Global Webinar: Clouds On The Horizon Or Just A Passing Fog?43xi6t2887o3iq32t1j8pfrm-wpengine.netdna-ssl.com/wp-content/upl… · Global Webinar: Clouds On The Horizon Or Just A Passing

Global Webinar:Clouds On The Horizon Or Just A Passing Fog?

Jim O’Sullivan & Carl WeinbergHigh Frequency Economics www.hifreqecon.com/WebinarJan2019

Gloom In Markets Looks Excessive For The United States…But Some Slowing Is Likely, Limiting Fed Tightening

Jim O’SullivanChief Economist www.hifreqecon.com/WebinarJan2019

High Frequency Economics® — Jim O’Sullivan, Chief Economist January 10, 2019

© 2019 High Frequency Economics, Ltd. 445 Hamilton Avenue, White Plains, NY 10601. All rights reserved. No secondary distribution without express permission. www.hifreqecon.com/WebinarJan2019

Page 3

Reasons To Expect Slowing—But How Much?

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Manufacturing ISM Export Orders Index (Left) Real Good Exports, %chya (Right)

1a. ISM Export Orders Index Has Dropped, But It Remains Above 50

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Bloomberg U.S. Financial Conditions Index (Left) Goldman Sachs Financial Conditions Index (Right, Inverted)

Shaded Bars Denote Periods Of Recession

More Accommodative

Less Accommodative

Early 2016

1b. Financial Conditions Have Tightened—Just Like In Early 2016?

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310

440

570

700

69 74 79 84 89 94 99 04 09 14

Weekly Four-Week Average Shaded Bars Denote Recession Periods

Initial Claims, Thousands Per Week

2013 Shutdown

1c. Claims Up Just Slightly, Probably Due In Part To Shutdown

2016 2017 2018 2019Actual Actual Est Now Est

Real GDP* 1.9 2.5 2.8 3.2 2.2Core PCE Prices* 1.8 1.6 1.9 1.9 2.2Total CPI* 1.8 2.1 2.2 2.3 2.3Core CPI* 2.2 1.7 2.3 2.2 2.5Unemployment† 4.7 4.1 3.5 3.8 3.4

S&P 500‡ 2239 2674 2650 2507 2632Fed Funds§ 0.6 1.4 2.4 2.4 2.610-Year T-Yield§ 2.5 2.4 3.0 2.7 3.0* %ch, Q4/Q4 † Level, Q4 ‡ Level, EOP § %, EOP

1d. How Did We Do? Our Start-Of-2018 Estimates Vs Latest Data



Page 4

%ch from previous period, annual rate, except where noted; forecasts in bold

2018 2019 Calendar Average Q4/Q4Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2018 2019 2020 2018 2019 2020

Real GDP 2.2 4.2 3.4 3.0 2.4 2.3 2.0 2.0 2.9 2.6 2.0 3.2 2.2 1.9Final Sales 1.9 5.4 1.0 2.9 2.9 2.5 2.2 1.9 2.8 2.6 2.0 2.8 2.4 1.9

Domestic Final Sales 1.9 4.0 2.9 3.4 3.0 2.3 2.3 2.0 2.9 2.8 2.1 3.1 2.4 2.0Net Exports (pct pt contr) 0.0 1.2 -2.0 -0.6 -0.1 0.1 -0.1 -0.2 -0.2 -0.3 -0.1 -0.4 -0.1 -0.1

Inventories (pct pt contr) 0.3 -1.2 2.3 0.1 -0.5 -0.2 -0.2 0.1 0.1 0.0 0.0 0.4 -0.2 0.0

Consumption 0.5 3.8 3.5 3.8 3.2 2.3 2.3 2.0 2.7 3.0 2.1 2.9 2.4 2.0Business Fixed Investment 11.5 8.7 2.5 3.9 3.1 2.5 2.7 2.3 6.8 3.3 2.6 6.6 2.6 2.7

Structures 13.9 14.5 -3.4 -1.0 -2.0 -2.0 2.0 2.0 5.2 -0.3 1.7 5.7 0.0 2.0Equipment 8.5 4.6 3.4 4.0 3.5 3.0 2.0 2.0 7.3 3.3 2.1 5.1 2.6 2.0Intellectual Property 14.1 10.5 5.6 7.0 6.0 5.0 4.0 3.0 7.3 5.8 3.9 9.3 4.5 4.0

