1. Ingeniería

Old Dominion University
2014 National Economic Outlook
February 5, 2014
Professor Gary A. Wagner
www.odu.edu/forecasting
1
Presentation Outline
• 2013 Scorecard
• Current economic conditions
• Outlook for 2014
– What are the likely sources for improved or slower growth?
• Federal Reserve and Monetary Policy
• Upside risks
• Downside risks
2
2013 Old Dominion University National Scorecard
Historical
2011
2012
2013
Forecast
Real Gross Domestic Product (GDP)
1.85%
2.78%
2.10%
1.92%
Employment growth
1.61%
1.65%
1.15%
1.70%
8.9
8.1
7.6
7.4
Consumer price index (CPI)
3.34%
1.90%
1.73%
1.22%
CPI – Core (excludes food and energy)
2.24%
1.89%
1.51%
1.71%
3-month Treasury bill
0.05%
0.09%
0.20%
0.06%
10-year Treasury bond
2.79%
1.80%
1.95%
2.35%
30-year conventional mortgage rate
4.46%
3.66%
3.80%
3.98%
Unemployment rate (%)
2013
Actual
3
Growth in Real Gross Domestic Product (GDP), 2006:Q1 - 2013:Q4
Seasonally adjusted annualized rate
6%
Average since June 2009: 2.40%
Recession
4%
2%
0%
-2%
2013 Growth Rates:
Q1 = 1.2%
Q2 = 2.5%
Q3 = 4.1%
Q4 = 3.2%
-4%
-6%
June 2009
Dec. 2007
-8%
Source: Bureau of Economic Analysis and Old Dominion University Economic Forecasting Project.
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
-10%
4
Month-to-Month Change in US Total Nonfarm Employment
600
January 2004 - December 2013
Average monthly change 2004-2006:
+ 182,600 jobs
400
Thousands
200
0
-200
-400
Average last 12 months: +182,167
Average last 6 months: +169,500
-600
Losing 800,000 jobs per month
-800
Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project.
Sep 2013
May 2013
Jan 2013
Sep 2012
May 2012
Jan 2012
Sep 2011
May 2011
Jan 2011
Sep 2010
May 2010
Jan 2010
Sep 2009
May 2009
Jan 2009
Sep 2008
May 2008
Jan 2008
Sep 2007
May 2007
Jan 2007
Sep 2006
May 2006
Jan 2006
Sep 2005
May 2005
Jan 2005
Sep 2004
May 2004
Jan 2004
-1000
5
US Unemployment Situation
Seasonally adjusted
January 2000 - December 2013
20
18
Unemployment rate
U6 rate
16
Peak
'07-10
10.0
17.2
One year Currently
ago
7.9
6.7
14.4
13.1
Percent
14
12
Average 9.1%
10
8
6
4
Average 5.3%
2
Recession
Unemployment Rate
Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project.
Jul 2013
Jan 2013
Jul 2012
Jan 2012
Jul 2011
Jan 2011
Jul 2010
Jan 2010
Jul 2009
Jan 2009
Jul 2008
Jan 2008
Jul 2007
Jan 2007
Jul 2006
Jan 2006
Jul 2005
Jan 2005
Jul 2004
Jan 2004
Jul 2003
Jan 2003
Jul 2002
Jan 2002
Jul 2001
Jan 2001
Jul 2000
Jan 2000
0
u6rate
6
Unemployment Duration in the US, January 1980 – December 2013
3-month moving average
60
Percentage of Unemployed
50
40
30
20
10
Recession
Less than 5 wks
5-14 wks
Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project.
14-26 wks
Oct-13
Jul-12
Apr-11
Jan-10
Oct-08
Jul-07
Apr-06
Jan-05
Oct-03
Jul-02
Apr-01
Jan-00
Oct-98
Jul-97
Apr-96
Jan-95
Oct-93
Jul-92
Apr-91
Jan-90
Oct-88
Jul-87
Apr-86
Jan-85
Oct-83
Jul-82
Apr-81
Jan-80
0
27 wks or more
7
Civilian Labor Force Participation Rate by Age
Comparison of Pre-Recession Average and Current, Seasonally Adjusted
90
82.8 80.7
80
74.7
70
70.7
60
50
40
43.7
37.1
33.9
39.9
30
20
10
0
Ages 16-19
Ages 20-24
Avg 2004-2006
Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project.
