2013 US Eco Outlook

Bloomberg BRIEF: Economics U.S. 2013 Economic Overview and Outlook

Joseph Brusuelas | January 2013

U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 2 <<<<

Executive Summary

Politics and Policy To Be Major Determinants of Growth

• Fiscal drag to be a major theme in 2013. - Automatic sequestration could increase fiscal drag.

• Fed policy designed to address economy caught in liquidity trap. - Fed will continue to purchase assets throughout 2013.

• Chances for major tax and fiscal reform are probably remote.



Executive Summary

Another Year of 2 Percent Growth Likely

• Job growth around 150,000 per month with a modest decline in the unemployment rate by end of year.

• Growth drivers: energy, housing , manufacturing and improving financial conditions.

Risks to the outlook

• External Sector: Euro zone and Middle East tensions.

• Domestic fiscal policy disputes.

• Financial regulation.



Jobs and Growth

-7

-5

-3

-1

1

3

5

-1000

-800

-600

-400

-200

0

200

400

1996 1998 2000 2002 2004 2006 2008 2010 2012

Qu

arterly A

verage (Pe

rcentage) Q

uar

terl

y A

vera

ge (

Tho

usa

nd

s)

Real GDP Y/Y (RHS) Total Change in Employment (LHS)

Source: Bloomberg R2=.77



Executive Summary

US Economy: Liquidity Trap Prevails

• Slow growth and elevated unemployment continue.

• Investors have not priced in fiscal drag on growth in first half of 2013.

• 10-year rate likely hit high for until second half of year.

• Dollar weakness to persist against trade weighted basket of currencies.

• Policy debate around debt ceiling and sequestration to economy remains the primary risk to the economic outlook.



Mind The Gap

7

8

9

10

11

12

13

14

15

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Trill

ion

s (2

00

5 C

hai

ne

d $

)

US Retains Substantial Output Gap

Real GDP Real Potential Output

Source: Bloomberg



Labor Market Slack Persists

3

4

5

6

7

8

9

10

1158

59

60

61

62

63

64

65

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Pe

rcent

Pe

rce

nt

Employment to Population Ratio (LHS) Unemployment Rate (RHS, Inverted)

Source: Bloomberg USERTOT , USURTOT INDEX<GO>



Real Consumption on Lower Trend

8000

8500

9000

9500

10000

10500

11000

2005 2006 2007 2008 2009 2010 2011 2012

Bill

ion

s (C

hai

ne

d 2

00

5 $

)

Real PCE Trend Prior to Recession

Source: Bloomberg US.HHSPNR BEA INDEX<GO>



Cyclical Growth Outlook

Core Scenario: Below Trend (2.5 percent) Growth

• Liquidity Trap Defines Business Cycle.

• Liquidity injections into banking system have failed to stimulate growth and employment back to trend.

• Monetary policy targeting liquidity trap.

• Policy gridlock offers no fiscal relief.




Structural adjustment to growth model and labor market continues.

• Moving away from overconsumption based on easy credit.

• Growth: 2.2 percent cyclical growth average.

• Consumption: 1.5 percent cyclical growth average.

• Diversification of growth drivers.

• Elevated unemployment likely to persist.

• Public and private deleveraging continues.




Alternative Scenario: Cyclical Outperformance

• Long term tax and fiscal reform.

• Sustainable increase in corporate and consumer confidence.

• Domestic corporations deploy.

• Growth and hiring move back toward long term trends.

• Rising rates and inflation.



Bloomberg Consensus: Survey of Forecasters

Q4 12 Q1 13 Q2 13 Q3 13 Q4 13

Real GDP 1.40% 1.60% 2.10% 2.50% 2.80%

CPI 2.0% 1.70% 2.0% 1.90% 2.10%

Core PCE 1.70% 1.60% 1.60% 1.70% 1.80%

Unemployment 7.83% 7.80% 7.80% 7.70% 7.50%

Central Bank Rate 0.25% 0.25% 0.25% 0.25% 0.25%

2-Year Rate 0.25% 0.26% 0.29% 0.34% 0.41%

10-Year Rate 1.76% 1.76% 1.86% 1.99% 2.14%

EUR/USD $1.32 $1.29 $1.28 $1.27 $1.27



Slow Growth Likely to Define 2013

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

1998 2000 2002 2004 2006 2008 2010 2012

GD

P Y

/Y P

erce

ntage

Ch

ange

Ind

ex (

Qu

arte

rly

Ave

rage

)

ISM Manufacturing Survey (LHS)

Weighted ISM Manufacturing & Non-Man (LHS)

GDP Y/Y (RHS)

Source: Bloomberg NAPMPMI, GDP CYOY INDEX<GO>



Low Wage Bias in Hiring

-50

-25

0

25

50

75

100

125

150

2010 2011 2012

Tho

usa

nd

s

Leisure and Hospitality Health Care and Social Assistance Temp Retail Trade

Source: Bloomberg USRTTOT, USESTEMP, USEETOTS, USEHTOTS INDEX<GO>



Real Consumption and Consumer Confidence

-4

-2

0

2

4

6

8

50

60

70

80

90

100

110

120

1996 1998 2000 2002 2004 2006 2008 2010 2012

Ye

ar Ove

r Ye

ar Pe

rcentage C

han

ge

Ind

ex

University of Michigan Consumer Sentiment Real Personal Consumption

Source: Bloomberg

PCE CHY%, CONSSENT INDEX<GO>



Central Bank Policy Outlook and Overview

Fed will likely remain on hold throughout 2013

• Forward guidance to remain unchanged.

