Navigating a sea of economic uncertainty. Outlook Sarasota, March 19, 2019… · Labor market: Still solid job growth overall, despite February figures Nonfarm payrolls (Monthly Change,

Navigating a sea

of economic

uncertainty

March 19, 2019

Sarasota, FL

Global slowdown leads to higher uncertainty

U.S. GDP expected to slow to 2.5% in 2019, and 2.0% in 2020

Risk of recession 24 months ahead remains elevated

Fed to delay raising rates until 4Q19

Labor market conditions remain favorable

Core inflation to remain stable, rebound in energy prices to lift headline

10-year Treasury to follow shallower path, implying a flat interest rate curve

Oil prices converging with long-term equilibrium of around $60/b

High debt levels in a rising rate environment pose credit cycle risks

Trade deal with China has the potential to support the current expansion

Florida among the states posed to outperform in growth in 2019

Sarasota region enjoying excellent economic conditions

Key messages

Global economy – elevated uncertainty

0

50

100

150

200

250

300

350

06 07 08 09 10 11 12 13 14 15 16 17 18 19

Global policy uncertainty Index

Source: BBVA Research and Haver

Industrial production YoY % Change

China: Total imports YoY % Change

Global sentiment Index

3

-60

-40

-20

0

20

40

60

80

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

-10

-5

0

5

10

15

20

12 13 14 15 16 17 18 19

Japan Germany

-40

-30

-20

-10

0

10

20

30

40

06 07 08 09 10 11 12 13 14 15 16 17 18 19

Economic activity

Real-time economic momentum heat map

Source BBVA Research Below Average Above Average

Improving manufacturing

sentiment on less negative views

on domestic demand and thawing

trade tensions

Small business optimism has

improved after a period od decline

Aug-January on concerns about

future economic growth

Home prices appreciation strong

despite weaker demand side

conditions

Consumer confidence reversed in

February after reaching lowest

level since 2017 in January

Steady productivity growth amidst

strong labor force inflows and

modest wage increases

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

3-months

ago

2-months

ago

1-month

agoCurrent

Industrial production (Year-over-year %)

Retail sales (Year-over-year %)

Economic trends: Industrial production moderates while retail

sales recovered somewhat after plummeting in December

Source: BBVA Research, FRB & BEA

-6%

-4%

-2%

0%

2%

4%

6%

8%

2010 2011 2012 2013 2014 2015 2016 2017 2018

Oil & Gas High-Tech Motor Vechicles

Consumer Gds Biz Equip Headline (lhs)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Autos Health & P. Care Gas

Clothing Nonstore Food Servc

Headline (lhs)

Economic trends: FX and slower global growth weigh

on exports

Real exchange rate and exports (Year-over-year %)

Real exports (Contribution to year-over-year %)

Source: BBVA Research, FRB & Census

-6

-4

-2

0

2

4

6

8

10

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

Feb

-2017

De

c-2

016

Oct-

2016

Aug-2

016

Jun-2

016

Apr-

2016

Feb

-2016

De

c-2

015

Oct-

2015

Aug-2

015

Jun-2

015

Consumer Goods ex Food Food & Bev.

Industrial Supplies Autos

Other Cap Goods ex Autos

-10

-5

0

5

10

15

20

Jan-2

015

Apr-

2015

Jul-2

015

Oct-

2015

Jan-2

016

Apr-

2016

Jul-2

016

Oct-

2016

Jan-2

017

Apr-

2017

Jul-2

017

Oct-

2017

Jan-2

018

Apr-

2018

Jul-2

018

Oct-

2018

Trade weighted dollar index Exports

GDP

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

20

20

20

22

Real GDP Average: '00-Current

Real GDP Year-over-year %

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

PCE Nonres Res Inv NetExports

Federal State

4Q18 Average 2014-Current

Source: BBVA Research & BEA

GDP- contribution to growth Annualized %

7

GDP and recession probability

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Q1-1

8

Q2-1

8

Q3-1

8

Q4-1

8

BB

VA

Atl F

ed

NY

Fed

20

19

20

19-2

021

Forecast1Q19

Baseline

Real GDP SAAR, %

0

10

20

30

40

50

60

70

80

90

100

83 86 88 91 94 97 00 03 06 09 12 15 18

12-months ahead 24-months ahead

Source: BBVA Research & BEA Recession Probability

Recession probability %, 4wkma

8

Labor market

In February, nonfarm payroll employment grew 20,000, down

from 311,000 and 227,000 in December

The unemployment rate (UR) decreased to 3.8

Major weaknesses: construction (-31K), education (-18.7K), retail trade (-6.1K),

transportation and warehousing (-3.0K), mining (-2.8K), and leisure and

hospitality (unchanged).

