US Economic and Capital Markets Outlook
description
Transcript of US Economic and Capital Markets Outlook
www.institutional.alliancebernstein.com
May 3, 2005
Giulio MartiniChief Investment Officer—Currency and Quantitative Strategies
US Economic and Capital Markets Outlook
NFSA 100th Anniversary
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(6)
(4)
(2)
0
2
4
6
8
10
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04
Liquidity Flows
Liquidity* Flows vs. Real GDP Growth
Recent US Economic Momentum Is Sustainable
*Liquidity is a measure of real money growth, growth in business and consumer credit, growth in short-term liquid assets, foreign purchases of US securities, net cash flow into bond and stock fundsSource: Bureau of Economic Analysis, Haver Analytics and Alliance Capital Fixed Income
(YoY % chg)
Real GDP Growth
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Real Final Sales vs. Real Inventory Positions
Inventory Rebuilding Still Lags Final Demand
Source: Bureau of Economic Analysis, Haver Analytics and Alliance Capital Fixed Income
Final Sales
InventoryPositions
(4)%
(2)%
0%
2%
4%
6%
8%
10%
60 65 70 75 80 85 90 95 00
(YoY chg)
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Investment Is Key Driver of Economic Growth
2004 Real GDP Growth
Source: Bureau of Economic Analysis, Haver Analytics and Alliance Capital Fixed Income
Real GDP
(0.0)%
1.6%
3.0%
5.9%
6.5%
(9.8)%
3.9%
3.8%
14.5%
Government
Inventories
Consumption
Exports
Residential
Equipment and Software
Structures
Imports
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Nonresidential Construction Usually Rises Steadily
60
80
100
120
140
160
0 2 4 6 8 10 12 14 16 18 20
1991
Source: US Department of Commerce, Haver Analytics and AllianceBernstein
Quarters from Trough
Index
Average of 5 expansions
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1991 Recovery Was Weaker and More Gradual
60
80
100
120
140
160
0 2 4 6 8 10 12 14 16 18 20
1991
Source: US Department of Commerce, Haver Analytics and AllianceBernstein
Quarters from Trough
Index
1991
Average of 5 expansions
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Current Recovery Very Modest
60
80
100
120
140
160
0 2 4 6 8 10 12 14 16 18 20
Source: US Department of Commerce, Haver Analytics and AllianceBernstein
Quarters from Trough
Index
Current Expansion
1991
Average of 5 expansions
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Sprinklers Defy Construction Trend
Annualized Growth: 1980–2004
(0.3)%
4.0%
Nonresidential Construction
(Infation-Adjusted)
Sprinklers
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Employment and Income Trends Are Improving
(3,000)
(2,000)
(1,000)
0
1,000
2,000
3,000
4,000
5,000
91 93 95 97 99 01 03 05
Jobs (000s)
Source: Bureau of Economic Analysis, Bureau of Labor Statistics and Haver Analytics
Payroll Employment
HouseholdEmployment
Payroll and Household Employment
(Year-over-Year Change)
Disposable Income vs. Wages
(Year-over-Year Change)
Wage & SalaryIncome
DisposableIncome
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
91 93 95 97 99 01 03
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Personal Saving at All-Time Low, But Wealth at Record Levels
Personal Saving Rate
Source: Bureau of Economic Analysis, Federal Reserve Board and Haver Analytics
15
20
25
30
35
40
45
50
90 92 94 96 98 00 02 04
($ Trillions)
Household Net Worth
0
1
2
3
4
5
6
7
8
9
90 92 94 96 98 00 02 04
(%)
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Housing Market Supported By Strong Fundamentals
Existing-Home Sales(left scale)
Housing Affordability(right scale)
Source: Federal Housing Finance Board, Office of Housing Enterprise Oversight, National Association of Realtors, Haver Analytics and Alliance Capital Fixed Income
Home Sales and Affordability
0
2
4
6
8
10
12
14
16
18
76 79 82 85 88 91 94 97 00 03
(%)
Mortgage RateHouse Price Index
(YoY % chg)
Rates vs. Prices
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
75 79 83 87 91 95 99 03
(000s)
0
20
40
60
80
100
120
140
160Index
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500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
2,300
80 83 86 89 92 95 98 01 04
Units (Thousand)
Housing Starts Are Strong and Inventories Are Low
Source: Census Bureau and Haver Analytics
0
2
4
6
8
10
12
75 78 81 84 87 90 93 96 99 02
Ratio
Month’s Supply of New Homesat Current Sales Rate
Housing Starts
January2005
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0
200
400
600
800
1,000
1,200
1,400
80 84 88 92 96 00 04
($ Billions)
Net Cash Flow vs. Business Investmentin Equipment and Software
Cash Flow
Investment
$287Billion
WOW!!
