The US economic outlook:
Surprising pessimists, disappointing optimists
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Michael Feroli
Chief US Economist
JPMorgan
March 2011
1
Economic outlook
 Look for growth to be somewhat better in 2011 than in 2010
 Fiscal policy remains supportive
 Low inflation allows monetary policy to remain friendly
 Financial, credit conditions turning more supportive
 Spending still coming off depressed levels
 Negatives: fiscal drag coming, falling house prices
 For inflation, high unemployment will swamp high commodity prices
 Low inflation to keep Fed on the sidelines
2
The recovery in pictures: firming growth to
contribute to slow improvement in jobs picture
Real GDP
Unemployment rate
%ch at annual rate over 1 quarter
Forecast
10
percent, sa
Forecast
12
10
5
8
0
6
-5
4
-10
2
80
85
90
95
00
05
10
80
85
90
95
00
05
10
3
Bank credit turning slightly less restrictive
Lending standards, C&I loans
net % tightening
100
75
Large firm
50
25
0
Small firm
-25
-50
90
95
00
05
10
4
Household balance sheets under repair
Household debt service ratio
Household debt to income ratio
percent of disposable personal income, sa
%
14
140
Forecast
120
13
100
12
80
60
11
40
10
80
85
90
95
00
05
10
20
70
75
80
85
90
95
00
05
10
5
QE2 is having beneficial effects
Inflation breakeven
(Fed measure 5yr5yr forward)
%, both scales
1.8
1.6
Jackson
Hole
1.4
0.8
3.2
3.0
92
nominal broad
effective
exchange rate
90
1350
1300
Jackson Hole
1250
88
1.2
1.0
index, both scales
2.8
S&P 500
index
86
Real yield
(10-year)
2.6
84
0.4
0.2
Jan 1 Apr 1
2.2
Jun Sep 28 Dec
30
27
Mar
27
82
1050
80
Jan 1 Apr 1
1150
1100
0.6
2.4
1200
1000
Jun
30
Sep
28
Dec
27
Mar
27
6
Fiscal lift bought at a steep price
Fiscal impact
Federal deficit
Percentage point contribution to
annualized GDP growth
% of GDP
5
3
2
0
1
0
-5
-1
-10
-2
-3
2009
2010
2011
2012
-15
60 65 70 75 80 85 90 95 00 05 10
7
Consumers: near-term hit from higher gas prices
Consumer sentiment by income
Index
120
Family income more
than 75k/yr
110
100
90
80
70
Family income less
than 75k/yr
60
50
05
07
09
11
8
Adjustment to higher saving probably behind us
Household wealth to annual income
Saving rate
ratio
percent, sa
6.5
14
12
6.0
10
5.5
8
6
5.0
4
4.5
2
4.0
60 65 70 75 80 85 90 95 00 05 10
0
60 65 70 75 80 85 90 95 00 05 10
9
Consumers have benefited from removal of fear
factor
Employment expectations and real consumer
spending
Index,
%less-%more
140
% ch, oya
30
U Mich survey, expected unemployment over next year
120
20
100
10
80
0
60
20
-10
Real durables spending
40
78
83
88
93
98
03
08
-20
10
…and from support from D.C.
Household sector: taxes paid - gov't payments received
as % of income
12
10
8
6
4
2
0
-2
59
64
69
74
79
84
89
94
99
04
09
11
Consumers’ pent-up demands should continue
giving some lift
Vehicle sales and scrappage
Millions of vehicles, annual rate
20
18
Light vehicle sales
16
14
12
10
Light vehicles scrapped
8
6
76
81
86
91
96
01
06
11
12
Businesses: capital spending has been solid
Real spending on equipment and software
during expansions
Sa, level at trough of recession=100
130
Business spending on information processing equipment,
software
$ bn, saar
$2005 bn, saar
700
1982
Real
spending
610
585
650
560
600
120
Nominal
spending
550
510
2009
500
1991
2006
2007
2008
2009
2010
485
Real business spending on business equipment ex high tech
110
1975
2001
1.25
0.75
0.50
-2
qtrs
0
+2
qtrs
+4
qtrs
+6
qtrs
Industrial
equipment
Index, 1Q05=1.00
1.00
100
90
535
0.25
Other
equipment
Transportation
equipment
2005 2006 2007
2008 2009 2010
13
Investment spending coming off low levels
