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The U.S. Economic Outlook
Nigel Gault
Chief U.S. Economist, IHS Global Insight
Jackson, Mississippi
September 14, 2010
The U.S. Recovery: Uneven and Subpar
•
Growth boost from fiscal stimulus and inventories is fading
•
Headwinds are blowing from consumer and business caution
•
No underlying housing improvement
•
Non-residential construction remains a drag; stimulus is
propping up state and local spending
•
Exports, business spending on equipment and software remain
the main growth areas
•
Inflation is a long way off; deflation is the immediate threat
2
Copyright © 2010 IHS Global Insight. All Rights Reserved.
Deeper Recession, Slower Recovery:
The Damage from the Financial Crisis Lingers
(Real GDP compared with recession trough)
1.10
1.08
1.06
1.04
1.02
1.00
0.98
-8
-7
-6 -5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
Quarters from Trough
Post-1950 Average Recovery
Current Recovery*
* Assumes 2009Q2 trough
Copyright © 2010 IHS Global Insight. All Rights Reserved.
3
Still Growing, Just Slowly
ISM Indicators Off Their Highs, But Show Growth:
Small Business Still Lagging Behind
(ISM Diffusion Indexes, 50 = breakeven)
65
(NFIB Optimism Index,1986=100)
101
60
98
55
95
50
92
45
89
40
86
35
83
30
80
2007
2008
Manufacturing Index
2009
Nonmanufacturing Index
2010
NFIB Small-Business
5
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Employment Is Turning, But Not Rapidly
Private Payroll Employment*
250
Unemployment Rate**
12
0
10
-250
-500
8
-750
6
-1,000
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
4
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Length of Workweek***
Temporary Employment*
35.0
100
34.5
50
0
34.0
-50
33.5
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
-100
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
*Thousands, monthly change, SA; **Percent; ***Hours, SA
6
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Inventory Cycle Support For Growth Has Peaked
(Annualized real rate of growth, Q/Q, percent)
6
4
2
0
-2
-4
-6
-8
2008
2009
2010
GDP
2011
2012
Final Sales
7
Copyright © 2010 IHS Global Insight. All Rights Reserved.
U.S. Economic Growth by Sector
(Percent change unless otherwise noted)
2009
2010
2011
2012
Real GDP
-2.6
2.6
2.2
3.1
Final Sales
-2.1
1.2
2.3
3.0
Consumption
-1.2
1.5
2.2
2.2
Light Vehicle Sales (Millions)
10.4
11.4
12.8
14.8
-22.9
-3.9
7.5
32.9
0.55
0.59
0.79
1.24
-17.1
4.9
6.6
8.5
5.7
3.8
-0.7
-3.7
State and Local Government
-0.9
-1.2
0.5
0.2
Exports
-9.5
11.9
7.6
7.3
Imports
-13.8
12.3
6.2
5.3
Residential Investment
Housing Starts (Millions)
Business Fixed Investment
Federal Government
8
Copyright © 2010 IHS Global Insight. All Rights Reserved.
Other Key Indicators
(Percent unless otherwise noted)
2009
2010
2011
2012
Industrial Production (% growth)
-9.3
5.3
2.8
3.3
Employment (% growth)
-4.3
-0.5
0.9
2.2
9.3
9.7
9.6
9.0
-0.3
1.6
1.5
1.8
Oil Prices (WTI, US$/bbl)
62
77
83
89
Core PCE Price Inflation
1.5
1.4
1.2
1.4
Federal Funds Rate
0.16
0.16
0.14
1.27
10-year Government Bond Yield
3.26
3.13
2.51
3.14
Dollar (Major Currencies, 2005=1)
0.93
0.91
0.92
0.90
Unemployment Rate
CPI Inflation
9
Copyright © 2010 IHS Global Insight. All Rights Reserved.
The Housing Cycle:
Still At The Bottom
House Price Adjustment Has Gone a Long Way:
Probably Not Complete
(FHFA house price index* divided by average labor compensation, 2000 = 1.0)
1.3
1.2
1.1
1.0
0.9
0.8
1975
1980
1985
1990
* Purchase-only index from 1991 onwards
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1995
2000
2005
2010
11
Housing Supply Overhang Still Severe
(Proportion of homeowner inventory vacant and for sale, percent)
3.0
2.5
2.0
1.5
1.0
0.5
1975
1980
Source: Census Bureau
Copyright © 2010 IHS Global Insight. All Rights Reserved.
