US Q2 2013 Economic Outlook

Bloomberg BRIEF: Economics U.S. Q2’ 2013 Economic Overview and Outlook

Joseph Brusuelas | April 2013

U.S. Q2’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664

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

Executive Summary

Growth Likely to Slow Following Solid Q1’13

• Growth • Q1’13 Growth likely to accelerate above 3 percent.

• Personal consumption tracking near 3 percent for Q1’13

• Capital expenditures and residential investment, manufacturing growth, trade all drivers in Q2’13

• Pace of consumption and government spending to slow in Q2’13.

• Monthly job creation to slow due to sequestration. • What’s driving consumption?

• Income pulled forward to avoid tax hikes • Spending by upper 2 quintile of income earners • Drawing down of savings rate by lower income cohorts



Bloomberg Consensus: Survey of Forecasters

Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14

Real GDP 2.00% 1.75% 2.35% 2.60% 2.80% 2.90%

CPI 1.70% 1.90% 2.00% 2.00% 2.10% 2.20%

Core PCE 1.30% 1.40% 1.50% 1.70% 1.80% 1.80%

Unemployment 7.80% 7.70% 7.60% 7.50% 7.40% 7.30%

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

2-Year Rate 0.31% 0.31% 0.34% 0.37% 0.41% 0.46%

10-Year Rate 1.85.% 1.99% 2.15% 2.31% 2.48% 2.64%

EUR/USD $1.32 $1.30 $1.30 $1.29 1.27% -



Jobs and Growth

-10

-8

-6

-4

-2

0

2

4

6

8

-800

-600

-400

-200

0

200

400

600

1996 1998 2000 2002 2004 2006 2008 2010 2012

Qu

arterly A

verage

(Pe

rcen

tage) Q

uar

terl

y A

vera

ge (

Tho

usa

nd

s)

Jobs and Growth

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

Source: Bloomberg R2=.77



Imbalance Between Income and Spending

35

40

45

50

55

60

65

-8

-6

-4

-2

0

2

4

6

8

10

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Ye

ar O

ver

Ye

ar P

erc

en

tage

Ch

ange

Divergence Between Income and Spending

Nominal Income (RHS)

Nominal Spending (LHS)

Real Disposable Personal Income(LHS)

ISM Non Man (RHS)

Source: Bloomberg



Upper Income Earners Driving Spending

8.9

12.9

17.1

23.1

38.0

Lowest 20%

Second 20%

Third 20%

Fourth 20%

Highest 20%

Source: BLS Consumer Expenditure Survey



Sustained Residential Investment Growth in 2013

0

0.5

1

1.5

2

2.5

0

10

20

30

40

50

60

70

80

90

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Millio

ns (A

nn

ualize

d P

ace

Ind

ex

Considerable Room to Grow

Multi-Family Starts (RHS)

Single Family Starts (RHS)

NAHB Housing Market Index (LHS)

Source: Bloomberg USHBMIDX, NHSPS1, NHSPSM INDEX<GO>



Executive Summary

• Monetary Policy • Pace of asset purchases to remain unchanged • Employment, not inflation primary concern of policy • Fed to remain cautions on tapering purchases due to:

• Prodigious labor slack, output and consumption gaps • External headwinds

• Fiscal Policy restraint and layoffs to restrain growth • What to watch?

• Rising initial jobless claims • Slower pace of spending • Bloomberg economic surprise index reflects likely slowing • Risk of another spring swoon in fundamental data



Fed Balance Sheet Swells to $3.2 Trillion

0

0.5

1

1.5

2

2.5

3

3.5

2007 2008 2009 2010 2011 2012 2013

Trill

ion

s ($

)

Fed Balance Sheet Swells To $3 Trillion

Fed Agency Debt Mortgage-Backed Securities Purchases

Liquidity to Key Credit Markets

Lending to Financial Institutions

Long Term Treasury Purchases

Traditional Security Holdings

Source: Bloomberg FED<GO>



Growth Drivers

• Housing • Reduced supply supporting price appreciation • Shift in buyer preference toward new construction

• Autos • Historically low rates and aggressive discounting by auto dealers • Age of auto fleet supports improved total vehicle sales

