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#MIGlobal
Policy Uncertainty
Trumps Growth Outlook
William Lee, PhDChief Economist
#MIGlobal
Black Swan Incubators: Many Signs of Discontent SurfacedVictims of Economic Dislocation, Especially From Globalization, Amplified Anomie and Boosted
Support for Brexit and Trump
Source: Citi Research.
Greater Nationalism, Isolationism
Greater
Isolationism
Increased
NationalismIncreased Domestic
Polarization
Social Unrest
Reduced Trust in
Government
Political Upheaval
#MIGlobal
Trump/Republican Fiscal Policy Proposals• Repatriate corporate profits held
abroad: Tax rate of 10%
• Infrastructure investment: $550 Billion
• Tax Reform: Lower Rates and
Simplify Code
o Lower Business income tax: from
35% to [15 to 20 maybe 25?]%
o Lower Individual income taxes
o Close Loopholes
Source: greatagain.gov and Citi Research.
#MIGlobal
Trump Fiscal Package Enlarges Deficit More and
Provides Growth Stimulus in 2018
Source: Congressional Budget Office, and Citi Research.
#MIGlobal
Tax Reform That Incentivizes US Production Requires
“Matching” Tax On Imports & Tax Exemption For Exports
Source: BEA and Milken Institute Research
#MIGlobal
39.6%
35%
33%
28%
25%
15%
10%
33%
25%
12%
Simplify Individual Tax Code:
Fewer Brackets and Lower RatesCurrent Proposed
Source: greatagain.gov and Citi Research.
#MIGlobal
US Election & Global Shift Toward
Political and Economic Fragmentation
#MIGlobal
US Elections Are Not An American Brexit Re-Play
Similarities between Brexit and the US
2016 Presidential election themes:
1. Establishment/elite vs.
disenfranchised populist/outsider
2. Pragmatic internationalist vs.
nationalistic views globalization costs
3. Clash of regional, age and class
differences
4. Benefits vs. costs from international
trade, immigration, and (supra)
government intervention in the
economy
Drivers of Brexit may have little bearing on the
US Presidential election where minority vote is
critical influence:
1. Brexit: Referendum against power of EU
bureaucracy vs.
US Election: Referendum on the national
government activism
2. Less general animus in the US over
immigration, trade, foreign policy.
3. More diverse US minority populace (US ~35%
ethnic minorities) vs. less diverse UK population
(UK minorities less than 20% of population)
4. US electoral power is concentrated in diverse,
heavily populated states, and cities/suburbs.
Source: Note: Exit polling results 2012 Presidential election and 2016 primaries. Source:
Politico, Washington Post, Huffington Post and Citi Research.
#MIGlobal
US Voters Less Worried About Immigration, Trade, Foreign Policy• UK Net (In Less Out) Migration Has Ramped Up, While US Immigration Has been Fairly Steady
(Post-2005 net migration approximately 1½ percent of population in both countries)
• Gallup Poll of US Persons: What do you think is the most important problem facing this country today?
Source: United Nations, Gallup, and Citi Research.
#MIGlobal
Immigration Is Greater Source of Uncertainty/Fear
In the UK than In the US
Source: Economic Policy Uncertainty and Citi Research.
#MIGlobal
EU Disapproval Higher In Other EU States Than in the UKOut of 10 largest countries in the EU, Spain, France, and Italy have highest
disapproval polls on EU economic policy
Many Disapprove of EU’s
Handling of Economy
Majorities Disapprove of EU’s
Handling of Immigration Crisis
Source: Citi Research, Spring 2016 Global Attitudes Survey. Q50b. "Euroskepticism Beyond
Brexit“ PEW Research Center.
