This is an exclusive presentation of US Q4 Economic Overview and Outlook by Bloomberg Brief Economist Joe Brusuelas.
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U.S. Q4’12 Economic Overview and Outlook
Bloomberg BRIEF: Economics
Joseph Brusuelas
October 2012
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U.S. Q4’12 Economic Overview and Outlook
Image page Summary
Executive
• Growth is tracking at 1.5 percent in the third quarter of 2012
• Q4’12 growth of 1.5 percent vs. 2 percent consensus forecast
• 10-year rate likely range bound between 1.5- 2 percent
• EUR/USD depreciation. $1.28 at year end
• Recession risk due to approaching fiscal cliff
• The U.S. economy is downshifting amid broadening global
deceleration
• Job growth around 100,000 per month with slight risk of
unemployment rate rising to 8 percent by end of year
• Risks to the outlook:
• External Sector: Euro zone, Middle East tensions
• Public policy: 2012 impact from 2013 fiscal cliff
• Political Economy: U.S. presidential election
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U.S. Q4’12 Economic Overview and Outlook
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Cyclical Growth Scenario Remains Intact
• Core Scenario: Below Trend (2.5 percent) Growth
• Structural adjustment continues
• Fiscal drag, household and public sector deleveraging
• Elevated unemployment persists
• Modest consumption and low inflation
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U.S. Q4’12 Economic Overview and Outlook
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Cyclical Growth Scenario Remains Intact
• Alternative: The Long Malaise
• Liquidity trap ensnares economy
• Policy Mistake: Premature fiscal & monetary tightening
• Persistent deflation and deleveraging
• Low Probability: Cyclical Outperformance
• Policy directed at 27 percent of first mortgages in negative equity
or near-negative equity positions
• Acceleration in hiring quickly brings down unemployment
• Corporate sector deploys cash
• Inflation risk
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U.S. Q4’12 Economic Overview and Outlook
Bloomberg Consensus: Survey of Forecasters
Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13
Real GDP 1.70% 1.80% 2.00% 1.90% 2.30% 2.50% 2.70%
CPI 1.90% 1.60% 1.90% 1.70% 2.00% 2.10% 2.10%
Core PCE 1.81% 1.70% 1.80% 1.70% 1.80% 1.90% 1.85%
Unemployment 8.17% 8.07% 8.10% 8.10% 8.00% 7.90% 7.80%
Central Bank Rate 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
2-Year Rate 0.30% 0.23% 0.31% 0.37% 0.45% 0.56% 0.69%
10-Year Rate 1.65% 1.63% 1.74% 1.90% 2.05% 2.21% 2.41%
EUR/USD 1.27 1.29 1.28 1.27 1.26 1.25 1.25%
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U.S. Q4’12 Economic Overview and Outlook
Image page Overview
U.S. Rates
• Bloomberg consensus forecast indicates higher 10- and 30-year rates.
• Fed Operation Twist to continue at $44 billion per month pace
• Current Rates:
• 2-Year: .26 percent
• 10-year: 1.74 percent
• 30-year: 2.97 percent
• Fourth Quarter Consensus Survey Rate Forecast
• 2-Year: .31 percent
• 10-year: 1.9 percent
• 30-year: 2.85 percent
• Risk to that forecast:
• Slowing U.S. economy
• Euro zone sovereign crisis
• U.S. fiscal cliff
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U.S. Q4’12 Economic Overview and Outlook
Jobs and Growth
400 6
Q4'12 Growth Tracking at
200
4
Quarterly Average (Percentage)
Quarterly Average (Thousands)
0
2
-200
0
-400
-2
-600
-4
-800
Total Change in Employment (LHS) Real GDP Y/Y (RHS)
-1000 -6
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg R2=.77
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U.S. Q4’12 Economic Overview and Outlook
Labor Market Slack
58 11
Employment to Population Ratio (LHS, Inverted)
Unemployment Rate (RHS)
59 10
9
60
8
61
Percent
Percent
7
62
6
63
5
64 4
65 3
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Bloomberg USERTOT, USURTOT INDEX<GO>
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U.S. Q4’12 Economic Overview and Outlook
Employment Snapshot Reflects Tough Economy
250
225
200 Includes September Household Survey
175
150
125
Thousands
100
75
50
25
0
-25
-50
3-Month Average 6-Month Average 12-Month Average
-75
Total Change In Employment Private Payrolls Household Survey
Source: Bloomberg NFP TCH, NFP PCH, USEMNCHG INDEX<GO>
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U.S. Q4’12 Economic Overview and Outlook
Slow Grind Back To Full Employment
