The U.S. Economic Outlook - Tax Admin...The U.S. Economic Outlook Nigel Gault Chief U.S. Economist,...
Transcript of The U.S. Economic Outlook - Tax Admin...The U.S. Economic Outlook Nigel Gault Chief U.S. Economist,...
The U.S. Economic Outlook
Nigel Gault Chief U.S. Economist, IHS Global Insight FTA Revenue Estimation & Tax Research Conference Charleston, West Virginia October 17, 2011
Copyright © 2010 IHS Global Insight. All Rights Reserved.
What Has Happened to the Recovery? The Bad News
• Growth very weak; usual pattern after a severe financial crisis
• Commodity price surge and Japan disaster hit H1 growth
• Confidence in U.S. policy-making has hit new lows
• The debt-ceiling outcome offered neither short-term fiscal support nor long-term fiscal reforms; huge uncertainty remains
• Fed running out of options
• Global growth slowing; Eurozone recession likely
• Financial fall-out from Eurozone sovereign debt crisis could be severe if policy-makers cannot act more decisively
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Copyright © 2010 IHS Global Insight. All Rights Reserved.
What Has Happened to The Recovery? The Good News
• Leading indicators don’t yet point to U.S. recession
• Stock market is down but financial stress indicators are nothing like 2008, or even 2007
• Japan shock effects receding, commodity price pressures easing
• The downside to battered sectors like housing is limited
• Pent-up demand is building
• Consumer sentiment is at recession levels, but spending hasn’t followed sentiment down
• It would probably take more shocks to make a recession (rather than just weak growth) the most likely outcome
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Copyright © 2010 IHS Global Insight. All Rights Reserved.
Key Leading Indicators Have Slipped, but ISM Indexes Still Above Breakeven
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50
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60
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2007 2008 2009 2010 201180
83
86
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ISM Manufacturing Index (L scale)ISM Nonmanufacturing Index (L scale)NFIB Small-Business Optimism Index (R scale)
(ISM Diffusion Indexes, 50 = breakeven) (NFIB Index, 1986=100)
ISM = Institute for Supply Management; NFIB = National Federation of Independent Business 4
Copyright © 2010 IHS Global Insight. All Rights Reserved.
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375
400
425
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500
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Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11
4-Week Moving Average Actual
No Surge in Initial Claims
(Initial unemployment insurance claims, thousands)
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-10-8-6-4-20246
2008 2009 2010 2011 2012 2013
October Forecast July Forecast
(Annualized real rate of growth, Q/Q, percent)
Deep Recession, Slow Recovery
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Summary Outlook Tables
Copyright © 2010 IHS Global Insight. All Rights Reserved.
(Percent change unless otherwise noted)
U.S. Economic Growth by Sector
2010 2011 2012 2013 Real GDP 3.0 1.7 1.4 2.4 Final Sales 1.4 1.9 1.4 2.3 Consumption 2.0 2.1 1.9 1.8 Light Vehicle Sales (Millions) 11.6 12.5 13.2 14.7 Residential Investment -4.3 -2.1 4.3 17.9 Housing Starts (Millions) 0.58 0.59 0.67 0.94 Business Fixed Investment 4.4 8.7 4.3 5.8 Federal Government 4.5 -1.9 -2.7 -3.6 State and Local Government -1.8 -2.4 -2.7 -0.9 Exports 11.3 6.7 3.4 7.5 Imports 12.5 4.6 2.4 3.8
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(Percent unless otherwise noted)
Other Key Indicators
2010 2011 2012 2013 Industrial Production (% growth) 5.3 3.6 1.6 3.2
Employment (% growth) -0.7 0.9 0.6 1.3 Unemployment Rate 9.6 9.1 9.3 9.1
CPI Inflation 1.6 3.0 1.3 1.9
Oil Prices (WTI, $/bbl) 79 91 89 98
Core PCE Price Inflation 1.4 1.5 1.4 1.6
Federal Funds Rate 0.18 0.11 0.10 0.11 10-year Government Bond Yield 3.21 2.76 2.32 2.84 Dollar (Major Currencies, 2005=1) 0.90 0.85 0.88 0.86
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The Housing Cycle: Still At The Bottom
Copyright © 2010 IHS Global Insight. All Rights Reserved.