#MIGlobal
Institutions Considered Less Trustworthy Among AEs Than EM* Level Of Trust Among General
Population Is Higher in EMs than AEs
The Trust Gap Between the “Informed Public” and
“Mass Population” Is Higher for AEs than EMs
Source: Citi Research, Edelman Trust Barometer 2016Note: “General population” is composed of the entire sample. “Informed public” are those with at least a college education, are very engaged in
media, and have an income in the top 25%. “Mass population” is the remaining 85%
• Data assess trust in the institutions of government, media, business and NGOs
AEs EMs
UAE 66 China 73
Singapore 64 India 65
Canada 56 Indonesia 62
Netherlands 52 Mexico 60
Australia 49 Colombia 55
Italy 49 Argentina 51
US 49 Malaysia 51
Hong Kong 47 Brazil 50
Spain 46 S. Africa 45
Germany 42 Turkey 41
S. Korea 42 Russia 39
UK 42
France 41 Average 53.8
Ireland 41
Japan 38
Sweden 37
Poland 35
Average 46.8
AEs EMs
France 16 Mexico 15
UK 17 Malaysia 8
US 19 India 16
Spain 9 China 11
Singapore 10 Brazil 10
S. Korea 10 Russia 3
Germany 9 Indonesia 8
Australia 16 Argentina 3
Ireland 10 Colombia 6
Poland 8 S. Africa 10
Canada 9 Turkey 8
Japan 3
Italy 11 Average 8.9
UAE 9
Netherlands 10
Sweden 10
Hong Kong 6
Average 10.7
#MIGlobal
Policy Uncertainty Generates Drag to
Global and US Growth
#MIGlobal
Economic Policy Uncertainty: Trade Collapse May Worsen Trump Backs Down on Calls for Tariffs and Trade Restrictions—Objective is to Negotiate Bilaterally
Source: WTO via Haver and Citi Research.
#MIGlobal
Post-Election Policy Uncertainty Stays High—But Markets Split
Source: Haver, Bloomberg, and Citi Research.
Stock market
plunges over China
slowdown
MOVE Index
February’16
Global Scare
China devaluationBond market flash
crash
Strong jobs report
fuels more taper
speculation
#MIGlobal
Economic Policy Uncertainty: Major Source of Drag on US GrowthMeasurable Policy Uncertainty: Rose Significantly With Debt Ceiling Crisis, Fed Indecision/China
Devaluation In September 2015, and Global Market Volatility Early-2016. Trump Uncertainty Next
Source: Haver and Citi Research.
Economic Fragmentation
#MIGlobal
Policy Uncertainty Reduces Investment ShareInvestment and uncertainty are inversely related in the US and German data.
Policy uncertainty statistically significant influence lowering investment United States
(1985-2012)Germany(1995-2012)
Source: Economic Policy Uncertainty website of Scott Baker, Nicolas Bloom, and Steven Davis
http://www.policyuncertainty.com/index.html, Haver, and Citi Research
#MIGlobal
Post-Crisis Uncertainty Impact on Investment-GDP Ratio (I/Y) (Percentage Points)
United States Germany
Changes to Investment Share (2007-2012)
Actual change in I/Y -1.1 -1.3 Uncertainty impact on I/Y -0.6 -0.5
Required changes to offset uncertainty impact on I/Y
Change in real interest rate -6.6 — Change in credit growth — 8.2 Increase in nominal GDP growth 4.2 4.6
Source: Citi Research
Policy Uncertainty Contributed to Secular Stagnation
• Simulations show that
during 2007- 2012, policy
uncertainty contributed
to 57 and 36 percent of
the investment share
decline in the United
States and Germany,
respectively
• Offsetting the decline in
investment shares would
require large reductions in
real interest rates and/or
considerable increases in
GDP growth.
#MIGlobal
US Manufacturing
Holds Steady
#MIGlobal
US Weakness Largely Energy and Traded GoodsWeak Components of Industrial Production In Mining and Utilities, But Not Overall Manufacturing.
Retail Sales Data Suggest Consumption Rebound In Place.
Source: Federal Reserve.