Scenario 1: Structural Break Scenario 2: Cyclical Recovery
7% NAIRU 7% NAIRU 5.5% NAIRU 5.5% NAIRU
Monthly Job Gains 151,000 151,000 151,000 151,000
Labor Force Participation
63.50% 63.50% 63.50% 63.50%
Rate
Average Annual
0.92% 0.50% 0.92% 0.50%
Population Growth
Years to Full Employment 3 Years 1.5 Years 7 Years 4 Year
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U.S. Q4’12 Economic Overview and Outlook
Policy Uncertainty
300
Policy Uncertainty Index
1985-2007 Average=95.2 European Sovereign Debt Crisis
2008-Present Average=164.3 US Debt Ceiling Dispute
250 Banking Crisis/Obama Elected
Lehman Bros/TARP
9/11
200
Balanced Budget Act
2nd Gulf War
Index
1St Gulf War
Clinton Era
Fed Rate
150 Cuts, Stimulus
Black
Monday LTCM
100
50
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: policyuncertainty.com
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U.S. Q4’12 Economic Overview and Outlook
Projected Path of Long- and Short-Term Rates
5.50
5.00
4.50
4.00
3.50
Percent
3.00
2.50
2.00
1.50
1.00
0.50
US 10-Year (LHS) 3-Month, 2-Year Forward (RHS)
0.00
Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12
Source: Bloomberg USGG10YR INDEX, G0025 2Y3M BLC2CURNCY<GO>
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U.S. Q4’12 Economic Overview and Outlook
FX Overview
Image page
• Dollar appreciation versus euro- and-trade weighted basket of
currencies eases:
• Near-term test of $1.30 against the euro
• Likely to move toward $1.28 by end of the third quarter
• Euro zone recession supports modest USD appreciation
• Risks to the outlook:
• Fiscal concerns at year end
• Weak labor market outlook
• More forceful Fed action
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U.S. Q4’12 Economic Overview and Outlook
EUR/USD: Likely Test of $1.28
600 1.18
1.23
500
1.28
EUR/USD (RHS, Inverted)
400
Basis Points
1.33
300
1.38
200
1.43
100
1.48
German-Italian 10-Year Spread (LHS) EUR/USD (RHS, Inverted)
0 1.53
2011 2012
Source: Bloomberg
EUR Curncy, GDBR10, GBTPG10 INDEX<GO>
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U.S. Q4’12 Economic Overview and Outlook
Real Trade Weighted Broad Dollar Index
115
QE 1 Begins QE 2 QE 3
110
105
Index
100
95
90
2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg USTWBROA INDEX<GO>
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U.S. Q4’12 Economic Overview and Outlook
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U.S. Manufacturing Outlook
• Manufacturing growth slowing
• Noticeable pullback in capital expenditures
• Slower external demand
• US fiscal cliff
• Global production decelerating
• Weak U.S. aggregate demand
• European recession
• China recession
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U.S. Q4’12 Economic Overview and Outlook
Manufacturing Growth Slowing Noticeably
Industrial Production and Growth
6.0 10.0
5.0
Y/Y Percentage Change (Quarterly Average)
4.0 5.0
3.0
Y/Y Percentage Change
2.0
0.0
1.0
0.0
-5.0
-1.0
-2.0
-3.0 -10.0
-4.0
GDP CYOY Industrial Production
-5.0 -15.0
1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Bloomberg
IP YOY, GDP CYOY INDEX<GO> R2=.76
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U.S. Q4’12 Economic Overview and Outlook
Slower Manufacturing Growth
ISM Manufacturing, Services and Growth
65.0 6.0
5.0
60.0 4.0
3.0
GDP Y/Y Percentage Change
Index (Quarterly Average)
55.0 2.0
1.0
50.0 0.0
-1.0
45.0 -2.0
-3.0
40.0 -4.0
ISM Manufacturing Survey (LHS)
Weighted ISM Manufacturing & Non-Man (LHS) -5.0
GDP Y/Y (RHS)
35.0 -6.0
1998 2000 2002 2004 2006 2008 2010 2012
Source: Bloomberg NAPMPMI, GDP CYOY INDEX<GO>
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U.S. Q4’12 Economic Overview and Outlook
Capital Expenditures Falling: Slower Growth
Capital Goods Orders Excluding Aircraft
25
20
15
Year Over Year Percentage Change
10
5
0
-5
-10
-15
-20
-25
Recessions Capital Goods New Orders Non-Defense Excluding Aircraft and Parts
-30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg CGNOXAY% INDEX<GO>
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U.S. Q4’12 Economic Overview and Outlook
Global Manufacturing Cools
65 1
60
0
Y/Y Percentage Change (Index)
55
0
50
Index
0
45
0
40
0
35
MSCI World Index (RHS) US ISM (LHS) China PMI (LHS)
30 Euro Zone PMI (LHS) JP Morgan Global PMI (LHS) -1
2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg
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U.S. Q4’12 Economic Overview and Outlook