• Manufacturing • Rebound following 2012 second half swoon

• Civilian aircraft, domestic auto production and external demand

• Trade • Growing U.S. energy independence



Housing Supply Dwindles

1

1.25

1.5

1.75

2

2.25

2.5

2.75

3

3.25

3.5 25

50

75

100

125

150

175

200

225

250

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Un

its for Sale

: Millio

ns

Tho

usa

nd

s

Falling Supply Supporting Price Appreciation

Median Price (RHS) Homes for Sale (LHS, Inverted)

Source: Bloomberg EHSLMP, EHSLHAFS INDEX<GO>



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 (Q

uarte

rly Average)

Y/Y

Pe

rcen

tage

Ch

ange

GDP CYOY (LHS) Industrial Production (RHS)

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



Industrial Production and Growth

45

50

55

60

65

70

-5

0

5

10

15

20

25

30

2010 2011 2012 2013

Ind

ex

Ye

ar o

ver

Ye

ar P

erc

en

tage

Ch

ange

Solid Manufacturing Growth Likely to Continue

Durable Goods Orders (LHS) ISM New Orders (RHS)

DGNOYOY, NAPMNEWO INDEX<GO> Source: Bloomberg



Less Trade Drag on Growth in 2013

90

95

100

105

110

115

120

125

130

135 -50

-45

-40

-35

-30

-25

-20

-15

-10

-5

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Ind

ex

Bill

ion

s ($

)

Trade Balance Likely to Narrow This Year

US Trade Balance Excluding Petroleum(LHS) Trade Weighted Dollar Index 18 Month Lag(RHS)

Source: Bloomberg



Less Trade Drag on Growth in 2013

-8.0

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Mill

ion

Bar

rels

Pe

r D

ay (

3-M

on

th A

vera

ge)

Narrowing Gap Between Supply and Demand

US Oil Imbalance: Supply and Demand

Source: Bloomberg DOIDCRUD, DOSUUSA INDEX<GO>



Financial Conditions Overview

• Global central banks asset purchase supportive of financial conditions.

• Improved financial conditions supportive of U.S.

• Financial easing via asset purchases appropriate and necessary in Europe



Euro Area Economy Monetary Policy

-4

-3

-2

-1

0

1

2

3

4

5

6

7

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Pe

rce

nt

E.U. Taylor Rules Suggest Aggressive Easing Appropriate

ECB Rate Traditional Taylor Rule Estimate Aggressive Taylor Rule

Source: Bloomberg TAYL<GO>



Bloomberg Financial Conditions Indices

-6

-5

-4

-3

-2

-1

0

1

2

2010 2011 2012 2013

Ind

ex(

Z-Sc

ore

)

US Financial Conditions Index EU Financial Conditions Index

Source: Bloomberg BFCIUS, BFCIEU INDEX<GO>



Private Credit Creation Improving

-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

Velocity of Money

M2

Source: Bloomberg VELOM2 INDEX<GO>



Image page U.S. Rates Overview

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

Current Rates:

• 2-Year: .25 percent

• 10-year: 1.85 percent


Fourth Quarter Consensus Survey Rate Forecast: Rising Appetite for Risk Assets • 2-Year: .46 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>



U.S. Economic Surprise Index & 10-Year Treasury Yields

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

-1.2

-0.8

-0.4

0.0

0.4

0.8

1.2

2010 2011 2012

U.S. Economic Surprise Index US 10-Yr Yield (6-Mo. Basis Point Chg.)

Source: Bloomberg ECSURPUS, USGG10YR Index<GO>



U.S. Economic Surprise Index & U.S. Equity Markets

-60%

-40%

-20%

0%

20%

40%

60%

-1.2

-0.8

-0.4

0.0

0.4

0.8

1.2

2010 2011 2012

Ind

ex (P

erce

ntage

Ch

ange

)

Z Sc

ore

U.S. Economic Surprise Index S&P 500 (6-mo. % chg.)

U.S. Economic Surprise Index & the U.S. Equity Market

Source: Bloomberg ECSURPUS, SPX INDEX<GO>



FX Overview

Investors Likely to Favor Risk Assets in Q2’13

• Flight to quality likely to dominate given EU economic and financial issues.

