MAY 2016 CRC MACRO MONTHLY

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1 MAY 2016 CRC MACRO MONTHLY Important disclosures found in appendix Our View: Over the past 45 days, we ve seen a notable slowing in Retail activity, following a strong (weather-assisted) February/March. We are cautious on the outlook for 2H16, as we expect income growth to decelerate and credit conditions to tighten as economic uncertainty continues to grow. Page 2 CRC Industrial & Consumer Surveys Page 6 Consumer Credit Analysis Lending Canary? The biggest change in the 2Q16 Fed Senior Loan Officer Survey was a sharp tightening in lending standards for Commercial Real Estate (CRE) loans. Historically, CRE lending has been a good leading indicator for banks broader risk appetite, likely due to the longer duration and larger relative size of CRE loans. We believe the 2Q16 tightening was driven in large part by increased uncertainty about the trajectory of the US economy, and we think this could signal a broader tightening of bank lending standards over the next 12 months: Bank Lending Standards -- CRE vs. Consumer 60 Loosening Standards on Commercial Real Estate Lending Increased Willingness to Make Consumer Installment Loans Q Q82 2Q85 2Q88 2Q91 2Q94 2Q97 2Q00 2Q03 2Q06 2Q09 2Q12 2Q15 Source: Federal Reserve, CRC 1

2 CRC Consumer Surveys Our latest monthly/quarterly Consumer & Retail surveys (rate of change positive, mixed, negative): Amazon Darden Restaurants Paint Aramark Flooring Sysco Burger King Genuine Parts Company Tyson Foods Cabinets & Faucets Homecenters ULTA Salon Coach Kate Spade Whirlpool Lawn Equipment Bed Bath & Beyond Europe Bldg Products Sanderson Farms Best Buy Homebuilders Sprouts Farmers Market Cruise Lines Hotels Starbucks Dollar General Lawn & Garden Tools - DIY/Pro Dollar Tree Kohl s Tractor Supply Drug Retail McDonald s Walmart Dunkin Donuts Panera Whole Foods Automotive Aftermarket Kroger SuperValu Chipotle Macy s Target Costco Nordstrom Sporting Goods Footwear Office Supply United Natural Foods Our research points to a deceleration in Retail activity over the past 45 days, following a strong (weather-assisted) February/March: 90 CRC Retail Supplier Index Diffusion Index - 3 month rolling average May Source: CRC Channel Research 2

3 CRC Consumer Surveys We think one of the key factors to watch for Consumer Spending in 2H16 (as always) will be Income growth: 15% Withheld Income and Employment Taxes y/y % change in 3MMA of monthly average of daily data Payroll Tax Cut 10% 5% 0% 5/19/2016-5% -10% -15% '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Sources: Daily Treasury Statements & Dailyjobsupdate.com The good news for Consumer Spending is that we appear to have plenty of dry powder still available on our credit cards; the bad news is that we re going to need it if income growth continues to decelerate: 40% Consumer Credit Card Balances As % of Limit 35% 30% 25% 20% 1Q16 15% 10% '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: Federal Reserve Bank of NY Consumer Credit Panel / Equifax 3

4 CRC Industrial Surveys Our latest monthly/quarterly Industrial surveys (rate of change positive, mixed, negative): Analog Semis - Industrial Aggregates Cement Electrical Industrial Automation Monsanto Fluid Power Industrial Distribution United Parcel Service HVAC Lighting Wallboard Metalworking Ag Equipment FedEx LTL Trucking Boxboard Fertilizer Mining Equipment Construction Equipment Flatbed Trucking Oilfield Services Containerboard Frac Sand Rails Ethanol & Oilseed Freight Forwarders Tools - Industrial Farmer Spending Heavy Truck Truck Brokerage Intermodal The CRC Industrial Sentiment index improved again in May, led by green on the construction side, and a shift from red to black for several manufacturing surveys: 100 CRC Industrial Sentiment Index Diffusion Index - 3 month rolling average Jun May Source: CRC Channel Research 4

5 CRC Industrial Surveys While the declines have generally stabilized across our Industrial surveys, our Transportation surveys (and our Packaging surveys) point to sluggish economic activity, in part due to excess inventories throughout the supply chain: Truckload Spot Freight Demand Index Range /23/ Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: CRC Analysis and ITS Capital Goods orders remained in contraction in April this has been a decent leading indicator for Employment growth: 30% CapEx vs Employment SA, y/y % change Manufacturers' New Orders for Nondefense Capital Goods Ex Aircraft (left) All Employees: Total Nonfarm Payrolls (right) 6% 20% 10% Apr '16 4% 2% 0% 0% -10% -2% -20% -4% -30% -6% -40% '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15-8% Sources: FRED, Census & BLS 5

