U.S. Economic &
Market outlook
Thomas Corcoran
Senior Managing Director
GE Capital
May 13, 2014
1
The Latest
•No economic growth in Q1
•Housing recovery has stalled
•Geopolitical tensions are rising
•Some asset prices are a little too high
2
Tonight’s discussion
•The Fed will err on keeping rates too low
•The impact on the markets
•More runway for growth
•Less extreme business cycles
•Beginning to see fiscal improvements
3
The Fed’s Critical Juncture
Extraordinary Fed response continues
US capacity utilization % (left axis)
Target fed funds rate % (right axis)
83
7
77
4
72
2
64 months
66
Dec-98
Oct-02
Aug-06
Jun-10
0
Apr-14
Data source: Federal Reserve
5
Abundant liquidity still being provided
Federal Reserve's Balance Sheet - Total Assets
in trillions of dollars
4.3
QE3
QE2: Fed bought
$600 BN in US
Treasurys
3.1
2.0
Fed now
buying MBS
& UST at a
pace of $55
Bn per
month
After
Lehman
failure in
Sept '08
0.8
Jul-07
Nov-08
Mar-10
Jul-11
Dec-12
Apr-14
Data source: www.federalreserve.gov/releases/h41/Current/
6
Labor Markets Slowly Improve
Full-time workers (left axis)
Part-time workers (right axis)
in millions
122
29
118
27
114
26
110
24
Dec-03
Jul-06
Feb-09
Sep-11
Apr-14
Data source: Bureau of Labor Statistics - Household Data
7
A single policy for an uneven situation
Unemployment
rate - March '14
US
% point
change from
post-crisis peak
% point
change from
pre-crisis 5-yr avg
6.7%
(3.3)
1.5
8.7%
8.5%
8.4%
8.1%
7.9%
(3.2)
(5.5)
(2.9)
(4.3)
(2.8)
3.5
3.9
2.7
2.3
2.0
4.0%
3.7%
3.7%
3.4%
2.6%
(3.5)
(1.2)
(1.7)
(3.8)
(1.6)
0.4
0.1
0.3
(0.5)
(0.8)
Highest 5 states
1.
2.
3.
4.
5.
Rhode Island
Nevada
Illinois
California
Kentucky
Lowest 5 states
46.
47.
48.
49.
50.
Wyoming
Nebraska
S. Dakota
Vermont
N. Dakota
Data source: Bureau of Labor Statistics & GE IRM
8
There’s Increasingly More Opportunity
US Job Openings
in millions
5
'07 high: 4.7 mn
'09 low: 2.1 mn
Latest ( March ): 4.0 mn
4
3
2
Jun-03
Jan-07
Data source: Bureau
Aug-10 of Labor Statistics Mar-14
9
Expectations Hold Near 2%
Inflation expectations (*)
CPI - annual rate
5.0%
3.5%
2.0%
0.5%
-1.0%
-2.5%
Dec-07
Jul-09
(*) Per 10-yr TIPS/ UST spread
Feb-11
Sep-12
Apr-14
Data source: BLS & FRB St. Louis
10
New leadership
- Gradual pullback from extraordinary accommodation
- Fed’s likely to state its intentions with less lead time
Per FOMC's March Forecast
Appropriate Timing of Policy
Firming per FOMC members
13
1
2
2016
2015
2014
number of FOMC participants
11
Market Accommodated in ’14 So Far
US Treasury Yield Movement
in bps
January thru April 2014
From onset of May Fed 'taper talk' through Y/E 2013
110
92
84
3
15
(7)
2-yr
5-yr
(38)
10-yr
(51)
30-yr
Data source: Federal Reserve Bank of St. Louis
12
Watch short-term Treasuries
2-Year US Treasury Yield
3.00%
2.25%
1.50%
0.75%
0.00%
Mar-08
Since Aug '11
Sep-09
Mar-11
Sep-12
Apr-14
Data source: Federal Reserve Bank of St. Louis
13
The Fed’s impact on the
Market
Private credit expansion continues
1.7
Commercial and Industrial Loans
at US Commercial Banks
Oct '08
in trillions of dollars
1.5
1.3
1.1
0.9
Fed tightening
cycle began
0.7
0.5
Dec-90
Since