Financial Conditions Overview
• Forceful action by ECB and Fed behind improved financial
global financial conditions
• Improved pace of credit creation
• Both demand and supply of credit is improving
• This has not resulted in an increase in monetary velocity
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U.S. Q4’12 Economic Overview and Outlook
Bloomberg Financial Conditions Indices
Financial Conditions Turn Easing
2
1
0
-1
Index(Z-Score)
-2
-3
-4
-5
US Financial Conditions Index EU Financial Conditions Index
-6
2010 2011 2012
Source: Bloomberg BFCIUS, BFCIEU INDEX<GO>
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U.S. Q4’12 Economic Overview and Outlook
Credit Markets Healing
Private Credit Creation & Nominal Growth
20%
Nominal GDP Total Credit Creation Private Financial Instiutions
15%
Year Over Year Percentage Change
10%
5%
0%
Adjusted R2=.64
-5%
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
Source: Federal Reserve, Bloomberg
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U.S. Q4’12 Economic Overview and Outlook
Credit Markets Healing, Not Translating to Rising Velocity
Velocity of Money
2.2
M2
2.1
2
1.9
1.8
1.7
1.6
1.5
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Source: Bloomberg VELOM2 INDEX<GO>
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U.S. Q4’12 Economic Overview and Outlook
Housing Outlook and Overview
• Modest cyclical recovery
• Recovery in starts driven by demand for multifamily dwellings
• Prices have stabilized
• Some metro-areas experiencing price appreciation
• Overall housing recovery still years away
• Inventory
• Pricing
• Tight credit
• Attractive rates support sales albeit at historically low levels
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U.S. Q4’12 Economic Overview and Outlook
Housing Outlook
• Shadow inventory rising.
• Pace of foreclosures key to recovery
• Housing drag on economy persists
• 23.7 percent of homeowners have negative equity
• 4.9 percent near-negative equity
• Shadow inventory a drag on recovery
• Negative equity and overhang of supply is blocking the
monetary transmission mechanism
• Likely to need a policy response to target underwater
homeowners and the shadow inventory to move back toward
growth path
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U.S. Q4’12 Economic Overview and Outlook
Housing Starts Stabilize
2.5
Multi-Family Starts Single Family Starts
2
Millions (Annualized Pace)
1.5
1
0.5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg NHSPS1, NHSPS5 INDEX<GO>
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U.S. Q4’12 Economic Overview and Outlook
Traditional Buyers Re-entering Market
Percentage of Existing Home Sales
35
Aug-11 Aug-12
30
25
20
15
10
5
Distressed Sales Foreclosures Short Sales First Time Buyers All Cash Investors
Source: Bloomberg
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U.S. Q4’12 Economic Overview and Outlook
Central Bank Policy Outlook and Overview
• Five C’s of U.S. Monetary Policy
• Communications
• Commitment
• Conditionality
• Composition
• Credibility
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U.S. Q4’12 Economic Overview and Outlook
Central Bank Policy Outlook and Overview
• Forward guidance to remain unchanged
• Maturity extension program continued through 2014
• Possible unsterilized treasury purchases due to fiscal cliff
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U.S. Q4’12 Economic Overview and Outlook
Monetary Policy at the Zero Bound
FOMC Projections of Year-End Levels of the Fed Funds Rate
(Median Projections as of January, June and September 2012)
4.5%
January Median FOMC Projection 4.00%
4.0% June Median FOMC Projection
Sept. Median FOMC Projection
3.5%
3.0%
2.5%
Percent
2.0%
1.5%
1.00%
1.0%
0.5%
0.25% 0.25% 0.25%
0.0%
2012 2013 2014 2015 Longer Run
Source: Bloomberg
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U.S. Q4’12 Economic Overview and Outlook
Monetary Policy at the Zero Bound
Federal Reserve SOMA Maturity Distribution
300,000
9/22/2011 (Wt Avg Years to Maturity 6.09) 10/3/2012 (Wt Avg to Maturity 9.48)
250,000
200,000
Millions
150,000
100,000
50,000
0
2011
2024
2042
2012
2013
2021
2022
2014
2017
2023
2027
2031
2032
2033
2034
2037
2041
2015
2025
2035
2019
2029
2039
2016
2020
2026
2030
2036
2018
2028
2040
2038
Source: Bloomberg DEBT FED<GO>
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U.S. Q4’12 Economic Overview and Outlook
Monetary Policy at the Zero Bound
