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Economic Outlook
Economic Outlook
Whitley Penn
Nathaniel KarpChief EconomistBBVA Compass
Ft. Worth, TXDecember
2018
Economic Outlook
DISCLAIMER
This document and the information,opinions, estimates and recommendationsexpressed herein, have been prepared byBanco Bilbao Vizcaya Argentaria,S.A.(hereinafter called “BBVA”) to provideits customers with general informationregarding the date of issue of the reportand are subject to changes without priornotice. BBVA is not liable for giving noticeof such changes or for updating thecontents hereof.
This document and its contents do notconstitute an offer, invitation or solicitationto purchase or subscribe to any securitiesor other instruments, or to undertakeor divest investments. Neither shall thisdocument nor its contents form the basisof any contract, commitment or decision ofany kind.
Investors who have access to thisdocument should be aware that thesecurities, instruments or investments towhich it refers may not be appropriate forthem due to their specific investmentgoals, financial positions or risk profiles, asthese have not been taken into account toprepare this report. Therefore, investorsshould make their own investmentdecisions considering the saidcircumstances and obtaining suchspecialized advice as may be necessary.The contents of this document is basedupon information available to the publicthat has been obtained from sourcesconsidered to be reliable. However, suchinformation has not been independentlyverified by BBVA and therefore nowarranty, either express or implicit, isgiven regarding its accuracy, integrity orcorrectness. BBVA accepts no liability ofany type for any direct or indirect losses
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The market prices of securities orinstruments or the results of investmentscould fluctuate against the interests ofinvestors. Investors should be aware thatthey could even face a loss of theirinvestment. Transactions in futures,options and securities or high-yieldsecurities can involve high risks and arenot appropriate for every investor. Indeed,in the case of some investments, thepotential losses may exceed the amount ofinitial investment and, in suchcircumstances, investors may be requiredto pay more money to support thoselosses. Thus, before undertaking anytransaction with these instruments,investors should be aware of theiroperation, as well as the rights, liabilitiesand risks implied by the same and theunderlying stocks. Investors should alsobe aware that secondary markets for thesaid instruments may be limited or evennot exist.BBVA or any of its affiliates, as well astheir respective executives andemployees, may have a position in any ofthe securities or instruments referred to,directly or indirectly, in this document, or inany other related thereto; they may tradefor their own account or for third-partyaccount in those securities, provideconsulting or other services to the issuer ofthe aforementioned securities orinstruments or to companies relatedthereto or to their shareholders, executivesor employees, or may have interests or
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In the United Kingdom, this document isdirected only at persons who (i) haveprofessional experience in matters relatingto investments falling within article 19(5) ofthe financial services and markets act2000 (financial promotion) order 2005 (asamended, the “financial promotion order”),(ii) are persons falling within article 49(2)(a) to (d) (“high net worth companies,unincorporated associations, etc.”) Of thefinancial promotion order, or (iii) arepersons to whom an invitation orinducement to engage in investmentactivity (within the meaning of section 21of the financial services and markets act
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“BBVA is subject to the BBVA Group Codeof Conduct for Security Market Operationswhich, among other regulations, includesrules to prevent and avoid conflicts ofinterests with the ratings given, includinginformation barriers. The BBVA GroupCode of Conduct for Security MarketOperations is available for reference at thefollowing web site:www.bbva.com / Corporate Governance”.BBVA, S.A. is a bank supervised by theBank of Spain and by Spain’s StockExchange Commission (CNMV),registered with the Bank of Spain withnumber 0182.
