE3 in Sept: QE3 in Sept: unlimitedunlimited purchases $40B MBS/mo. purchases $40B MBS/mo. • QE4 in Dec: QE4 in Dec: unlimitedunlimited purchases $45B treasuries/mo. purchases $45B treasuries/mo.• Likely to have limited effect. Rates near record lows, Likely to have limited effect. Rates near record lows,

plenty of excess reserves - banks don’t want to lend. plenty of excess reserves - banks don’t want to lend. Did wrk?Did wrk?

382013 | © Copyright Euler HermesQe wrk?Qe wrk?

Did QE2 work?Did QE2 work?

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Yield on 10 year Treasury Note


Jackson Hole '10

QE2

hoped for this

392013 | © Copyright Euler HermesQe wrk?Qe wrk?


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Jackson Hole '10

QE2

but got this: record rate of increase, inflationary expectations

402013 | © Copyright Euler HermesQE not wrkQE not wrk

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Jackson Hole '10

Arab Spring

Japan euro worries

risk aversion

oil prices, weak data, US & euro worries

QE2 ends...did it work?

QE2




No infl?No infl?

QE does not work, does not address problem – already have huge excess QE does not work, does not address problem – already have huge excess reserves and record low rates. Banks are risk-averse due to uncertaintyreserves and record low rates. Banks are risk-averse due to uncertainty

1.0%

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Jackson Hole '10

Arab Spring

Japan euro worries

risk aversion

oil prices, weak data, US & euro worries

QE2 ends...did it work?

J. Hole '12mrtgs +6 bps

QE4+16 bps

QE doesn't work

QE2


Fed says there’s no inflationFed says there’s no inflationReally? How about asset inflation?Really? How about asset inflation?

Since QE1:Since QE1:•Gold Gold +91%+91%•SilverSilver +178%+178%

Since QE2:Since QE2:•OilOil +42%+42%•Commodities (GSCI)Commodities (GSCI) +25%+25%•S&P 500, annualizedS&P 500, annualized +14.7% (ave +7.4%)+14.7% (ave +7.4%)

•Y/Y mean new homeY/Y mean new home +15% (ave +6.7%)+15% (ave +6.7%)

All sameAll same


QE2/3/4 = Inflation = Printing money = Dollar devaluationQE2/3/4 = Inflation = Printing money = Dollar devaluationThey are all the same thing.They are all the same thing.

Example; suppose today there is Example; suppose today there is • one loaf of bread priced at $1, up for auctionone loaf of bread priced at $1, up for auction• two hungry people, each with a printing presstwo hungry people, each with a printing press• to out-bid the other, each runs his press as fast as to out-bid the other, each runs his press as fast as possible until one breakspossible until one breaks• by then, the price of the bread is $1Mby then, the price of the bread is $1M


QE2/3/4 = Inflation = Printing money = Dollar devaluationQE2/3/4 = Inflation = Printing money = Dollar devaluationThey are all the same thing.They are all the same thing.

Example; suppose today there is Example; suppose today there is • one loaf of bread priced at $1, up for auctionone loaf of bread priced at $1, up for auction• two hungry people, each with a printing presstwo hungry people, each with a printing press• to out-bid the other, each runs his press as fast as to out-bid the other, each runs his press as fast as possible until one breakspossible until one breaks• by then, the price of the bread is $1Mby then, the price of the bread is $1M• printing money printing money created created inflation;inflation; price from $1 to $1M price from $1 to $1M• printing moneyprinting money devalueddevalued each $1 bill; each $1 bill each $1 bill; each $1 bill used to be worth one loaf of bread, but now is worth 1 used to be worth one loaf of bread, but now is worth 1 millionth of a loaf of breadmillionth of a loaf of bread

• Money was printed (QE)Money was printed (QE)• Inflation was createdInflation was created• The dollar was devaluedThe dollar was devalued


$ Devalued, QE at Work$ Devalued, QE at Work

debtdebt

-40%

-30%

-20%

-10%

0%

10%Ju

n-1

0

Au

g-1

0

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-10

Dec

-10

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Ap

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-11

Au

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1

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Ap

r-12

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Au

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2

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Dec

-12

Feb

-13

Ap

r-13

$C -3%

C¥ -9%

£ -4%

¥ +6%

$A -19%

€ -6%

SF-19%

source: Federal Reserve Bank of New York

$US weakening

Value of the USD from June 1, 2010


Simple exampleSimple exampleToday: Lend $1 @10%. Loaf of Bread costs $1Today: Lend $1 @10%. Loaf of Bread costs $1Inflation goes to 20%Inflation goes to 20%

A Year later:A Year later:Creditor gets $1.10 back.Creditor gets $1.10 back.But now loaf of bread costs $1.20.But now loaf of bread costs $1.20.