Ages 25-54
Current
Ages 55+
8
Civilian Labor Force Participation Rate by Education
Comparison of Pre-Recession Average and Current, Seasonally Adjusted
45.6
43.8
Less than High School
63.2
58.2
High School Graduate
72.4
67.3
Some College
77.9
75.0
Bachelor Degree and Higher
0
Avg 2004-2006
20
40
60
80
Current
Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project.
9
Reasons and Changes for Not Being Part of the Labor Force
Between 2007:Q4 and 2013:Q4
14
12
Millions of People
10
12.6 million people have dropped
out of the labor force since 2007:Q4
32% increase
19% increase
8
Other (99,000)
Caring for Family/House (161,000)
Wants a Job (1.5 million)
23% increase
6
In School (2.5 million)
4
2
Disabled or Ill (2.9 million)
16% increase
Retired (5.5 million)
0
Source: Current Population Survey and the Federal Reserve Bank of Atlanta.
10
Actual vs Projected Labor Force Participation Rates
Annual Data, 1970-2013
66.1 in 2007
68
66
65.7
64
63.1
62
Gap = 6.4 million people
60
58
Actual
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
56
BLS Projections in 2007
Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project.
11
Workers Employed Part-Time Because of Economic Reasons
January 2000 – December 2013, Seasonally adjusted
10000
9000
8000
Thousands
7000
7.7 million
6000
Average = 4.3 million
5000
4000
3000
2000
1000
Recession
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
2007-09 Recession
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jan-00
Jul-00
2001 Recession
0
Employed Part-Time for Economic Reasons
Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project.
12
Employment-Population Ratio
January 1948 – December 2013, Seasonally Adjusted
65
Mid 1970s – Late 1980s
63
Percentage
61
Average 1983 to 2008: 62.3
Average 1948 to 1980: 56.8
59
57
Average since June 2009: 58.5
Currently: 58.6
55
Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project.
Jan-13
Jan-08
Jan-03
Jan-98
Jan-93
Jan-88
Jan-83
Jan-78
Jan-73
Jan-68
Jan-63
Jan-58
Jan-53
Jan-48
53
13
Job Growth Needed to Restore the Employment-Population Ratio
Assume a Target Ratio of 62%
65
63
2016
2018
2020
59
2018
+267,000
2020
+228,000
Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project.
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
53
Jan-21
+359,000
Jan-20
2016
55
Jan-19
Average Monthly Job
Growth Needed
Jan-18
Hypothetical
Target Date
Jan-17
57
Jan-16
Percentage
61
14
National Outlook for 2014
Historical
2011
2012
2013
2014
Forecast
Real Gross Domestic Product (GDP)
1.85%
2.78%
1.92%
2.84%
Employment growth
1.61%
1.65%
1.70%
1.75%
8.9
8.1
7.4
6.3
Consumer price index (CPI)
3.34%
1.90%
1.22%
1.64%
CPI – Core (excludes food and energy)
2.24%
1.89%
1.71%
1.94%
3-month Treasury bill
0.05%
0.09%
0.06%
0.15%
10-year Treasury bond
2.79%
1.80%
2.35%
3.26%
30-year conventional mortgage rate
4.46%
3.66%
3.98%
4.74%
Unemployment rate (%)
15
Components of Real Gross Domestic Product (average since 2008)
Real GDP = $15.7 trillion
(in 2009 dollars)
Consumption
(68% of GDP)
Government
(20% of GDP)
Investment
(15% of GDP)
Net Exports
(-3% of GDP)
16
A Comparison of Post-Recession Growth in Real GDP
Cumulative percentage change the first 18 quarters following the recession’s end
1983
Recession
1991
Recession
2001
Recession
2007-2009
Recession
GDP
24.5%
15.1%
14.8%
11.2%
Consumption
23.5%
16.4%
15.0%
10.5%
Investment
50.5%
34.4%
29.6%
45.5%
Exports
34.8%
41.4%
32.7%
34.8%
Imports
71.8%
45.4%
38.6%
28.7%
Government
22.4%
0.5%
8.8%
-7.3%
12% decline in defense and a 7%
decline in state & local government
Source: Bureau of Economic Analysis and Old Dominion University Economic Forecasting Project.
