Resolving Uncertainties: The U.S. Economic Outlook Presented to: Council of Economic Advisors Salt Lake City, Utah March 10, 2003 Presented by: Sara Johnson

Resolving Uncertainties: The U.S. Economic Outlook

Presented to:Council of Economic Advisors

Salt Lake City, UtahMarch 10, 2003

Presented by:Sara Johnson

Managing Director,Global Macroeconomics

Group781-860-6709

[email protected]

Copyright © 2003 Global Insight, Inc.

Copyright © 2003 Global Insight, Inc. 23/10/200

3

Another Jobless U.S. Recovery?

• The U.S. recovery lost momentum in late 2002. Investment and hiring plans are on hold until the Iraq situation is resolved.

• Consumer spending is driving the expansion; incomes continue to rise, but household finances and confidence have weakened.

• Business investment has stabilized, but excess capacity will limit its near-term growth.

• Europe, Japan, and South America are struggling, holding back the recovery in U.S. exports.

• Expect subpar growth through spring.


3

No Employment Growth So Far

-3

-2

-1

0

1

2

3

1998 1999 2000 2001 2002 2003 2004 2005 2006

The U.S. lost 1.9 million jobs from March 2001 to February 2003.

(Percent change, annual rate)


3

Recovery Forces Are in Place

• Expansionary monetary and fiscal policies—early and often

• Resilient consumer spending

• Strong housing demand

• End of high-tech bust

• Low inflation and strong productivity growth

• A successful outcome in Iraq will set the stage for solid growth in late 2003 and 2004.


3

The U.S. Expansion Will Strengthen

(Percent change, annual rate) (Percent)

-2

0

2

4

6

8

1998 1999 2000 2001 2002 2003 2004 2005 2006

2

3

4

5

6

7

Real GDP Growth Unemployment Rate


3

Asymmetric Global Risks

• Another major terrorist attack

• Escalation of Iraq war

• Nuclear weapons in Asia

• Potential housing market bubbles

• Policy inflexibility in Europe and Japan

• Global imbalances from too much dependence on the U.S. locomotive


3

Five Scenarios for the Iraq Conflict

• Baseline—Short War: War starts by March, lasts two months or less, minimal coalition casualties, no oil field damage, oil prices spike to $40 and retreat quickly, 60% probability

• Victory Without War: A regime change in Iraq without war (or war lasting only a few days), sanctions against Iraq lifted, oil prices drop below $20 then recover as demand strengthens, 20% probability

• No War, No Resolution: No war but uncertainty over Iraq continues and geopolitical tensions remain high, oil prices are volatile, averaging $30 this year, under 10% probability

• Long War: War drags on for six months with higher coalition casualties; oil prices stay above $30 this year, under 10% probability

• Bad War: War escalates to regional conflict, oil prices spike to $60 and average $40 this year, dollar falls 20%, U.S. and world experience a double-dip recession, under 2% probability


3

Real GDP Growth in Alternative Scenarios

-4

-2

0

2

4

6

8

1999 2000 2001 2002 2003 2004

Baseline (60%) Pessimistic (20%) Optimistic (20%)

(Percent change, annual rate)


3

Crude Oil Prices Will Retreat After the War

(WTI price, dollars per barrel)

10

15

20

25

30

35

40

45

50

1995 1997 1999 2001 2003 2005 2007

Baseline (Short War) War with Oil Field Damage


3

0

1

2

3

4

5

6

7

8

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

A Cold Winter Drives Up Natural Gas Prices

(Dollars per million Btus, Henry Hub)


3

20

40

60

80

100

120

140

160

1974 1978 1982 1986 1990 1994 1998 2002 2006

A Modest Recovery in Copper Prices

(Cents per pound)


3

Price and Wage Inflation Will Stay Mild

(Year-over-year percent change)

-3-2-10123456

1998 1999 2000 2001 2002 2003 2004 2005 2006

CPI Producer Prices Employment Cost Index


3

200

250

300

350

400

450

500

1972 1976 1980 1984 1988 1992 1996 2000 2004

Federal Military Spending Is Surging

(Billions of 1996 dollars)


3

Government Budgets Are Back in Deficit

-400

-300

-200

-100

0

100

200

300

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Federal State & Local

(Billions of dollars, fiscal years)


3

The Federal Reserve Will Start to Raise Interest Rates in September 2003

(Percent)

0

2

4

6

8

10

1998 1999 2000 2001 2002 2003 2004 2005 2006

Federal Funds Municipal Bond Yield Mortgage Rate


3

Beyond the Technology Bubble: Nasdaq and S&P 500 Indexes

0

1000

2000

3000

4000

5000

1995 1996 1997 1998 1999 2000 2001 2002 2003

0

600

1200

1800

2400

3000

Nasdaq S&P 500


3

The Stock Market Will Recover: Returns on S&P 500 Stocks and Treasury Bonds

-20

-10

0

10

20

30

40

1990 1992 1994 1996 1998 2000 2002 2004 2006

Stock Market Return 10-Year Treasury Bond Yield

(Percent)


3

-100

0

100

200

300

400

500

600

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Capital Gains Have Disappeared

(Billions of dollars)


3

When Will Profits Recover?