Economic Outlook
Global Economy
World GDPYoY % Change
Source: BBVA Research, WB, FH, IMF and Haver3
Subpar global economic growth amid elevated uncertainty
5.5
3.0
-0.1
5.4
4.3
3.5 3.5 3.6 3.4 3.43.7 3.7 3.6 3.6 3.6
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Advanced Developing
• Growth moderating & less synchronized
• Monetary policy normalization at different stages
• Structural imbalances remain
• Pressures on emerging markets with greater vulnerabilities
• Rebalancing of risk appetite impacting all asset classes
• Elevated policy uncertainty and geopolitical risks
Economic Outlook
Global Economy
Source: BBVA Research, WB, FH, IMF and Haver
0.4
0.6
0.8
1.0
1.2
Dec
-13
Jun-
14
Dec
-14
Jun-
15
Dec
-15
Jun-
16
Dec
-16
Jun-
17
Dec
-17
Jun-
18
Dec
-18
CI 20% CI 40% CI 60%Point Estimates Period average
World GDPQoQ % Change
-20
-10
0
10
20
07 08 09 10 11 12 13 14 15 16 17 18
Industrial ProductionTrade
Industrial Production and TradeYoY % Change
Industrial OutputYoY % change
4
Global economic activity losing momentum
-4-202468
Economic Outlook
Global Economy
Source: BBVA Research, Haver, Bloomberg, FT, WSJ
FX vs. USDYTD Change: Exchange rate per USD
Global Stock Markets, Jan-18=100
10Y Government Bond Yields, %
5
80859095
100105110115
Jan-
18
Feb-
18
Mar
-18
Apr-1
8
May
-18
Jun-
18
Jul-1
8
Aug-
18
Sep-
18
Oct
-18
Nov
-18
Emerging US Developed ex US
4.0
5.0
6.0
7.0
8.0
9.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jan-
17Fe
b-17
Mar
-17
Apr-1
7M
ay-1
7Ju
n-17
Jul-1
7Au
g-17
Sep-
17O
ct-1
7N
ov-1
7D
ec-1
7Ja
n-18
Feb-
18M
ar-1
8Ap
r-18
May
-18
Jun-
18Ju
l-18
Aug-
18Se
p-18
Oct
-18
Nov
-18
U.S. Developed Emerging (rhs)
0 20 40 60 80 100
Hong KongJapan
ThailandNorway
SwitzerlandUK
SingaporeMalaysia
MexicoTaiwanCanada
PeruEMU
DenmarkN ZealandPhilippines
ChinaIsrael
ColombiaAustralia
IndonesiaSweden
ChileIndia
BrazilTurkey
Argentina
Economic Outlook
U.S. Financial Markets
Financial Stress Indicators>0 = stress above average
Source: BBVA Research, FRBKC, Treasury OFR, R. Shiller, ICE and Haver
Oil & Real Effective Exchange RateDpb and Broad Index (CPI based 2010=100)
Financial Stress IndexAbove 0 = above average stress
Corporate SpreadsBasis points
6
-2
0
2
4
6
94 96 98 00 02 04 06 08 10 12 14 16 18-6
-4
-2
0
2
4
Credit Equities Safeassets
Funding Volatility Risk NonfinLeverage
Last (+/- 2sd)
9095100105110115120
20406080
100120140
08 09 10 11 12 13 14 15 16 17 18
WTI REER (rhs)
175225275325375425475
5090
130170210250290
10 11 12 13 14 15 16 17 18
AAA BBB (rhs)
Economic Outlook
U.S. Business Cycle
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
Cons Inv Net X Gov't GDP
Real GDP GrowthYoY % CHange
-0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4
Net Exports
Struc+Resid
Eqpt+IP
Federal
Inventories
PCE
State & Local
Source: BBVA Research, BEA & Haver
Contribution to GDP Growth2018 vs. 2017, pp, first 3 quarters
7
Budget deal and personal income tax cuts boosting government spending and private consumption
Economic Outlook
Business Cycle
Heatmap: 3m change, normalized 1994-2018, 10th vs. 90th percentileSource: BBVA Research, CBI & Haver
8
BetterWorse
-20
-15
-10
-5
0
5
10
15
63 68 73 78 83 88 93 98 03 08 13 18
Leading IndicatorsYoY % Change
Solid economic conditions
Last 3m ago 6m ago 12m ago
Activity IndexISM Manufacturing
ISM NonmanufacturingSmall Business OptimismIndustrial Production
Capacity UtilizationNew OrdersNonfarm Payroll
Unemployment RateConsumer ConfidencePersonal IncomePersonal Consumption
Retail SalesAuto SalesHousing Starts
New Home SalesExisting Home SalesHome Prices
Bank Credit
Economic Outlook
Business Cycle
Duration of Expansion Cycles Months
Source: BBVA Research, BEA, NBER & Haver
Real GDP Per Capita GrowthAnnual rate, %, 10-year average
9
Will the current expansion become the longest in modern history?