17
Net Exports
(-3% of GDP)
Exports (12% of GDP)
 Goods (8%)
 Services (4%)
Imports (15% of GDP)
 Goods (12%)
 Services (3%)
• Primarily driven by
– Domestic economic conditions
– Economic conditions of our trading partners
– Exchange rates
18
Net Exports in 2014
• Expected to provide a small boost to GDP
• Positive factors…
– Sovereign debt problems of Europe have stabilized
– Eurozone will grow at its fastest rate in nearly 3 years
• Including Germany, France, United Kingdom, and Italy
• Negative factors…
– Growth in China and Japan should slow in 2014
• Estimates for China’s slowdown range from -0.2% to -1%
19
Real Trade-Weighted US Exchange Rate Broad Index
January 2000 – December 2013, not seasonally adjusted
120
91.1
100
80
Dollar is depreciating
60
84.7
40
20
Source: Board of Governors of the Federal Reserve System.
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
0
20
Projected Change in Growth for Our Major Trading Partners
Expected percentage change between 2013 and 2014
Top Export Partners
Projected Change
in Growth
Top Import Partners
Projected Change
in Growth
Canada
0.55%
China
-0.35%
Mexico
0.02%
Canada
0.55%
China
-0.35%
Mexico
0.02%
Japan
-0.71%
Japan
-0.71%
UK
0.44%
Germany
0.91%
Germany
0.91%
South Korea
0.82%
Brazil
-0.04%
UK
0.44%
Netherlands
1.59%
Saudi Arabia
0.82%
Hong Kong
0.91%
France
0.80%
South Korea
0.82%
India
1.35%
TRADE-WEIGHTED
+0.3%
TRADE-WEIGHTED
+0.1%
Source: IMF, Bureau of the Census, and Old Dominion University Forecasting Project.
21
Investment
(15% of GDP)
Non-residential (12%)
 Equipment (6%)
 Structures (3%)
Residential (2.7%)
Change in Inventories
(0.3%)
• Primarily driven by
– Expectations of future economic performance
– Interest rates
– Access and availability of credit
22
Investment in 2014
• Although investment spending has been strong since 2009, it
should moderate some in 2014
– Purchases of equipment slowed considerably in 2013
• Business confidence remains somewhat fragile
– However, the upside risks far outweigh the downside risks
• Federal Reserve “tapering”
23
Small Business Optimism Index (1986=100)
National Federation of Independent Business, January 2003 – December 2013
110
93.9
100
90
Pre-recession average: 100.7
Average since recession’s end: 91.2
80
Source: National Federation of Independent Business.
Nov-13
Jun-13
Jan-13
Aug-12
Mar-12
Oct-11
May-11
Dec-10
Jul-10
Feb-10
Sep-09
Apr-09
Nov-08
Jun-08
Jan-08
Aug-07
Mar-07
Oct-06
May-06
Dec-05
Jul-05
Feb-05
Sep-04
Apr-04
Nov-03
Jun-03
Jan-03
70
24
Firms Expecting “Better” or “Worse” Conditions in 6 Months
Net Percentage Responding, January 2003 – November 2013
60
More respondents expect conditions
to be “better” in 6 months
Net Percentage Responding
45
13 consecutive months respondents
have been expecting “worse” conditions
30
15
0
-15
-30
Source: National Federation of Independent Business.
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Government shutdown
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
-45
More respondents expect conditions
to be “worse” in 6 months
25
Loan Standards for Commercial and Industrial Loans
Net Percentage of Banks Reporting Tightening Standards, 1990:Q2 – 2013:Q3
100
80
60
40
Harder to obtain loans
20
0
-20
Easier to obtain loans
Recession
Source: Board of Governors of the Federal Reserve System.
Large & Medium Firms
Aug 2013
Oct 2012
Dec 2011
Feb 2011
Apr 2010
Jun 2009
Aug 2008
Oct 2007
Dec 2006
Feb 2006
Apr 2005
Jun 2004
Aug 2003
Oct 2002
Dec 2001
Feb 2001
Apr 2000
Jun 1999
Aug 1998
Oct 1997
Dec 1996
Feb 1996
Apr 1995
Jun 1994
Aug 1993
Oct 1992
Dec 1991
Feb 1991
Apr 1990
-40
Small Firms
26
Government
(20% of GDP)
Federal (8% of GDP)
 Defense spending (5%)
 Non-defense (3%)
State and local (12% of GDP)
27
State and Local Government Tax Revenue Recovery
% Decline in Total Nominal Tax Revenue From Start of 2007-2009 Recession
Cumulative % change since start of recession
18%
15%
12%
9%
2013: Q2
6%
3%
0%
-3%
-6%
-9%
-12%
-15%
0
1
2
3
4
5
6
7
1991 Recession
Source: Nelson Rockefeller Institute of Government.