Business capital spending, net of depreciation
% of GDP
8
6
4
2
0
-2
60
65
70
75
80
85
90
95
00
05
10
14
Housing: pent-up demand but still oversupply
Construction and demographics
Vacant, for-sale housing units
thousands, saar
thousands, sa
2500
3500
3000
New housing units started
2000
2500
1500
2000
1500
1000
1000
Household growth (10-yr average)
500
69
74
79
84
89
94
99
04
09
500
95
97
99
01
03
05
07
09
15
Home prices are cheap by some metrics, but
downside momentum continues
Average monthly home payment
as a percent of median income
Real house prices
index, 1976=1
percent, nsa
40
2.5
35
2.0
30
25
1.5
20
1.0
15
10
81
86
91
96
01
06
11
0.5
76
81
86
91
96
01
06
16
State and local: improvement in finances partly
dependent on federal support
Combined state and local deficits
State and local tax receipts
% of GDP
% ch, saar
20
1.0
10
0.5
0
-10
-20
0.0
97
99
01
03
05
07
09
Fedeeral aid to state and local gov'ts
-0.5
% of GDP
4.0
-1.0
3.5
3.0
2.5
-1.5
2.0
1.5
80
85
90
95
00
05
10
-2.0
60 65 70 75 80 85 90 95 00 05 10
17
Labor market: Business caution toward hiring
is a hallmark of modern recoveries
Hires and separation rates
Private payrolls around recessions
Trough employment = 100
Percent of workforce, sa
108
Quits + layoffs
4.4
1982
107
4.2
106
1975
105
4.0
3.8
104
3.6
103
2009
102
3.4
1991
101
100
3.2
Hires rate
3.0
99
2.8
2001
98
-8
-4
0
4
8
Months from trough
12
16
20
2.6
01
03
05
07
09
11
18
Increases in workweek, productivity should
give way to more full-time hiring
Average workweek
Productivity
hours
%ch at annual rate over 8 quarters
35.0
5
4
34.5
3
34.0
2
33.5
1
33.0
90
95
00
05
10
0
90
95
00
05
10
19
Participation rate has undershot trend
Labor force participation rates, age 25-54
Labor force participation rate
%, both scales
94
Male
78
Female
93
CBO
67.5
77
92
76
91
67.0
75
90
89
74
88
73
90
95
00
05
Labor force participation rates
%, both scales
70
16-24
10
55 and
over
66.5
Social Security
Admin.
66.0
42
65.5
Actual
40
65
38
65.0
J.P.
Morgan
36
60
34
32
55
50
%, annual average
64.5
February
30
90
95
00
05
10
28
64.0
00
02
04
06
08
10
*
12
14
20
Unemployment mostly cyclical, not
structural
Long-term unemployed
Job-related moving
000s, sa, unemployed 27 weeks or more
000s
1200
8500
Manufacturing
8000
Nonfarm
employment
%ch, oya
6
4
2
7500
Construction
1000
Job-related
internal
migration
0
7000
-2
6500
800
6000
Trade
-4
98
00
02
04
06
08
-6
Ratio: unskilled/skilled unemp. rate
600
4.5
4.0
400
Health and
education
200
3.5
3.0
2.5
0
05
07
09
u-rate, less than high school / urate, college degree
92
94 96 98
00
02 04 06 08 10
11
21
Inflation: underlying inflation has been low
CPI
% ch, oya
6
5
4
Median
3
2
Core
1
0
90
95
00
05
10
22
In the long run, wage and price inflation are
linked together
Business costs and prices
% ch, oya
Prices, business output
15
10
Unit labor
costs
5
0
-5
48
53
58
63
68
73
78
83
88
93
98
03
08
23
Labor market slack keeping a lid on wage inflation
Wages and unemployment
%
11
Unemployment rate
9
7
5
3
Average hourly earnings, change over year-ago
1
85
90
95
00
05
10
24
Nobody is even hoping for a raise
Median expected change in family income in the coming
year
Percent
7
6
5
4
3
2
1
0
80
85
90
95
00
05
10
25
A Fed on hold is not a Fed at ease
Taylor rules
Fed Treasury holdings as % of outstanding UST,
with passive run-off
%
%, assuming QE2 completed
Original Taylor rule
10
25
Forecas
t
Fed funds
5
20
0
15
-5
10
Rudebusch Taylor rule
-10
5
88
93
98
03
08
13
52 57 62 67 72 77 82 87 92 97 02 07 12
26
The US economic outlook in brief
 First year and a half of recovery have been uneven
