1. enterpriseSeattle’s
40th Economic Forecast Conference
Thursday, January 12, 2012
Washington State Convention Center
info@enterpriseSeattle.org (206) 389-8650 www.enterpriseSeattle.org
2. 2012 FORECAST: A LOOK AHEAD
Moderator:
Jeff Marcell, enterpriseSeattle
Panelists:
- Dick Conway, Puget Sound Economic Forecaster
- Mike Dueker, Russell Investments
- Ken Goldstein, The Conference Board
3. 2012 Economic Outlook: A Decoupling of
the U.S. and Eurozone Economies?
Michael Dueker, Chief Economist
January 12, 2012
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5. Scenarios that are likely to shape asset returns in 2012
as a whole
PROBABILITY ≈ 65%
PROBABILITY ≈ 10% PROBABILITY ≈ 25%
Strong growth take-off Modest recovery Downside to growth---
above 3 ¼ pct. proceeds with recession or stagnation
growth near 2 ½ pct.
Smooth (5%) ›Square-root-shaped Recession contagion
›Risky assets rally from Europe (20%)
recovery
across the board, ›Bond yields go even
bond yields rise ›Inflation stays benign lower; risky assets
modestly
›Equity valuations rise negative
modestly
Bumpy (5%)
›Inflation scare (as in Stagflation (5%)
1994) ›Bond markets in the ›Longer-than-expected
›Flat year for risky core sell off mildly as drought in jobs market
assets and bad year for ›Negative equity price
U.S. growth is not
fixed income environment
derailed
Source: Russell Investments research. There is no guarantee that any stated expectations will occur.
5
V308
6. BCI forecasts look consistent with a 7.5 percent
unemployment rate in Oct. 2014
Business cycle index as of November 2011 data
Out of sample forecasts were calculated by simulating the time-series model into the future.
3 Source: Recession data from National Bureau of Economic Research
YELLOW BARS INDICATE PERIODS OF RECESSION
2
sample st. devs. from zero
1
0
-1
-2
-3
Source: http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.aspx
6
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7. Notwithstanding Europe’s recession and risks, the economy’s
chief obstacle to rapid growth is the ongoing deleveraging
Source: http://www.econbrowser.com/archives/2012/01/a_call_for_acti.html
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8. BCI forecasts look consistent with a 7.5 percent (!)
unemployment rate in Oct. 2014
7
Cyclical Oomph and Unemployment
6
1982-90
Decline in unemployment rate
5
4 1991-2001
1975-80
3
2009-14
2 2001-2007
2009-12
1
0
0 20 40 60 80 100 120 140
Area under BCI during an economic expansion
Source: Bureau of Labor Statistics for data; Russell calculations and Russell forecasts for 2012-14
8
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9. Employment forecast shows a plateau at 180-190 thousand
per month
Forecasts of nonfarm payroll employment changes as of
November 2011 data
Source: Actual employment data from St. Louis Fed's FRED database
400
200
0
thousands of jobs
-200
-400
-600
-800
http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.aspx
9
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10. We are far below where we expected to be by now
Nonfarm payroll employment changes
Nonfarm payroll employment changes (in thousands of
jobs): Data and forecasts as of Dec. 2008 and actual data
and forecasts as of Nov. 2011
400 Source: Actual employment data from St. Louis Fed's FRED database
200
Data and forecasts as of
December 2008 and actual 0
data through June 2011
Source: Actual employment
data from St. Louis Fed's -200
FRED database
This analysis is not meant Forecast Dec 08
to serve as a direct -400 Data Dec 08
prediction regarding the Data Nov 11
future results of any
-600 Forecast Nov 11
economic or financial
market. Similarly, they are
in no way intended to
predict or guarantee future -800
results of any sort. Other
economic or financial
market indictors not
considered in this analysis
may produce different
results. http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.aspx
10
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11. A forecast of 2.5 pct GDP growth in 2012 makes us raging
bulls? The consensus is moving towards us though
GDP growth forecast
GDP growth forecast
3.5
3.0
2.5
2.0
Source: Russell
Investments. Data as of Russell
12/31/2011. 1.5 Blue Chip
The Blue Chip is a panel of
approximately 50 top
economic forecasters. 1.0
Forecasting represents
predictions of market prices
and/or volume patterns 0.5
utilizing varying analytical
data. It is not
representative of a
-
projection of the stock
market, or of any specific 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2
investment.
