U.S. Economic Outlook June 2019 · BBVA Research - U.S. Economic Outlook. June 2019 10 Labor...

U.S.

Economic Outlook

June 2019

2BBVA Research - U.S. Economic Outlook. June 2019

Baseline growth forecast unchanged, but risks to downside growing

Model-based recession projections suggest probability around 60%

over the next 24-months

Mixed signals from labor market indicators

Inflation outlook in question with core PCE persistently below target

Fed preparing markets for rate cuts in 3Q19

Yield curve dynamics mainly driven by flight to safety and

dovish monetary policy expectations

Weaker demand pressuring oil prices, but geopolitical risks remain

Economic Outlook


GDP growth decelerated in 2Q19

Rebound in consumption should support moderate growth rates in 2H19

Survey-based investment indicators declining amidst deteriorating

business expectations

Countervailing trade dynamics(weaker global growth vs. reduced trade

tensions) imply no material change in net export balance

Boost from fiscal stimulus will fade in 2H19 if no additional measures

taken

Growth to remain above potential despite growing risks to downside

Macro Fundamentals


Economic activity

Overall balance of risks tilted to

the downside amid weaker

indicators

Slight improvement in industrial

production from April, but surveys

deteriorating

Growth in private residential

construction the weakest since

crisis

Confidence indicators whipsaw

with market correction and

geopolitical tensions

Nontrivial deceleration in labor

productivity

REAL-TIME ECONOMIC MOMENTUM HEAT MAP

Source BBVA Research

Below Average Above Average

3-months

ago

2-months

ago

1-month

agoCurrent

ISM Manufacturing

Small Business Optimism

Industrial Production

IP-Manufacturing

IP-Mining

IP- Nonenergy High-Tech

Capital Goods ex Aircraft

Private Construction

Building Permits

Core Logic Home Prices

Consumer Confidence

Private Nonfarm Payrolls

Prime-Age Participation

Marginally Attached (PA)

Average Hourly Earnings

Real Disposable Income

Personal Savings Rate

Productivity


Economic trends: Slowdown in mining and manufacturing underlie

weakness in industrial production

Source: BBVA Research, FRB & BEA

-6%

-4%

-2%

0%

2%

4%

6%

2011 2012 2013 2014 2015 2016 2017 2018 2019

Oil & Gas High-Tech Motor Vechicles

Consumer Gds Biz Equip Headline (lhs)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

Autos Health & P. Care Gas

Clothing Nonstore Food Servc

Headline (lhs)

INDUSTRIAL PRODUCTION(YEAR-OVER-YEAR %)

RETAIL SALES

(YEAR-OVER-YEAR %)


Economic trends: Real exports decline despite stable dollar,

suggesting further deterioration in global demand

Source: BBVA Research, FRB & Census

-6

-4

-2

0

2

4

6

8

10

Apr-

2019

Feb

-2019

De

c-2

018

Oct-

2018

Aug-2

018

Jun-2

018

Apr-

2018

Feb

-2018

De

c-2

017

Oct-

2017

Aug-2

017

Jun-2

017

Apr-

2017

Fe

b-2

017

De

c-2

016

Oct-

2016

Aug-2

016

Jun-2

016

Apr-

2016

Feb

-2016

De

c-2

015

Oct-

2015

Consumer Goods ex Food Food & Bev.

Industrial Supplies Autos

Other Cap Goods ex Autos

-10%

-5%

0%

5%

10%

15%

Sep-1

5

De

c-1

5

Ma

r-1

6

Jun-1

6

Sep-1

6

De

c-1

6

Ma

r-1

7

Jun-1

7

Sep-1

7

De

c-1

7

Ma

r-1

8

Jun-1

8

Sep-1

8

De

c-1

8

Ma

r-1

9

Real Trade Weighted FX Real Exports

REAL EXCHANGE RATE AND EXPORTS(YEAR-OVER-YEAR %)

REAL EXPORTS(CONTRIBUTION TO YEAR-OVER-YEAR %)


Economic trends: 2Q19 growth to dip below 2%, recession risk

around 40% in next 12 months

Source: BBVA Research, and ATL & NY Fed

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Q2-1

8

Q3-1

8

Q4-1

8

Q1-1

9

BB

VA

-N

ow

ca

st

Atl F

ed

NY

Fed

20

19

20

19-2

021

Forecast1Q19

Baseline

REAL GDP(QOQ SAAR, %)