90
100
110
120
130
140
150
2010 2011 2012 2013 2014 2015 2016
IP - Manufacturing
Index, 2010=100
IP - Mining
Industrial Production - Overall
IP - Utilities
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2013 2014 2015 2016 2017
Retail Sales and Food Services
Retail Sales Control Group
#MIGlobal
US Labor Markets Do Not Show Manufacturing WeaknessPayrolls declined for mining sector but manufacturing employment remained steady even though dollar
appreciated more than 20 percent in last year and half. Service sector job growth remained robust
Source: BLS and Citi Research.
#MIGlobal
“Structural” Headwinds Retard
Investment and Productivity
#MIGlobal
Post-2008 Investment Pace Slowest In Post-WWII EraMost of the Post-2008 Investment Rebound Occurred in 2010-2011
Source: BEA, Haver and Citi Research.
#MIGlobal
Last Five Years Saw Slowest Productivity Growth in Post-WWIIPost-2008 Cyclical Rebound Occurred in 2009-2010
Source: Federal Reserve, BEA via Haver and Citi Research.
#MIGlobal
Current Monetary Easing Smaller Than In 1960s and 1970sNeutral Real Rate (R-Star) Declined to Historically Low Level But Gap Has Not
Source: BEA, Federal Reserve via Haver, and Citi Research.
#MIGlobal
Low Investment Not Due To Insufficient Funding Sufficient Bank Lending and Free Cash Flow Growth To Finance Investment
But Profit Share Off Historically High Levels
Source: Federal Reserve and BEA via Haver, and Citi Research.
#MIGlobal
Banks Diverted Funding To Large BorrowersCostly Regulations Incentivized Banks to Lend More to Large Borrowers
Source: Federal Reserve and BEA via Haver, and Citi Research.
#MIGlobal
Investment Growth Slower Post-1985: Missing GDP Acceleration
Su
bse
qu
en
t in
ve
stm
en
t g
row
th (
pe
rce
nt)
Real GDP Growth Thresholds (percent) Real GDP Growth Thresholds (percent)
Pre-1985 capital spending rose more with rising GDP growth than
post-1985 where investment growth is less robust during both waves
Source: Bureau of Economic Analysis and Citi Research.
Note: ** denotes statistically significant at 1 percent; * at 5 percent
#MIGlobal
Investment Is Cyclical: Composition Shifting Toward Smart ComputersProfits-led Slowdown In Investment Mainly in Structures and Equipment
Source: BEA and Citi Research.
#MIGlobal
US Consumers Overwhelmingly Benefit From Oil Price ShockUS consumers spend less for
gasoline from cheaper pricesMuch of the gains being saved for now
Source: IMF, EIA, IEA, Bureau of Economic Analysis and Citi Research.
Oil Price Shock
200
250
300
350
400
Consumer Spending on Gasoline/Fuel Oil(Billion Dollars, monthly)
-$ 75Billion
#MIGlobal
Spending Lags Prior Cycles. Caution May Be Hindering Activity
Household spending this cycle has been lacklusterConsumers reluctant to spend after
2000 and 2008 crises
Note: Rolling regressions use a 20-year window incremented by quarter.
Source: Bureau of Economic Analysis and Citi Research.
#MIGlobal
Consumer Spending Is Not Growing Fast Enough Improved but still-high consumer debt burdens (made worse by rising student loans)
limit consumption gains associated with surge in household wealth
Consumer Deleveraging Stalled
by Rising Student Loans
Source: Federal Reserve Board, New York Fed, and Bureau of Economic Analysis.Source: Federal Reserve Board and Bureau of Economic Analysis.
Household Net Worth and Real PCE
Consumption Growth, 2000-2014
#MIGlobal
Post-Crisis Wealth Gains Skewed Towards Savers Not Spenders
Source: Federal Reserve Board, and Citi Research.