Residential Investment -3.4 -1.4 -3.5 -2.0 -2.0 -1.0 0.0 0.0 -0.1 -1.6 -0.1 -2.6 -0.8 0.0Exports 3.6 9.3 -4.9 2.5 2.0 3.5 3.5 3.0 4.0 2.2 3.1 2.5 3.0 3.0Imports 3.0 -0.6 9.3 6.0 2.5 2.0 3.5 3.5 4.8 3.9 3.2 4.4 2.9 3.2Government 1.5 2.5 2.6 2.7 3.1 3.1 2.4 2.4 1.7 2.8 2.1 2.3 2.7 1.8

Inventories (ch $B annual rate) 30 -37 90 95 72 61 51 56 45 60 54 95 56 55

CPI 3.5 1.7 2.0 1.7 1.0 2.6 2.8 2.7 2.4 1.9 2.7 2.2 2.3 2.7Core CPI 3.0 1.8 2.0 2.0 2.4 2.4 2.6 2.7 2.1 2.3 2.7 2.2 2.5 2.7

Core PCE Prices 2.2 2.1 1.6 1.6 2.1 2.1 2.3 2.4 1.9 2.0 2.4 1.9 2.2 2.4

Unemployment (%, level) 4.1 3.9 3.8 3.8 3.7 3.5 3.4 3.4 3.9 3.5 3.4 3.8 3.4 3.4Federal Budget Balance ($B, FY) -779 -1050 -1125

% Of GDP -3.8 -4.9 -5.0

End Of YearFed Funds Target (%, EOP) 1.63 1.88 2.13 2.38 2.38 2.63 2.63 2.63 1.8 2.5 2.6 2.38 2.63 2.6310-Year Treasury (%, EOP) 2.7 2.9 3.1 2.7 2.8 3.0 3.0 3.0 2.8 2.9 3.0 2.7 3.0 3.030-Year Treasury (%, EOP) 3.0 3.0 3.2 3.0 3.0 3.2 3.2 3.2 3.0 3.1 3.2 3.0 3.2 3.2S&P 500 (level, EOP) 2641 2718 2914 2507 2557 2632 2632 2632 2716 2597 2592 2507 2632 2550

2. HFE’s Economic & Financial Forecasts

Weakness To Feed On Itself, Or Renewed Upward Momentum?



Page 5

Survey Data Likely To Weaken More Than The Hard Data

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Real GDP, %ch, Q/Q, Annual Rate (Left) Composite ISM Index (Manufacturing And Non-Manufacturing Combined, Right) Composite Markit Index (Right)

3a. Strength In The ISM Data Still Looks Exaggerated

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Real Consumer Spending, %ch From 6 Months Ago In 6-Month Avg, AR (Left) Expectations Component Of Conference Board Confidence Index (Right)

2011 Debt-Limit Scare

Fiscal Cliff Threat

Shutdown

3b. Conference Board Index Remains Historically High

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Composite ISM Index, Points (Left) S&P 500, %, (Right) Change From 3 Months Earlier

3c. Big Swings In Equities Tend To Be Mirrored In ISM Data

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Overall Index Democrats Republicans Independents

Vertical Lines Mark Presidential Elections

Weekly Bloomberg Consumer Comfort Index

3d. Dip In Bloomberg Index Has Been Led By Republicans



Page 6

Most Survey Data Have Been Overstating Strength

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00 04 08 12 16

Manufacturing ISM Index (Left) Manufacturing Output, %ch From 6 Months Ago in 3-Month Average, AR (Right)

Shaded Bars Denote Recession Periods

4a. December Drop In Manufacturing ISM Largest Since 2008!

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Real GDP, %q/q, Annual Rate (Left) NFIB Small Business Optimism Index (Right)


4b. NFIB Index Still High Enough To Be Consistent With 5% Growth

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10 12 14 16 18

Housing Market Index (Right) Single-Family Housing Starts, Thousands, Annual Rate (Left) Single-Family Permits, Thousands, Annual Rate (Left)

4c. Housing Market Index Has Dropped Sharply

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Core Capex Orders, %ch From 6 Months Ago In 3-Month Average (Left) Average Of 5 Regional Capex Plans Indexes* (Right)

*New York, Philadelphia, Richmond, Dallas & KC Fed Surveys

Shaded Bar Denotes Recession Period

4d. Capex Survey Indexes Remain Fairly High



Page 7

Lower Oil Prices Are Like A Tax Cut, But Not For Oil Companies Fiscal Stimulus Poised To Fade

