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Bloomberg BRIEF: Economics U.S. 2013 Economic Overview and Outlook
Joseph Brusuelas | January 2013
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 2 <<<<
Executive Summary
Politics and Policy To Be Major Determinants of Growth
• Fiscal drag to be a major theme in 2013. - Automatic sequestration could increase fiscal drag.
• Fed policy designed to address economy caught in liquidity trap. - Fed will continue to purchase assets throughout 2013.
• Chances for major tax and fiscal reform are probably remote.
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 3 <<<<
Executive Summary
Another Year of 2 Percent Growth Likely
• Job growth around 150,000 per month with a modest decline in the unemployment rate by end of year.
• Growth drivers: energy, housing , manufacturing and improving financial conditions.
Risks to the outlook
• External Sector: Euro zone and Middle East tensions.
• Domestic fiscal policy disputes.
• Financial regulation.
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 4 <<<<
Jobs and Growth
-7
-5
-3
-1
1
3
5
-1000
-800
-600
-400
-200
0
200
400
1996 1998 2000 2002 2004 2006 2008 2010 2012
Qu
arterly A
verage (Pe
rcentage) Q
uar
terl
y A
vera
ge (
Tho
usa
nd
s)
Real GDP Y/Y (RHS) Total Change in Employment (LHS)
Source: Bloomberg R2=.77
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 5 <<<<
Executive Summary
US Economy: Liquidity Trap Prevails
• Slow growth and elevated unemployment continue.
• Investors have not priced in fiscal drag on growth in first half of 2013.
• 10-year rate likely hit high for until second half of year.
• Dollar weakness to persist against trade weighted basket of currencies.
• Policy debate around debt ceiling and sequestration to economy remains the primary risk to the economic outlook.
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 6 <<<<
Mind The Gap
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
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 7 <<<<
Labor Market Slack Persists
3
4
5
6
7
8
9
10
1158
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>
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 8 <<<<
Real Consumption on Lower Trend
8000
8500
9000
9500
10000
10500
11000
2005 2006 2007 2008 2009 2010 2011 2012
Bill
ion
s (C
hai
ne
d 2
00
5 $
)
Real PCE Trend Prior to Recession
Source: Bloomberg US.HHSPNR BEA INDEX<GO>
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 9 <<<<
Cyclical Growth Outlook
Core Scenario: Below Trend (2.5 percent) Growth
• Liquidity Trap Defines Business Cycle.
• Liquidity injections into banking system have failed to stimulate growth and employment back to trend.
• Monetary policy targeting liquidity trap.
• Policy gridlock offers no fiscal relief.
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 10 <<<<
Cyclical Growth Outlook
Structural adjustment to growth model and labor market continues.
• Moving away from overconsumption based on easy credit.
• Growth: 2.2 percent cyclical growth average.
• Consumption: 1.5 percent cyclical growth average.
• Diversification of growth drivers.
• Elevated unemployment likely to persist.
• Public and private deleveraging continues.
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 11 <<<<
Cyclical Growth Outlook
Alternative Scenario: Cyclical Outperformance
• Long term tax and fiscal reform.
• Sustainable increase in corporate and consumer confidence.
• Domestic corporations deploy.
• Growth and hiring move back toward long term trends.
• Rising rates and inflation.
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 12 <<<<
Bloomberg Consensus: Survey of Forecasters
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13
Real GDP 1.40% 1.60% 2.10% 2.50% 2.80%
CPI 2.0% 1.70% 2.0% 1.90% 2.10%
Core PCE 1.70% 1.60% 1.60% 1.70% 1.80%
Unemployment 7.83% 7.80% 7.80% 7.70% 7.50%
Central Bank Rate 0.25% 0.25% 0.25% 0.25% 0.25%
2-Year Rate 0.25% 0.26% 0.29% 0.34% 0.41%
10-Year Rate 1.76% 1.76% 1.86% 1.99% 2.14%
EUR/USD $1.32 $1.29 $1.28 $1.27 $1.27
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 13 <<<<
Slow Growth Likely to Define 2013
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
1998 2000 2002 2004 2006 2008 2010 2012
GD
P Y
/Y P
erce
ntage
Ch
ange
Ind
ex (
Qu
arte
rly
Ave
rage
)
ISM Manufacturing Survey (LHS)
Weighted ISM Manufacturing & Non-Man (LHS)
GDP Y/Y (RHS)
Source: Bloomberg NAPMPMI, GDP CYOY INDEX<GO>
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 14 <<<<
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>
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 15 <<<<
Real Consumption and Consumer Confidence
-4
-2
0
2
4
6
8
50
60
70
80
90
100
110
120
1996 1998 2000 2002 2004 2006 2008 2010 2012
Ye
ar Ove
r Ye
ar Pe
rcentage C
han
ge
Ind
ex
University of Michigan Consumer Sentiment Real Personal Consumption
Source: Bloomberg
PCE CHY%, CONSSENT INDEX<GO>
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 16 <<<<
Central Bank Policy Outlook and Overview
Fed will likely remain on hold throughout 2013
• Forward guidance to remain unchanged.
• Asset purchase to remain in place, then slow in 2014.
.
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 17 <<<<
Central Bank Policy Outlook and Overview
• Aggressive action to unclog monetary transmission mechanism to remain in place through 2013.
• Balance sheet likely to expand to $4 trillion by end of 2013.
• If policy does not gain traction, Fed will begin to create conditions for targeting of nominal GDP.