PROBABILITY OF RECESSION IN 12 MONTHS(%)

0

10

20

30

40

50

60

70

80

90

100

1991 1995 1999 2003 2007 2011 2015 2019

Yield Curve Slope BBVA-24

BBVA-Multidimensional(12) BBVA-Multidimensional(24)


Consumer credit cycle: No major signs of deterioration in

consumer credit conditions

Source: BBVA Research, FRB, NY Fed & BEA

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

3.1

Jul-6

1

Ma

y-6

4

Ma

r-6

7

Jan-7

0

No

v-7

2

Se

p-7

5

Jul-7

8

Ma

y-8

1

Ma

r-8

4

Jan-8

7

No

v-8

9

Sep-9

2

Jul-9

5

Ma

y-9

8

Ma

r-0

1

Jan-0

4

No

v-0

6

Sep-0

9

Jul-1

2

Ma

y-1

5

Ma

r-1

8

0

2

4

6

8

10

00 02 04 06 08 10 12 14 16 18

Mortgage HELOC Auto CC

Student Other Total

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2012 2013 2014 2015 2016 2017 2018

Credit card Autos Consumer excl. credit cards

PERSONAL INTEREST EXPENSE(YEAR-OVER-YEAR %)

PERSONAL INTEREST EXPENSE TO DISP.

INCOME (RATIO, %)

NEW 90+ DAY CONSUMER DELINQUENCIES

RATES (CONTRIBUTION, %)

SENIOR LOAN OFFICERS LENDING

STANDARDS (+ TIGHTENING / - LOOSENING)


In May, nonfarm payroll employment grew 75,000; an nontrivial

deceleration since April (224,000)

Weakness in the retail trade sector (-7K), transportation and

warehousing (-0.2), information (-5K) and government (-15K) offset

strength in professional and business services (33K), health care (16K)

and construction (4K)

The unemployment rate (UR) held steady at 3.6% in May

The labor force participation rate and the employment-population ratio

were unchanged at 62.8% and 60.6%

Baseline assumes only modest declines in UR in 2019. Average

monthly job growth to slow to 166K this year, from 223K in 2018

Labor Market


Labor market: 104 consecutive months of positive payroll

growth, but headwinds building

Source: BBVA Research & BLS

-1000

-800

-600

-400

-200

0

200

400

600

800

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

Actual Forecast

-4 -2 0 2 4 6

Information Services

Retail Trade

State Government

Local Government

Federal Government

Financial Activities

Other Services

Manufacturing

Wholesale Trade

Professional & Business Services

Education & Health Services

Leisure & Hospitality

Transportation & Warehousing

Construction

Mining

Monthly Year-over-year

NONFARM PAYROLLS(MONTHLY CHANGE, K)

INDUSTRY EMPLOYMENT (ANNUALIZED % CHANGE)


Labor market: Slowdown in average weekly hours

and earnings


33.2

33.4

33.6

33.8

34.0

34.2

34.4

34.6

34.8

Ap

r-08

Oct-

08

Ap

r-09

Oct-

09

Ap

r-10

Oct-

10

Ap

r-11

Oct-

11

Ap

r-12

Oct-

12

Ap

r-13

Oct-

13

Ap

r-14

Oct-

14

Ap

r-15

Oct-

15

Ap

r-16

Oct-

16

Ap

r-17

Oct-

17

Ap

r-18

Oct-

18

Ap

r-19

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Ap

r-08

Oct-

08

Ap

r-09

Oct-

09

Ap

r-10

Oct-

10

Ap

r-11

Oct-

11

Ap

r-12

Oct-

12

Ap

r-13

Oct-

13

Ap

r-14

Oct-

14

Ap

r-15

Oct-

15

Ap

r-16

Oct-

16

Ap

r-17

Oct-

17

Ap

r-18

Oct-

18

Ap

r-19

79.0

79.5

80.0

80.5

81.0

81.5

82.0

82.5

83.0

83.5

Ap

r-09

Oct-

09

Ap

r-10

Oct-

10

Ap

r-11

Oct-

11

Ap

r-12

Oct-

12

Ap

r-13

Oct-

13

Ap

r-14

Oct-

14

Ap

r-15

Oct-

15

Ap

r-16

Oct-

16

Ap

r-17

Oct-

17

Ap

r-18

Oct-

18

Ap

r-19

Pre-Crisis Avg.