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1958 1968 1978 1988 1998 2008 2018
0
20
40
60
80
100
120
140
Aug2
1-M
ay23
Aug2
4-O
ct26
Dec
27-A
ug29
Apr3
3-M
ay37
Jul3
8-Fe
b45
Nov
45-N
ov48
Nov
49-J
ul53
Jun5
4-Au
g57
May
58-A
pr60
Mar
61-D
ec69
Dec
70-N
ov73
Apr7
5-Ja
n80
Aug-
80-J
ul81
Dec
82-J
ul90
Apr-9
1-M
ar01
Dec
01-D
ec07
Jun0
9-Pr
esen
t
Economic Outlook
Households
Liabilities/Disposable IncomeRatio
Source: BBVA Research, Federal Reserve, BLS, BEA and Haver
Hours Worked and Real Personal IncomeYoY % Change
Interest Payments/Personal Income%
Consumer Delinquency Rate%
10
0.5
0.7
0.9
1.1
1.3
1.5
70 74 78 82 86 90 94 98 02 06 10 14 181.5
1.7
1.9
2.1
2.3
2.5
2.7
70 74 78 82 86 90 94 98 02 06 10 14 18
2
3
4
5
6
7
8
88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Credit Card Other
0.0
0.0
0.0
0.0
0.0
0.1
0.1
0.1
0.1
0.1
0.1
-10
-5
0
5
10
82 85 88 91 94 97 00 03 06 09 12 15 18
Hours Income
Economic Outlook
Business Sector
Nonfinancial Corporate Profits and Tax Rate% of GDP and % of Profits
Source: BBVA Research, Federal Reserve, BEA and Haver
Nonfarm Cost / Unit of Real Value AddedYoY % change, Nonfinancial Corporate Business Sector
Nonfinancial Business Debt% of GDP
Business ConfidenceIndex
11
10
20
30
40
50
70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18
Corporate NonCorporate
5
15
25
35
45
0
2
4
6
8
70 74 78 82 86 90 94 98 02 06 10 14 18
Profits Tax rate (rhs)
-4
-2
0
2
4
6
84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 1880
90
100
110
120
3035404550556065
87 88 90 92 94 96 98 99 01 03 05 07 09 10 12 14 16 18
Manufacturing NFIB (rhs)
$9.4t
$5.4t
Economic Outlook
Labor Markets
Labor Force Participation Rate by Age%
Source: BBVA Research, BLS & Haver
18000
20000
22000
24000
26000
4000
5000
6000
7000
00 02 04 06 08 10 12 14 16 18
Want JobPrime-age (rhs)
Not in the Labor ForceThousands
1.52.02.53.03.54.04.55.0
68
1012141618
00 02 04 06 08 10 12 14 16 18
U6Openings (rhs)
Unemployment and Job Openings Rate%
0123456
07 08 09 10 11 12 13 14 15 16 17 18
Goods Servcies
Average Hourly EarningsYoY % Change
12
80
81
82
83
84
85
62636465666768
00 02 04 06 08 10 12 14 16 18
Total 25-54 (rhs)
Economic Outlook
Real Estate
Housing Starts and New Home SalesThousand units, annualized
Source: BBVA Research, Federal Reserve, Census, BEA and Haver
Delinquency Rate%
Housing Affordability and PricesIndex and YoY % Change
Nonresidential ConstructionYoY % Change
13
0
500
1000
1500
2000
2500
74 78 82 86 90 94 98 02 06 10 14 18
Starts Sales
50
100
150
200
250
-20
-10
0
10
20
74 78 82 86 90 94 98 02 06 10 14 18
HPI Affordability (rhs)
0.00
2
4
6
8
10
12
91 93 95 97 99 01 03 05 07 09 11 13 15 17
Residential CRE
-20-10
0102030
Economic Outlook
Inflation
Distribution of Inflation%, PCE
Source: BBVA Research, BEA, BLS and Haver
CPI Inflation12M % Change
Share of Expenditures with Price:%, PCE
Core CPI12M % Change
14
-10.0
-5.0
0.0
5.0
10.0
00010203040506070809101112131415161718
10th Median 90th
0
25
50
75
100
00010203040506070809101112131415161718
Declines Increases
-2.0
0.0
2.0
4.0
6.0
00 02 04 06 08 10 12 14 16 18
Core Headline
-3.0-2.0-1.00.01.02.03.04.05.0
00 02 04 06 08 10 12 14 16 18
Core Srvs ex Shelter Core Goods Shelter
Economic Outlook
Monetary Policy
FOMC Fed Funds ExpectationsEOY, %, dots and median
0.00.51.01.52.02.53.03.54.04.5
FOMC Dovish
FOMC Median
FOMC Hawkish
Consensus
Dealers
Source: BBVA Research, Bloomberg, FRB & Haver
Fed Funds ExpectationsEOY, %
15
Debate within the FOMC to intensify as rates approach neutral
2.0
2.5
3.0
3.5
4.0
4.5 Sept Jun
Economic Outlook
Treasury Yields
10-Year Yield Decomposition%
Source: BBVA Research & Haver
Distribution of Treasury Holdings
16
Upward pressures contained by negative term-premium
0
10
20
30
40
50
60
70
80
90
100
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Private
Government
Fed
Financial
Foreign