 2011 should see somewhat better growth
 Inflation trends remain soft
 Monetary policy will be more growth-supportive than fiscal policy
27
The US economic forecast in detail
% q/q, saar
% q4/q4
% y/y
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2010
2011
2012
2010
2011
2012
2.6
0.9
2.6
2.4
10.0
15.4
-3.5
-27.3
3.9
-505
6.7
16.8
121.4
2.8
6.7
3.1
4.1
5.3
5.5
4.5
2.7
-1.5
-395
9.6
-12.4
7.1
2.5
1.0
2.2
2.1
6.7
8.0
2.0
10.0
-0.9
-437
15.0
21.0
57.8
3.5
3.6
3.6
3.5
10.5
12.0
5.0
15.0
-1.3
-440
8.0
7.0
55.8
3.5
3.6
4.0
4.0
11.4
12.0
9.0
15.0
-1.3
-459
8.0
10.0
53.9
3.0
2.9
3.3
3.0
10.1
10.0
10.0
10.0
-0.1
-479
8.0
10.0
59.2
2.0
1.9
2.3
1.5
10.1
10.0
10.0
10.0
-0.4
-494
8.0
9.0
62.2
2.7
2.4
2.8
2.6
10.0
16.3
-4.7
-4.7
1.2
9.2
11.0
-
3.1
2.7
3.3
3.1
9.7
10.5
6.5
12.5
-0.9
9.7
11.9
-
3.0
3.0
3.0
2.6
8.9
8.5
10.0
13.7
-0.5
8.7
7.7
-
2.8
1.4
1.8
1.8
5.6
15.1
-13.8
-3.0
1.0
11.8
12.7
-
2.9
2.9
3.1
3.1
9.0
10.8
3.5
5.5
-0.2
9.9
9.5
-
2.9
2.9
3.1
2.7
9.7
9.6
9.6
12.8
-0.6
8.4
8.6
-
2.7
-1.7
1.6
3.2
3.4
-3.7
2.2
-1.2
1.5
3.6
0.0
-0.1
4.0
-0.5
-0.1
3.3
-0.5
0.1
2.3
-0.4
0.1
2.9
-0.5
0.3
3.3
-0.5
0.4
3.0
0.0
0.0
1.9
-0.4
1.4
3.1
-0.1
-0.1
3.1
-0.2
0.1
6.6
1.0
6.0
10.0
1.4
5.4
6.0
1.0
5.1
10.0
3.0
5.0
8.0
3.3
4.8
7.0
3.3
4.9
3.0
0.0
4.5
18.4
2.3
-
7.7
2.6
-
5.5
2.4
-
29.2
1.4
5.8
8.3
2.1
5.0
5.9
2.4
4.6
1.4
1.1
1.1
2.1
2.1
0.5
-1.4
2.3
2.6
0.6
7.2
-0.4
0.4
0.5
-4.1
2.6
4.0
1.4
6.0
0.6
1.0
0.9
-2.5
2.0
1.8
0.9
0.7
0.5
1.0
0.7
-1.0
2.5
1.5
0.7
0.8
0.5
1.0
0.7
0.0
2.0
1.1
0.8
1.3
1.0
1.1
0.8
0.5
2.0
1.1
0.9
1.3
1.0
1.2
0.9
1.5
1.0
1.2
0.6
3.9
1.4
1.4
0.8
-4.1
1.9
2.1
0.9
2.2
0.6
1.0
0.8
0.5
2.1
1.3
1.1
1.4
1.1
1.2
1.0
2.0
1.6
1.6
1.0
4.2
1.2
1.0
1.3
0.1
3.8
2.2
1.0
3.3
0.7
1.1
0.7
-0.8
2.0
1.3
0.9
1.3
1.0
1.2
0.9
1.9
1.7
0.588
4.3
72.4
11.6
9.6
4.6
-127.2
-3.5
-
0.534
4.0
73.0
12.3
9.6
3.2
-105.3
-2.8
-
0.600
4.5
73.7
13.0
8.9
3.5
-107.8
-2.9
-
0.650
5.0
74.4
13.1
8.8
4.5
-109.8
-2.9
-
0.675
4.5
75.0
13.3
8.7
4.5
-113.6
-3.0
-
0.700
3.5
75.5
13.5
8.6
4.1
-121.4
-3.1
-
0.725
3.5
75.8
13.1
8.5
3.2
-124.7
-3.2
-
6.0
4.1
-
4.4
4.2
-
3.5
4.3
-
0.585
6.0
71.8
11.5
9.6
3.8
-464.9
-3.2
-1294.2
-8.8
0.656
4.7
74.6
13.2
8.8
4.0
-452.7
-3.0
-1500.0
-9.8
0.781
3.7
76.2
13.3
8.4
4.1
-513.3
-3.2
-1100.0
-6.9
Mar 11
2Q11
3Q11
4Q11
1Q12
Fed funds target
3-mo LIBOR
3-month T-bill (bey)
0.13
0.31
0.08
0.13
0.30
0.18
0.13
0.30
0.20
0.13
0.30
0.21
0.13
0.30
0.21
2-yr Treasury
5-yr Treasury
10-yr Treasury
30-yr Treasury
0.63
2.04
3.39
4.54
0.75
2.30
3.60
4.70
0.83
2.40
3.65
4.70
0.90
2.50
3.70
4.70
1.20
2.85
3.90
4.70
Gross domestic product
Real GDP
Final sales
Domestic
Consumer spending
Business investment
Equipment
Structures
Residential investment
Government
Net exports ($bn, chained $2005)
Exports (goods and services)
Imports (goods and services)
Inventories (ch $bn, chained $2005)
Contribution to real GDP growth (% pts):
Domestic final sales
Net exports
Inventories
Income and profits (NIPA basis)
Adjusted corp profits
Real disposable personal income
1
Saving rate
Prices and labor cost
Consumer price index
Core
Producer price index
Core
GDP chain-type price index
Core PCE deflator
S&P/C-S house price index (% oya)
Productivity
Other indicators
1
Housing starts (mn units, saar)
Industrial production, mfg.
1
Capacity utilization, mfg. (% )
1
Light vehicle sales (mn units, saar)
1
Unemployment rate
Nominal GDP
1
Current account balance ($bn)
% of GDP
Federal budget balance ($bn)1
% of GDP
1. Entries are average level for the period. Federal balance figures are for fiscal years.
Interest rate forecast (end of period)
28
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29