Gains: professional business services (42K) and financial related industries (6K).

Average hourly earnings growth at 3.4% is just shy of the pre-crisis peak of 3.6%.

Labor force participation has some room to increase further

We expect the UR to reach its low point in this business cycle in 3Q19 (3.6%),

and job growth to continue to decelerate

Labor market: Still solid job growth overall, despite February

figures

Nonfarm payrolls (Monthly Change, K)

Industry employment (Annualized % change)

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

-10 -5 0 5 10

Retail Trade

Information Services

Federal Government

Local Government

State Government

Financial Activities

Other Services

Wholesale Trade

Manufacturing

Education & Health Services

Leisure & Hospitality

Professional & Business Services

Construction

Transportation & Warehousing

Mining

Monthly Year-over-year

Labor market: While hours worked fluctuate somewhat, wage

pressures are rising

Average weekly hours (number & 5mcma)

Average hourly earnings (YoY% & 5mcma)


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Jan

-200

8

Au

g-2

00

8

Ma

r-2

009

Oct-

20

09

Ma

y-2

01

0

De

c-2

010

Jul-

201

1

Fe

b-2

012

Se

p-2

01

2

Ap

r-20

13

No

v-2

013

Jun

-201

4

Jan

-201

5

Au

g-2

01

5

Ma

r-2

016

Oct-

20

16

Ma

y-2

01

7

De

c-2

017

Jul-

201

8

Fe

b-2

019

33.2

33.4

33.6

33.8

34.0

34.2

34.4

34.6

34.8

Jan

-200

8

Jul-

200

8

Jan

-200

9

Jul-

200

9

Jan

-201

0

Jul-

201

0

Jan

-201

1

Jul-

201

1

Jan

-201

2

Jul-

201

2

Jan

-201

3

Jul-

201

3

Jan

-201

4

Jul-

201

4

Jan

-201

5

Jul-

201

5

Jan

-201

6

Jul-

201

6

Jan

-201

7

Jul-

201

7

Jan

-201

8

Jul-

201

8

Jan

-201

9

Labor market: Solid labor market utilization with some

decline in the unemployment rate

U-6 (%)

Unemployment rate (%)


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

Jan-0

9

Jul-0

9

Jan-1

0

Jul-1

0

Jan-1

1

Jul-1

1

Jan-1

2

Jul-1

2

Jan-1

3

Jul-1

3

Jan-1

4

Jul-1

4

Jan-1

5

Jul-1

5

Jan-1

6

Jul-1

6

Jan-1

7

Jul-1

7

Jan-1

8

Jul-1

8

Jan-1

9

Pre-Crisis Avg.

Labor market: While more workers can enter the workforce,

wage inflation will continue to inch up

80.0

80.5

81.0

81.5

82.0

82.5

83.0

83.5

84.0

84.5

85.0

90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Prime-age LF participation rate 1990-1999 average

Prime-age labor force participation rate %

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

LF Participation Average hourly earnings (rhs)

Source: BBV A Research and BLS

Labor force participation and wages PP YoY and % YoY

13

Inflation

Headline consumer price index (CPI) was up 0.2% month-

over-month in February and core CPI was up 0.1%

The declines in energy prices ended and the recovery in oil prices should

limit pass-through to energy prices going forward

On a year-over-year basis, headline CPI stood at 1.5% while core remained

stable at 2.1%

The probability of entering high-inflation regime is nonexistent; deflation risks

are also low

Implied 5-year and 10-year inflation expectations have edged up with energy

prices rising and demand-side fears fading

Pass-through from low energy prices to bring headline CPI below 2% for

year; core CPI to remain close 2.2%

Inflation: Although core prices remains stable,

headline dropping due to declines in energy prices

Consumer price inflation (12m change)

Core inflation measures (12m change)