-1.5-1.0-0.50.00.51.01.52.02.53.03.54.04.5
13 14 15 16 17 18
Risk premium Inflation expReal rate Yield
Economic Outlook
Fiscal Policy
Federal Outlays% of GDP, CBO Baseline
Source: BBVA Research, CBO & Haver
Fiscal Balance and Debt% of GDP, CBO Baseline
17
USD reserve status tolerating fiscal profligacy
12.5
13.0
13.5
14.0
14.5
15.0
15.5
4.8
5.0
5.2
5.4
5.6
5.8
6.0
6.2
6.4
6.6
17 18 19 20 21 22 23 24 25 26 27 28
Discretionary Mandatory (rhs)
-12
-10
-8
-6
-4
-2
0
2
4
30
40
50
60
70
80
90
100
00 02 04 06 08 10 12 14 16 18 20 22 24 26 28
Balance (rhs) Debt
Economic Outlook
Risks: Asset Prices
Cyclically Adjusted
Source: BBVA Research, R. Shiller, BEA and Haver
Corporate SpreadsBasis points vs. 1MTN
70
85
100
115
130
74 78 82 86 90 94 98 02 06 10 14 18
BBVA Residential Price Misalignment Index1990=100
7085
100115130145160
74 78 82 86 90 94 98 02 06 10 14 18
BBVA CRE Prices Misalignment Index1990=100
18
0
10
20
30
40
50
84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
S&P Price Earnings Ratio
700
800
900
1000
1100
400
450
500
550
600
Jan-
17Fe
b-17
Mar
-17
Apr-1
7M
ay-1
7Ju
n-17
Jul-1
7Au
g-17
Sep-
17O
ct-1
7N
ov-1
7D
ec-1
7Ja
n-18
Feb-
18M
ar-1
8Ap
r-18
May
-18
Jun-
18Ju
l-18
Aug-
18Se
p-18
Oct
-18
Nov
-18
B CCC (rhs)
Economic Outlook
Risks: Business Leverage
Nonfinancial Corporate ST LiabilitiesYoY % Change
Source: BBVA Research, FRB, FDIC and Haver
0.00
2.00
4.00
6.00
0.20
0.70
1.20
1.70
96 98 00 02 04 06 08 10 12 14 16 18
LCDDI C&I loan delinquency rate (rhs)
BBVA Debt Distress and C&I DelinquenciesIndex (1=Average) and %
Leveraged Loans & HY Bond Ratings% of issuance
0.0
2.0
4.0
6.0
8.0
10.0
4
6
8
10
12
14
16
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Past Due Fed Funds (rhs)
C&I Past Due Loans and Interest Rates%
19
-20
-10
0
10
20
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
3 5 14 15
44 50 44 50
53 45 42 35
0%20%40%60%80%
100%
2017 2018 2017 2018
Leveraged Loans High-Yield Bonds
Ba
B
Caa-Ca
Economic Outlook
Recession Probability, Timing and Severity
BBVA TSTPA Recession Probability%, 12m-ahead
Source: BBVA Research, Federal Reserve Board, FRBSL and Haver
BBVA Recession Timing IndexAbove 0 = longer lag to recession
BBVA TSTPA Risk FactorsPercentile Rank
BBVA Credit Cycle Risk IndexAbove 0 = above average risk
20
0.0
0.2
0.4
0.6
0.8
1.0
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
0102030405060708090
100
Wages ShadowBanking
Slope Personal IntExpense
CAPE
Tipping Point
-2.0-1.5-1.0-0.50.00.51.01.5
70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18-1.0
-0.5
0.0
0.5
1.0
82 85 88 91 94 97 00 03 06 09 12 15 18
Economic Outlook
Regional: Economic Conditions
Source: BBVA Research and Haver
GDP Growth 2017-Present%
State GDP Distribution% change, 50 States plus DC
State GDP VolatilityStandard deviation real GDP growth
21
All states expanding above post-crisis average amid
greater convergence
-2
0
2
4
6
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49
Post Crisis 2018
0.01.02.03.04.05.0
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
Economic Outlook
Texas: Economic Conditions
BBVA State Monthly Activity IndexYoY % change
Source: BBVA Research & Haver
Retail SalesYoY % change, nominal
Mining Nonfarm PayrollYoY % change
Unemployment Rate%
22
-0.6-0.4-0.20.00.20.40.6
07 08 09 10 11 12 13 14 15 16 17 18
US Texas
-30
-20
-10
0
10
20
07 08 09 10 11 12 13 14 15 16 17 18
US ex TX Texas
0.02.04.06.08.0
10.012.0
07 08 09 10 11 12 13 14 15 16 17 18
US Texas
-20
-10
0
10
20
07 08 09 10 11 12 13 14 15 16 17 18
US Texas
Economic Outlook
Texas: GDP
Real GDP 2006=100
Source: BBVA Research and Haver
Real GDP ContributionPP contribution YoY
23
Manufacturing, professional services, wholesale trade and mining
contributing with 60% to GDP growth
80
90
100
110
120
130
140
06 07 08 09 10 11 12 13 14 15 16 17 18
New YorkCaliforniaFloridaIllinoisTexasU.S.