Oct '10
low, up
$486 Bn
Fed tightening cycle began
Aug-95
Apr-00
Dec-04
Aug-09
Apr-14
Data source: Federal Reserve
15
Latest Market Volatility’s Contained
VIX Index
S&P 500 Volatility Gauge
Anxiety Measure
80
60
US
financial
crisis
40
Flash
crash &
Euro-zone
crisis
US debt
ceiling &
Euro-zone
'Taper
Feb
Tantrum' '14
20
0
Jan-06
Feb-08
Mar-10
Apr-12
May-14
Data source: CBOE
16
Wealth is being restored
US Public Equity Market Capitalization
Wilshire 5000 Full Cap Index
in trillions of dollars
$16 Pre-crisis
$19.7
$19.9
2013
'14 so
far
$15
high
$12
$13
$13
2010
2011
$9
Oct-07
2008
2009
2012
Data source :Federal Reserve Bank of St. Louis
17
Credit Markets Get More Attention
BB Composite Bond Spread
10-year maturity in bps
490
410
Fed
introduced
'Op Twist'
Fed expanded
'Op Twist' to
Y/ E '12
Fed launched QE3:
…. MBS & UST
After
Bernanke's QE QE taper
begins
'taper' talk
330
250
Jan-11
Feb-12
Mar-13
May-14
Data source: Bloomberg
18
Euro-Zone’s in a Better Place
10-Year Gov't Bond Yield
Italy
Spain
Since Sept 6, 2012
8.0%
ECB reached bond-buying agreement
7.0%
6.0%
5.0%
4.0%
Nov 7 '13: ECB rate cut
3.0%
2.0%
May-11
May-12
May-13
Data source:
marketw atch.com
May-14
19
Runway for growth
GDP Mix, Mild Differences 6 Yrs Later
Net exports,
-2.6% vs
-4.1% Q4 '07
Private
investment,
16.3% vs
17.4% Q4 '07
Gov't
spending,
18.0% vs
19.6% Q4 '07
US Real GDP
$16 Tn
Q1 2014
Personal
consumption
68.4% vs
67.2% Q4 '07
Data source: BEA
21
GDP’s Grown Despite Dramatic Change
Quarterly Change
in US Residential Mortgages Outstanding
Bn's of $
325
200
Peak, Q1 '06: + 311 Bn
Latest, Q4 '13: - 23 Bn
75
-50
-175
Sep-02
Jun-06
Mar-10
Dec-13
Data source: Federal Reserve
22
Is Moderate Growth Behind Us?
Annual Growth - Nominal US GDP
15%
11%
4.7% = 25-year average
6.8% = 50-year average
7%
3%
-1%
(*) '14
Data sources: FRB,BEA & GE IRM
Dec-65
Dec-77
Dec-89
Dec-01
Dec-13
(*) '14 GDP projection from March 19th FOMC forecast plus Price Deflator of 1.6%
23
The fiscal drag looks set to ease
US personal spending - left axis
US gov't purchases & investment
in trillions of dollars
11
3.2
9
2.7
6
2.1
Data source: BEA
4
Dec-84
Mar-92
Jun-99
Sep-06
1.6
Dec-13
24
Consumption - Up 17 Straight Quarters
US GDP - Real Personal Consumption
Total: $10.9 Tn
4.6%
Spent on services: $7.2 Tn
qoq - annual growth rate
+4.4%
+3.0%
2.3%
0.0%
-2.3%
-4.6%
Mar-08
Sep-09
Mar-11
Sep-12
Mar-14
Data source: Bureau of Economic Analysis
25
Upside Potential … Bus. Investment
Change in Real Private Business Investment
20%
Quarterly outcome - annualized
Half-year outcome - annualized
Year over year outcome
10%
3%
2%
-2%
0%
-10%
Since recession officially ended:
-20%
19 qtrs: Real Bus. Investment + 23%
and Real GDP + 11%
-30%
Mar-08
Sep-09
Mar-11
Sep-12
Mar-14
Data source: Bureau of Economic Analysis
26
Upside Potential … US Exports
Relative Growth in US Exports
30%
20%
Total
European Union
Pacific Rim
S. & Central America
10%
0%
-10%
-20%
2014 so
far
2013
2012
2011
2010
2009
Data source: US Census Bureau, For Goods Only - Not Seasonally Adjusted
27
The Stretched Out
Business Cycle
What inning are we in?