Source: BBVA Research, BLS & BEA

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

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

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

No

v-2

000

Oct-

2001

Sep-2

002

Aug-2

003

Jul-2

004

Jun-2

005

Ma

y-2

006

Apr-

2007

Ma

r-2

008

Feb

-2009

Jan-2

010

De

c-2

010

No

v-2

011

Oct-

2012

Sep-2

013

Aug-2

014

Jul-2

015

Jun-2

016

Ma

y-2

017

Apr-

2018

Core CPI Core PCE Weighted Median

Inflation: Probability of high inflation regime

extremely low

Core PCE price index & inflation regimes Month-over-month %

Inflation regime change probability %


0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

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

-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

Inflation: Baseline for modest undershoot in 2019

Inflation expectations (%)

Headline & core CPI (Year-over-year %)

Source: BBVA Research & Haver Analytics

-2

-1

0

1

2

3

4

5

6

Ma

r-2

000

Ma

y-2

001

Jul-2

002

Sep-2

003

No

v-2

004

Jan-2

006

Ma

r-2

007

Ma

y-2

008

Jul-2

009

Sep-2

010

No

v-2

011

Jan-2

013

Ma

r-2

014

Ma

y-2

015

Jul-2

016

Sep-2

017

No

v-2

018

Jan-2

020

Ma

r-2

021

Ma

y-2

022

Core Headline

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

The FOMC left the target range of the Fed Funds rate

unchanged at their January 29-30th meeting

FOMC shifting tone saying, “[i]n light of global economic and financial

developments and muted inflation pressures, the Committee will be patient”

The FOMC has not reached a consensus on what conditions would be needed

to continuing raising rates, but several members felt higher inflation or a more

benign risk outlook would be sufficient for the Fed to raise later this year

Terminal level of the balance sheet will be significantly higher (1-1.5Tr) than

previously estimated and the normalization cycle will end sooner (EOY)

With conditions similar to 2016—elevated uncertainty, financial tensions and

weaker growth fundamentals— and with actual and expected inflation likely to

undershoot the Fed’s target in the 1H19, we believe that this means the Fed will

wait until the 4Q19 before raising rates again.

Monetary policy: Federal Reserve

Fed: Patience is name of the game; rate increases on hold until

4Q19

BBVA & dealers projections of Fed Funds (%, Effective)

FOMC projections of Fed Funds (Year-over-year %, Mid-point)

Source: BBVA Research & FRB

1

1.5

2

2.5

3

3.5

4

2018 2019 2020 2021 L-Term

Sep-18 Current

0

1

2

3

4

5

6

BBVA-Baseline Median 75th Percentile

25th Percentile BBVA-Upside BBVA-Downside

Monetary policy: Markets discounting prolonged pause,

possible rate cut in 2020

Fed Funds implied probability (Number of rate increases through 2019, %)

Fed Funds futures & BBVA baseline (%)

Source: BBVA Research & Bloomberg

0.5

0.75

1

1.25

1.5

1.75

2

2.25

2.5

2.75

3

3.25

Oct-

16

Jan-1

7

Apr-

17

Jul-1

7

Oct-

17

Jan-1

8

Apr-

18

Jul-1

8

Oct-

18

Jan-1

9

Apr-

19

Jul-1

9

Oct-

19

Jan-2

0

Apr-

20

Jul-2

0

Oct-

20

FFR + BBVA Forecast 8/8/2018

10/3/2018 12/26/2018

2/20/2019

0

10

20

30

40

50

60

70

80

90

100

<2.25% 2.25-2.5 2.5-2.75 2.75-3.0 3.0+

Cut Zero One Two Three

Last 1M Ago

10-yr Treasury in February at 2.68%, 70bp below 4Q18 peak,

2-yr Treasury at 2.51% 50bp below peak

Dramatic shift in Fed’s balance sheet strategy and the U-turn on their

guidance for policy rates suggests further compression in the term

premium in medium-term and shift in the level

Rising global uncertainty and dovish monetary policy abroad could add to

the compression on the term premium, meaning a flatter-for-longer

scenario for the yield curve

Ample domestic demand for U.S. government debt from domestic sectors

contain upside pressures on yields

10-yr Treasury to reach 2.9% by end of 2019 and 3.1% by year end 2020

Interest rates

Interest rates: Drop in inflation expectations and negative

term premium push 10-year Treasury below 2.7%

10-Year Treasury yield decomposition (%)

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

12 13 14 15 16 17 18

Real Rate Term Premium Inflation Expectations Yield

Interest rates: Nontrivial downward revisions to 10-year,

risks now more balanced

10-Year Treasury yield (%)

