The General Economic Outlook

Transcription

1 The General Economic Outlook Nigel Gault Group Managing Director North American Macroeconomic Services FTA Revenue Estimating Conference Raleigh, North Carolina September 17, 27 Copyright 27 Global Insight, Inc. Growth Resilient So Far Despite Housing Bust But Can It Remain So? (Real GDP, annualized rate of growth) Real GDP Excl. Residential Fixed Investment Contribution Copyright 27 Global Insight, Inc. 9/27 2 1

2 U.S. Economic Growth by Sector (Percent change) Real GDP Consumption Residential Investment Bus. Fixed Investment Federal Government State & Local Govt Exports Imports Copyright 27 Global Insight, Inc. 9/27 3 Other Key Indicators (Percent change unless noted) Industrial Production Payroll Employment Light Vehicle Sales (Millions) Housing Starts (Millions) Consumer Price Index Core Consumption Deflator Federal Funds Rate (%) Year Treasury Yield (%) Copyright 27 Global Insight, Inc. 9/27 4 2

3 Credit Contagion Copyright 27 Global Insight, Inc. Financial Fall-Out From the Subprime Debacle Huge mortgage-related losses ($1-$2 billion?) Dispersed around the world, but nobody knows where for sure Have led investors to flee from mortgage-backed assets (if they can) Contagion has tainted investor appetite for all forms of risk Corporate debt and inter-bank funding markets have tightened forcing central banks to intervene Copyright 27 Global Insight, Inc. 9/27 6 3

4 U.S. Mortgage Originations in 26 by Loan Type 21% 36% Prime Conforming FHA/VA Guaranteed Prime "Jumbo" 2% 3% Alt-A Subprime 1% Copyright 27 Global Insight, Inc. 9/27 7 Credit Impacts on the Economy Home Mortgages More foreclosures, fewer qualified buyers Conforming prime sector still intact Adjustable rate resets have not yet peaked Consumer Consumer credit standards likely to tighten Home equity pump drying up Business Leveraged buy-out market stalled Increased credit spreads (but from very low levels) Commercial paper market freezing up Copyright 27 Global Insight, Inc. 9/27 8 4

5 The Housing Downturn Copyright 27 Global Insight, Inc. Residential Construction Adjustment Much More To Come (Residential structures investment, percent of GDP) Copyright 27 Global Insight, Inc. 9/27 1

6 Foreclosure Rate Has Hit New Highs.7 (Percent of all home mortgage loans entering foreclosure) Source: Mortgage Bankers Association Copyright 27 Global Insight, Inc. 9/27 11 Key State Foreclosure Variations 1.2 (Percent of all home mortgage loans entering foreclosure) National Michigan California Florida Source: Mortgage Bankers Association Copyright 27 Global Insight, Inc. 9/

7 Bloated Supplies of Homes for Sale (Months supply at current selling rate, single-family homes) Existing Homes New Homes Copyright 27 Global Insight, Inc. 9/27 13 Home Sales Have Further To Fall 1.3 (Millions of units) (Millions of units) New Home Sales (Left scale) Existing Home Sales (Right scale) Copyright 27 Global Insight, Inc. 9/

8 Housing Starts Dip Further, Prices To Fall 2.2 (Million units) (Year/year percent change) Housing Starts (Left scale) OFHEO House Price Index (Right scale) Copyright 27 Global Insight, Inc. 9/27 1 Consumers at Risk Copyright 27 Global Insight, Inc. 8

9 Employment Growth Decelerating 3 (Payroll employment, year-on-year rate of change) Copyright 27 Global Insight, Inc. 9/27 17 Mortgage Equity Withdrawal Has Been Fueling Consumer Spending, and Is Fading (Percent of disposable income) Q1 Net Equity Extraction Source: Federal Reserve - Kennedy/Greenspan data updated as of June 27 Copyright 27 Global Insight, Inc. 9/

10 Good News: Wage Growth Outpacing Price Inflation (Year-over-year percent change) ECI, Wages & Salaries Consumption Deflator Copyright 27 Global Insight, Inc. 9/27 19 Consumption Growth Will Slow Further (Percent growth, real) Real Consumption Real Disposable Income Copyright 27 Global Insight, Inc. 9/27 2 1

11 Business Investment Has Been Less Supportive Than Hoped Copyright 27 Global Insight, Inc. The Business Capital Spending Cycle: Construction Has Taken the Lead (Percent change from a year earlier, real spending) Equipment and Software Buildings Copyright 27 Global Insight, Inc. 9/

12 Foreign Trade: Export-Led Growth Copyright 27 Global Insight, Inc. U.S. Export Growth Is Catching Up with World Trade Growth Helped By the Falling Dollar 16 (Percent change, real) U.S. Export Growth World Import Growth (Excluding U.S.) Copyright 27 Global Insight, Inc. 9/

13 Inflation and Interest Rates Copyright 27 Global Insight, Inc. Core Consumer Inflation Moving Below 2% (Ex-food and energy, percent change from a year earlier) Core Consumption (PCE) Price Index Copyright 27 Global Insight, Inc. 9/

14 We Expect the Fed To Cut Interest Rates (Percent) Federal Funds 1-Year Treasury Yield Copyright 27 Global Insight, Inc. 9/27 27 Government Revenue Issues Copyright 27 Global Insight, Inc. 14

15 The Profits Boom Is Out Of Steam 4 (Percent change in pre-tax profits, calendar year) Copyright 27 Global Insight, Inc. 9/27 29 Other Key Indicators Affecting State Budgets 7 6 (Percent change, calendar years) Nonfarm Employment Wages per Worker Wage Income Personal Income Retail Sales Copyright 27 Global Insight, Inc. 9/27 3 1

16 Bottom Line Sluggish growth at best; housing has further to fall, the consumer will be cautious A deeper slowdown is the main risk (recession risk: 3%) The prospect of growth sliding below 2% should trigger rate cuts Downside Risk (1): Credit contagion worsens, spills over more severely to the U.S. and global economies Downside Risk (2): Vulnerability to another energy shock remains high Downside Risk (3): Mutual Assured Destruction: Protectionism at home, buyer s strike against Treasuries by China Copyright 27 Global Insight, Inc. 9/27 31 Thank You! Visit our Web site at Copyright 27 Global Insight, Inc. 9/