● Post-Crisis Gains in Wealth Have Been Uneven
#MIGlobal
Relative sector sizes and weekly earnings in 2015
Jobs Gains Skewed Towards Slow-Growth and Low-Wage Sectors
Sectoral employment growth 1975-1979: robust
balanced growth in high and low-wage sectors
Sectoral employment growth 2009-2015: low-wage sector
job gains dominated the smaller high-wage sectors
Note: The “Other” category includes nondurable goods manufacturing, transportation and warehousing,
wholesale trade and other services. Source: Bureau of Labor Statistics and Citi Research.
#MIGlobal
Rate Normalization Needed
To Reduce Market Distortions
#MIGlobal
Fed Easing With QE & Low Rates Raises US Corporate LeverageCorporates Leverage As Household and Financial Sectors Deleverage
Percent Percent
Source: Federal Reserve, Haver, Citi Research
#MIGlobal
Reach For Yield Induces Increased High-Yield Credit FinancingCorporate Bond Leverage Reaches New High Levels.
Source: Haver and Citi Research
#MIGlobal
Much of Corporate Cash Goes to Share Buy-backs and Dividends Corporate Investment Has Risen—But So Have Buybacks and Dividends
$0
$100
$200
$300
$400
$500
$600
$700
$800
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
1H
16
$ b
illions
S&P 500 Uses of Cash
Dividends Buybacks Capex
Source: Haver, Factset, and Citi Research
#MIGlobal
Worried About China?
Here’s Why
#MIGlobal
Official data suggest relatively rapid rebalancing towards services, while the
industrial sector is slowing.
Note: Secondary industry includes Mining and quarrying, manufacturing, construction, and utilities. Tertiary industry includes
Transportation and storage, wholesale and retail trade, hotels and catering services, financial intermediation, real estate and
others. Source: NBS.
Share of services vs industry sector
China: Growing Services and Slowing Industry
Real GDP growth by Industry
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
2002 2004 2006 2008 2010 2012 2014 2016
%YoY SecondaryIndustry
Tertiary Industry
0%
10%
20%
30%
40%
50%
2000 2002 2004 2006 2008 2010 2012 2014 2016
Industry Services
Share of GDP
#MIGlobal
China’s investment share and excess capacity remain unusually high. Total debt
is on par with AE. Total non-fin corporate debt is high even compared to AE.
Source: World Bank and Citi Research.
China: Growing Debt Main Vulnerability In Growth Strategy
Source: BIS via Haver and Citi Research.
Investment as % of GDPCredit to Non-financial Sector as % of GDP
(2015 Q3)
#MIGlobal
China Is Large But Not Systemic For US TradeLarge Import Share And Small Export Share
Means US is More Important to China Than China To US
#MIGlobal
US Total Exports Geographically DispersedExports of Goods, Services, and Income
Exports of Goods
Model simulation of impact on US GDP of
3 percentage point drop in global GDP with E-rate unchanged
Source: Macro Advisors, Bureau of Economic Analysis and Citi Research
#MIGlobal
Understanding Why
Inflation Risks Are Low
#MIGlobal
Transitory Factors Largest Contributors to Low Inflation
Source: Federal Reserve Board and Citi Research.
#MIGlobal
Vice-Chair Fischer’s Analysis of Exchange Rate Appreciation
Appreciation
lowers inflation
for a year
Source: Federal Reserve Board.
#MIGlobal
Inflation Less Sensitive to Unemployment-based Slack Than in 1960sGreat Moderation and Credible Monetary Policy since mid-1990s lowered
inflation expectations and reduced slope of Phillips Curve
Core inflation measured y-o-y and Nairu from CBO Estimates
Source: Bureau of Labor Statistics. and CBO
#MIGlobal
Inflation Drag Fades in 2017: Stronger Dollar Adds Drag but
Prospective Rise in Energy Prices to Produce Slight Upward Pressure
Source: Federal Reserve and Citi Research.
#MIGlobal
Labor Market “Dynamism” Lacking: Low Wages and ProductivityLow gross labor market turnover suggests search inefficiencies have remained high
since 2009. Slow hiring keeps wages down and low quit rate dampens productivity.