11
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12. Inflation expectations seem more entrenched
in 2012
In early 2011, the 10-year break-even inflation rate
between TIPS and conventional Treasury bonds
reached 2.6 percent, as commodities prices were bid
up.
This year we expect inflation expectations to remain
more closely rooted near 2 percent.
Commodities should be less susceptible to
speculative price increases in 2012 also, although
some price rise is justified if global growth meets
expectations.
12
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13. Inflation expectations seem more entrenched
in 2012 than in 2011: break-even inflation rates
Source: http://www.econbrowser.com/archives/2012/01/a_call_for_acti.html
13
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14. Inflation never did concern us as an ongoing
problem
Consumer Price Index (CPI) forecast
Consumer price inflation forecast
3.5
3.0
2.5
2.0
Source: Russell
Russell
Investments. Data as of
12/312011. 1.5 Blue Chip
The Blue Chip is a panel of
approximately 50 top
economic forecasters. 1.0
Forecasting represents
predictions of market prices
and/or volume patterns 0.5
utilizing varying analytical
data. It is not
representative of a -
projection of the stock
2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2
market, or of any specific
investment.
14
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15. Eurozone is projected to have a recession;
the U.S. is not
Eurozone and U.S. business cycle indices (2007-2012)
3
Sample standard deviations
2
Values shown for the in-
1
sample estimates and out-of-
sample forecasts are the
median of the simulated
0
values for the quarter. Out-of-
sample forecasts were
calculated by simulating the
-1
time-series model into the
future.
Source: U.S. recession data
-2
from National Bureau of
Economic Research. Europe
recession data from the
-3
Centre for Economic Policy
Research. Recession for
Europe in 2002 is based on
research completed by Mike
Dueker, Ph.D., Russell
Investments:
Euro U.S. In-sample estimates | Out-of-sample forecast
http://research.stlouisfed.org/
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. There is no
wp/more/2008-001
guarantee that the stated results will occur. Index performance is not indicative of the performance of any specific
Data as of Sept. 30, 2011
investment. Indexes are not managed and may not be invested in directly.
15
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16. Fed policy and the possibility of additional
easing
Ahead of the fact, a 10-year Treasury yield that
lingered below 2 ¼ percent would be an obvious
sign of ‘Japan Disease’ and cause for the Fed to
undertake additional easing.
Fed policymakers have convinced
themselves, however, that the low yields are a risk-
off anomaly in the face of European turmoil and not
a sign of expectations of deflationary stagnation.
This story might get old in 2012.
16
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17. A bridge too far:
How much stimulus does the Fed ‘owe’
Implied gaps between target and actual nominal GDP
following the Great Recession
9.75
9.7
Nominal GDP (in natural logarithms)
9.65
9.6
Romer's proposed linear target path
9.55
Target path w/ rebasing
Actual path
9.5
9.45
9.4
2007-01-01
2007-03-01
2007-05-01
2007-07-01
2007-09-01
2007-11-01
2008-01-01
2008-03-01
2008-05-01
2008-07-01
2008-09-01
2008-11-01
2009-01-01
2009-03-01
2009-05-01
2009-07-01
2009-09-01
2009-11-01
2010-01-01
2010-03-01
2010-05-01
2010-07-01
2010-09-01
2010-11-01
2011-01-01
2011-03-01
Source: Data from St. Louis Fed; rebased path from Russell calculations;
Romer’s proposal from http://www.nytimes.com/2011/10/30/business/economy/ben-bernanke-needs-a-volcker-moment.html
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18. Fed transparency and communication
Each Fed policymaker will now provide multi-year
forecasts of the federal funds rate under her/his view
of what is ‘appropriate’ monetary policy
In the January meeting, this means that we will get a
glimpse at when each policymaker envisions a first
Fed rate hike
We need to pay attention to the accompanying
explanation, however, to see whether the reported
number is what that policymaker actually expects to
happen, or what the policymaker thinks should
happen. These could be two different things.
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