US Economic Outlook 2012 Ohio

7/28/2019 US Economic Outlook 2012 Ohio

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US Economic Outlook 2012-13

Dimitri Delis, Ph.D.

DirectorStrategic Analytics Group

Fixed Income U.S. Strategy


2/33

2

The wimpy recovery


3/33

3

The weakest recovery by far

0.95

1.00

1.05

1.10

1.15

1.20

0 2 4 6 8 10 12 14 16

Time (quarters)

2007

1982

2001

1990

Consumption growth during

recessions & recoveries

start of recessions

Source: BEA


4/33

4

Lower confidence should lead to lower spending

Source: BEA

-5%

-3%

-1%

1%

3%

5%

7%

9%

50

60

70

80

90

100

110

120

Jan-81 Jan-86 Jan-91 Jan-96 Jan-01 Jan-06 Jan-11

Consumer Spending

Consumer Confidence


5/33

5

US economic activity is dropping

Average of ISM (Chicago), Empire Manufacturing, Philadelphia and Richmond Index

US Manufacturing Index

Source: ISM, Bloomberg

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

Jul-01 Nov-02 Mar-04 Jul-05 Nov-06 Mar-08 Jul-09 Nov-10 Mar-12

2010 2011

2012

Reccessions


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6

Employment conditions have been improving

Source: BLS

100

200

300

400

500

600

700

Jan-67 Jan-73 Jan-79 Jan-85 Jan-91 Jan-97 Jan-03 Jan-09

Thousand

s

Initial jobless claims have been

steadily dropping

360K


7/337

0.92

0.94

0.96

0.98

1.00

1.02

1.04

1.06

1.08

0 10 20 30 40 50Months

1982

average ( past 9 recessions)

2001

current -2007

employment growth during

recessions & recoveries

start of recessions

but the job recovery has been lackluster as

Source: BLS, BMO


8/338

key labor metrics are not participating in the recovery

Source: BLS

54

56

58

60

62

64

66

Jan-48 Jul-60 Jan-73 Jul-85 Jan-98 Jul-10

employment/population ratio (%)

0

10

20

30

40

50

Jan-48 Jul-60 Jan-73 Jul-85 Jan-98 Jul-10

average duration ofunemployment (in weeks)


9/339

The US labor market has recovered 50% of the jobs lostduring the recession

Source: BLS, BMO

137

139

141

143

145

147

Jun-07 Apr-08 Feb-09 Dec-09 Oct-10 Aug-11 Jun-12

millions

US employment level

lost

8.6MM

gained4.4MM


10/33

A bleak job recovery for the 25-55 age group

10

Cumulative changes in employmentduring the recession

Cumulative changes in employmentduring the recovery

-8

-6

-4

-2

0

2

Dec-07 Jul-08 Feb-09 Sep-09

millions

between 25 years and 55 years

older than 55 years

younger than 25 years

Source: BLS

-1

0

1

2

3

4

Jan-10 Aug-10 Mar-11 Oct-11 May-12

millions

between 25 years and 55 years

older than 55 years

younger than 25 years


11/33

Pulling its weight at last, but

Source: US Census Bureau

0

200

400

600

800

1000

1200

1400

Jan-68 Jan-79 Jan-90 Jan-01 Jan-12

('000s)

rising from low levels

new home sales

0

500

1000

1500

2000

2500

Jan-68 Jan-79 Jan-90 Jan-01 Jan-12

('000s)

housing starts

rising from low levels

11


12/33

Source: Bloomberg/ National Association of Realtors

additional pressure on home prices is likely

0

2

4

6

Mar-79 Mar-85 Mar-91 Mar-97 Mar-03 Mar-09

millions

shadow inventory

12


13/33

How low can home prices go?

Source: Irrational Exuberance, Robert Shiller

13

60

80

100

120

140

160

180

200

1890 1910 1930 1950 1970 1990 2010

real home rice index

another10%drop ?

41% drop thusfar


14/3314

An explosion in the monetary base

The monetary base M0 is the narrowest definition of money supply. The monetary base M0 consists of coins, notes and commercial banks reserves with

the central bank.

Source: Federal Reserve

0

500

1,000

1,500

2,000

2,500

3,000

Jan-59 Jan-68 Jan-77 Jan-86 Jan-95 Jan-04 Jan-13

$billi

ons

monetary base M0


15/3315

has not led to an explosion in the money supply

M2 consists of : M0 + demand deposits + savings accounts + money market accounts +retail money market mutual funds + time deposits under $100K


0

2,000

4,000

6,000

8,000

10,000

12,000

Apr-59 Jan-67 Oct-74 Jul-82 Apr-90 Jan-98 Oct-05 Jul-13

$billio

ns

money supply M2


16/3316


% change M2 + % change velocity= % change GDP

and money velocity keeps on dropping

1.5

1.6

1.7

1.8

1.9

2

2.1

2.2

2.3

Jan-59 Sep-65 May-72 Jan-79 Sep-85 May-92 Jan-99 Sep-05 May-12

money velocity = GDP/M2

Recessions


17/3317

The European sovereign debt crisis has receded fornow

Source: Bloomberg

0

100

200

300

400

500

600

700

Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12

5-yr CDS spreads (bps)

France Germany

Italy Spain

USA


18/3318

but may soon resurface since negative growth is

expected for 2012

Source: Bloomberg

-4

-2

0

2

4

2010 2011 2012 2013 2014

GDP(%)