• Asset purchase to remain in place, then slow in 2014.

.




• Aggressive action to unclog monetary transmission mechanism to remain in place through 2013.

• Balance sheet likely to expand to $4 trillion by end of 2013.

• If policy does not gain traction, Fed will begin to create conditions for targeting of nominal GDP.




Five C’s of U.S. Monetary Policy

• Communications

• Commitment

• Conditionality

• Composition

• Credibility



The Long Road Ahead

Scenario 1: Structural Break Scenario 2: Cyclical Recovery

7% NAIRU 7% NAIRU 5.5% NAIRU 5.5% NAIRU

Monthly Job Gains 150,000 150,000 150,000 150,000

Labor Force Participation Rate 63.50% 63.50% 63.50% 63.50%

Average Annual Population Growth 0.92% 0.50% 0.92% 0.50%

Years to Full Employment 3 Years 1.5 Years 7 Years 4 Years

Slow Grind Back To Full Employment



Mortgage Backed Primary Secondary Spread

80

100

120

140

160

180

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13

Bas

is P

oin

ts

Mortgage Backed Primary-Secondary Spread

Fed MBS Purchase Program Starts

Source: Bloomberg ILM3NAVG, MTGEFNCL INDEX<GO>



Monetary Policy at the Zero Bound

-10

-8

-6

-4

-2

0

2

4

6

8

2007 2008 2009 2010 2011 2012 2013 2014 2015

Pe

rcen

tage

Taylor Rule & Evans Rule Estimates of the Fed Funds Rates

Source: Bloomberg USFEDL01, PCE CYOY, USURTOT INDEX<GO>

Taylor Rule Estinates

Evans Rule Estimates

Fed Funds Rate



Rate Outlook

U.S. 10-Year likely posted highs for first half of 2013

• Forward looking rates indicated Fed policy to continue to suppress curve.

• Slower spending, followed by slow growth and modest deceleration in hiring mid year.

• Expect move back toward 1.50 on 10-year due to weak January data.

• Long term rates should trade in range between 1.50 and 2 percent.

• Risks to the outlook: - Acceleration in demand from external sector bolsters growth prospects. - Gains in labor market and housing offset fiscal drag. - Premature exit by Fed from asset purchase program.



Image page U.S. Rates Overview

Bloomberg consensus forecast indicates higher 10- and 30-year rates.

Fed Asset Purchases Likely to continue near $85 billion per month.

Current Rates:

• 2-Year: .41 percent

• 10-year: 2.14 percent


Fourth Quarter Consensus Survey Rate Forecast: • 2-Year: .26 percent





Projected Path of Long- and Short-Term Rates

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Pe

rce

nt

US 10-Year (LHS) 3-Month, 2-Year Forward (RHS)

Source: Bloomberg USGG10YR INDEX, G0025 2Y3M BLC2CURNCY<GO>



FX Overview

Dollar appreciation versus euro- and-trade weighted basket of currencies eases:

• Global central bank policy will drive foreign exchange valuations.

• Competitive quantitative easing manage currency competition among highly indebted industrialized states.

• USD depreciation against a broader trade weighted based of currencies.

• Winners - AUD - CAD - BRL - MXN



Dollar Depreciation Likely to Continue

90

95

100

105

110

115

2006 2007 2008 2009 2010 2011 2012 2013

Ind

ex

Real Trade Weighted Broad Dollar Index

Source: Bloomberg USTWBROA INDEX<GO>

QE 1 Begins QE 2 QE 3



Image page U.S. Manufacturing Outlook

Manufacturing growth stabilizes

• Rise in capital expenditures following resolution of

- Automatic sequestration.

- Debt ceiling.

- Auto production leads modest growth in manufacturing.

o Rebuilding of auto stock following Hurricane Sandy.

o 250,000 autos destroyed by storm.

External Demand Rebounds

• Modest support for U.S. growth picture.

• European recession.

• China bounce in second half of 2013.