Source: BBVA Research, ACM & Haver Analytics

0

1

2

3

4

5

6

7

Jan.2

00

7

Ma

y.2

00

7

Sep.2

007

Jan.2

00

8

Ma

y.2

00

8

Sep.2

008

Jan.2

00

9

Ma

y.2

00

9

Sep.2

009

Jan.2

01

0

Ma

y.2

01

0

Sep.2

010

Jan.2

01

1

Ma

y.2

01

1

Sep.2

011

Jan.2

01

2

Ma

y.2

01

2

Sep.2

012

Jan.2

01

3

Ma

y.2

01

3

Sep.2

013

Jan.2

01

4

Ma

y.2

01

4

Sep.2

014

Jan.2

01

5

Ma

y.2

01

5

Sep.2

015

Jan.2

01

6

Ma

y.2

01

6

Sep.2

016

Jan.2

01

7

Ma

y.2

01

7

Sep.2

017

Jan.2

01

8

Ma

y.2

01

8

Sep.2

018

Jan.2

01

9

Ma

y.2

01

9

Sep.2

019

Jan.2

02

0

Ma

y.2

02

0

Sep.2

020

Jan.2

02

1

Ma

y.2

02

1

Sep.2

021

Jan.2

02

2

Ma

y.2

02

2

Sep.2

022

Historic Baseline upside Downside Risk NABE (EOP)

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

Interest rates: Yield curve slope to remain low, but

positive

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)

Yield curve slope (Bp)

Yield curve (%, eop)

Source: BBVA Research

0.0

0.5

1.0

1.5

2.0

2.5

Jan-2

015

Jul-2

015

Jan-2

016

Jul-2

016

Jan-2

017

Jul-2

017

Jan-2

018

Jul-2

018

Jan-2

019

Jul-2

019

Jan-2

020

Jul-2

020

Jan-2

021

Jul-2

021

Jan-2

022

Jul-2

022

30Yr-10yr 10Yr-1Yr

OPEC+ cuts, a pause in U.S. interest rate increases, and

signals of a trade deal between U.S. and China resulted

in higher prices

Going forward, the expiration of import waivers of Iranian oil could add an extra

boost

U.S. production is expected to remain robust through the year, more

transportation infrastructure will facilitate exports

Demand is projected to slow down as global economic growth weakens

We maintain our forecasts of convergence to long-term equilibrium 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

BBVA Research – U.S. Economic Outlook February 2019 / 26

Improving sentiment on the global economy, plus OPEC+ commitment

to adjust supply led to higher prices

Source: BBVA Research and Haver Analytics

Crude oil prices August 2018 to February 2019 ($ per barrel)

40

45

50

55

60

65

70

75

80

85

90

Sep Oct Nov Dec Jan Feb Mar

WTI Brent

September 23

OPEC and allies

agree not to further

increase oil

production

September 25

India may cut imports of

Iranian oil to zero in

November

October 8-12

Stock market chaos.

Concerns on weaker

demand emerge

November 2

U.S. issue waivers to

Iran’s oil buyers

November 6

EIA expects U.S. crude oil

production to surpass 12

million b/d by 2019

November 12

OPEC lowers oil

demand growth

forecasts and

anticipates

oversupply

December 6

OPEC hints a lower than

expected cut

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

extend talks to end

their trade war


Demand supported by China, India and the U.S.


Oil product demand: total world (Thousand barrels per day, yoy change)

Oil product demand (Million barrels per day)

43

44

45

46

47

48

49

50

30

35

40

45

50

55

Sep-0

8

Ma

r-0

9

Sep-0

9

Ma

r-1

0

Sep-1

0

Ma

r-1

1

Sep-1

1

Ma

r-1

2

Sep-1

2

Ma

r-1

3

Sep-1

3

Ma

r-1

4

Sep-1

4

Ma

r-1

5

Sep-1

5

Ma

r-1

6

Sep-1

6

Ma

r-1

7

Sep-1

7

Ma

r-1

8

Sep-1

8

non-OECD OECD (rhs)

60

70

80

90

100

110

120

130

140

3.4

3.5

3.6

3.7

3.8

3.9

4.0

4.1

4.2

4.3

4.4

2014 2015 2016 2017 2018

Th

ou

san

ds

Production (lhs) Imports (rhs)

China: imports and production of crude oil (Million metric tons SA, and million b/d)

Sharp increase induced

by Iranian sanctions and

expiration of small

refineries import quotas

-500

0

500

1000

1500

2000

2500

-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

Western Europe United States China

India Total World (rhs)