War Chest of Free Cash Flow; Bright Capital Spending Outlook
*Three-year sum.Source: Bureau of Economic Analysis, Haver Analytics and Alliance Capital Fixed Income
(0.2)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
60 68 76 84 92 00
Ratio
Ratio of Free Cash Flow*to Capital Spending
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$14.5 $14.8$14.0
Metals &Machinery
Technology TransportationEquipment
Strong Capex Cycle Is Underway, and It’s Broad Based
2004 Business Spending on Equipment and Software
(Year-over-Year Percent Change)
Source: Census Bureau, Bureau of Economic Analysis, Haver Analytics and Alliance Capital Fixed Income
Total
12-Month Dollar Change in Order Backlogs: February 2005
($ Billions)
8.1%
10.6%
13.1%
14.6%
20.1%
25.5%
14.5%
OtherTechnology
Industrial
Software
OtherEquipment
Transportation
Computers
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Source: Department of Commerce, Haver Analytics and Alliance Capital Fixed Income
Trade Deficit Is Large and Structural in Nature
(700)
(600)
(500)
(400)
(300)
(200)
(100)
0
80 83 86 89 92 95 98 01 04
($ Billions)
Trade DeficitImports As a Percent
of Domestic Shipments
10
15
20
25
30
1992 1995 1997 2002 2004
(%)
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US Runs a Deficit in Every Product Category With Every Region
By Product By Region
Through November 2004*Includes Venezuela and Indonesia.Source: Department of Commerce
2004 US Trade Deficit Composition
Capital Goods 2%Miscellaneous 2%
Agricultural Goods 1%
Pacific Rim44%
North America
17%
Latin America
6%
Other5%
Western Europe
17%
OPEC*11%
Consumer Goods
41%
Petroleum25%
Autos22%
Industrial Supplies
7%
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Source: International Monetary Fund Haver Analytics and Alliance Capital Fixed Income
US Relies on Foreign Capital To Fund Its Investment Needs
(7)
(6)
(5)
(4)
(3)
(2)
(1)
0
1
90 92 94 96 98 00 02 04
(%)
Current Account BalanceAs a Percent of GDP
Savings and Investment as a Percent of GDP
12
13
14
15
16
17
18
19
20
21
22
98 99 00 01 02 03 04
(%)
Investment
Savings
F
CurrentAccountImbalance
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Foreign Capital Flows into US Are Strong, Especially From Asia
Source: International Monetary Fund
Savings and Investment of Newly Industrialized
Asian Economies as a Percent of GDP
22
24
26
28
30
32
34
98 99 00 01 02 03 04
(%)
Investment
Savings
F
Foreign Purchases of US Financial Assets(4-Quarter Moving Average)
(100)
0
100
200
300
400
500
600
700
94 96 98 00 02 04
($ Billions)
Total
Official
Private
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Foreigners Have Lost Interest in US Equity Investments…
Source: Federal Reserve Board Flow of Funds
Stocks
2000 2004
$194 Bil.
Plant, Equipment,etc.
$321 Bil.
$163 Bil.
$33 Bil.
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$133
$233
…and Have Turned to Bonds
Stocks
Government
Corporate
2000 2004
Fixed Income
$194 Bil.$371
$1,019 Bil.
$282
Source: Federal Reserve Board Flow of Funds
Plant, Equipment,etc.
$321 Bil.
Agency
Fed Funds & Other
$163 Bil.
$33 Bil.
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Foreign Ownership of US Financial Assets Growing
December 2004Source: Federal Reserve Board
46%
US Treasury Bonds
Owned byForeigners
Fed Funds (Overnight Liquidity)
Stocks
42%
US CorporateBonds
24%11%
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90
100
110
120
130
73 77 81 85 89 93 97 01 05
Real-Dollar Exchange Rate Still Above Prior Lows
Mar 73=100
Through March 31, 2005Source: Federal Reserve Board and Haver Analytics
76
Real Trade-Weighted Dollar Index
8783
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3.7
1.5
1.3
Sources of New Supply(Million Barrels per Day)
1999–2004
FSU
All Other
OPEC
6.5
Growth in Oil Demand Met Largely by Former Soviet Union (FSU)
Source: BP Statistical Review, International Energy Agency (IEA), OPEC, and Bernstein
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5
10
15
20
25
30
1932 44 56 68 80 92 04E
0
2
4
6
8
10
12
Discoveries(Bil. bbl)
Source: HIS Energy, IEA, and Bernstein
Russian Output Growth Not Based on New Discoveries
Reserve Discoveries vs. Production Production(Mil. bbl/day)
Production
Few discoveries
since the 1980s
Discoveries
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50
100
150
200
250
32 44 56 68 80 92 04E
(Bil. bbl)
Source: HIS Energy, IEA, and Bernstein
Cumulative Reserves Discovered
Russian Production Rising, but Reserves Falling
Current Reserves
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2
4
6
8
66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04
(%)