Source: Bureau of Labor Statistics.
#MIGlobal
More Selective Hiring—Hiring Lags Vacancy Growth
Beveridge Curve Remains Shifted OutVacancy Rate Higher for given Unemployment Rate
2000- Present
Low Hires to Job Openings Ratio Means No Wage Pressure
as Nonfarm Productivity Rises Slowly
More job openings for given unemployment rate more skills mismatch + more selective
hiring because increased uncertainty about robustness and durability of expansion.
Source: Bureau of Labor Statistics and Citi Research.
#MIGlobal
Alternative Historical Hiring Scenario: Faster Hiring = More InflationIf hiring had recovered as in past cycle, 2 percent inflation would prevail now
Source: Bureau of Labor Statistics and Citi Research.
#MIGlobal
Recent Inflation Uptick Not Yet Corroborated By Labor MarketMore broad-based labor market improvements are required to absorb enough
slack to confidently boost inflation to Fed target
Source: Bureau of Labor Statistics and Citi Research.
#MIGlobal
Little Wage Acceleration Despite Robust Labor MarketsWage acceleration contained only to lowest wage groups. All other wages rising steadily.
Source: Bureau of Labor Statistics and Citi Research.
#MIGlobal
Aggregate Wage Pressures Still ContainedWage acceleration from lowest wage groups shows no sign of spreading
Source: Bureau of Labor Statistics and Citi Research.
#MIGlobal
Unanchored Inflation Expectations Will Stop/Pause NormalizationFOMC policy predicated on stable inflation expectations. If they have become unmoored
by repeated downward shocks from oil prices and strong dollar, then Fed unlikely to
continue raising rates. Market-based measures TOO SENSITIVE to oil prices.
Source: Bloomberg and Citi Research.
#MIGlobal
Weak Housing and
Energy Sectors
#MIGlobal
The housing sector shrank severely during the 2008 Crisis
Housing Still Small Share of GDP
Housing Much Smaller Share of GDP
Note: Shaded regions denote recessions.
Source: Bureau of Economic Analysis and Census Bureau.
Housing Contribution to GDP* Growth Expected to Rebound
*Four-Quarter Moving Average
Source: Bureau of Economic Analysis and
Census Bureau.
#MIGlobal
*S&P/Case-Shiller Composite 20 Index.
U.S. Housing Sector Recovery Stabilizes Below Pre-Crisis
Source: Bureau of Economic Analysis, Standard and Poor’s, and Citi Research.
#MIGlobal
NAHB survey of homebuilders regarding their perception of most important issues
Key Factors Contributing to New Home Supply BottleneckMore than half of all builders surveyed by the National Association of Home Builders (NAHB) cite
higher cost for materials, labor, and land as key contributors to the rise in new home prices.
Source: NAHB and Citi Research.#MIGlobal
#MIGlobal
US Domestic Oil Consumption Mainly From Domestic ProductionNet income transfer to energy consumers smaller than in the past as
declining prices disrupt now-larger domestic oil producing sector
Source: Energy Information Administration.
#MIGlobal
Energy is a Relatively Small Share of the US Economy
● The Oil & Gas Sector Is A Small Share Of US Economy ● Oil & Gas Sector Investment Is A Small Share of US GDP
Source: World Bank Development Indicators, IMF, EIA, IEA.
#MIGlobal
Oil Production Ramped Up, But Jobs Gains Are Largely Elsewhere
● The US Has Ramped UP Oil Production In Recent Years ● Most Hiring Has Been In The Non-Energy Sectors
Source: Energy Information Agency, Bureau of Labor Statistics, and Citi Research.
#MIGlobal
Energy Investment Not Significant Share of Cap ExpendituresOil and gas investment grew rapidly since 2000; it remains small share of
GDP but significant drag on GDP growth
Source: Bureau of Economic Analysis and Citi Research.