OPEC+ supply adjustments and the expiration of waivers to importers

of Iranian oil will tight supply thought 1H19

Source: BBVA Research, Haver Analytics, and Bloomberg

Crude oil production (Million barrels per day)

11.5

11.2

10.8

10.4

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

Ma

r-1

7

Ma

y-1

7

Jul-1

7

Sep-1

7

No

v-1

7

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

Wellhead Production: Non OPEC: Russia (Ths b/d)

Wellhead Production: OPEC: Saudi Arabia (Ths b/d)

Iran: exports of crude oil (million barrels per day)

0.0

0.5

1.0

1.5

2.0

2.5

2015 2016 2017 2018

Other China India Turkey South Korea Japan Europe


U.S. production to remain solid. No signs of domestic oversupply


WTI Midland-Cushing differential ($/b)

U.S. Estimated crude oil production (Thousand barrels/day)

U.S. Crude oil inventories (Excluding SPR, million barrels)

U.S. Real private investment in E&P (yoy $billion )

-150

-100

-50

0

50

100

150

0

20

40

60

80

100

120

140

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Th

ou

san

ds

WTI (lhs) Investment (rhs)

-20.0

-15.0

-10.0

-5.0

0.0

5.0

Jan-1

7

Ma

r-1

7

Ma

y-1

7

Jul-1

7

Sep-1

7

No

v-1

7

Jan-1

8

Ma

r-1

8

Ma

y-1

8

Jul-1

8

Sep-1

8

No

v-1

8

Jan-1

9

0

100

200

300

400

500

600

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2018 Average

5-yr high 5-yr low

6

7

8

9

10

11

12

13

2015 2016 2017 2018 2019

Risk indicators suggest low risk in the short-term

Risks are concentrated in the leverage and prices segments

Debt servicing is becoming more difficult for consumers and will become more

difficult for corporations

An increase in debt distress that would lead to a rise in delinquencies could be a

trigger for tighter credit standards, a credit crunch and a recession

Credit cycle

Debt to GDP is at historically high level supported by the

ability to borrow against assets

20

25

30

35

40

45

50

5256606468727680848892960004081216

Nonfinancial corporate debt to GDP %

0%

10%

20%

30%

40%

50%

60%

52 56 60 64 68 72 76 80 84 88 92 96 00 04 08 12 16

Total liabilities to total assets

Loans and debt securities to total assets

Source: BBVA Research and FRB

Nonfinancial corporations, leverage %

The risks are primarily in the leverage and prices segments, making

corporate debt one of the primary concerns

32

PCE Real

NRI

Residential

Costs

UR

SME Leverage

Corporate

Financials

Government

Households

S&P 500 Prices

Home Price Index

Stress

Slope Rates

Real Interest Rate

Spread C&I

Consumer Quality

Residential

CRE

C&I

Consumer Standards

Mortgages

CRE

C&I

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Less risk More risk


In the short term, the economy remains in expansion

mode

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

94 96 98 00 02 04 06 08 10 12 14 16 18

BBVA Research credit cycle risk index Normalized; >0 above average risk

-

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

0.10

-2

-1

0

1

2

3

4

5

94 96 98 00 02 04 06 08 10 12 14 16 18

Source: BBVA Research, Haver and FRBSTL

Financial stress index Normalized; >0 above average stress

33

Consumer credit: Consumer fundamentals remain strong, but

leverage is increasing in a rising rate environment

Personal interest expense

Year-over-year %

New 90+ day consumer delinquency rates

%

Personal interest expense to disp. income

Ratio, %

Senior loan officers lending standards

+ tightening / - loosening

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

Ma

r-1

961

Oct-

1963

Ma

y-1

966

De

c-1

968

Jul-1

971

Feb

-1974

Sep-1

976

Apr-

1979

No

v-1

981

Jun-1

984

Jan-1

987

Aug-1

989

Ma

r-1

992

Oct-

1994

Ma

y-1

997

De

c-1

999

Jul-2

002

Feb

-2005

Sep-2

007

Apr-

2010

No

v-2

012

Jun-2

015

Jan-2

018

0

2

4

6

8

10

99 01 03 05 07 09 11 13 15 17

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 2018Credit card Autos Consumer excl. credit cards