Source: BP Statistical Review, IEA, and Bernstein
Oil Production Growth Outside OPEC and FSU Very Disappointing
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Growth in Oil Demand Accelerating due to Asia
+3.2
+3.4
+4.9 90.8
All OtherDemand +3.3
New AsianDemand
82.5
76.0
Million Barrels per Day
Source: BP Statistical Review, IEA, and Bernstein
60
70
80
90
1999 2004 2009E
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3.7
2.0
1.5
4.8
1.5
1.3
Sources of New SupplyMillion Barrels per Day
1999–2004 2004–2009E
FSU
Demand for OPEC Oil to Rise Sharply
All Other
OPEC
8.3
6.5
Source: BP Statistical Review, International Energy Agency, OPEC, and Bernstein
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China’s Entry into Global Business Cycle Has Broad Implications
9.7
5.2 4.8
9.0 8.88.1
11.5
16.4
97 98 99 00 01 02 03 04
China GDP GrowthYear-over-Year Percent Change
Nominal GDP Growth
Source: China National Bureau of Statistics and CEIC Data
8.87.8
7.18 7.5
8.39.3 9.5
97 98 99 00 01 02 03 04
Real GDP Growth
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100
105
110
115
120
0 6 12 18 24 30 36 42
1975198219912001
Months from economic trough
(%) Cycle
China Has Altered Global Pricing Patterns
Journal of Commerce Industrial Price Index*
Cumulative Percent Change in Commodity and Goods Prices During Business Cycles
*The Journal of Commerce industrial price index includes prices of textiles, metals, petroleum products and miscellaneous products such as hides and flooring.Source: Bureau of Labor Statistics, Economic Cycle Research Institute, Haver Analytics and Alliance Capital Fixed Income
US Core Consumer Goods Prices
90
100
110
120
130
140
150
160
170
0 6 12 18 24 30 36 42
1975198219912001
Months from economic trough
(%) Cycle
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Low Import Inflation Has Kept Core Inflation & Interest Rates Low
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve Board, Haver Analytics and Alliance Fixed Income
(2)%
(1)%
0%
1%
2%
3%
4%
5%
6%
90 92 94 96 98 00 02 04
(YoY chg of Index)
Import Price of Consumer GoodsExcluding Autos
0
1
2
3
4
5
6
7
8
9
10
90 93 96 99 02
(%)
10-Year Treasury Yield
Total CPI (YoY chg)
CoreCPI (YoY chg)
Inflation and the 10-Year Treasury Yield
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Hourly Compensation 3.8% 4.4%
Productivity (0.6) 3.0
Unit Labor Cost 4.4% 1.4%
First Two Years of Recovery
Underlying Inflation: Labor Costs Contained
1990–1991 Recession
Annual Rates
Source: US Department of Commerce and AllianceBernstein
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Hourly Compensation 3.8% 4.4%
Productivity (0.6) 3.0
Unit Labor Cost 4.4% 1.4%
First Two Years of Recovery
Underlying Inflation: Labor Costs Contained
1990–1991 Recession
Annual Rates
2001 Recession
Hourly Compensation 3.2% 2.7%
Productivity 4.0 4.8
Unit Labor Cost (0.8)% (2.1)%
Source: US Department of Commerce and AllianceBernstein
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Labor Costs Still Contained
Hourly Compensation 3.2% 2.7% 4.2%
Productivity 4.0 4.8 2.7
Unit Labor Cost (0.8) (2.1) 1.4
First Two Years of Recovery
2001Recession
LatestYear
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0
2
4
6
8
60 65 70 75 80 85 90 95 00 05
(%) Equity Risk Premium*
Through March 31, 2005Treasury securities are guaranteed by the U.S. government as to the timely payment of principal and interest if held to maturity.*Difference between expected return on equities as represented by the S&P 500 and 10-Year U.S. TreasuriesSource: Federal Reserve and Bernstein
How Attractive Is the Stock Market? About Average
Stocks Very Attractive
Bonds Very Attractive
+1 Std. Dev.
-1 Std. Dev.
Average
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(%)
After-Tax Margins
Recession
US nonfinancial corporationsSource: Bureau of Economic Analysis
Economic Underpinnings Still Strong:Corporate Profit Margins at 30-Year High
Average
2
4
6
8
10
70 73 76 79 82 85 88 91 94 97 00 03
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Operating Earnings $74
Adjustments
Recurring “Nonrecurring” Charges (6)
Stock-Option Expense (3)
Lower Pension-Fund Returns (1)
Available Earnings $64
Earnings Retained for 6% Growth 24
Available for Dividends $40 3.4% Yield
Current Dividend $19 1.6% Yield
S&P 500One-Year Forward Estimate
As of January 31, 2005Source: Bernstein estimates
Potential for Dividend Growth Unusually Large
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Conclusions
U.S. economy very sound
Construction spending should improve gradually
Dollar will weaken further
Oil prices will stay relatively high
Stock market reasonably valued