-4 -2 0 2 4 6 8 10 12 14
Finance and insuranceGovernment
Arts, entertainment, and…Educational services
Accommodation and food…Other services, except…
Agriculture, forestry,…Health care and social…
Transportation and…Construction
UtilitiesManagement of companies…Real estate and rental and…
Administrative and waste…InformationRetail trade
MiningWholesale trade
Professional, scientific,…Manufacturing
Economic Outlook
Texas: Employment
Nonfarm PayrollThousands
Source: BBVA Research & Haver
Nonfarm PayrollThousands
24
Nonfarm payroll hits an all-time high of 12.7M
-100
102030405060708090 Last 12M ago
2700
2900
3100
3300
3500
3700
3900
4100
7000
7200
7400
7600
7800
8000
8200
8400
8600
8800
9000
06070809101112131415161718
Total ex Selected (rhs)
Trade, Health & ProfSrvcs (rhs)
Economic Outlook
Texas: Risks
Source: BBVA Research
Higher Interest Rates
Stronger USDWeaker Global Demand
25
HigherLower
Automation
Economic Outlook
Ft. Worth: Employment
Nonfarm PayrollThousands
Source: BBVA Research & Haver
Nonfarm PayrollThousands
Employment at 1.1M sets a new record-high
-1012345678
Last 12M ago
300
320
340
360
380
400
420
550
570
590
610
630
650
670
05060708091011121314151617
Total Ex SelectedEdu+Health+Trade (rhs)
Economic Outlook
Ft. Worth: Labor Markets
EmploymentIndex 2007=100
Source: BBVA Research & Haver
Unemployment Rate%
Solid job creation and low unemployment
90
95
100
105
110
115
120
125
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Ft. Worth ChicagoLos Angeles MiamiNew York
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
05 06 07 08 09 10 11 12 13 14 15 16 17 18
U.S.DallasTexasHoustonFt. WorthAustin
Economic Outlook
Ft. Worth: Residential Market
House Price Index2007=100
Source: BBVA Research & Haver
0
5
10
15
20
0
1,000
2,000
3,000
4,000
5,000
6,000
92 94 96 98 00 02 04 06 08 10 12 14 16 18
Sales Months (rhs)
Home Sales and Months Supply12mma, FWD
Vacancy Rates: FWD%
Household Debt Per Capita: TexasUS$ Thousand
28
0
10
20
30
40
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Mortgage C Card Auto
0.0
0.5
1.0
1.5
2.0
2.5
3.0
6
8
10
12
14
16
06 07 08 09 10 11 12 13 14 15 16 17 18
Rental
Homeowner (rhs)75
100
125
150
175
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
US TexasHouston Ft. WorthAustin San Antonio
Economic Outlook
Ft. Worth: Economic Outlook
Real GDPIndex, 2009=100
Source: BBVA Research & Haver
Real GDP Growth%, FWD
29
We expect economic performance to remain above national average
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2013 2014 2015 2016 2017 2018 2019
U.S. Average
100
105
110
115
120
125
130
135
140 TX HoustonFWD MiamiNYC LA
Downside risks to global growth
Solid U.S. economic performance
Recession risk still low but edging up
Structural challenges require attention
Positive outlook for Texas and Ft. Worth
Summary
Thank You
Thank You Merci Grazie Obrigado
Teşekkür Ederim תודה Gracias ありがとう
Xiè Xie Tak Спасибо A Dank
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Economic Outlook
Economic Outlook
Whitley Penn
Nathaniel KarpChief EconomistBBVA Compass
Ft. Worth, TXDecember
2018