Length of US Economic Expansions
number of months
120
1991-2001: tech boom
1961-69: roaring '60s
106
92
1982-90: Reagan boom
Fed forecast for current
90
2001-07: housing boom
73
Average since WW II
58
Current expansion so far
58
Data sources: NBER & WSJ, Monday April 21, 2014
29
Household finances have improved
US Household Debt Service as a Percent of
Disposable Personal Income
13.5%
Q4
'07
12.5%
11.5%
Q2
'93
10.5%
9.5%
Dec-80
Mar-89
Jun-97
Sep-05
Dec-13
Data source: Federal Reserve
30
Watch business inventories
US Inventory-to-Sales Ratio
number of months
1.5
Business inventory
Retail inventory - right axis
Q1 '09, worst of
the recession
1.7
1.6
1.4
1.5
1.3
1.4
1.2
Feb-03
1.3
Nov-05
Aug-08
May-11
Feb-14
Data source: US Com m erce Dept
31
US Fiscal Realities
US Public Debt Crosses GDP
Relative Growth
US Public Debt Outstanding: $17.6 Tn
US Nominal GDP
Tn's
of $
$16.7 Tn Federal debt limit reached,
debt ceiling suspended until March 15, 2015
18
13
9
4
0
Dec-82
Sep-90
Jun-98
Mar-06
Nominal
GDP
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
5.5%
2.2%
3.8%
6.4%
6.3%
6.5%
5.1%
4.4%
-1.0%
0.1%
4.6%
3.9%
3.8%
4.1%
Public
Debt
-2.0%
5.0%
7.8%
9.2%
8.5%
7.6%
6.2%
6.3%
15.9%
15.1%
13.9%
8.5%
7.9%
5.6%
Dec-13
Data sources: Bureau of Economic Analysis and US Treasury
33
Making Progress, Will it Continue?
US Budget Deficit as % of GDP
0.0%
-2.0%
-4.0%
-6.0%
2014 - 2023 CBO
Estimate April '14
-8.0%
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
-10.0%
Data sources: BEA, US Treasury & CBO
34
Big Actuarial Challenges Ahead
Number of Workers on US Private Payrolls for
Each Retiree on Social Security
3.7
3.4
3.1
2.8
Dec-68
Dec-77
Dec-86
Dec-95
Dec-04
Dec-13
Data sources: Social Security Administration, BLS & GE IRM
35
Fed policy aids the US Treasury
U.S. Public Debt ($ Tn's) - left axis
Interest Expense ($ Bn's) - right axis
17
15
500
Since Fiscal Year 2007
Public debt: + 86%
Annual interest expense: - 3%
450
12
400
10
350
7
5
300
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Data source: U.S. Treasury
36
Summary – What to Watch for
- Gov’t spending/investment -----> Less fiscal drag
- Export growth
-----> Dollar is competitive
- Full-time job gains
-----> Higher pay?
- Business investment
-----> Uneven, pent-up demand
- Housing
-----> Will recent slowdown last?
- 2-yr UST yields
-----> Fed’s policy path
- Global
-----> Geopolitical developments
- Asset markets
-----> Low volatility unlikely to last
37
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