The U.S. Economic Outlook

The U.S. Economic The U.S. Economic OutlookOutlook

Nigel GaultChief U.S. Economist, IHS Global Insight

Jackson, MississippiSeptember 14, 2010

Copyright © 2010 IHS Global Insight. All Rights Reserved.

2

The U.S. Recovery: Uneven and Subpar

• Growth boost from fiscal stimulus and inventories is fading

• Headwinds are blowing from consumer and business caution

• No underlying housing improvement

• Non-residential construction remains a drag; stimulus is propping up state and local spending

• Exports, business spending on equipment and software remain the main growth areas

• Inflation is a long way off; deflation is the immediate threat


3

0.98

1.00

1.02

1.04

1.06

1.08

1.10

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8

Quarters from TroughCurrent Recovery* Post-1950 Average Recovery

(Real GDP compared with recession trough)

Deeper Recession, Slower Recovery:The Damage from the Financial Crisis Lingers

* Assumes 2009Q2 trough

Still Growing, Just Still Growing, Just SlowlySlowly


5

ISM Indicators Off Their Highs, But Show Growth:Small Business Still Lagging Behind

30

35

40

45

50

55

60

65

2007 2008 2009 2010

80

83

86

89

92

95

98

101

Manufacturing Index Nonmanufacturing Index NFIB Small-Business

(ISM Diffusion Indexes, 50 = breakeven) (NFIB Optimism Index,1986=100)


6

-1,000

-750

-500

-250

0

250

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

Employment Is Turning, But Not Rapidly

4

6

8

10

12


*Thousands, monthly change, SA; **Percent; ***Hours, SA

Private Payroll Employment*Private Payroll Employment* Unemployment Rate**Unemployment Rate**

Length of Workweek***Length of Workweek*** Temporary Employment*Temporary Employment*

-100

-50

0

50

100


33.5

34.0

34.5

35.0



7

-8

-6

-4

-2

0

2

4

6

2008 2009 2010 2011 2012

GDP Final Sales

(Annualized real rate of growth, Q/Q, percent)

Inventory Cycle Support For Growth Has Peaked


8

(Percent change unless otherwise noted)

U.S. Economic Growth by Sector

2009 2010 2011 2012

Real GDP -2.6 2.6 2.2 3.1

Final Sales -2.1 1.2 2.3 3.0

Consumption -1.2 1.5 2.2 2.2

Light Vehicle Sales (Millions) 10.4 11.4 12.8 14.8

Residential Investment -22.9 -3.9 7.5 32.9

Housing Starts (Millions) 0.55 0.59 0.79 1.24

Business Fixed Investment -17.1 4.9 6.6 8.5

Federal Government 5.7 3.8 -0.7 -3.7

State and Local Government -0.9 -1.2 0.5 0.2

Exports -9.5 11.9 7.6 7.3

Imports -13.8 12.3 6.2 5.3


9

(Percent unless otherwise noted)

Other Key Indicators

2009 2010 2011 2012

Industrial Production (% growth) -9.3 5.3 2.8 3.3

Employment (% growth) -4.3 -0.5 0.9 2.2

Unemployment Rate 9.3 9.7 9.6 9.0

CPI Inflation -0.3 1.6 1.5 1.8

Oil Prices (WTI, US$/bbl) 62 77 83 89

Core PCE Price Inflation 1.5 1.4 1.2 1.4

Federal Funds Rate 0.16 0.16 0.14 1.27

10-year Government Bond Yield 3.26 3.13 2.51 3.14

Dollar (Major Currencies, 2005=1) 0.93 0.91 0.92 0.90

The Housing Cycle: The Housing Cycle:

Still At The BottomStill At The Bottom


11

0.8

0.9

1.0

1.1

1.2

1.3

1975 1980 1985 1990 1995 2000 2005 2010

(FHFA house price index* divided by average labor compensation, 2000 = 1.0)

House Price Adjustment Has Gone a Long Way:Probably Not Complete

* Purchase-only index from 1991 onwards


12

0.5

1.0

1.5

2.0

2.5

3.0

1975 1980 1985 1990 1995 2000 2005 2010

(Proportion of homeowner inventory vacant and for sale, percent)

Housing Supply Overhang Still Severe

Source: Census Bureau


13

Key Single-Family Housing Indicators:No Underlying Improvement Yet

4

6

8

10

12

14

2007 2008 2009 2010

New Existing

0.2

0.4

0.6

0.8

1.0

2007 2008 2009 2010

3

4

5

6

2007 2008 2009 2010

*Millions, SA; **Single-Family Homes for sale divided by monthly selling rate

Existing Home Sales*Existing Home Sales* New Home Sales*New Home Sales*

Months’ Supply of Homes**Months’ Supply of Homes** Housing Starts*Housing Starts*