Industrial Production and Growth

-15.0

-10.0

-5.0

0.0

5.0

10.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1996 1998 2000 2002 2004 2006 2008 2010 2012

Y/Y

Pe

rcen

tage C

han

ge (Qu

arterly A

verage) Y

/Y P

erc

enta

ge C

han

ge

GDP CYOY (LHS) Industrial Production (RHS)

Source: Bloomberg IP YOY, GDP CYOY INDEX<GO> R2=.76



Excluding Europe Global Manufacturing Rebounds

-60%

-40%

-20%

0%

20%

40%

60%

30

35

40

45

50

55

60

65

2006 2007 2008 2009 2010 2011 2012

Y/Y

Pe

rcen

tage Ch

ange

(Ind

ex)

Ind

ex

MSCI World Index (RHS) US ISM (LHS) China PMI (LHS)

Euro Zone PMI (LHS) JP Morgan Global PMI (LHS)

Source: Bloomberg



Financial Conditions Overview

• Global central banks asset purchase supportive of financial conditions.

• Improved financial conditions supportive of U.S. and global growth.

• Credit creation continues to improve.

• This has not resulted in an increase in monetary velocity.



Bloomberg Financial Conditions Indices

-6

-5

-4

-3

-2

-1

0

1

2

2010 2011 2012 2013

Ind

ex(Z

-Sco

re)

US Financial Conditions Index

EU Financial Conditions Index

Source: Bloomberg BFCIUS, BFCIEU INDEX<GO>



Credit Markets Healing

-5%

0%

5%

10%

15%

20%

1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

Ye

ar O

ver

Ye

ar P

erc

en

tage

Ch

ange

Private Credit Creation & Nominal Growth

Nominal GDP

Total Credit Creation Private Financial Instiutions

Source: Federal Reserve, Bloomberg Adjusted R2=.64



Credit Markets Healing, Not Translating to Rising Velocity

1.5

1.6

1.7

1.8

1.9

2

2.1

2.2

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

M2

Source: Bloomberg VELOM2 INDEX<GO>



Housing Outlook and Overview

Modest cyclical recovery

• Recovery in starts driven by demand for multifamily dwellings.

• Prices stabilization.

• Some metro-areas experiencing price appreciation.

Overall housing recovery still years away

• Mortgages underwater still a concern.



Housing Starts Stabilize

0

10

20

30

40

50

60

70

80

90

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Ind

ex

Mill

ion

s (A

nn

ual

ize

d P

ace

)

Single Family Starts National Association of Homebuilders Index

Source: Bloomberg USHBMIDX, NHSPS1 INDEX<GO>



Negative and Near Negative Equity Still A Policy Challenge

Negative Equity, 22.3

Near Negative Equity, 4.7

20

21

22

23

24

25

26

27

28

29

Q4'09 Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12

Pe

rce

nt

First Mortgages: Negative and Near Negative Equity

Source: Bloomberg NESHNATI, NNSHNATI INDEX<GO>

Joseph Brusuelas, Senior Economist Bloomberg, LP [email protected]

Bloomberg

Joseph Brusuelas is an economist who writes for the Bloomberg Economic Brief. The observations he makes

are his own. Bloomberg is a leading source of data, news, and analytics for financial and legal professionals,

corporations, media organizations and private individuals around the globe. The BLOOMBERG

PROFESSIONAL® service and Bloomberg’s media services provide real-time and historical pricing, indicative

data, reporting, research, estimates, analytics, portfolio management tools, electronic trading and order

management systems, multimedia events and electronic communications to Bloomberg clients in more

than 150 countries, 24 hours a day.

bloomberg.com

Frankfurt London San Francisco Singapore Tokyo

+49 69 9204 1210 +44 20 7330 7500 +1 415 912 2960 +65 6212 1000 +81 3 3201 8900

Hong Kong New York São Paulo Sydney

+852 2977 6000 +1 212 318 2000 +55 11 3048 4500 +61 2 9777 8600

The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and BLOOMBERG Order Management Systems (the "Services") are owned and distributed locally by Bloomberg Finance L.P. ("BFLP") and its

subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly-owned subsidiary of Bloomberg L.P. ("BLP"). BLP provides BFLP with all

global marketing and operational support and service for the Services and distributes the Services either directly or through a non-BFLP subsidiary in the BLP Countries. The Services include electronic trading

and order-routing services, which are available only to sophisticated institutional investors and only where the necessary legal clearances have been obtained. BFLP, BLP and their affiliates do not provide

investment advice or guarantee the accuracy of prices or information in the Services. Nothing on the Services shall constitute an offering of financial instruments by BFLP, BLP or their affiliates. BLOOMBERG,

BLOOMBERG PROFESSIONAL, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG ANYWHERE, BLOOMBERG TRADEBOOK, BLOOMBERG BONDTRADER, BLOOMBERG TELEVISION,

BLOOMBERG RADIO, BLOOMBERG PRESS and BLOOMBERG.COM are trademarks and service marks of BFLP, a Delaware limited partnership, or its subsidiaries.

Date post:	21-May-2015
Category:	Economy & Finance
Upload:	bloomberg-briefs
View:	952 times
Download:	0 times

2013 US Eco Outlook

Economy & Finance