Corporations are able to service their debt, despite some risks

in the tails, which are partly related to new corporations that still

have negative EBIT

0

0.5

1

1.5

2

2.5

3

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Average Median

Implied interest coverage ratio Ratio

-160

-140

-120

-100

-80

-60

-40

-20

0

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

5th percentile 10th percentile

Source: BBVA Research calculations and Bloomberg

Implied interest coverage ratio Ratio

35

Debt distress has been increasing, but is still at

favorable levels

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

0.1

0.2

0.3

0.4

0.5

0.6

0.7

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Distress index C&I loan delinquencies (rhs)

BBVA U.S. debt distress leading indicator Indicator estimated using financial data for a sample of 9448 firms and historical interest rates for

corporate debt (AA, BBB, BB, B and CCC)

Source: BBVA Research and FRB 36

Rising interest rates coupled with a sharp correction in

asset prices could cause a spike in defaults/delinquencies,

weakening expectations

0

1

2

3

4

5

6

7

8

94 96 98 00 02 04 06 08 10 12 14 16 18

BBB/5-yr Treasury spread C&I Delinquencies

Interest rate spreads and delinquencies Percentage points

0

1

2

3

4

5

6

7

8

0

2

4

6

8

10

12

878991939597990103050709111315171921

Fed funds rate (10 quarters ahead)

Delinquency rate (rhs)

Chargeoff rate (rhs)

Source: BBVA Research, Haver and FRB

Fed Funds rates and delinquencies %

37

China slowdown not necessarily only a result of trade war

Chinese growth estimate still above 6%

China and the U.S. working to arrive to a mutually acceptable solution.

Agreement expected some time in April, although risk of a no-deal still exists

Lifting of tariffs should translate to some support for growth both in the U.S. and

especially in China

China has indicated willingness to increase imports from the U.S. which could

have a positive impact on U.S. growth. Industries to benefit include aerospace,

O&G, agriculture and vehicles and machinery

U.S. – China trade war

China concerns are justified, but the challenges

seem contained at the moment

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

00010203040506070809101112131415161718

U.S. Euro area Japan China Rest of the world

World GDP

Distribution

Source: IMF, CEIC and BBVA Research * Mean since 2009

China activity indicators 3mma, YoY, SA

39

2018 2019

Mean* Jun Jul Aug Sep Oct Nov Dec Jan Feb

Industrial Production 9.4 6.6 6.2 5.9 6.0 6.0 5.7 5.7 5.4 5.2

CPI 2.7 1.6 1.6 1.8 2.1 2.3 2.2 2.1 1.8 1.7

Retail sales 14.4 4.2 4.1 3.7 3.9 3.6 4.4 4.5 5.5 7.1

Auto Sales 10.0 9.1 3.4 -1.5 -7.1 -9.5 -12.5 -12.7 -12.8 -12.1

Exports 8.9 11.7 11.7 10.9 12.0 13.4 11.9 4.4 1.8 -3.4

Imports 8.9 20.7 22.5 20.4 21.1 18.7 12.9 4.8 -2.1 -4.6

Manufacturing PMI -0.4 0.5 0.2 -0.5 -1.4 -2.2 -3.1 -3.5 -3.7 -3.3

Non-manufacturing PMI -0.5 0.8 0.0 0.2 -0.1 -0.1 -1.4 -1.8 -1.9 -1.2

Caixin PMI -0.2 1.9 1.2 -0.5 -1.5 -1.9 -1.6 -2.2 -3.6 -4.3

P/E ratio -0.1 -7.3 -14.6 -20.1 -21.6 -25.3 -26.6 -29.6 -30.8 -27.7

Real estate sales 23.7 12.6 12.9 14.0 14.5 14.5 13.8 13.9 13.9 13.9

Credit 17.0 12.7 12.9 13.0 13.2 13.2 13.1 13.2 13.3 13.4

MICA Forecast 6.70% 6.60% 6.50% 6.30%

GDP YoY 6.70% 6.50% 6.40%

Contraction Slow-down Growth Boom

U.S. – China trade

40 Source: BBVA Research

25% Steel

10% Aluminium All countries

25% $50 billion

10% $200 billion

China

25% $200 billion 25% All Imports from China 20% All Cars to US

-0.33

-0.66

-0.19

-0.12

-0.80 -0.60 -0.40 -0.20 0.00

World

China

US

Europe

-0.60

-1.06

-0.39

-0.23

-1.20 -1.00 -0.80 -0.60 -0.40 -0.20 0.00

World

China

US

Europe

-0.17

-0.11

-0.13

-0.13

-0.20 -0.15 -0.10 -0.05 0.00

World

China

US

Europe

Effect on GDP growth of approved US tariffs and retaliation (pp over two years, trade and financial/confidence channel)