• Profitability began to deteriorate in late 1997, three years ahead of the stock market downturn.

• After-tax earnings have fallen 26% from their peak.

• Earnings will be bolstered by rising productivity.

• Pricing power will be limited, although the dollar’s depreciation will help.

• Bottom line: a resurgence in 2003-04 and a slight retrenchment in 2005-06.


3

Corporate Profits Will Rebound in 2003-04

-15

-10

-5

0

5

10

15

20

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

After-Tax Profits GDP

(Percent change, NIPA basis)


3

Real Equity and Net Worth per Household

0

75

150

225

300

375

450

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Net Worth Equity Holdings

($Thousands per household, 2002 dollars)


3

Bank Card Delinquency Rate Reaches New High

0

1

2

3

4

5

1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

2

4

6

8

10

12

Bank Card Delinquency Rate Unemployment Rate

(Percent) (Percent)


3

Real Consumer Spending and Confidence

(Annual percent change, 1996$) (Michigan Index, 1967=1.0)

0

1

2

3

4

5

6

7

1998 1999 2000 2001 2002 2003 2004 2005 2006

75

80

85

90

95

100

105

110

Real Consumption Growth Consumer Sentiment


3

Light Vehicle Sales Responded to Incentives

(Millions of units)

0

4

8

12

16

20

1972 1976 1980 1984 1988 1992 1996 2000 2004

Cars Light Trucks


3

Monetary Policy Has Stabilized Home-Building

(Housing starts, millions of units)

0.0

0.4

0.8

1.2

1.6

2.0

2.4

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Single-Family Multi-Family


3

Allocation of Cash-outs from Home Refinance

Home Improvement

35%

Real Estate or Business

10%Stocks11%

Taxes2%

Debt Repayment

26%

Consumer Spending

16%

(Percent of total, January 2001-June 2002)


3

Little Improvement in Capital Goods Orders

(Billions of dollars, annual rates)

0

100

200

300

400

500

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Computers & Electronics Aircraft Other Nondefense


3

A Slow Recovery in Real Business Investment

-20

-10

0

10

20

30

Structures Computers Software Communic.Equipment

AllEquipment

2000 2001 2002 2003 2004

(Percent change, 1996 dollars)


3

Office Vacancy Rates Have Soared in the Tech Centers, Depressing Construction

0

4

8

12

16

20

24

1996 1997 1998 1999 2000 2001 2002

Salt Lake City Seattle San Jose U.S.

(Percent of available space)

Source: CB Richard Ellis


3

Computers and Software’s Share of GDP Will Rise

0.0

0.51.0

1.5

2.0

2.53.0

3.5

4.0

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Computers Software

(Consumer & business spending as a percent of GDP)


3

Real U.S. Exports and Imports Reflect the Business Cycle and Exchange Rates


-12

-8

-4

0

4

8

12

16

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Real Exports Real Imports


3

Emerging Asia Will Achieve the Fastest Growth

-2-1012345678

Canada Mexico SouthAmerica

W. Europe Japan Other Asia

2000 2001 2002 2003 2004

(Percent change, real GDP)


3

The Widening U.S. Current Account Deficit

(Billions of dollars) (Percent of GDP)

-800

-600

-400

-200

0

200

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

-8

-6

-4

-2

0

2

Current Account Deficit Deficit as % of GDP


3

The U.S. Dollar Is Still Overvalued

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1976 1980 1984 1988 1992 1996 2000 2004

Industrial Countries Developing Countries

(Real Trade-Weighted Dollar Index, 1996=1.0)


3

1.5 to 2.91.2 to 1.41.0 to 1.10.8 to 0.9

Western & Southern Regions Lead in Job Growth(Annual percent change, 2002-07)


3

Utah’s Employment Downturn Was Severe

-4

-2

0

2

4

6

8

1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

Utah U.S. (Sum of States)



3

Utah’s Employment and Income Growth

-2

0

2

4

6

8

Employment Wage Rates Wage Income Other Income

2000 2001 2002 2003 2004 2005

(Percent change, state fiscal years)


3

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Documents

Resolving Uncertainties: The U.S. Economic Outlook Presented to: Council of Economic Advisors Salt Lake City, Utah March 10, 2003 Presented by: Sara Johnson