Creditors lose with inflation.Creditors lose with inflation.Debtors, like the U.S. government, win.Debtors, like the U.S. government, win.The U.S. government The U.S. government is ok withis ok with inflation. inflation.The U.S. government The U.S. government is ok withis ok with a weaker dollar. a weaker dollar.May be only way out of $16T in debt.May be only way out of $16T in debt.

reviewreview

$ Devalued, QE at Work$ Devalued, QE at Work$ Devalued = Debt Devalued$ Devalued = Debt Devalued

472013 | © Copyright Euler HermesMon fiscMon fisc

MONETARY POLICY REVIEWMONETARY POLICY REVIEW

• Lowering the Lowering the short termshort term Fed Funds interest rate Fed Funds interest rate usually works.usually works.

• But this time needed an extra boost to lower But this time needed an extra boost to lower long termlong term interest rates, Quantitative Easing. interest rates, Quantitative Easing.

• Fed prints new money, pumps it into financial Fed prints new money, pumps it into financial system.system.

• Also causes $ and debt devaluation – huge Also causes $ and debt devaluation – huge incentive to print money. incentive to print money.

• QE3/4 unlikely to help. Risk of consumer QE3/4 unlikely to help. Risk of consumer inflation in long term. Asset inflation is here inflation in long term. Asset inflation is here nownow..


Monetary & Fiscal PolicyMonetary & Fiscal PolicyLess debt, faster recovery. Debt kills.Less debt, faster recovery. Debt kills.

0%

1%

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10%1/

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11/0

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7/09

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1/12

11/1

2

Ind 45%

Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%

source: central banks, national stat. offices

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Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


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Jpn 200%

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Jpn 200%

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Eur 70%UK 75%US 100%

Jpn 200%

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Eur 70%UK 75%US 100%

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Chl 10%


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S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


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Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

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Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

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Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

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S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

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Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Ind 45%

Chn 15%

S.K. 30%

Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Col 30%

line is central bank rate

# is debt/GDP


Monetary & Fiscal PolicyMonetary & Fiscal PolicyLess debt, faster recovery. Debt kills.Less debt, faster recovery. Debt kills.

European politicians get it, but can’t fix it. U.S. politicians don’t even get it.European politicians get it, but can’t fix it. U.S. politicians don’t even get it.

recaprecap

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Ind 45%

Chn 15%

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Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


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Chn 15%

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Eur 70%UK 75%US 100%

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Eur 70%UK 75%US 100%

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Chn 15%

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Eur 70%UK 75%US 100%

Jpn 200%

Chl 10%


Col 30%

line is central bank rate

# is debt/GDP


• Monetary policy impotent w/ huge inflation risk.Monetary policy impotent w/ huge inflation risk.• Fiscal policy a mess but can be fixed… crushing Fiscal policy a mess but can be fixed… crushing

debt load.debt load.• Neither fixing structural unemployment caused Neither fixing structural unemployment caused

by mis-matched skills, low mobility (underwater by mis-matched skills, low mobility (underwater houses), incentives not to work.houses), incentives not to work.

• But despite headwinds, consumer, housing, But despite headwinds, consumer, housing, yield curve and corporate profits indicate yield curve and corporate profits indicate continued (slow) growth.continued (slow) growth.

• More good news! Rebirth of U.S. manufacturing, More good news! Rebirth of U.S. manufacturing, on-shoring.on-shoring.

RECAPRECAP

ULCULC


Unit Labor Cost (ULC): Unit Labor Cost (ULC): labor cost to make one widgetlabor cost to make one widget

U.S. Country X

Hourly wage $20 $15

Hrs. to make one widget (productivity)

1 2

Unit labor cost

$20 $30

ULCULC


U.S. Manufacturing Very Competitive;U.S. Manufacturing Very Competitive;low wage growth+high productivity=low ULClow wage growth+high productivity=low ULC

50

100

150

200

U.S.

Japan

Korea

Germany

Canada

Italy

Taiwan

Unit Labor Costs

source: BLS

China gapChina gap


The ULC Gap with China is ClosingThe ULC Gap with China is Closing

offsetoffset

$0

$5

$10

$15

$20

$25

$30

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Effective Manufacturing Wage Gap

assumptions:wages and yuan grow at historical rate 2006-19U.S. worker 3.4x as productive

$17

$7

China

U.S.