72.0

73.0

74.0

75.0

76.0

77.0

78.0

79.0

80.0

81.0

Ap

r-09

Oct-

09

Ap

r-10

Oct-

10

Ap

r-11

Oct-

11

Ap

r-12

Oct-

12

Ap

r-13

Oct-

13

Ap

r-14

Oct-

14

Ap

r-15

Oct-

15

Ap

r-16

Oct-

16

Ap

r-17

Oct-

17

Ap

r-18

Oct-

18

Ap

r-19

Pre-Crisis Avg.

AVERAGE WEEKLY HOURS(NUMBER & 5MCMA)

AVERAGE HOURLY EARNINGS(YOY% & 5MCMA)

PRIME AGE LABOR FORCE PARTICIPATION(%)

PRIME AGE EMPLOYMENT-TO-POPULATION(%)


Labor market: Unemployment rate unlikely to decline

further, as signs of late-cycle fears growing


2

3

4

5

6

7

8

9

10

11

00

02

04

06

08

10

12

14

16

18

20

22

0

2

4

6

8

10

12

14

16

18

Apr-

09

Oct-

09

Apr-

10

Oct-

10

Apr-

11

Oct-

11

Apr-

12

Oct-

12

Apr-

13

Oct-

13

Apr-

14

Oct-

14

Apr-

15

Oct-

15

Apr-

16

Oct-

16

Apr-

17

Oct-

17

Apr-

18

Oct-

18

Apr-

19

Pre-Crisis Avg.

U-6(%)

UNEMPLOYMENT RATE(%)


Headline consumer prices increased 0.1% month-over-month in May,

after rising 0.3% in April

The 12-month change in headline CPI slumped below 2% again to

1.8%, while core CPI continued to decelerate, reaching 2.0% in May

In addition to the slowdown in energy prices, used car and trucks, and

motor vehicle insurance prices decelerated dragging down headline CPI

Idiosyncratic supply-side shocks from tariffs could push prices up in

short-run, but majority of risks are tilted to downside

Inflation expectations trending near lowest levels in 3 years

Baseline assumes average headline CPI to decelerate to 1.8% in 2019,

before rebounding in 2020

Inflation


Inflation: Core inflation continues to trend below Fed target

Source: BBVA Research, BLS & BEA

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Feb

-01

Jan-0

2

De

c-0

2

No

v-0

3

Oct-

04

Sep-0

5

Aug-0

6

Jul-0

7

Jun-0

8

Ma

y-0

9

Apr-

10

Ma

r-1

1

Feb

-12

Jan-1

3

De

c-1

3

No

v-1

4

Oct-

15

Sep-1

6

Aug-1

7

Jul-1

8

Core CPI Core PCE Weighted Median

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0 10 20 30 40 50 60 70 80 90 100

Relative Importance

Comm. ex

Food/

Energy

Food

Rent

Energy

Med

Services

Edu &

Comm.

Services

Trans.

Services

Other

Services

OER

CONSUMER PRICE INFLATION(12M CHANGE)

CORE INFLATION MEASURES(12M CHANGE)


Inflation: Lack of inflationary pressures a concern,

but deflation risk minimal


-0.2

0

0.2

0.4

0.6

0.8

1

70 74 78 82 86 90 94 98 02 06 10 14 18

Core PCE Low Inflaiton Regime

High Inflaiton Regime

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Jan-7

0

Jul-7

2

Jan-7

5

Jul-7

7

Jan-8

0

Jul-8

2

Jan-8

5

Jul-8

7

Jan-9

0

Jul-9

2

Jan-9

5

Jul-9

7

Jan-0

0

Jul-0

2

Jan-0

5

Jul-0

7

Jan-1

0

Jul-1

2

Jan-1

5

Jul-1

7

CORE PCE PRICE INDEX & INFLATION

REGIMES (MONTH-OVER-MONTH %)

INFLATION REGIME CHANGE PROBABILITY(%)


Inflation: Baseline continues to assume modest undershooting

in short-run, but recovery in 2H19

Source: BBVA Research & Haver Analytics

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

10 11 12 13 14 15 16 17 18

5Y Implicit 5Y Forward

-2

-1

0

1

2

3

4

5

6

Ma

r-0

0

Apr-

01

Ma

y-0

2

Jun-0

3

Jul-0

4

Aug-0

5

Sep-0

6

Oct-

07

No

v-0

8

De

c-0

9

Jan-1

1

Feb

-12

Ma

r-1

3

Apr-

14

Ma

y-1

5

Jun-1

6

Jul-1

7

Aug-1

8

Sep-1

9

Oct-

20

No

v-2

1

De

c-2

2

Core Headline

INFLATION EXPECTATIONS(%)