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Consumer Spending On Gasoline As % Disposable Income (Left) Crude Oil, WTI/Brent Average, $ Per Barrel (Right)

5a. $10/BBL Drop In Oil Boosts Real Disposable Income About 0.2%

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U.S. Oil Production, Millions Of BPD, Seasonally Adjusted (Left) U.S. Oil Rigs In Operation; Baker Hughes Data (Right)

5b. No Sign Yet Of Oil Price Drop Weakening Drilling Significantly

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Federal Budget Balance, % Of GDP, Scale Inverted (Left) Unemployment Rate (Right)


CBO Alternative Fiscal Scenario*

CBO Official Baseline

*Assumes extension of expiring tax provisions and continuation of recent increases in spending caps.

5c. Deficit Already High Before Tax Cut For Stage Of Cycle

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New Caps For FY18-19 Federal Discretionary Spending Budget Authority Caps, Billions Of Dollars, Fiscal Years

5d. Spending Caps Up Sharply—And Probably Not Just For Two Years



Page 8

Employment Growth Needs To Slow Sharply To Stop Downtrend In Unemployment

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83 87 91 95 99 03 07 11 15 19

Unemployment Rate, % Fed Funds Rate Target, % Shaded Bars Denote Fed Tightening Periods

Fed Est For Long-Run Normal Unemp: 4.4%

6a. Fed Is Trying To Stop Downtrend In Unemployment Rate

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Household Survey Employment, Break-Adjusted, %chya Labor Force, Break-Adjusted, %chya Payrolls, Excluding Temporary Census Hiring, %chya

Shaded Bar Denotes Recession Period

6b. Employment Growth Still Outpacing Labor Force Growth

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25-54 Years: Female 25-54 Years: Male Labor Force Participation Rate, %

Shaded Bars Denote Periods Of Recession

6c. The “Prime-Age” Female Participation Rate Has Been Surging

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Labor Force Participation Rate, %


6d. ...Even So, The Overall Rate Has Been Near Flat Since 2013



Page 9

Labor Market Already Unsustainably Tight?

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2.0

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3.6

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ECI: Private Sector Wages & Salaries, %chya Employment Report: Average Hourly Earnings, %chya

7a. Wage Gains Are Accelerating

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0.0

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CBO Estimate Of Unemployment Gap* (Left) Acceleration/Deceleration In Private Wage Component Of ECI† (Right)

*Reported unemployment rate minus CBO estimate of NAIRU. †%chya minus %chya one year earlier, four-quarter average.

7b. ...Consistent With The NAIRU Framework

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3.5

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Unemployment Rate, % CBO NAIRU Estimate, % Core PCE Price Index, %chya Average Hourly Earnings*, %chya

1995

*Production & nonsupervisory workers, with data starting in 1964.

7c. Unemployment Is Much Lower Now Than In 1995

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% Change From Five Years Earlier, Annual Rate %chya

Nonfarm Business Productivity

Late 1990s

7d. Productivity Picked Up Sharply In The Late 1990s



Page 10

Inflation: Still Tame, But Trend Up A Little

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Core PCE Price Index, %chya Total PCE Price Index, %chya

Fed's 2% Goal For PCE Prices

8a. Mission Almost Accomplished? Core PCE Inflation At 1.9%

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Unit Labor Costs, Nonfarm Business Sector, %chya, Four-Quarter Average Core PCE Price Index, %chya Compensation Per Hour, Nonfarm Business Sector, %chya, Four-Quarter Average

8b. Inflation Tends To Rise And Fall With The Pace For Labor Costs

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TIPS 5-Year, 5-Year Forward Inflation Compensation, % Michigan 5-to-10-Years-Ahead Inflation Expectations, % New York Fed 3-Years-Ahead Inflation Expectations, % Michigan One-Year-Ahead Inflation Expectations, %

8c. Survey-Based Inflation Expectations Low & Fairly Stable

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Non-Auto Consumer Goods Import Prices, %chya (Left) Core Goods CPI, %chya (Left) Fed's Broad Trade-Weighted Dollar Index, %chya (Right, Inverted)

8d. Pass-Through To Inflation From The Dollar Is Typically Small



Page 11

Yield Curve Signal: Is This Time Different, To Some Extent?