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Quarters since start of recession
2001 Recession
2007 Recession
28
Composition of Federal Government Expenditures, FY 2012
Share of $3.54 trillion
Social Security
17.4%
21.7%
Medicare
Medicaid
Income Security
19.0%
Retirement and Disability
15.6%
Other
5.2%
4.1% 10.0%
Source: Congressional Budget Office.
Defense
7.1%
Non-Defense Discretionary
29
Highlights of the 2014 Federal Budget
Discretionary Spending in FY 2014 = $1.012 Trillion
• $28 billion increase over FY13
• 2.85% (nominal) increase
• $63 billion in sequester “relief” will be spread over the next two years
• Split equally between Defense and Non-Defense
• $22 billion for Defense in FY14, $9.5 in FY15
• This is roughly a 5% boost over funding levels expected due to sequestration
• 1% pay raise for military personnel and federal civilian employees
30
Are we heading for another debt limit showdown?
• Presently, the debt limit is suspended until Feb. 7, 2014
– A new limit should be reset on or before Feb. 8
• If the new limit is not raised or suspended , Treasury Secretary
Jack Lew will use “extraordinary measures” to pay our
obligations until late Feb/early March
• What happens if the debt limit is not raised?
– Federal spending will fall by 25% immediately (6% of GDP)
– US economy will almost certainly enter a recession
– Our default risk/credit rating will be negatively impacted
31
Consumption
(68% of GDP)
Goods (23% of GDP)
 Motor vehicles & parts (2.3%)
 Recreational goods (2.4%)
 Food & beverages (5.3%)
Services (45% of GDP)
Housing & utilities (13%)
Health care (11%)
 Financial services (5%)
• Primarily driven by
– Employment and income
– Confidence about the future
– Wealth (home values & financial wealth)
– Interest rates
32
Consumption in 2014
• Consumption has been solid for 2+ years now
– I expect consumer spending to accelerate and boost growth
significantly in 2014
• Positive factors…
– Housing correction is (virtually) complete
– Consumer expectations have firmed considerably
– Labor market conditions are improving more rapidly
• Negative factors…
– “Tapering” should slow spending on durable goods
33
Household Expectations on Selected Measures, Jun. – Dec. 2013
Federal Reserve Bank of New York Rotating Survey of 1200 People
30
25
Avg. = 21.2
Percentage
20
Avg. = 16.4
15
10
Avg. = 5.4
5
Avg. = 4.8
0
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Probability of Losing a Job over Next 12 Months
Probability of Leaving a Job Voluntarily over Next 12 Months
Expected Household Spending Growth over Next 12 Months
Expected Home Price Growth over Next 3 Years
Source: Federal Reserve Bank of New York Survey of Consumer Expectations.
34
Total Household Debt Balances, 2003:Q1 – 2013:Q3
Trillions of Dollars
15
Mortgage
(70%)
2008Q4: $12.6 Trillion
HE Revolving
(5%)
Auto Loan
(8%)
Credit Card
(6%)
Trillions of Dollars
Student Loan
(9%)
Other
(3%)
15
12
12
9
9
6
2013Q3: $11.3 Trillion
6
3
3
0
0
Source: Federal Reserve Bank of New York Household Debt and Credit Survey.
35
Household Debt-to-Income Ratios, 1980:Q1 – 2013:Q3
Estimates began in 1980:Q1
2007:Q3
20
16
Financial Obligations Ratio (FOR) =
(debt service + rent + auto leases + others) / (after-tax income)
12
Financial Obligations Ratio
Source: Board of Governors.
Sep-12
Jul-11
May-10
Mar-09
Jan-08
Nov-06
Sep-05
Jul-04
May-03
Mar-02
Nov-99
Sep-98
Jul-97
Jul-83
May-82
Mar-81
May-96
15.4
Mar-95
15.1
Jan-94
18.1
Nov-92
FOR
Jan-80
0
Sep-91
9.9
Jul-90
9.9
May-89
13.2
Mar-88
DSR
Jan-87
Currently
Nov-85
All-Time Low
Sep-84
2007-09 Peak
4
Jan-01
Debt Service Ratio (DSR) =
(minimum debt payments) / (after-tax income)
8
Debt Service Ratio
36
Monetary Policy and the Federal Reserve System
New Chair of the
Board of Governors
New (Nominated) Vice-Chair
of the Board of Governors
Janet Yellen
Stanley Fischer
Ph.D., Economics, Yale
Ph.D., Economics, MIT
37
What can we expect from “The FED” in the coming year?