Effect on GDP growth of additional US tariff and retaliation (pp over two years, trade and financial/confidence channel)

-0.10

-0.20

-0.07

-0.04

-0.25 -0.20 -0.15 -0.10 -0.05 0.00

World

China

US

Europe

U.S. – China trade

Source: Census Bureau, BEA and BBVA Research

Exports of goods to China Trade with China, goods and services $bn and %

Computers and electronics

Electrical equipment andappliancesMisc. commodities

Machinery ex electrical

Apparel and accessories

Other

Imports of goods from China

-0.6%

-0.5%

-0.4%

-0.3%

-0.2%

-0.1%

0.0%

0

20

40

60

80

100

120

140

160

99 02 05 08 11 14 17

Imports Exports Balance as a share of GDP (rhs)

Aerospace products

Oilseeds and grains

Oil and gas

Motor vehicles

Semiconductors and otherelectronicsOther

Florida expected to outperform in terms of growth in 2019

The state’s low relative exposure to China limits both the upside from the trade

deal and the downside from the trade tensions

The Sarasota region enjoys excellent economic conditions which are expected to

continue in the coming period

The Sarasota-North Port-Bradenton economy is relatively more exposed to

cyclical industries, implying greater stress when in recession

The region could improve its competitiveness with greater investment in facilities

that attract young educated people and businesses

Regional

Growth forecasts

Real GDP growth 2019, Forecast %


43

Regional economy: Trade exposure

Exports to China as a share of GDP %

Source: BBVA Research, Census Bureau and BEA 44

Regional economy: Florida and Sarasota to outperform in 2019

-10

-5

0

5

10

15

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Sarasota-North Point-Bradenton Florida U.S.

Real GDP % YoY

0

2

4

6

8

10

12

14

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21

Sarasota-North Point-Bradenton Florida U.S.

Source: BEA, BLS and BBVA Research

Unemployment rate % YoY

0

5

10

15

20

25

Construction Manufacturing Trade Transportation,warehousingand utilities

Financialactivities

Professionaland business

services

Education andhealth services

Leisure andhospitality

Government Other

Sarasota-North Port-Bradenton Florida U.S.

Regional economy: Sarasota more exposed to

cyclical industries

Value added by industry group % of GDP

Source: BEA and BBVA Research 46

Regional economy: Diverging patterns between GDP and

personal income per capita

GDP per capita $

Source: BEA, Census Bureau and BBVA Research

Personal income per capita $

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

05 06 07 08 09 10 11 12 13 14 15 16 17

Sarasota-North Port-Bradenton Florida U.S.

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

05 06 07 08 09 10 11 12 13 14 15 16 17

Sarasota-North Port-Bradenton FL U.S.

Economic scenarios Probability (%) Current Previous

Upside 5 5

Baseline 55 55

Downside 40 40

Subject to revision without notice

Macro Scenarios

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

GDP 2.5 2.9 1.6 2.2 2.9 2.5 2.0 1.9 1.8 1.8

Upside 3.0 3.0 3.2 3.1 2.7 2.7

Downside 2.8 0.7 -0.9 1.9 2.1 2.3

UR 6.2 5.3 4.9 4.4 3.9 3.8 4.1 4.2 4.5 4.5

Upside 3.1 2.9 2.9 3.0 3.0

Downside 4.3 6.2 6.6 5.7 5.0

CPI 1.6 0.1 1.3 2.1 2.4 1.7 2.2 2.0 2.1 2.0

Upside 1.6 3.8 3.5 3.8 3.8

Downside 0.7 1.1 1.1 1.3 1.4

Fed [eop] 0.25 0.50 0.75 1.50 2.50 2.75 2.75 2.75 2.75 2.75

Upside 3.50 5.00 5.00 5.00 5.00

Downside 1.50 0.25 0.25 0.25 0.25

10-Yr [eop] 2.21 2.24 2.49 2.4 2.83 2.87 3.09 3.23 3.37 3.46

Upside 3.90 5.10 5.90 5.90 5.90

Downside 2.40 1.60 1.90 2.10 2.10

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.

Navigating a sea

of economic

uncertainty

March 19, 2019

Sarasota, FL

Documents

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