Recessions Duration (Mths) Expansions Duration (Mths)1945 8 1945-48 371948-49 11 1949-53 451953-54 10 1954-57 391957-58 8 1958-60 241960-61 10 1961-69 1061970 11 1970-73 361973-75 16 1975-80 581980 6 1980-81 121981-82 16 1982-90 921990-91 8 1991-2001 1202001 8 2001-07 732008-09 18 2009-? 114 So Far

Averages: Averages:1854-1919 21.6 1854-1919 26.61919-45 18.2 1919-45 35.0 1945-2009 11.1 1945-2009 58.4

9a. A Long Expansion, But “Expansions Do Not Die Of Old Age”

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Yield Curve: 10-Year Minus 2-Year Treasury Yield, Percentage Points (Left) Yield Curve: 10-Year Minus Federal Funds Rate, Percentage Points (Left) Real GDP, %chya (Right)


1966 1998

9b. Recesions Preceded By Inverted Curves, But Some False Signals

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Real Fed Funds Rate, Deflated With %Y/Y In Core PCE Prices, % Nominal Fed Funds Rate, %


9c. ...Tightening Cycles Have Tended To Be Followed By Recessions

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90 95 00 05 10 15

10-Year Term Premium*, % Nominal 10-Year Treasury Yield, % 10-Year Risk-Neutral Yield*, %

*NY Fed data; methodology developed by Tobias Adrian, Richard Crump & Emanuel Moench.

“Bond Market Conundrum”

Shaded Bars Mark Fed Tightening Periods

9d. Is This Time Different? Term Premiums Historically Low



Page 12

Tariff Rate, %

Simple Average*

Weighted Average**

United States' Exports To ChinaAgricultural Products 15.1 5.8Non-Agricultural Products 9.0 5.3

China's Exports To United StatesAgricultural Products 4.0 2.8Non-Agricultural Products 4.0 3.0

Source: WTO’s World Tariff Profiles 2017*Based on a standardized simple average across six harmonized system categories.**Based on a weighted average of recorded exports.

Trade Tensions: Art Of The Deal?

Simple Average MFN Tariff Rates, %

Bound (Required By WTO) AppliedAustralia 9.9 2.5Brazil 31.4 13.5Canada 6.8 4.2China 10.0 9.9European Union 4.8 5.1India 48.5 13.4Japan 4.4 4.0Mexico 36.2 7.1Russia 7.6 7.8South Korea 16.8 13.9United States 3.5 3.5Source: WTO’s World Tariff Profiles 2017

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Goods Imports From China, %chya Goods Exports To China, %chya

10c. Exports To China Have Weakened Sharply

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Imports Exports Goods Trade With China, Billions Of Dollars Per Month, Seasonally Adjusted

10d. ...Such Exports Are Minuscule Relative To Imports

10a. Tariffs: United States Versus China

10b. MFN Tariff Rates

Outlook Darkens For The Global Economy

Carl B. WeinbergChief International Economist www.hifreqecon.com/WebinarJan2019

High Frequency Economics® — Carl B. Weinberg, Chief International Economist January 10, 2019 Page 14


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IMF Measure Of World Trade Value

Global Exports In U.S. Dollars, Percent Change Year Ago, Black Line Is 5-Year Trend

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Percent Change Year Ago

WTO Measure Of World Trade Volume

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World Export Volume, Percent Change Year Ago, Right Axis World GDP, Percent Change Year Ago, Left Axis

IMF Estimates Of Yearly World Trade And GDP Data Through 2018e

IMF Measure Of World Trade Volume Vs GDP Growth

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G-7 Only G-7 Plus China

G-7 Plus China Industrial Production Growth, Percent

Data Through Nov 2018pf Using GDP Weights

The Pulse Of The Beast: TradeWorld trade was grinding to a halt in 2018. Nothing good can be said about that.



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Euro Zone: Retail Sales Volume, Percent Change Year Ago

Green Line Shows Annualized Change Of 3-Month Moving Average

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Nominal Retail Sales Retail Sales Volumes

Canada: Retail Sales, Percent Change Year Ago

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United Kingdom: Retail Sales, Percent Change Year Ago

Volume Index, Line Shows Yearly Change Of Three-Month Moving Average

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Seasonally Adjusted Monthly Index, 2005=100, Blue Line Is 3-Month Change Annualized

Japan: Retail Sales Volume, Percent Change Year Ago

Consumer Spending… Not So HotMaybe it was the surge in energy prices that slowed the consumer in 2018… but the damage is done, even though oil prices have now declined.