HEADLINE & CORE CPI(YEAR-OVER-YEAR %)


Fed kept interest rates unchanged at their June 18-19th meeting, but

altered their forward guidance from “patient” to “closely monitor”

Elevated policy uncertainty, renewed “crosscurrents” and the threat of

inflation and inflation expectations further drifting below the Fed’s two

percent target suggest the Fed will lower rates this year

The summary of economic projections recognized that risks to inflation

have shifted to the downside and that FOMC will cut interest rates.

However, Dot Plot hinted at a more polarized committee, with eight

members viewing no rate increases as the most likely path while seven

members projected two rate cuts in 2019 as the most likely outcome.

Baseline assumes two 25bp rates cuts this year plus one additional

“fine-tuning” cut in 2020

Monetary Policy: Federal Reserve


Fed: Projections fail to reflect change in committee members

communication and shift in guidance

Source: BBVA Research & FRB

0

1

2

3

4

5

6

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

BBVA-Baseline Median 75th Percentile

25th Percentile BBVA-Upside BBVA-Downside

BBVA & DEALERS PROJECTIONS OF FED

FUNDS (%, EFFECTIVE)

FOMC PROJECTIONS OF FED FUNDS(YEAR-OVER-YEAR %, MID-POINT)

0

0.5

1

1.5

2

2.5

3

3.5

2019 2020 2021 Longerrun


Monetary policy: Market expectations coalesce around

three or more rate cuts

Source: BBVA Research & Bloomberg

1.25

1.50

1.75

2.00

2.25

2.50

2.75

Jan-1

8

Ma

r-1

8

Ma

y-1

8

Jul-1

8

Sep-1

8

No

v-1

8

Jan-1

9

Ma

r-1

9

Ma

y-1

9

Jul-1

9

Sep-1

9

No

v-1

9

Jan-2

0

Ma

r-2

0

Ma

y-2

0

Jul-2

0

Sep-2

0

No

v-2

0

FFR + BBVA Forecast 2/7/2019

5/2/2019 6/27/2019

0

10

20

30

40

50

60

70

<1.75 1.75-2.0 2.0-2.25 2.25-2.5

Three orMore

2 Cuts 1 Cut Zero

Last 1M Ago 2M Ago 4m Ago

FED FUNDS IMPLIED PROBABILITY(NUMBER OF RATE CUTS THROUGH 2019, %)

FED FUNDS FUTURES & BBVA BASELINE(%)


Monetary policy: Balance sheet attrition plateaued as increase in

Treasury holdings offsetting wind down in MBS portfolio

Source: BBVA Research & FRB

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

Sep-15 Apr-16 Nov-16 Jun-17 Jan-18 Aug-18 Mar-19

Upper Bound Lower Bound

Effective SOFR

0

50

100

150

200

250

300

350

400

U.S Govt Securities MBS

FED FUNDS & REPO RATES(%)

BALANCE SHEET ATTRITION(US$BN, CUMULATIVE)


10-yr Treasury down to 2.0%, 2-yr Treasury down to 1.75%

Term premium remains at historic lows due to dramatic shift in Fed’s

balance sheet strategy, U-turn in rates guidance, global weakness and

elevated uncertainty

Short-term rates converging with IOER; deviation from these levels

unlikely with shift in monetary policy strategy (“floor system”)

Yield curve slope narrows across most durations (6-month, 3-month

and 1-year). Weakening rates outlook impacting belly (2-year to 5-year)

of yield curve

New baseline assumes lower year end target for the 10-yr Treasury

yields; short-terms rates to align with Fed rate cut scenario

Interest Rates


Interest rates: Drop in inflation expectations and increased risk

aversion fueling decline in long-term rates

Source: BBVA Research, ACM & Haver Analytics

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

13 14 15 16 17 18 19

Real Rate Term Premium Inflation Expectations Yield

10-YEAR TREASURY YIELD DECOMPOSITION(%)