• Favors USD and CAD

• Yen to benefit from flight to quality in short-term and times of Euro stress

• Further depreciation ahead contingent on BOJ policy

• Short term rally in Euro likely to fade as fundamentals to asset themselves.

• Contraction in real economy

• Rising unemployment

• Country risk



Economic Fundamentals Favor EUR/USD Depreciation

1.15

1.2

1.25

1.3

1.35

1.4

-100

-80

-60

-40

-20

0

20

40

60

80

100

2012 2013

EUR

/USD

In

de

x

Citigroup European Economic Surprise Index EUR/USD

Source: Bloomberg EUR Curncy, CESIER INDEX<GO>



Central Bank Policy Outlook and Overview

Fed will likely remain on hold throughout 2013

• Forward guidance to remain unchanged.

• Aggressive action to unclog monetary transmission mechanism to remain in place through 2013, then slow 2014.

• Balance sheet likely to expand to $4 trillion by end early 2014.

.



Central Bank Policy Outlook and Overview

Fed will likely remain on hold throughout 2013

• Policy made for economy stuck in liquidity trap

• Labor slack, consumption and employment gaps drive Fed policy

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

.



The Long Road Ahead

Slow Grind Back To Full Employment

Scenario 1: Structural Break

Scenario 2: Cyclical Recovery

6.5% NAIRU 6.5% NAIRU 5.5% NAIRU 5.5% NAIRU

Monthly Job Gains 200,000 200,000 200,000 200,000

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 2 Years 1 Years 4 Years 2 Years



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 Estimates

Evans Rule Estimates

Fed Funds Rate



Significant Output Gap Remains

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

11 58

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

Bil

lio

ns

(Ch

ain

ed

20

05

$)

Real PCE Trend Prior to Recession

Source: Bloomberg US.HHSPNR BEA INDEX<GO>



Negative and Near Negative Equity Still A Policy Challenge

20

22

24

26

28

30

32

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

Pe

rce

nt:

Fir

st M

ort

gage

s

First Mortgages in Negative and Near Negative Equity Positions

Near Negative Equity Negative Equity

Negative Equity 22%

Near Negative Equity 4.8%

Source: Bloomberg NESHNATI, NNSHNATI 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>



Labor Slack Sustained

-4 -3 -2 -1 0 1 2 3 4

Lower-Wage Occupations

Mid-Wage Occupations

Higher-Wage Occupations

Net Change in Occupational Employment (millions)

Jobs Lost in the Recession and Gained in the Recovery

Recession (Q1 2008 - Q1 2010)

Recovery (Q1 2010 - Q1 2012)

Source: National Employment Law Project analysis of CPS data

22% of Job Growth during Recovery

58% of Job Growth during Recovery

21% of Job Losses during Recession





Mortgage Backed Primary Secondary Spread

-20

0

20

40

60

80

100

120

140

160

2005 2006 2007 2008 2009 2010 2011 2012 2013

Bas

is P

oin

ts:

30

Day

Mo

vin

g A

vera

ge

Mortgage Backed Primary-Secondary Spread

Start Dates of Fed MBS Purchase Programs

QE 1 QE 3

Source: Bloomberg




-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Occ

up

atio

nal

Gro

wth

Rat

e

Occupational Growth Rates since 2001

Lower-Wage Occupations Mid-Wage Occupations Higher-Wage Occupations

Source: National Employment Law Project analysis of CPS

Lower-Wage

Mid-Wage

Higher-Wage




0 50 100 150 200 250 300 350 400

Waiters and Waitresses

Food Preparations Workers

Personal and Home Care Aides

Retail Salespersons

Grounds Maintenance Workers

Laborers and Freight, Stock & Material Movers

Office Clerks

Miscellaneous Assemblers and Fabricators

Customer Service Representatives

Construction Laborers

Occupational Growth Rate

Net Employment Growth of Low-Wage Occupations


Lower-Wage

Higher-Wage


Lower-Wage

Mid-Wage

Higher-Wage

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

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US Q2 2013 Economic Outlook

Economy & Finance