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Euro Zone: Industrial Production, Percent Change Year Ago Black Line Shows Annualized Percentage Change In Three-Month Moving Average Blue Line Shows Percent Change Since April 2008 Peak

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Canada: Manufacturing Output, Percent Change Year Ago

Volume Measure

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United Kingdom: Industrial Production

Bars Are Industrial Production, %chya, Blue Line Is Percent Change Since Peak Yellow Line Is Annualized Three-Month Change In Production

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Japan: Industrial Production, Percent Change Year Ago

Blue Line Is Percent Change Since Feb 2008 Peak

Industrial Output… Not So HotProblems emerged in most advanced economies starting in early 2018, not just in the fourth quarter.



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Economic Confidence, Right Axis

Consumer Confidence, Left Axis

Industrial Confidence, Left Axis

Based On Monthly Survey Results

Euro Zone: Economic Confidence Indexes

70 75 80 85 90 95 100 105 110 115 120

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Germany: IFO Index And Its Components

Blue Line Shows IFO Business Sentiment Overall Index Yellow Line Is Expectations Index, Red Line Is Current Conditions Index

39 41 43 45 47 49 51 53 55 57 59 61 63

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United Kingdom: CIPS Services Sector PMI

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GDP To Q3 18,%chya Dev From Trend Large Manufacturers Large Non-Manufacturers Small Manufacturers Small Non-Manufacturers

Japan: Tankan Indexes And GDP Growth Trends

Informative Surveys… Also Not So HotEuro Zone to Japan, survey data point to decaying supply-side conditions.



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Total MFI Lending Lending To SMEs Ex-Mortgages Mortgages

Euro Zone: Bank Lending, Percent Change Year Ago

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Business Credit Mortgage Lending Total Lending

Canada: Measures Of Credit, Percent Change Year Ago

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United Kingdom: Growth Of Broad Money And Credit

Bars Are M4, Red Line Shows M4 Lending, Percent Change Year Ago

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M2+CDs, Bank Lending M2+CDs Ex-QE

Japan: Money And Credit, Percent Change Year Ago

Bank Lending: Too Slow And SlowingGrowth of money and credit is too low to accommodate desired nominal GDP growth—except in Canada. Credit is slowing everywhere.



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Euro Zone: Exports, Percent Change Year Ago

Yellow Line Shows Five-Month Moving Average

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Canada: Exports, Percent Change Year Ago

Blue Line Is Five-Month Trend

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United Kingdom: Exports, Percent Change Year Ago

Red Line Shows Five-Month Moving Average

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Japan: Exports, Percent Change Year Ago

Line Shows Five-Month Moving Average

Exports Are Not HelpingThe counterpart to the decline in global exports is evident.



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China: Retail Sales, Percent Change Year Ago

Green Line Shows CPI-Adjusted Sales

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China: Industrial Production, Percent Change Year Ago

Yellow Line Is Three-Month Production Trend

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M2 M1 Aggregate Financing

China: Money And Credit, Percent Change Year Ago

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China: Exports, Percent Change Year Ago

Yellow Line Shows 5-Month Moving Average, In RMB

What About China?Growth of money and credit is too slow to accommodate desired nominal GDP growth… except in Canada. Credit growth is slowing everywhere.



Key Takeaways…• World trade is slowing: The pulse of the global economy is slowing.

• Industrial production and survey data indicate output is faltering in many economies. It is not quite a recession yet, but a clear slowdown is indicated.

• Consumer spending slowdown in 2018 may be partially due to rise in oil prices. Even though prices have retraced their 2018 jump, the damage has been done.

• Bank lending is wicked slow in most economies, and still slowing in many cases. The damage of the 2018 financial crisis is not yet undone.

• None of this is China’s fault. Trade wars so far are not the cause of global slowdown …although they do not help

• HFE has no indication of inflation risk in any major economy at this time, so…

• Most central banks are not going to tighten in 2019 No 2019 rate hike or other tightening expected by ECB. Tapering is not tightening. No 2019 rate hike or other tightening expected by BoJ, BoE or RBA. BoC tightening intentions will be scaled back as employment slows.

• Bond yields, already low, still have room to fall, although negative yields are unsustainable.

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