Interest rates: Baseline assumes 10-year below 2% by end of year

Source: BBVA Research, ACM & Haver Analytics

0

1

2

3

4

5

6

7

8

Jan-0

7

Ma

y-0

7

Sep-0

7

Jan-0

8

Ma

y-0

8

Sep-0

8

Jan-0

9

Ma

y-0

9

Sep-0

9

Jan-1

0

Ma

y-1

0

Sep-1

0

Jan-1

1

Ma

y-1

1

Sep-1

1

Jan-1

2

Ma

y-1

2

Sep-1

2

Jan-1

3

Ma

y-1

3

Sep-1

3

Jan-1

4

Ma

y-1

4

Sep-1

4

Jan-1

5

Ma

y-1

5

Sep-1

5

Jan-1

6

Ma

y-1

6

Sep-1

6

Jan-1

7

Ma

y-1

7

Sep-1

7

Jan-1

8

Ma

y-1

8

Sep-1

8

Jan-1

9

Ma

y-1

9

Sep-1

9

Jan-2

0

Ma

y-2

0

Sep-2

0

Jan-2

1

Ma

y-2

1

Sep-2

1

Jan-2

2

Ma

y-2

2

Sep-2

2

Historic Baseline Upside Downside NABE (EOP)

SPF(EOP) Blue Chip(Yr. Avg) OMB (Yr.Avg) CBO(Yr. Avg)

10-YEAR TREASURY YIELD(%)


Interest rates: Inverted yield curve (10y-6m) through remainder

of 2019

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

10-Year Average 2016 2017

2018 2019 (f) 2020 (f)

Source: BBVA Research

0.0

0.5

1.0

1.5

2.0

2.5

Jan-1

5

Jun-1

5

No

v-1

5

Apr-

16

Sep-1

6

Fe

b-1

7

Jul-1

7

De

c-1

7

Ma

y-1

8

Oct-

18

Ma

r-1

9

Aug-1

9

Jan-2

0

Jun-2

0

No

v-2

0

Apr-

21

Sep-2

1

Feb

-22

Jul-2

2

De

c-2

2

30Yr-10yr 10Yr-1Yr

YIELD CURVE SLOPE(BP)

YIELD CURVE(%, EOP)


OPEC+ extended the output deal through the rest of the year

Weaker economic growth to lead to slower demand for oil

Escalation of tensions between U.S. and Iran, as well as trade

negotiations between China and the U.S. are the main sources of

uncertainty

U.S oil production will expand further while substantial transportation

capacity is being added

Our prospects for lower prices in 2H19 and 2020 assume slower

economic growth amid sufficient supply

We maintain our view of convergence to long-term equilibrium of around

$60/b

Elevated uncertainty around long-term equilibrium: CAPEX,

protectionism, transportation infrastructure, alternative energy sources,

EM convergence, EVs, climate change, efficiency and technology

Oil Prices Outlook


Downward pressures from weaker economic growth were partially

offset by growing tensions between the U.S. and Iran

CRUDE OIL PRICES DECEMBER 2018 TO JUNE 2019 ($ PER BARREL)

40

45

50

55

60

65

70

75

80

Dec Jan Feb Mar Apr May Jun

WTI Brent

December 7

OPEC+ decide to cut

output by 1.2 Mb/d

Jan 4-19

U.S–China trade

talks, expectation of

OPEC+ cuts

Jan 20

China post slowest

economic growth

since 1990

Feb 13

Fears of market

disruptions from

political crisis in

Venezuela

Feb 18

U.S. and China

signal a deal or

extend talks to end

their trade war

March 18

OPEC+ reaffirms

commitment to

output cuts

March 22

Eurozone’s

manufacturing

activity shows the

worst performance

in 5 years

April 5

Tensions in Libya

increased supply

concerns

April 22

U.S. ends sanctions

waivers on Iranian

oil imports

May 20

OPEC Considers

extending

production cuts until

end of 2019

May 13

US-China trade

tensions increase

Jun 4

President Trump

threatens to impose

tariffs on Mexico

Jun20

Iran shoots down

U.S. drone aircraft

Source BBVA Research with data from Haver Analytics


Demand in developing countries remains supportive

OIL PRODUCT DEMAND: TOTAL WORLD (THOUSAND BARRELS PER DAY, YOY CHANGE)

-500

0

500

1000

1500

2000

2500

-1000

-500

0

500

1000

1500

2000

2500

3000

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

2Q

19

W. Europe U.S.China IndiaTotal World (rhs)

-500

0

500

1000

1500

2015 2016 2017 2018 2019

OECD (rhs) non-OECD U.S. OECD exUS

20

25

30

35

40

45

2015 2016 2017 2018 2019

Source BBVA Research with data from Haver Analytics and Bloomberg

OIL PRODUCT DEMAND (THOUSAND BARRELS PER DAY, YOY CHANGE)