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 18 <<<<
Central Bank Policy Outlook and Overview
Five C’s of U.S. Monetary Policy
• Communications
• Commitment
• Conditionality
• Composition
• Credibility
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 19 <<<<
The Long Road Ahead
Scenario 1: Structural Break Scenario 2: Cyclical Recovery
7% NAIRU 7% NAIRU 5.5% NAIRU 5.5% NAIRU
Monthly Job Gains 150,000 150,000 150,000 150,000
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 3 Years 1.5 Years 7 Years 4 Years
Slow Grind Back To Full Employment
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 20 <<<<
Mortgage Backed Primary Secondary Spread
80
100
120
140
160
180
Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13
Bas
is P
oin
ts
Mortgage Backed Primary-Secondary Spread
Fed MBS Purchase Program Starts
Source: Bloomberg ILM3NAVG, MTGEFNCL INDEX<GO>
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 21 <<<<
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 Estinates
Evans Rule Estimates
Fed Funds Rate
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 22 <<<<
Rate Outlook
U.S. 10-Year likely posted highs for first half of 2013
• Forward looking rates indicated Fed policy to continue to suppress curve.
• Slower spending, followed by slow growth and modest deceleration in hiring mid year.
• Expect move back toward 1.50 on 10-year due to weak January data.
• Long term rates should trade in range between 1.50 and 2 percent.
• Risks to the outlook: - Acceleration in demand from external sector bolsters growth prospects. - Gains in labor market and housing offset fiscal drag. - Premature exit by Fed from asset purchase program.
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 23 <<<<
Image page U.S. Rates Overview
Bloomberg consensus forecast indicates higher 10- and 30-year rates.
Fed Asset Purchases Likely to continue near $85 billion per month.
Current Rates:
• 2-Year: .41 percent
• 10-year: 2.14 percent
• 30-year: 3.26 percent
Fourth Quarter Consensus Survey Rate Forecast: • 2-Year: .26 percent
• 10-year: 1.90 percent
• 30-year: 3.10 percent
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 24 <<<<
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. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 25 <<<<
FX Overview
Dollar appreciation versus euro- and-trade weighted basket of currencies eases:
• Global central bank policy will drive foreign exchange valuations.
• Competitive quantitative easing manage currency competition among highly indebted industrialized states.
• USD depreciation against a broader trade weighted based of currencies.
• Winners - AUD - CAD - BRL - MXN
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 26 <<<<
Dollar Depreciation Likely to Continue
90
95
100
105
110
115
2006 2007 2008 2009 2010 2011 2012 2013
Ind
ex
Real Trade Weighted Broad Dollar Index
Source: Bloomberg USTWBROA INDEX<GO>
QE 1 Begins QE 2 QE 3
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 27 <<<<
Image page U.S. Manufacturing Outlook
Manufacturing growth stabilizes
• Rise in capital expenditures following resolution of
- Automatic sequestration.
- Debt ceiling.
- Auto production leads modest growth in manufacturing.
o Rebuilding of auto stock following Hurricane Sandy.
o 250,000 autos destroyed by storm.
External Demand Rebounds
• Modest support for U.S. growth picture.
• European recession.
• China bounce in second half of 2013.
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 28 <<<<
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 (Qu
arterly A
verage) Y
/Y P
erc
enta
ge C
han
ge
GDP CYOY (LHS) Industrial Production (RHS)
Source: Bloomberg IP YOY, GDP CYOY INDEX<GO> R2=.76
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 29 <<<<
Excluding Europe Global Manufacturing Rebounds
-60%
-40%
-20%
0%
20%
40%
60%
30
35
40
45
50
55
60
65
2006 2007 2008 2009 2010 2011 2012
Y/Y
Pe
rcen
tage Ch
ange
(Ind
ex)
Ind
ex
MSCI World Index (RHS) US ISM (LHS) China PMI (LHS)
Euro Zone PMI (LHS) JP Morgan Global PMI (LHS)
Source: Bloomberg
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 30 <<<<
Financial Conditions Overview
• Global central banks asset purchase supportive of financial conditions.
• Improved financial conditions supportive of U.S. and global growth.
• Credit creation continues to improve.
• This has not resulted in an increase in monetary velocity.
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 31 <<<<
Bloomberg Financial Conditions Indices
-6
-5
-4
-3
-2
-1
0
1
2
2010 2011 2012 2013
Ind
ex(Z
-Sco
re)
US Financial Conditions Index
EU Financial Conditions Index
Source: Bloomberg BFCIUS, BFCIEU INDEX<GO>
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 32 <<<<
Credit Markets Healing
-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
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 33 <<<<
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
M2
Source: Bloomberg VELOM2 INDEX<GO>
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 34 <<<<
Housing Outlook and Overview
Modest cyclical recovery
• Recovery in starts driven by demand for multifamily dwellings.
• Prices stabilization.
• Some metro-areas experiencing price appreciation.
Overall housing recovery still years away
• Mortgages underwater still a concern.
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 35 <<<<
Housing Starts Stabilize
0
10
20
30
40
50
60
70
80
90
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Ind
ex
Mill
ion
s (A
nn
ual
ize
d P
ace
)
Single Family Starts National Association of Homebuilders Index
Source: Bloomberg USHBMIDX, NHSPS1 INDEX<GO>
U.S. 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 36 <<<<
Negative and Near Negative Equity Still A Policy Challenge
Negative Equity, 22.3
Near Negative Equity, 4.7
20
21
22
23
24
25
26
27
28
29
Q4'09 Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12
Pe
rce
nt
First Mortgages: Negative and Near Negative Equity
Source: Bloomberg NESHNATI, NNSHNATI INDEX<GO>
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
are his own. Bloomberg is a leading source of data, news, and analytics for financial and legal professionals,
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