0.25

0.50

0.75

1.00

1.25

2007 2008 2009 2010


14

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

165

175

185

195

205

215

225

Housing Starts (Left scale) FHFA House Price Index (Right scale)

(Million units)

Housing Starts Have Hit Bottom:Prices Not Quite There Yet

(Purchase-only index, 1991Q1 = 100)

The Consumer : The Consumer : Reviving, But Without Vigor Reviving, But Without Vigor


16

The Personal Saving Rate Has Risen

0

2

4

6

8

10

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(Personal savings rate, percent of disposable income)

Microsoft DividendMicrosoft Dividend

9/119/11

Post 9/11 vehicle incentivesPost 9/11 vehicle incentives

Stimulus Stimulus PaymentsPayments

Economic Economic Recovery Recovery PaymentsPayments


17

Consumer Sentiment Off the Floor But Still Weak

50

60

70

80

90

100

110

120

1978 1982 1986 1990 1994 1998 2002 2006 2010

(Reuters/University of Michigan Index, 1966=100)


18

-4

-2

0

2

4

6

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(Annualized rate of growth)

Consumer Spending Stabilizing, But Not a Strong Driver of Recovery

Business Business Investment:Investment:A Mixed PictureA Mixed Picture


20

Business Equipment Demand Recovering

(Non-defense capital goods ex-aircraft, 3-mo moving average, US$ billions)

45

50

55

60

65

70

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Orders Shipments


21

Nonresidential Construction: Architects’ Billings Still Soft, But Off the Floor

(Diffusion Index)

30

35

40

45

50

55

60

65

1995 1997 1999 2001 2003 2005 2007 2009

* Source: American Institute of Architects


22

(Percent change annualized rate, real spending)

Business Capital Spending Cycle:Construction Lags

-40

-30

-20

-10

0

10

20

30

2007 2008 2009 2010 2011 2012

Software & Equipment Buildings

Foreign Trade:Foreign Trade:A Drag Now, A Plus LaterA Drag Now, A Plus Later


24

(Percent growth, merchandise exports, YTD, as of June 2010)

Export Growth By Destination:All Strong Except for Europe

0

10

20

30

40

Total(100%)

Pac Rim(25%)

Europe(23%)

LatinAmerica(22%)

Canada(20%)

Other(10%)

Export shares are in parentheses. Latin America includes Mexico.


25

(Percent change annualized rate, volumes)

We Expect Exports to Outpace Imports

-45

-30

-15

0

15

30

45

2007 2008 2009 2010 2011 2012

Real U.S. Exports Real U.S. Imports


26

(2005=1.0, inflation-adjusted)

The U.S. Dollar: Secular Weakness Against EMG Currencies

0.6

0.8

1.0

1.2

1.4

1.6

1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

Major Currency Index Other Important Trading Partners Index

Inflation and Interest Inflation and Interest RatesRates


28

(Percent change from a year earlier)

Headline CPI Inflation Is Positive Again;But Core Inflation Is Still Easing

-2

-1

0

1

2

3

4

5

6

2006 2007 2008 2009 2010 2011 2012

All-Urban CPI Core PCE Price Index


29

(Percent)

Federal Funds Rate to Stay Near Zero Until 2012:More Quantitative Easing Is Probable

0

1

2

3

4

5

6

7

1999 2001 2003 2005 2007 2009 2011

Federal Funds 10-Year Treasury Yield

Federal Government Federal Government Budget:Budget:Harsh Realities Harsh Realities


31

Federal Fiscal Policy Assumptions

• Long-run tightening essential......but immediate tightening risky...and markets are not demanding it

• We assume

– Bush tax cuts extended for one more year (1.1% of GDP in CY 2011)

– Making Work Pay tax credit extended one more year (0.3% of GDP in CY 2011)

• Upper-income tax cuts (0.3% of GDP) and Making Work Pay tax credit (0.3% of GDP) assumed to expire in 2012

• Further income-tax increases in 2013 and beyond


32

The Federal Budget Gap

(Percent of GDP)

14

16

18

20

22

24

26

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

Revenues Expenditures


33

(percent of GDP)

Federal Spending Shares in GDP

0

5

10

15

20

25

Defense Medicare/MedicaidSocial Security InterestNondefense goods & services Other


34

Taxes Must Rise For Everybody

(Effective federal personal income tax rate, percent)

14

16

18

20

22

24

26

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020


35

Implications

• Growth boost from the inventory cycle and stimulus is fading

• Employment and consumption improving, but slowly

• Exports, business equipment spending moving higher

• Nonresidential construction still declining; no sustainable residential construction recovery yet

• Inflation trend is down; Fed to stay loose

• “Double-dip” risk: 25%

• The question is not whether taxes will rise but when and how

• A deficit reduction plan is needed—but not yet action

Thank you!Thank you!

Nigel Gault

Chief U.S. Economist

[email protected]

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The U.S. Economic Outlook