Economic OutlookWinter 2013

Gregory MillerChief Economist

US Economy Prevails .. Maybe

2

Economic Outlook The US economy is on a tentative path toward sustainable expansion

• Cap Spending stalled for Presidential Campaign – Always Does!• Consumer holding on, but resources stretched thin• Labor market: Housing is back but skills rule• Inflation is below 2%; gasoline prices no help

But, the economy confronts an overload of uncertainty• Government still has extensive agenda of unfinished and barely-started

business– Failure to date– Fiscal Cliff Half Done– Debt Ceiling– Global recession is a real issue but export impact is minor

Inflation: On hold; risk of deflation• Energy: Shale boosts US/Canada above OPEC capacity

Monetary Policy: Bernanke, ZIRP, Guidance, QE. – Fed is Bailing Out “Do Nothing Right” Congress

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Economic Performance: Back Story Since Great Recession, THREE sectors account for “all the

BAD”:• Housing

– Worst housing recession in history• Bank lending

– Regulatory uncertainty is not the way to repair capital markets

• Government/ Politics– The risk of committing ECONOMIC issues to POLITICAL

solutions– Politics can stall; Markets never do

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Housing is Back Still has plenty of warts, i.e. foreclosure backlog Production is back Prices are low but rising, and mortgage rates are historically low Biggest problem is getting borrowers through underwriting

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13.6Housing production even stronger than 2004/05/06

GDP Residential InvestmentExpansion Mean = 7.2%

Y/Y%

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010203040

Both Sales and Prices Grinding Higher

New Home SalesMedian Price of New One-family Home

% Y

/Y

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Bank lending is half back Credit is the “grease.” All economies need access to capital Not a LIQUIDITY problem! TRANSMISSION problem! Government regulatory uncertainty in aftermath of financial meltdown

leaves bank liquidity sequestered And there’s plenty of liquidity in “reserve”: IOER from 3% to 93%

Jan 1990 Apr 1993 Jul 1996 Oct 1999Jan 2003 Apr 2006 Jul 2009 Oct 2012-20

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Business Loans Back to Expansion Trend

Commercial & Industrial LoansExpansion Mean

Y/Y

%

Jan 1990 Apr 1993 Jul 1996 Oct 1999 Jan 2003 Apr 2006 Jul 2009 Oct 20120

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"IOER" sequesters 90% of bank reserves

Total Bank ReservesRequired Bank ReservesExcess Bank Reserves

$ M

illio

ns

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Not everything wrong with the economy is the government’s fault.

BUT MOST OF IT IS: • Policy throwing good money after bad • Government still recession 3.5 years after recession ended• Fiscal Cliff/ Debt/ Taxes• Bad policy for the times

– Higher taxes and spending cuts are correct policy, but stretched over 5 or 10 years.

• Brinksmanship yields uncertainty

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Not everything wrong with the economy is the government’s fault.

BUT MOST OF IT IS: Debt Ceiling Brinksmanship yields uncertainty – probably the worst thing for business and

households The irony of the debt ceiling is, the level is not the problem -- Downgrade is. US debt remains the global “safe haven” Who owns it, anyway?

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US Public Debt: $16.4 Trillion and bigger than total economy

Public Debt Public Debt % GDP Nominal

US$

Bill

ion

Deb

t % U

S R

eal G

DP

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There is a recession out there somewhere

The prospect of near-term recession should not be a surprise• The US economy suffers cyclical recession on average about

every five years• The current recovery is now over three years old

Year-to-date GDP = 1.7%• When the economy slows to 2.0%, it does not remain there long• Beneath 2.0%, we quickly resolve to either re-acceleration or

recession• The probability is about 50/50

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What Bernanke Knows Bernanke will hold the funds rate at ZIRP (Zero Interest Rate

Policy). • Effective zero, until 2015 unless something remarkable occurs –

like rationality out of politics. Bernanke sees his short-term goal as protecting economy from

Fiscal Cliff/sequestration. Part of Bernanke’s decision to deploy an open ended QE3 was a

direct jab at Congress failure Further, No support for rumors of Bernanke retirement

• He can always go back to being a college professor

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Deterioration of Household Resources The single biggest market-based risk to the economy: deterioration of household resources.

• No real wage increases for the past five years. Households are falling behind. And taxes have gone up.

• Past 20 years = 2.8• Past 5 years = -0.6

Jan 1982Oct 1985 Jul 1989 Apr 1993Jan 1997Oct 2000 Jul 2004 Apr 2008Jan 2012-4

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Past 3 years: Incomes Stagnate

Real disposable personal income Mean (30-yr)

% Y

/YWeakest in a generation

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Labor Market: Composition is the key Unemployment peaked at 10.2% but slowly recovered to 7.8%. Expect that is will

accelerate downward from here. But there are constraints on improvement.• During the Great Recession, 30% of all jobs lost were in construction and mortgage finance..• With only a year of housing market recovery, housing accounts for 10% of job gains• Fed Chair Bernanke expects 6.5% unemployment in mid-2015• You should expect 6.5% in mid-2014

The underlying labor market weakness is skill complement. Unemployment for college grads is 3.9%; for less-than-high school it is 9.9% -- 2.5

times higher Labor Market Cycle  

Private Payroll Job Change (000) Total Housing1 Housing % Total

Recession losses -8733 -2502 -30

Recovery gains to date 3889 394 101 Housing is construction plus mortgage finance    

Source: BLS; Moody's Economy.com; STIEcon    

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Summary and looking ahead The US economy weathered the Great Recession Recovery and expansion is a tribute to the resilience of the Private Sector driven by US

business and confirmed by relentless US consumers Expansion continues through the next two years but risk is high Consumer resources are stretched thin while taxes rise Business investment should rebound in the short-run and corporate profits should

continueSunTrust Economic Forecast Summary 

 

  GDP Consumption InflationJobs (000)

Unemployment Rate (%)

Mortgage Rate (%)

Expansion Norm 3.0 3.3 2.3 121 5.8 7.02012 2.0 1.6 1.6 168 8.1 3.72013 2.1 1.8 2.0 145 7.3 3.32014 3.3 3.1 2.3 177 6.5 3.1

Source: BEA; BLS; Federal Reserve; STIEcon