1985
1990
1995
2000
2005
2010
12
Key Single-Family Housing Indicators:
No Underlying Improvement Yet
Existing Home Sales*
New Home Sales*
6
1.0
5
0.8
0.6
4
0.4
3
2007
2008
2009
2010
0.2
2007
Months’ Supply of Homes**
14
2008
2009
2010
Housing Starts*
1.25
12
1.00
10
0.75
8
6
4
2007
New
2008
0.50
Existing
2009
2010
0.25
2007
2008
2009
2010
*Millions, SA; **Single-Family Homes for sale divided by monthly selling rate
13
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Housing Starts Have Hit Bottom:
Prices Not Quite There Yet
(Million units)
(Purchase-only index, 1991Q1 = 100)
2.4
225
2.0
215
1.6
205
1.2
195
0.8
185
0.4
175
0.0
165
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Housing Starts (Left scale)
FHFA House Price Index (Right scale)
14
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The Consumer :
Reviving, But Without Vigor
The Personal Saving Rate Has Risen
(Personal savings rate, percent of disposable income)
10
Stimulus
Payments
8
Economic
Recovery
Payments
Microsoft Dividend
6
9/11
4
2
Post 9/11 vehicle incentives
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
16
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Consumer Sentiment Off the Floor But Still Weak
(Reuters/University of Michigan Index, 1966=100)
120
110
100
90
80
70
60
50
1978
1982
1986
1990
1994
1998
2002
2006
2010
17
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Consumer Spending Stabilizing,
But Not a Strong Driver of Recovery
(Annualized rate of growth)
6
4
2
0
-2
-4
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
18
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Business Investment:
A Mixed Picture
Business Equipment Demand Recovering
(Non-defense capital goods ex-aircraft, 3-mo moving average, US$ billions)
70
65
60
55
50
45
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Orders
Shipments
20
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Nonresidential Construction:
Architects’ Billings Still Soft, But Off the Floor
(Diffusion Index)
65
60
55
50
45
40
35
30
1995
1997
1999
* Source: American Institute of Architects
Copyright © 2010 IHS Global Insight. All Rights Reserved.
2001
2003
2005
2007
2009
21
Business Capital Spending Cycle:
Construction Lags
(Percent change annualized rate, real spending)
30
20
10
0
-10
-20
-30
-40
2007
2008
2009
2010
Software & Equipment
2011
2012
Buildings
22
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Foreign Trade:
A Drag Now, A Plus Later
Export Growth By Destination:
All Strong Except for Europe
(Percent growth, merchandise exports, YTD, as of June 2010)
40
30
20
10
0
Total
(100%)
Pac Rim
(25%)
Europe
(23%)
Latin
America
(22%)
Export shares are in parentheses. Latin America includes Mexico.
Copyright © 2010 IHS Global Insight. All Rights Reserved.
Canada
(20%)
Other
(10%)
24
We Expect Exports to Outpace Imports
(Percent change annualized rate, volumes)
45
30
15
0
-15
-30
-45
2007
2008
2009
Real U.S. Exports
2010
2011
2012
Real U.S. Imports
25
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The U.S. Dollar: Secular Weakness Against EMG
Currencies
(2005=1.0, inflation-adjusted)
1.6
1.4
1.2
1.0
0.8
0.6
1976
1980
1984
1988
Major Currency Index
1992
1996
2000
2004
2008
2012
Other Important Trading Partners Index
26
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Inflation and Interest Rates
Headline CPI Inflation Is Positive Again;
But Core Inflation Is Still Easing
(Percent change from a year earlier)
6
5
4
3
2
1
0
-1
-2
2006
2007
2008
2009
All-Urban CPI
2010
2011
2012
Core PCE Price Index
28
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Federal Funds Rate to Stay Near Zero Until 2012:
More Quantitative Easing Is Probable
(Percent)
7
6
5
4
3
2
1
0
1999
2001
2003
2005
Federal Funds
2007
2009
2011
10-Year Treasury Yield
29
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Federal Government Budget:
Harsh Realities
Federal Fiscal Policy Assumptions
• Long-run tightening essential......but immediate tightening risky...and
markets are not demanding it
• We assume
– Bush tax cuts extended for one more year (1.1% of GDP in CY
2011)
– Making Work Pay tax credit extended one more year (0.3% of
GDP in CY 2011)
• Upper-income tax cuts (0.3% of GDP) and Making Work Pay tax
credit (0.3% of GDP) assumed to expire in 2012
• Further income-tax increases in 2013 and beyond
31
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The Federal Budget Gap
(Percent of GDP)
26
24
22
20
18
16
14
1980
1984
1988
1992
1996
2000
Revenues
2004
2008
2012
2016
2020
Expenditures
32
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Federal Spending Shares in GDP
(percent of GDP)
25
20
15
10
5
20
00
20
0
20 1
02
20
03
20
04
20
0
20 5
0
20 6
07
20
08
20
09
20
1
20 0
11
20
12
20
13
20
14
20
1
20 5
16
20
17
20
18
20
1
20 9
20
0
Defense
Social Security
Nondefense goods & services
Medicare/Medicaid
Interest
Other
33
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Taxes Must Rise For Everybody
(Effective federal personal income tax rate, percent)
26
24
22
20
18
16
14
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020
34
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Implications
•
Growth boost from the inventory cycle and stimulus is fading
•
Employment and consumption improving, but slowly
•
Exports, business equipment spending moving higher
•
Nonresidential construction still declining; no sustainable
residential construction recovery yet
•
Inflation trend is down; Fed to stay loose
•
“Double-dip” risk: 25%
•
The question is not whether taxes will rise but when and how
•
A deficit reduction plan is needed—but not yet action
35
Copyright © 2010 IHS Global Insight. All Rights Reserved.
Thank you!
Nigel Gault
Chief U.S. Economist
[email protected]