2016ECONOMIC OUTLOOK

1

AGENDA

• INTRODUCTIONS

• GLOBAL ECONOMY

• UNITED STATES ECONOMY

• Q&A

2

SPEAKERS

GEOFFREY ALLEN PIGMAN, D.Phil.

• Consultant to public and private entities in Europe, N.A., Africa

• Political economist

• Research Associate, University of Pretoria and Research Associate at the Institute for Global Dialogue

• Published author

• D.Phil (Oxford), MA (Johns Hopkins SAIS), BA (Swarthmore)

CHRISTOPHER W. YOUNG, Ph.D.

• Managing Director, Economist at Sobel & Co. [Valuation]

• Prof. Rutgers Business School

• Ph.D. (Rutgers), MBA (Rutgers), Mathematics, [CUNY]

3

“The only function of economic forecasting is to make astrology

look respectable.”

John Kenneth Galbraith

4

“The most reliable way to forecast the future is to try to understand the

present.”

John Naisbitt

5

APPROACH

• Comprehensive – not inclusive of all endogenous variables

• Normative based upon historical economic data

• Inclusive of opinions of other economists and financial service firms

• Includes discussion about exogenous market threats and opportunities

• END RESULT: Mosaic to consider when addressing future market and economic conditions

6

GLOBAL CONSIDERATIONS

• Long-Term Growth in Trade• The Dollar Impact• Foreign Direct Investment• Trade Policy• Geopolitical Risk

7

End of gold standard1st IT revolution –EFT begins

End of Cold WarGerman reunification

2008 financial crisis

GLOBAL TRADE % OF U.S. GDP1950-2011

Brazil China Germany India Japan U.K. USA

U.S. TRADE DEPENDENCE: growing, but still a ‘continental’ economy

Sum of exports and imports as share of US GDP 1950-2011

8

US TOP TEN TRADING PARTNERS:Jan-Nov 2015

Rank Country Exports ($ B)

% Total Exports

1 Canada 259.0 18.7%

2 Mexico 217.8 15.7

3 China 106.1 7.7

4 Japan 57.7 4.2

5 UK 52.0 3.8

6 Germany 45.9 3.3

7 S Korea 40.1 2.9

8 Netherlands 37.2 2.7

9 Hong Kong 33.8 2.4

10 Belgium 31.6 2.3

Rank Country Imports ($ B)

% Total Imports

1 China 443.9 21.5%

2 Canada 271.6 13.2

3 Mexico 271.6 13.2

4 Japan 119.8 5.8

5 Germany 113.4 5.5

6 S Korea 66.4 3.2

7 UK 53.7 2.6

8 France 43.7 2.1

9 India 41.7 2.0

10 Italy 40.2 2.0

9

~48% of US Goods imports were intra-firm and ~30% of US Goods exports were intra-firm

10

U.S. GOODS / SERVICE TRADE BALANCE:1992-2015

Total Net Trade Deficit

increasing at 12.0% per annum

Goods Net Trade Deficit increasing at

9.4% per annum

Services Net Trade Surplus increasing at

6.1% per annum

Net Exporter of Services

Millio

ns

U.S. DOLLAR APPRECIATION 1992-2016

11

US FDI FLOW 2013-2013

12

GLOBALIZING THE SUPPLY CHAIN: intra-firm trade vs. outsourcing

13

Global market size of outsourced services 2000-2014 ($ Billions)

THREE CATEGORIES OF OUTSOURCING:

1. Logistics, sourcing & distribution

• contract manufacturing

2. IT services: software creation, computer center management

3. business process outsourcing (BPO)

• call centers• financial transaction

processing• HR management

TRADE AGREEMENTS

14

US implementation: Trade Promotion Authority (TPA) (formerly ‘Fast Track’) –agreements get an up-or-down vote in Congress

Treaty principles: most favored nation (MFN), non-discrimination,

national treatment, reciprocity

Bilateral/Regional – NAFTA, FTAs with Israel, Australia, South Korea, Morocco, Jordan, etc.

Multilateral – World Trade Organization (WTO)

– GATT, GATS, Agreement on Subsidies & Countervailing Measures, Agreement on Agriculture

LOOKING AHEAD

15

New considerations for prospective trade agreements

Plurilateral

– Trade in Services Agreement (TiSA)

Mega-regional

– Trans-Pacific Partnership (TPP)

– Transatlantic Trade and Investment Partnership (TTIP)

– Regional Comprehensive Economic Partnership (RCEP) – China, India, Japan, SE Asia (not USA)

GEOPOLITICAL RISK:China in transition

* Supply-demand imbalance

from exports to services and consumption

* equities

* markets

16

* Military: maritime expansionism, SCO

* New Silk Road, energy sourcing

* Regional Comprehensive Economic Partnership (RCEP)

* Anti-corruption drive = Xi power push

* Rivalries: PLA, provinces, etc.