0.5
1.0
1.5
2.0
2.5
3.0
1975 1980 1985 1990 1995 2000 2005 2010
(Proportion of homeowner inventory vacant and for sale, percent)
The Homeowner Vacancy Rate Is Little Changed
Source: Census Bureau 11
Copyright © 2010 IHS Global Insight. All Rights Reserved.
0.50
0.751.00
1.251.50
1.75
2.002.25
2.50
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013150
160170
180190
200
210220
230
Housing Starts (LS, millions of units)FHFA House Price Index (RS, purchase-only index, 1991Q1 = 100)
A Prolonged Trough for Housing Starts: Prices Not At Bottom Yet
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The Consumer: Too Many Negatives
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Consumer Sentiment Is In Recession Territory
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1978 1982 1986 1990 1994 1998 2002 2006 2010
(Reuters/University of Michigan Index, 1966=100)
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Consumer Finances: Too Many Negatives
Negative Forces
• High Unemployment
• Heavy Wealth Loss
• Tight Credit Conditions
• High Debt Burdens
• High Prices – esp. Gasoline, Food
• Future Tax Increases Likely
Positive Forces
• Fiscal Stimulus (temporary)
• Pent-Up Demand
• Gasoline Prices Should Fall, Food Inflation Should Ease
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-4
-2
0
2
4
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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
(Annualized rate of growth)
Consumer Spending Is Not A Strong Driver of Recovery, But It’s Doing Better Than Sentiment
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Business Investment: Are Structures Joining The Recovery?
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(Percent change annualized rate, real spending)
Business Capital Spending Cycle: Construction Dawn Premature?
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-30
-20
-10
0
10
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2007 2008 2009 2010 2011 2012 2013
Software & Equipment Buildings
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Foreign Trade: Still A Plus For Growth, Though Export Prospects Have Dimmed
Copyright © 2010 IHS Global Insight. All Rights Reserved.
(Percent change annualized rate, volumes)
Exports Expected to Outpace Imports
-40
-30
-20
-10
0
10
20
30
2008 2009 2010 2011 2012 2013
Real U.S. Exports Real U.S. Imports
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Fiscal Policy
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Our Fiscal Policy Assumptions
• Discretionary spending caps implemented, as agreed under debt-ceiling deal
• Supercommittee fails...
• ...but sequester is replaced by entitlement savings and tax increases to be determined after the 2012 elections
• 2% payroll tax cut and emergency UI benefits extended into 2012, and later phased out, not suddenly removed
• But nothing on top of that from the President’s jobs plan
• These assumptions stabilize (but do not cut) the debt-to-GDP ratio
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The Federal Budget Gap: We Expect Action On Both Sides of the Ledger…
(Percent of GDP)
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1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020
Revenues Expenditures
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(IHSGI September Baseline, percent of GDP)
Big Squeeze on Discretionary Spending – Defense and Non-Defense
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5
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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Defense Medicare/MedicaidSocial Security InterestNondefense Goods & Services Other
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Recession Risks
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Will We Fall Back Into Recession?
Why?
• An economy near stall speed is vulnerable to shocks
• Fed can’t help much
• Risks of policy mistakes – Premature fiscal tightening – Policy paralysis
• Eurozone is the immediate risk
• Oil shocks a perennial threat
Why Not?
• U.S. banks in better shape than 2008
• Nonfinancial corporations balance sheets are strong
• Exposures to Eurozone sovereign debt are better understood than exposures to sub-prime debt were
• Europe unlikely to allow a major institution to collapse
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(Annualized rate of growth)
GDP Growth Outlook
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-2
0
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2010 2011 2012 2013
Baseline (50%) Pessimistic Scenario (40%) Optimistic Scenario (10%)
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(Percent)
Unemployment Outlook
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2007 2008 2009 2010 2011 2012 2013
Baseline (50%) Pessimistic Scenario (40%) Optimistic Scenario (10%)
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Implications and Bottom Line
• Most likely outcome is anemic growth, not recession
• Recovery very muted; growth doesn’t beat 3% until 2014 (helped, at last, by a housing revival)
• Fed powers are limited; no panaceas
• Fiscal stimulus; the question is how fast it’s withdrawn, not whether it will be ramped up
• Still huge fiscal uncertainty; supercommittee task looks impossible
• January 1, 2013 could be another crisis deadline
• Growth at around “stall speed” leaves the economy highly vulnerable to recession risks (40% odds)
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Thank you!
Nigel Gault Chief U.S. Economist [email protected]