EURO ZONE Germany France

Italy Spain Portugal

A worsening Euro crisis will hurt the US through less


19/33

A worsening Euro-crisis will hurt the US through lessexports

33%

25%

23%

12%

2%5%

0%

10%

20%

30%

40%

Canada/Mexico

Pacific Rim Europe South/CentralAmerica

Africa Other Countries

In 2011 total US exports to the world were about $2 trillion In 2011 total US exports to the Eurozone were about $280 billion or 14% of total

exports

Source: Department of Commerce

14%

4%5%

0%

5%

10%

15%

Euro Zone UK Rest of Europe

19


20/33

but more worrisome is the exposure of the US banking

system to Euro debt

7%

26%

49%

5%2%

11%

0%

10%

20%

30%

40%

50%

60%

Canada/Mexico Pacific RimCountries

Europe South/CentralAmerica

Africa Offshore/Other

In 2011 US banks held about $3.1 trillion in foreign debt In 2011 total exposure by US banks to Eurozone debt was about $750 billion Total exposure by US banks to UK debt was about $629 billion

752

629

172

0

200

400

600

800

EuroZone

UK Rest of Europe

Billions

($)

Source: Department of Commerce

20


21/33

A sizeable fiscal cliff

21

-1.60

-1.20

-0.80

-0.40

0.00

0.40

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

$trillions

actual

forecasted

$560bn

fiscal cliff

US deficit

Source: CBO


22/3322

Understanding the fiscal cliff

Source: CBO, BMO

Revenues $bn %GDP

Payroll Tax cuts 100 0.7%

Bush tax cuts & AMT indexing 230 1.6%

Other expiring provisions 78 0.5%

Spending

Emergency unempl. benefits 30 0.2%

Medicare payments to Physicians 11 0.1%

Mandatory sequestration 65 0.4%

Other 46 0.3%

Total change 560 3.8%


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The debt limit poses significant headwinds tofurther spending

5

7

9

11

13

15

17

Sep-00 Aug-02 Jul-04 Jun-06 May-08 Apr-10 Mar-12

$trillions

debt limit

US debt outstanding

Source: Bloomberg


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24

US federal debt /GDP ratio (%)

Averting the fiscal cliff under the alternativescenario may be possible, but.

Source: CBO

0

20

40

60

80

100

120

1940 1950 1960 1970 1980 1990 2000 2010 2020 2030

Alternative Fiscal Scenario

CBO's Baseline Projection

actual forecasted


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25

the future of public debt is daunting and

unsustainable

Source: BIS,Cecchetti et al.March 2010


26/33

26

the future of public debt is daunting and

unsustainable (continued)

Source: BIS,Cecchetti et al.March 2010


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27

How low can we go?

Nominal rate = Real rate + Inflation

Source: Bloomberg

0

1

2

3

4

5

Oct-07 Jan-09 Apr-10 Jul-11 Oct-12

%

Nominal 10-yr Treasury rate (%)


28/33

28

Can we get negative nominal yields?

+

Nominal rate = Real rate + Inflation1.84% = -0.70% + 2.54%

Source: Bloomberg

-2

-1

0

1

2

3

4


10-yr Treasury real rate (%)

-1

0

1

2

3


10-yr Treasury inflation

expectations (%)


29/33

29

3

4

5

6

1873 1877 1881 1885 1889 1893

US 10-year rate(1873-1893)

0

2

4

6

8

1990 1994 1998 2002 2006 2010

Japenese 10-year rate

(1990-2011)

1.5

2.0

2.5

3.0

3.5

4.0

1928 1933 1938 1943 1948

US 10-year rate

(1928-1952)

12 years to hitthe low



Rates can stay low for many many years

Source: Bloomberg


30/33

An unnerving comparison

30

Source: Bloomberg

0

2

4

6

8

10

3

4

5

6

0 5 10 15 20Years since crisis

US 10-Yr(%) (1873-1894)

Japan 10-Yr(%) (1990-2011)

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

0

1

2

3

4

5

0 5 10 15 20Years since crisis

US 10-Yr(%) (2007-2012)

US 10-YR (1873-1894)

Japan 10-Yr (1990-2011)

QE3 h th 10 t hi h th t


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31

1

2

3

4

5

Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12

QE 1 QE 2

QE 3

forecasted

10-yr Treasury rate (%)

QE3 may push the 10-yr rate higher over the nextseveral months


32/33

European CDS spreads suggest that the 10-yrshould be closer to 2.5%

32

Source: Bloomberg

1

2

3

450

150

250

350

450

Jan-11 Jul-11 Jan-12 Jul-12

average 5-yr CDS spread (bps)

(Spain, France, Italy)

10-yr Treasury(%)


33/33

Conclusion

The current economic recovery has been the weakest over the past 60 years.

A recent run of weaker than expected economic data illustrates that the economy has lost a fair amount ofmomentum. Currently manufacturing activity across the US has dropped at an alarming pace and is approachinglevels last seen in 2009.

Employment growth is following one of the lowest growth trajectories over the past 9 recessions. While job growthhas been weak, the economy has recovered about 50% of the jobs lost during the recession. But the job recoveryhas been asymmetrical as most jobs have gone to those 55 years and older.

Housing has stabilized at lower levels but the large shadow inventory may cause further declines in home prices of10-15%.

The velocity of money will continue to drop over the next year as deleveraging continues. This means that M2growth will not necessarily translate into higher GDP even after the Feds latest round of more quantitative easing.

The crisis in the Eurozone can be transmitted to the US via two channels, i.e. trading and banking. The far more

detrimental channel of transmission would be through the banking system.

Despite the 1873 US financial crisis and the 1990 Japanese bubble being separated by 117 years and 6,000 milesthe path of the 10-yr rate after both crises follows eerily an identical trajectory. The 10-yr rate is currently following asimilar path suggesting that rates may hit the 1% level over the next few years.

The latest measures adopted by the ECB and the Fed have created the perfect environment for rates to movehigher over the near term. Our analysis suggest that the 10-yr may move closer to 2.3% over the next severalmonths.

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