The ULC Gap with China is ClosingThe ULC Gap with China is Closing

energyenergy

$0

$5

$10

$15

$20

$25

$30

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Effective Manufacturing Wage Gap

assumptions:wages and yuan grow at historical rate 2006-19U.S. worker 3.4x as productive

$17

$7

China

U.S.

The $7 benefit maybe not enough to offset:The $7 benefit maybe not enough to offset:•QualityQuality•Lower trans. costLower trans. cost•Lower inventory costLower inventory cost•Time to marketTime to market•Keeping technologyKeeping technology


Big Advantage, Cheap EnergyBig Advantage, Cheap Energy

energyenergy

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140M

ar-0

8

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-09

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-09

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-10

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-10

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-11

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-11

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-11

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-11

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-12

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-12

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-12

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-12

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-13

Global: Brent

U.S.: West Texas Intermediate (WTI)

$93

$109

Oil Prices, $/bbl

source: World Bank

562013 | © Copyright Euler Hermesnergy flownergy flow

Big Advantage, Cheap EnergyBig Advantage, Cheap Energy

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-201

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-201

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Price of Natural Gas, $/MMBtu

U.S.

Japan

KoreaChinaU.K.

Germ.

source; Energy Intelligence

572013 | © Copyright Euler Hermesng carsng cars

582013 | © Copyright Euler HermesUS changeUS change

Nat Gas cars represent huge potential. Nat Gas cars represent huge potential. Only two Nat Gas passenger cars available Only two Nat Gas passenger cars available in US; Honda Civic, Chrysler Ram Pickupin US; Honda Civic, Chrysler Ram Pickup

CountryNatural Gas

Vehicles%of total

Refuelling stations

%of total

Iran 3,300,000 19% 1,960 9%Pakistan 3,100,000 18% 3,330 16%Argentina 2,183,487 13% 1,921 9%Brazil 1,733,469 10% 1,793 8%China 1,500,000 9% 2,800 13%India 1,500,000 9% 724 3%Italy 746,470 4% 909 4%Ukraine 388,000 2% 324 2%Colombia 387,250 2% 676 3%Thailand 352,652 2% 481 2%Uzbekistan 310,000 2% 175 1%Armenia 244,000 1% 345 2%Bolivia 207,405 1% 156 1%Egypt 178,000 1% 160 1%Peru 136,662 1% 189 1%U.S. 112,000 1% 1,035 5%Others 671,357 4% 4,408 21%Total 17,050,752 100% 21,386 100%

592013 | © Copyright Euler HermesConcl glblConcl glbl


Conclusions, GlobalConclusions, Global

Global GDP growth: Global GDP growth: • 2.5% in 2013, 3.2% in 2014 2.5% in 2013, 3.2% in 2014 • most coming from China, India, Latin most coming from China, India, Latin America, emerging mktsAmerica, emerging mkts• Europe:Europe:

• recession, severe in some countriesrecession, severe in some countries• risk of exits or disorderly defaults lowrisk of exits or disorderly defaults low• EMU probably holds, but will need:EMU probably holds, but will need:

• a lot of timea lot of time• fiscal unity, ECB, ESM, IMF/othersfiscal unity, ECB, ESM, IMF/others

US conclUS concl


Conclusions, U.S.Conclusions, U.S.PositivesPositives

•Super stimulative Super stimulative monetary policy will monetary policy will eventually helpeventually help•Yield curve positiveYield curve positive•Housing market firmingHousing market firming•Bank lendingBank lending•Consumer debt improvedConsumer debt improved•Auto SalesAuto Sales•Dollar fallingDollar falling•Global economy growingGlobal economy growing•Manufacturing re-birthManufacturing re-birth•EnergyEnergy

NegativesNegatives•Uncertainty from WDC, Uncertainty from WDC, EuropeEurope•TaxesTaxes•Debt dragDebt drag•Personal consumption, Personal consumption, income, confidence weakincome, confidence weak•Housing market smallHousing market small•High unemploymentHigh unemployment•Future inflation riskFuture inflation risk

GDP growth anemic 2% in 2013, 2.5% in 2014…GDP growth anemic 2% in 2013, 2.5% in 2014…not doomsday, not greatnot doomsday, not great

Thank you for your attention.

Documents

1 2012 | © Copyright Euler Hermes The Outlook for the U.S. and Global Economies April 2013 Dan North Euler Hermes Chief Economist, North America