CHINA CUSTOMS CRUDE OIL TOTAL IMPORTS (MILLION METRIC TONES)


However, there are signs that demand is also slowing down in Asia

28

ASIA REFINING MARGINS ($ PER BARREL)

0

1

2

3

4

5

6

7

8

9

10

50

55

60

65

70

75

80

85

90

Jan-1

8

Fe

b-1

8

Ma

r-1

8

Apr-

18

Ma

y-1

8

Jun-1

8

Jul-1

8

Aug-1

8

Sep-1

8

Oct-

18

No

v-1

8

De

c-1

8

Jan-1

9

Feb

-19

Ma

r-1

9

Apr-

19

Ma

y-1

9

Brent (left axis)Singapore Complex Refining Margins (right axis)

2.6

2.8

3.0

3.2

3.4

3.6

3.8

4.0

4.2

2014 2015 2016 2017 2018 2019

CHINA DIESEL CONSUMPTION (MILLION BARRELS PER DAY)

Source BBVA Research with data from Bloomberg


A weaker economic outlook points to slower demand growth

29

99.8 101.0102.1103.3

104.6105.8

80

85

90

95

100

105

110

Actual BBVA Research forecasts

1.41

1.23

1.08

1.281.25 1.26

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2018 2019F 2020F 2021F 2022F 2023F3.0

3.2

3.4

3.6

3.8

4.0

2017E 2018E 2019F 2020F

Oct-18 Apr-19

OIL PRODUCT DEMAND(YOY CHANGE, MILLION BARRELS PER DAY)

OIL PRODUCT DEMAND(MILLION BARRELS PER DAY)

IMF WORLD GDP GROWTH(YOY PERCENT CHANGE)

Source BBVA Research with data from Bloomberg Source : IMF WEO , E = estimates, F = forecast


OPEC production is the lowest since 2015

Source: BBVA Research, Haver Analytics, and Bloomberg

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan

-17

Ma

r-1

7

Ma

y-1

7

Jul-

17

Se

p-1

7

Nov-1

7

Jan

-18

Ma

r-1

8

Ma

y-1

8

Jul-

18

Se

p-1

8

Nov-1

8

Jan

-19

Ma

r-1

9

Ma

y-1

9

34.0

34.5

35.0

35.5

36.0

36.5

37.0

37.5

38.0

38.5

39.0

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

Ma

r-1

5

Jun-1

5

Sep-1

5

De

c-1

5

Ma

r-1

6

Jun-1

6

Sep-1

6

De

c-1

6

Ma

r-1

7

Jun-1

7

Sep-1

7

De

c-1

7

Ma

r-1

8

Jun-1

8

Sep-1

8

De

c-1

8

Ma

r-1

9

Jun-1

9

Milla

res

U.S. OPEC (right axis)

CRUDE OIL PRODUCTION

(MILLION BARRELS PER DAY)

IRAN: EXPORTS OF CRUDE OIL


VENEZUELA: CRUDE OIL PRODUCTION



U.S. shale production on track to reach 9 million b/d

Source: BBVA Research and Haver Analytics

6

7

8

9

10

11

12

13

2015 2016 2017 2018 2019

800

850

900

950

1000

1050

1100

Jan-1

8

Feb

-18

Ma

r-1

8

Apr-

18

Ma

y-1

8

Jun-1

8

Jul-1

8

Aug-1

8

Sep-1

8

Oct-

18

No

v-1

8

De

c-1

8

Jan-1

9

Feb

-19

Ma

r-1

9

Apr-

19

Ma

y-1

9

Jun-1

9

U.S. STOCKS OF CRUDE OIL

(EXCLUDING SPR, MILLION BARRELS)

U.S. ACTIVE RIG COUNT

(UNITS)

U.S. OIL PRODUCTION BY REGION


U.S. TOTAL ESTIMATED CRUDE OIL PRODUCTION

(THOUSAND BARRELS PER DAY)

300

350

400

450

500

550

2015 2016 2017 2018 2019

-

1.0

2.0

3.0

4.0

5.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Bakken Eagle Ford Permian Other