6 Consumer Credit Mortgages comprise ~2/3 of total Consumer Credit outstanding; thankfully, a painful deleveraging has ended, and we re back to adding a healthy level of mortgage debt; we expect Housing to remain a relative bright spot in the economy: 1,200 Household Mortgages, Flow of Funds Liabilities - mortgage, billions of dollars, annual rates 1, Source: Federal Reserve One notable change vs a decade ago is the relative shift of Mortgage debt from the 30-somethings to the 60+ crowd: Average Home Related Debt by Age balance reported in $2015, includes mortgages and home equity lines of credit $20, less 2003 $15,000 $10,000 $5,000 $0 -$5,000 -$10,000 -$15, Borrower Age Source: New York Fed Consumer Credit Panel / Equifax 6

7 Consumer Credit We think the main risk in the Housing market lives in places like Texas, Louisiana, Oklahoma, etc where the Energy boom also drove a mini-housing Boom: 2.0 Mortgage Balance Growth in High Energy Counties Indexed 1Q04=1 1.8 High Energy US Average '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 1Q16 '16 Source: New York Fed Consumer Credit Panel/Equifax. There has been smoke, but no fire (yet) for Housing in Energy-heavy regions this will be something to watch: 10.0% Mortgage 90+ Day Delinquency Rates in High Energy Counties % of balance 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% US Average High Energy 0.0% '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 1Q16 '16 Source: New York Fed Consumer Credit Panel/Equifax. 7

8 Consumer Credit On the Automotive side debt outstanding has now passed the $1 trillion mark 1,200 Motor Vehicle Loans Owned and Securitized, Outstanding 1,000 1Q16 Billion Dollars '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 Source: Federal Reserve, G.19 Consumer Credit as banks have continued to extend the average duration and amount financed for new car loans: Amount Financed vs Loan Maturity for New Car Loans at Finance Companies, amount financed weighted $29,000 Average Amount Financed (left) Average Maturity (right) 66 $28,000 $27,000 $26,000 $25,000 $24,000 $23,000 $22,000 $21, Source: Federal Reserve/FRED Dec '

9 Consumer Credit Similar to the mini-housing Boom Energy-heavy regions also enjoyed an Auto Boom during the recovery Auto Loan Balance Growth in High Energy Counties Indexed 1Q04=1 High Energy US Average '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 1Q16 '14 '15 '16 Source: New York Fed Consumer Credit Panel/Equifax. but unlike Housing loans in these regions, Auto loans have already started to show notable signs of distress: 6.0% Auto Loan 90+ Day Delinquency Rates in High Energy Counties % of balance 5.0% High Energy 4.0% 3.0% US Average 2.0% 1.0% 0.0% '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 1Q16 '16 Source: New York Fed Consumer Credit Panel/Equifax. 9

10 Consumer Credit One of the biggest changes in Consumer Credit over the past decade has been the explosion of Student Loan debt: 45% Loans as % of Consumer Credit 40% 35% Student Loan 30% Motor Vehicle 25% 20% 15% 10% '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 1Q16 '16 Source: Federal Reserve Not surprisingly, this burden lies largely on the shoulders of the Millennials; the likely impact of this is not yet understood, and so far the exercise has been largely Academic (couldn t resist): $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 -$1,000 -$2,000 Average Debt Balance by Age Change from 2003 to 2015 Credit Card Auto Student Loan Borrower Age Source: New York Fed Consumer Credit Panel / Equifax 10

11 Consumer Credit Another major change over the past decade has been Uncle Sam picking up the Nation s tab: Debt Outstanding by Sector quarterly, debt securities & loans at end of period in $trillions $20 Households Nonfinancial Business Government Financial Sectors $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 Source: Federal Reserve Z.1 Financial Accounts This was likely necessary during the major deleveraging that followed the Great Recession; the key question that comes next is whether the US consumer will take the borrowing baton from here: Household Debt vs Income Growth difference of nominal y/y % change for Households' & Nonprofits' Total Debt Securities & Loans and Disposable Personal Income 8% Income Growth > Debt Growth Debt Growth > Income Growth 4Q15 4% 0% -4% -8% -12% -16% '60 '64 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12 Sources: FRED, Federal Reserve Z.1 Financial Accounts & BEA 11

APPENDIX Other Disclosures: We, Erik Vaughan and Skylar Xie, certify that the views expressed in the research report(s) accurately reflect our personal views about the subject security(s).

12 APPENDIX Other Disclosures: We, Erik Vaughan and Skylar Xie, certify that the views expressed in the research report(s) accurately reflect our personal views about the subject security(s). Further we certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report(s). The analysts responsible for the preparation of this report have no ownership stake in this company. Cleveland Research Company provides no investment banking services of any type on this or any company. Proprietary research and Information contained herein which forms the basis for findings or opinions expressed by Cleveland Research Company may be used by Cleveland Research for other purposes in the course of compensated consulting and other services rendered to third parties. The information transmitted is intended only for the person or entity to which it is addressed. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this in error, please contact the sender and delete the material from any computer. Member FINRA/SIPC Skylar Xie, CFA Macro Research Analyst 1375 E. 9 th Street, Suite 2700 Cleveland, OH Phone: (216) sxie@cleveland-research.com Erik Vaughan, CFA Head of Macro Research 1375 E. 9 th Street, Suite 2700 Cleveland, OH Phone: (216) Mobile: (216) IM: erikvaughan evaughan@cleveland-research.com 12

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