• May 2013
– Announced a “step down” in quantitative easing may occur soon
• December 2013
– QE purchases would slow from $85 to $75 billion per month
• Quantitative easing (QE)
– Purchases of mortgage-backed securities and other agency debt
– MBS drop from $40 to $35B, Treasuries from $45 to $40B
• QE1: 3/2009 – 3/2010
• QE2: 11/2010 – 6/2011
• QE3: 9/2012 - ?
38
Federal Reserve Balance Sheet, January 2007 – January 2014
4500000
4000000
Quantitative easing
3500000
Millions
3000000
2500000
2000000
1500000
1000000
500000
0
1/3/2007
1/3/2008
1/3/2009
1/3/2010
Fed Agency Debt Mortgage-Backed Securities Purch
Lending to Financial Institutions
Traditional Security Holdings
Source: Board of Governors of the Federal Reserve.
1/3/2011
1/3/2012
1/3/2013
1/3/2014
Liquidity to Key Credit Markets
Long Term Treasury Purchases
39
What can we expect from “tapering”?
• It should lead to higher middle and longer term interest rates
– Estimated increase: 80 to 100 basis points
• The rate at which the FED will taper remains uncertain and will
likely depend on inflation expectations
• If inflation expectations remain anchored around 2%, then I
suspect the FED will taper slowly
• If inflation expectations rise sharply during the year, then
tapering is likely to be more rapid
40
Expected Inflation Yield Curve
Federal Reserve Bank of Cleveland Estimates
2.5%
Jan 2013
Dec 2013
Jan 2014
2.0%
1.5%
1.0%
0.5%
0.0%
1 2 3 4 5 6 7 8 9 10
12
15
20
25
30
Time Horizon (Years)
Source: Federal Reserve Bank of Cleveland and Old Dominion University Economic Forecasting Project.
41
FOMC Expectations of Policy Firming
Expected year of first increase in target federal funds rate
16
14
Number of Respondents
Mean Expected
Target Rate (Dec. 2013)
14
13
12
12
2013
0.25
2014
0.34
10
2015
1.09
8
2016
2.28
12
6
4
4
2
3
3
3
2
1
1
1
2
1
0
0
Mar, 2013
Jun, 2013
2013
2014
0
Sep, 2013
2015
Dec, 2013
2016
FOMC Meeting Dates
Source: Board of Governors of the Federal Reserve System.
42
Upside risks
• Household deleveraging cycle appears to be over
• Leading labor market indicators are all moving the right
direction
• The “energy boom” will continue to be a bright spot
• Quantitative easing is winding down
43
Downside risks
• No obvious significant headwinds
• Political and regulatory uncertainty remains elevated
– Financial regulations are way behind schedule
– Affordable Care Act rollout may dent confidence
• Fear that slowing growth in China will spread
• Inflation expectations grow
44
2014 National Forecast: Quarter-by-Quarter
2014:Q1
Forecast
2014:Q2
Forecast
2014:Q3
Forecast
2014:Q4
Forecast
2014
Annual
Nominal GDP (level)
17275.6
17452.5
17632.3
17814.7
17543.8
Real GDP (level)
16072.7
16169.4
16262.8
16354.3
16214.8
Real GDP growth
2.71%
2.43%
2.33%
2.27%
2.84%
Employment growth
1.84%
1.77%
1.71%
1.66%
1.66%
6.6
6.4
6.2
6.1
6.3%
Consumer price index (CPI)
1.27%
1.64%
1.88%
1.76%
1.64%
CPI – Core
1.90%
1.72%
2.11%
2.02%
1.92%
3-month Treasury bill
0.09%
0.12%
0.16%
0.22%
0.15%
10-year Treasury bond
3.02%
3.16%
3.34%
3.53%
3.26%
30-year conventional mortgage rate
4.47%
4.63%
4.82%
5.02%
4.74%
Unemployment rate (%)
* Annual growth in real GDP does not equal the average growth rate of the 4 quarters of 2014. It is the percentage change between the average level of real
GDP in 2013 and the average level of real GDP in 2014.
46