U.S. Imports substitution has accelerated

32

U.S. EXPORTS OF CRUDE OIL


U.S. PRODUCTION AND NET IMPORTS OF CRUDE OIL


0.0

0.5

1.0

1.5

2.0

2.5

3.0

19

95

19

96

19

97

19

98

20

00

20

01

20

02

20

03

20

05

20

06

20

07

20

08

20

10

20

11

20

12

20

13

20

15

20

16

20

17

20

18

0

2

4

6

8

10

12

14

19

95

19

96

19

97

19

98

19

99

20

00

20

02

20

03

20

04

20

05

20

06

20

07

20

09

20

10

20

11

20

12

20

13

20

14

20

16

20

17

20

18

Net imports Crude oil production

Source: BBVA Research and Haver Analytics


Escalation of tensions between the U.S. and Iran could cause

significant disruption

33

STRAIT OF HORMUZ

Source: Australian BC

17.2 18.420.6 20.3 20.7

39.240.5

40.6 42.2 43.8

0

10

20

30

40

50

60

70

2014 2015 2016 2017 2018

Through the Strait of Hormuz Other

WORLD MARITIME OIL TRADE


Note: Other maritime trade flows in 2018 are BBVA Research estimate.

Source: Energy Information Administration


Supply adjustments will support prices in 2019, but demand will be the

main driver going forward

Source: BBVA Research, Bloomberg and EIA

WTI prices forecast ($ per barrel)

Brent prices forecast ($ per barrel)

BBVA Research (baseline)

Bloomberg

Survey (June 25)

EIASTEO (June 11)

2017 54.2 54.2 54.2

2018 71.1 71.1 71.1

2019 64.2 67.2 66.7

2020 55.4 67.7 67.0

2021 60.8 68.0

2022 60.0 67.8

2023 59.7 67.6

BBVA

Research

Bloomberg

Survey (June 25)

EIA STEO (June 11)

2017 50.9 50.9 50.9

2018 65.0 65.0 65.0

2019 55.4 60.5 59.3

2020 48.2 61.0 63.0

2021 58.0 62.9

2022 57.7 63.8

2023 57.4 61.0

64.2

55.4

60.8 60.0 59.7

40

45

50

55

60

65

70

75

80

2019 2020 2021 2022 2023

BBVA Research Bloomberg Survey (June 25)

EIA STEO (June 11)

55.4

48.2

58.0 57.7 57.4

40

45

50

55

60

65

70

75

80

2019 2020 2021 2022 2023

BBVA Research Bloomberg Survey (June 25)

EIA STEO (June 11)


Futures curve remains in backwardation

Source: BBVA Research and Bloomberg

Brent Futures($ per barrel)

WTI Futures($ per barrel)

40

45

50

55

60

65

70

75

1 2 3 4 5 6 7 8 9 101112131415161718192021222324

$U

SD

/bb

l

Months Ahead

06/27/19 1 month ago3 months ago 6 months ago

40

45

50

55

60

65

70

75

1 2 3 4 5 6 7 8 9 101112131415161718192021222324

$U

SD

/bb

l

Months Ahead

06/27/19 1 month ago3 months ago 6 months ago


The balance of short-term risks is tilted to the upside

*Brent crude prices. Source: BBVA Research

>=

$60/b*

<

$60/b*

OPEC spare capacity insufficient to deal with unexpected

shocks

Tensions between the U.S. and Iran escalate

Stronger–than–expected impact from additional negative

supply shocks (e.g., Eastern Europe, Venezuela and Libya)

Signs of progress in trade negotiations between the U.S.

and China after G-20

Milder-than-expected deceleration of global demand

Takeaway issues preventing U.S. crude to reach global

markets

Weaker global economic outlook

Persistent deadlock in trade talks between U.S. and China

OPEC+ output deal is broken

Dollar appreciation

President Trump’s pressure on OPEC

Limited enforcement of Iranian sanctions

Iran sues for peace and quickly revamps exports

Higher-than-expected crude oil production in the U.S.


Macroeconomic Outlook

Source: BBVA Research

*Forecasts subject to change

2011 2012 2013 2014 2015 2016 2017 2018 2019 (f) 2020 (f) 2021 (f) 2022 (f)

Real GDP (% SAAR) 1.6 2.2 1.8 2.5 2.9 1.6 2.2 2.9 2.5 2.0 1.9 1.8

Real GDP (Contribution, pp)