Diminishing Wealth Effects from Fed Purchases
1500
End of QE1 End of QE2
1400
Standard and Poors 500
1300
1200
1100
1000
900
800
S&P Gains 80% S&P Gains 30% S&P 500 Gains 22% During
700 Operation Twist I & II
600
2009 2010 2011 2012
Source: Bloomberg
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U.S. Q4’12 Economic Overview and Outlook
Monetary Policy at the Zero Bound
Taylor Rule Model Estimates of the Fed Funds Rate
8
Fed Funds Rate Hawks Baseline Taylor Rule Estimate
Doves Sept. Median FOMC Projection Baseline
Rudebusch Model
6
4
2
Percent
0
-2
-4
-6
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Source: Bloomberg
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U.S. Q4’12 Economic Overview and Outlook
Fiscal Drag
• Medium-term policy shift
• Discretionary spending declining
• Potential fiscal shock in first quarter of 2013
• Q1’13 GDP -2.2 percent
• Q2’13 GDP -1.3 percent
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U.S. Q4’12 Economic Overview and Outlook
Fiscal Cliff Impact
Estimated Impact
Tax Changes Spending Changes
Bush Tax Cuts -221 Automatic Sequestration -65
2% Cut in Payroll Tax -95 Expiration of Emergency Unemployment -26
Benefits
Partial Expensing of Investment -65 Scheduled Reduction in Medicare Payment -11
Rates
Tax Provisions: Affordable Health Care Act -18 Other Revenue Increases/Spending -105
Reductions
Impact of Tax Changes -400 Impact of Spending Changes -207
Gross Impact on Spending Changes -607
Less Secondary Effects on Economy 47
Net Impact on Fiscal Deficit -560
Potential Hit on GDP 4%
Source: CBO, Bloomberg
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U.S. Q4’12 Economic Overview and Outlook
Growth Cliff
3.0
2.7
Bloomberg Consensus Forecast Bloomberg Brief GDP Estimate With Fiscal Cliff
2.5 2.3
2.0 2.0
2.0 1.9 1.9
1.5
1.5 1.3
1.0
Percentage
0.5
0.0
-0.5
-1.0
-1.3
-1.5
-2.0
-2.2
-2.5
Q3'12 Q4'12 Q1'13 Q2'13 Q3'13
Source: Bloomberg
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U.S. Q4’12 Economic Overview and Outlook
Employment and the Fiscal Cliff
Unemployment Rate Likely to Rise
10.0
Bloomberg Consensus Forecast
9.8
Bloomberg Brief Forecast With Fiscal Cliff
9.6
9.4
9.2
9.0
8.8
Percentage
8.6
8.4
8.2
8.0
7.8
7.6
7.4
7.2
7.0
2010 2011 2012 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13
Source: Bloomberg
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U.S. Q4’12 Economic Overview and Outlook
Competing Fiscal Visions
Competing Fiscal Visions
26
Obama Plan Actual Forecast
CBO Baseline
25
CBO Alternative
Federal Spending as Percentage of GDP
Ryan Plan
24
23
22
21
20
19
18
17
1990 1994 1998 2002 2006 2010 2014 2018 2022
Source: CBO, OMB, House Budget Committee
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U.S. Q4’12 Economic Overview and Outlook
Competing Fiscal Visions
Entitlement Spending vs. Net Fixed Business Investment
16
Net Business Fixed Investment Actual Forecast
Mandatory Entitlement Spending
14
Spending as a Percentage of GDP
12
10
8
6
4
2
0
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022
Source: Bloomberg, CBO
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U.S. Q4’12 Economic Overview and Outlook
Fiscal Drag
Federal Government Spending
12.0
Actual Projected
11.0
10.0
9.0
Percentage of GDP
8.0
7.0
6.0
5.0
4.0
3.0
Defense Nondefense Total
2.0
1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022
Source: Congressional Budget Office
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U.S. Q4’12 Economic Overview and Outlook
Deficit Dynamics
Federal Deficit: Baseline vs. Alternative
-11.0
Deficit or Surplus Actual Forecast
-10.0
Alternative Fiscal Scenario
-9.0
-8.0
-7.0
Percentage of GDP
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
1972 1978 1984 1990 1996 2002 2008 2014 2020
Source: CBO
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U.S. Q4’12 Economic Overview and Outlook
Debt Dynamics
Federal Debt: Baseline vs. Alternative
120
Debt Alternative Fiscal Scenario Actual Forecast
110
100
90
Percentage of GDP
80
70
60
50
40
30
20
1940 1950 1960 1970 1980 1990 2000 2010 2020
Source: CBO
Email jbrusuelas3@bloomberg.net or call 212-617-7664
43
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45. Bloomberg
Joseph Brusuelas,
Senior Economist
Bloomberg, LP
jbrusuelas3@bloomberg.net
Joseph Brusuelas is an analyst who writes for the Bloomberg Economic Brief. The observations he makes
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