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  U.S. Q4’12 Economic Overview and Outlook
  Bloomberg BRIEF: Economics
  Joseph Brusuelas
  October 2012
Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com
                  or enter BRIEF <GO> on Bloomberg terminal

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

                              Email jbrusuelas3@bloomberg.net or call 212-617-7664                           2
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 U.S. Q4’12 Economic Overview and Outlook


Image page
 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




                               Email jbrusuelas3@bloomberg.net or call 212-617-7664                           3
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 U.S. Q4’12 Economic Overview and Outlook


Image page
 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




                               Email jbrusuelas3@bloomberg.net or call 212-617-7664                           4
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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%

                                Email jbrusuelas3@bloomberg.net or call 212-617-7664
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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

                               Email jbrusuelas3@bloomberg.net or call 212-617-7664
                                                                                                             6
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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


                                                                          Email jbrusuelas3@bloomberg.net or call 212-617-7664
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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>


                                              Email jbrusuelas3@bloomberg.net or call 212-617-7664
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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

                                                Email jbrusuelas3@bloomberg.net or call 212-617-7664
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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>



                                     Email jbrusuelas3@bloomberg.net or call 212-617-7664
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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




                                Email jbrusuelas3@bloomberg.net or call 212-617-7664
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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>


                                            Email jbrusuelas3@bloomberg.net or call 212-617-7664
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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>


                                   Email jbrusuelas3@bloomberg.net or call 212-617-7664
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 U.S. Q4’12 Economic Overview and Outlook


Image page
 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


                                                          Email jbrusuelas3@bloomberg.net or call 212-617-7664
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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>


                                                                  Email jbrusuelas3@bloomberg.net or call 212-617-7664
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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>


                                                                          Email jbrusuelas3@bloomberg.net or call 212-617-7664
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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>

                                               Email jbrusuelas3@bloomberg.net or call 212-617-7664
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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


                                                                        Email jbrusuelas3@bloomberg.net or call 212-617-7664
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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>

                                        Email jbrusuelas3@bloomberg.net or call 212-617-7664
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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>



                                                                   Email jbrusuelas3@bloomberg.net or call 212-617-7664
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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


                                                Email jbrusuelas3@bloomberg.net or call 212-617-7664
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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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                                                         or enter BRIEF <GO> on Bloomberg terminal

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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                                            or enter BRIEF <GO> on Bloomberg terminal

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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                                        or enter BRIEF <GO> on Bloomberg terminal