PCE 1.3 1.0 1.0 2.0 2.5 1.9 1.8 1.8 1.5 1.3 1.3 1.2

Gross Investment 0.9 1.6 1.1 0.9 0.8 -0.2 0.8 1.0 0.7 0.7 0.8 0.9

Non Residential 1.0 1.2 0.5 0.9 0.3 0.1 0.7 1.0 0.6 0.7 0.7 0.8

Residential 0.0 0.3 0.3 0.1 0.3 0.2 0.1 0.0 -0.1 0.0 0.0 0.1

Exports 0.9 0.5 0.5 0.6 0.1 0.0 0.4 0.5 0.4 0.6 0.7 0.7

Imports -0.9 -0.5 -0.3 -0.9 -1.0 -0.3 -0.8 -0.8 -0.2 -0.8 -0.9 -0.9

Government -0.7 -0.4 -0.5 -0.2 0.3 0.3 0.0 0.3 0.2 0.1 0.0 0.0

Unemployment Rate (%, average) 8.9 8.1 7.4 6.2 5.3 4.9 4.4 3.9 3.7 4.0 4.2 4.4

Avg. Monthly Nonfarm Payroll (K) 173 181 192 251 227 193 179 223 166 151 135 113

CPI (YoY %) 3.1 2.1 1.5 1.6 0.1 1.3 2.1 2.4 1.8 1.9 2.0 2.1

Core CPI (YoY %) 1.7 2.1 1.8 1.8 1.8 2.2 1.8 2.1 2.0 2.0 2.0 2.0

Fiscal Balance (% GDP, FY) -8.4 -6.8 -4.1 -2.8 -2.4 -3.2 -3.5 -3.8 -4.6 -4.1 -4.2 -4.7

Current Account (bop, % GDP) -2.9 -2.6 -2.1 -2.1 -2.2 -2.3 -2.3 -2.4 -2.2 -2.3 -2.3 -2.4

Fed Target Rate (%, eop) 0.25 0.25 0.25 0.25 0.50 0.75 1.50 2.50 2.00 1.75 1.75 2.25

Core Logic National HPI (YoY %) -2.9 4.0 9.7 6.8 5.3 5.5 5.9 5.7 3.7 3.0 3.2 3.5

10-Yr Treasury (% Yield, eop) 1.98 1.72 2.90 2.21 2.24 2.49 2.40 2.83 1.71 1.82 2.09 2.45

West Texas Intermediate

Oil Prices (dpb, average)94.9 94.1 97.9 93.3 48.7 43.2 50.9 65.0 55.4 48.2 58.0 57.7


Economic Scenarios Probability (%) Current Previous

Upside 5 5

Baseline 55 55

Downside 40 40

Subject to revision without notice

Macro Scenarios

2015 2016 2017 2018 2019 2020 2021 2022 2023

GDP 2.9 1.6 2.2 2.9 2.5 2.0 1.9 1.8 1.7

Upside 3.1 3.5 3.1 2.7 2.7

Downside 1.5 -0.7 1.2 1.4 1.6

UR 5.3 4.9 4.4 3.9 3.7 4.0 4.2 4.4 4.4

Upside 3.5 2.9 2.9 3.0 3.0

Downside 4.2 6.2 6.6 5.7 5.0

CPI 0.1 1.3 2.1 2.4 1.8 1.9 2.0 2.1 2.0

Upside 2.0 3.3 3.7 3.8 3.8

Downside 1.3 0.4 1.1 1.3 1.4

Fed [eop] 0.50 0.75 1.50 2.50 2.00 1.75 1.75 2.25 2.25

Upside 3.50 5.00 5.50 6.00 6.50

Downside 1.50 0.25 0.25 0.25 0.25

10-Yr [eop] 2.24 2.49 2.4 2.83 1.71 1.82 2.09 2.45 2.6

Upside 5.15 5.88 6.72 7.20 7.35

Downside 0.67 0.68 0.93 1.21 1.55


Disclaimer

This document was prepared by Banco Bilbao Vizcaya Argentaria’s (BBVA) BBVA Research U.S. on behalf of itself and its affiliated companies (each BBVA Group Company) for

distribution in the United States and the rest of the world and is provided for information purposes only. Within the US, BBVA operates primarily through its subsidiary Compass Bank. The

information, opinions, estimates and forecasts contained herein refer to the specific date and are subject to changes without notice due to market fluctuations. The information, opinions,

estimates and forecasts contained in this document have been gathered or obtained from public sources, believed to be correct by the Company concerning their accuracy, completeness,

and/or correctness. This document is not an offer to sell or a solicitation to acquire or dispose of an interest in securities.

U.S.

Economic Outlook

June 2019

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