POLITICS ECONOMY SECURITY

ASSESSING GEOPOLITICAL RISK

THREATS

• Migration/refugee flows• War in the Levant/terrorism• Putin• Integrity of the European Union:

‘Brexit’, integrity of UK, Spain• Hotspots: North Korea, Venezuela• Domestic: shadow of 2016 election

• Trade agreements

• Cuba

• Iran

• African Union

• Domestic: post-election

17

OPPORTUNITIES

SUMMARY: IMPACT OF GLOBAL ECONOMY ON U.S. BUSINESS

4. Focus on sustaining sources of US power

entrepreneurship, innovation, capital markets, regulatory leadership, transparency, rule of law, security umbrella

18

3. China rising and changing

2. US hegemony persistent

1. US dependence on cross-border flows of goods, services, capital and labor growing

19

U.S. ECONOMIC THEMES

• CONSUMER – slowing tailwinds in the forecast

• CORPORATE – headwinds strengthening

• GOVERNMENT – stand still, for now

• MARKET VOLATILITY

U.S. GDP

20

GS Forecast

Real US GDP, per capita [to Q3 2015]

21

CONSUMERslowing tailwinds forecasted

22

U.S. Unemployment Trend

23

4.9%

U.S. CONSUMER SENTIMENTUniversity of Michigan

24

92.0 January 201698.1 January 2015

Consumer expectations (not included here)

82.7 January 201691.0 January 2015

U.S. CONSUMER SPENDING

25

INFLATION: U.S. Long Term

26

U.S. Weekly Gasoline Prices

27

2016 prices are expected to increase to $2.20 by 2017

U.S. Rates (Mortgage)

28

U.S. Housing Market (Starts)

29

Number as of December 31, 2015Represents the number of new homes starts (beginning of construction on new residential housing)

U.S. Housing Market (Permits)

30

Number as of December 31, 2015Represents the number of building permits granted

U.S. Housing Market (Price)

31

Number as of December 31, 2015Based on CaseShiller Index (tracks the prices of repeated residential home sales over time]

U.S. DOLLAR APPRECIATION 1992-2016

32

Average Hourly Earnings (non-management)

33

Average Hourly Earnings (non-management)

34

monthly change in wage ticking down

Hours are ticking up

U.S. HH PERSONAL SAVINGS

35

1960-2010

2011-2016

U.S. CONSUMER CREDIT

36

US Student Loan Debt

37

$27k UG avg.$200k GRAD avg.

DELINQUENCY RATE ~ 17%-30%

U.S. CONSUMER DELINQUENCIES

38

CORPORATEstrengthening headwinds OR

storm ahead?39

U.S. Corporate Profits

40

U.S Inventory to Sales Ratio

41

Manufacturing numbers are down in Dec and Jan.

U.S. Rates (20 Year Treasury)

42

U.S. High Yield Spreads

43

MARKETS

44

U.S. Markets

45

VOLATILITY – CANNOT SEE A FUTURE

U.S. Venture Capital Funding

46

U.S. IPO Outlook

47

Volatility - RISK

48

GOVERNMENT

49

GOV’T SPENDING AS % OF OUTPUT

50

World War II

Korean WarCold War

Vietnam WarGreat Society

‘Second’ Cold War

Dot.com boom

TARPAuto, bank nationalizations

FDRNew Deal

U.S. FED. DEBT RELATIVE TO OUTPUT

51

‘Second’ Cold War defense buildupReagan tax cuts’

‘Peace dividend’Dot.com revenues

TARPAuto, bank nationalizations

FEDERAL TAX DOLLARS

52

THE BATTLE OF PENNSYLVANIA AVENUE: The White House v. Congress

53

3. Budget Control Act of 2011

2. National debt ceiling debate

1. Annual Fed. Budget appropriation process

RECAP

54

1. Expect to see a solid performance from the consumer in the first half of 2016 – yet tailing off in back half of the year.

2. Corporates expected to see challenging year –profits squeezed, margins decreasing and exports decreasing.

3. Exogenous international factors unknown but can have an impact on the global economy.