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

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US Eco Q4'12 Outlook

  • 1. Image page U.S. Q4’12 Economic Overview and Outlook Bloomberg BRIEF: Economics Joseph Brusuelas October 2012
  • 2. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 2
  • 3. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal U.S. Q4’12 Economic Overview and Outlook Image page 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 3
  • 4. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal U.S. Q4’12 Economic Overview and Outlook Image page 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 4
  • 5. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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% Email jbrusuelas3@bloomberg.net or call 212-617-7664 5
  • 6. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 6
  • 7. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 7
  • 8. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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> Email jbrusuelas3@bloomberg.net or call 212-617-7664 8
  • 9. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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> Email jbrusuelas3@bloomberg.net or call 212-617-7664 9
  • 10. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 10
  • 11. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 11
  • 12. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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> Email jbrusuelas3@bloomberg.net or call 212-617-7664 12
  • 13. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 13
  • 14. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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> Email jbrusuelas3@bloomberg.net or call 212-617-7664 14
  • 15. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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> Email jbrusuelas3@bloomberg.net or call 212-617-7664 15
  • 16. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal U.S. Q4’12 Economic Overview and Outlook Image page 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 16
  • 17. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 17
  • 18. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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> Email jbrusuelas3@bloomberg.net or call 212-617-7664 18
  • 19. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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> Email jbrusuelas3@bloomberg.net or call 212-617-7664 19
  • 20. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 20
  • 21. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 21
  • 22. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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> Email jbrusuelas3@bloomberg.net or call 212-617-7664 22
  • 23. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 23
  • 24. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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> Email jbrusuelas3@bloomberg.net or call 212-617-7664 24
  • 25. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 25
  • 26. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 26
  • 27. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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> Email jbrusuelas3@bloomberg.net or call 212-617-7664 27
  • 28. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 28
  • 29. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 29
  • 30. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 30
  • 31. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 31
  • 32. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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> Email jbrusuelas3@bloomberg.net or call 212-617-7664 32
  • 33. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 33
  • 34. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 34
  • 35. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 35
  • 36. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 36
  • 37. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 37
  • 38. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 38
  • 39. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 39
  • 40. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 40
  • 41. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 41
  • 42. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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 Email jbrusuelas3@bloomberg.net or call 212-617-7664 42
  • 43. Published by Bloomberg's Economics Newsletter - Take a free trial at Bloombergbriefs.com or enter BRIEF <GO> on Bloomberg terminal 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
  • 44. Free Trial Offer to Bloomberg’s Economics Brief This is an exclusive presentation from Bloomberg Brief Economics by Joseph Brusuelas. Bloomberg BRIEF Economics is a new, groundbreaking publication written by leading economists in US, Europe and Asia, published by Bloomberg, the premier source of data and analytics in the financial world. Bloomberg BRIEF Economics is already read by thousands every morning and you’ll soon see why – the Economics Brief provides a clear, concise snapshot every morning of all the key information you need to know: • Valuable insight and independent analysis from our renowned economists who've spent decades on Wall Street including Joseph Brusuelas, Michael McDonough, Tamara Henderson, Richard Yamarone, David Powell and Niraj Shah. • Proprietary data and commentary that gets beneath the numbers with eye catching charts. • Guest columnists from top-tier firms. • Exclusive publications such as the Orange Book, Quarterly Economic Overviews, The Economist Notepad, Daily Economic Outlook Videos and much more! Your time is valuable. Maximize it by switching to Bloomberg BRIEF Economics today. Take a free 30 day trial today! Or visit www.bloombergbriefs.com for more information.
  • 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 are his own. Bloomberg is a leading source of data, news, and analytics for financial and legal professionals, corporations, media organizations and private individuals around the globe. The BLOOMBERG PROFESSIONAL® service and Bloomberg’s media services provide real-time and historical pricing, indicative data, reporting, research, estimates, analytics, portfolio management tools, electronic trading and order management systems, multimedia events and electronic communications to Bloomberg clients in more than 150 countries, 24 hours a day. bloomberg.com Frankfurt London San Francisco Singapore Tokyo +49 69 9204 1210 +44 20 7330 7500 +1 415 912 2960 +65 6212 1000 +81 3 3201 8900 Hong Kong New York São Paulo Sydney +852 2977 6000 +1 212 318 2000 +55 11 3048 4500 +61 2 9777 8600 The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and BLOOMBERG Order Management Systems (the "Services") are owned and distributed locally by Bloomberg Finance L.P. ("BFLP") and its subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly-owned subsidiary of Bloomberg L.P. ("BLP"). BLP provides BFLP with all global marketing and operational support and service for the Services and distributes the Services either directly or through a non-BFLP subsidiary in the BLP Countries. The Services include electronic trading and order-routing services, which are available only to sophisticated institutional investors and only where the necessary legal clearances have been obtained. BFLP, BLP and their affiliates do not provide investment advice or guarantee the accuracy of prices or information in the Services. Nothing on the Services shall constitute an offering of financial instruments by BFLP, BLP or their affiliates. BLOOMBERG, BLOOMBERG PROFESSIONAL, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG ANYWHERE, BLOOMBERG TRADEBOOK, BLOOMBERG BONDTRADER, BLOOMBERG TELEVISION, BLOOMBERG RADIO, BLOOMBERG PRESS and BLOOMBERG.COM are trademarks and service marks of BFLP, a Delaware limited partnership, or its subsidiaries.