Economic Outlook: Cyclical Recovery, Structural Challenges Federal Reserve Bank of Atlanta Annual Banking Outlook Conference

Transcription

1 Economic Outlook: Cyclical Recovery, Structural Challenges Federal Reserve Bank of Atlanta Annual Banking Outlook Conference John E. Silvia, Chief Economist March 1, 2012

2 Where Are We Now? Inflation Interest Rates Five benchmarks for good decision making Growth Profits The Dollar Source: 2

3 Wells Fargo vs. Consensus Expectations for the Future Sustained below-trend growth Still cautious on the consumer How do we differ from consensus? Still cautious on housing State and local governments still restructuring Employment cyclical and structural change 3

4 What We Get Versus What We Expect 10.0% 8.0% 6.0% 4.0% Real GDP Bars = CAGR Line = Yr/Yr Percent Change GDP - CAGR: 2.8% GDP - Yr/Yr Percent Change: 1.6% Forecast 10.0% 8.0% 6.0% 4.0% Sustained recovery in 2012, but still below historical experience 2.0% 0.0% -2.0% -4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -6.0% -8.0% -8.0% -10.0% % Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 4

5 GDP Cycles Q Q Q U.S. Business Cycles Real GDP, Peak Indexed to Slow cyclical recovery, but GDP has overtaken its prerecession peak Quarters From Peak Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 5

6 Recession Outlook 120% Recession Probability Based on Probit Model Two-Quarter Ahead Probability Two-Quarter Ahead Recession Probability: 0.00% 120% 100% 100% 80% 80% The outlook for growth ahead remains in tact 60% 40% 60% 40% 20% 20% 0% % Source: Wells Fargo Securities, LLC 6

7 Manufacturing: Cyclical 65 ISM Manufacturing Composite Index Diffusion Index Large, Global Businesses: Moderate growth in manufacturing ISM Manufacturing Index: Month Moving Average: Source: Institute for Supply Management and Wells Fargo Securities, LLC 7

8 Initial Unemployment Claims: Cyclical Initial Claims for Unemployment Seasonally Adjusted, In Thousands Year-over-Year Percent Change: -8.6% Initial Claims: Thousand 4-Week Moving Average: Thousand 52-Week Moving Average: Thousand Signaling continued job gains Source: U.S. Department of Labor and Wells Fargo Securities, LLC 8

9 Employment: Structural 12.0% 10.0% 8.0% 6.0% 4.0% Cycle Cycle Cycle 2001 Cycle 2007-To-Date Forecast Employment Cycles Percent Change from Cycle Peak 12.0% 10.0% 8.0% 6.0% 4.0% Employment will eventually regain its peak, but not quickly 2.0% 0.0% -2.0% -4.0% -6.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% % Source: U.S. Department of Labor and Wells Fargo Securities, LLC 9

10 Employment: Structural 65 Employment-Population Ratio 16 Years and Over, Seasonally Adjusted A much lower base to support spending Employment-Population Ratio: Source: U.S. Department of Labor and Wells Fargo Securities, LLC 10

11 Employment: Structural 8 Participation Rate Change By Age Cohort, Percentage Point Change since January Secular shifts in labor force participation : : : : and older: Source: U.S. Department of Labor and Wells Fargo Securities, LLC 11

12 Debt Service Ratio: Cyclical or Structural? 14.0% Household Debt Service Ratio As a Percent of Disposable Personal Income 14.0% 13.5% 13.5% 13.0% 13.0% 12.5% 12.5% Debt service has returned to more sustainable levels 12.0% 11.5% 12.0% 11.5% 11.0% 11.0% 10.5% DSR: 11.1% 10.0% % 10.0% Source: Federal Reserve Board and Wells Fargo Securities, LLC 12

13 Income: Rising Returns to Education $ Income By Education Level 2007 Dollars Before Taxes, Thousands $80 $ $70 $60 $60 Real income has remained relatively flat over the past year, except for those with a college degree $50 $40 $30 $20 $50 $40 $30 $20 $10 $10 $0 No High School Diploma High School Diploma Some College College Degree $0 Source: Federal Reserve Board and Wells Fargo Securities, LLC 13

14 Consumer Credit: Cyclical 40% Banks' Willingness to Make Loans Consumer Installment 40% 30% 30% 20% 20% 10% 10% Increased lending is offering some support to consumer spending 0% -10% -20% 0% -10% -20% -30% -30% -40% Willingness to Lend - Consumer: 11.5% -50% % -50% Source: Federal Reserve Board and Wells Fargo Securities, LLC 14

15 Consumer Credit: Cyclical 6.5% Credit Card Delinquencies Simple Average of 6 Major Companies, Not Volume Weighted 6.5% 6.0% 6.0% 5.5% 5.5% 5.0% 5.0% Credit card delinquencies have declined below prerecession rates, reflecting improvement in consumers balance sheets 4.5% 4.0% 3.5% 4.5% 4.0% 3.5% 3.0% 3.0% 2.5% Average Delinquency Rate: 2.8% 2.5% 2.0% % Source: Bloomberg and Wells Fargo Securities, LLC 15

16 Credit Standards: A New Equilibrium Demand for loans has picked up, but credit standards are slightly tighter Standards Demand 100% Net Percentage of Banks Tightening Standards Commercial and Industrial Loans 100% 60% Net Percent of Banks Reporting Stronger Demand Commercial and Industrial Loans 60% 80% 80% 40% 40% 60% 60% 20% 20% 40% 40% 0% 0% 20% 20% -20% -20% 0% 0% -40% -40% -20% -20% -60% -60% -40% -60% C&I Loans to Large & Medium Firms: 5.4% C&I Loans to Small Firms: 1.9% % -60% -80% -100% Demand for C&I Loans to Large & Medium Firms: 19.6% Demand for C&I Loans to Small Firms: 15.1% % -100% Source: Federal Reserve Board and Wells Fargo Securities, LLC 16

17 Banking: Cyclical 25% C&I Lending and Business Inventories Year-over-Year Percent Change 25% 20% 20% 15% 15% 10% 10% 5% 5% Banks are lending and helping to support business operations 0% -5% 0% -5% -10% -10% -15% -15% -20% -25% C&I Loans: 11.1% Business Inventories: 7.7% % -25% Source: Federal Reserve Board and Wells Fargo Securities, LLC 17

18 Banking $1,800 $1,600 $1,400 Commercial & Industrial Loans by Bank Type Billions of U.S. Dollars Foreign Banks: $250.8 B Small Domestic Banks: $384.7 B Large Domestic Banks: $719.7 B $1,800 $1,600 $1,400 $1,200 $1,200 Banks of all types are integral to business lending $1,000 $800 $600 $1,000 $800 $600 $400 $400 $200 $200 $ $0 Source: Federal Reserve Board and Wells Fargo Securities, LLC 18

19 Real Estate: Structural 25% Real Estate Lending By Commerical Banks, Year-over-Year Percent Change 25% 20% 20% 15% 15% 10% 10% Retrenchment in real estate lending continues 5% 5% 0% 0% -5% Real Estate Loans: -2.9% -10% % -10% Source: Federal Reserve Board and Wells Fargo Securities, LLC 19

20 Banking Interest Margins: Structural 5.00 Net Interest Margin All U.S. Banks The initial boost to margins from a low fed funds rate is fading Net Interest Margin: Source: Federal Financial Institutions Examination Council and Wells Fargo Securities, LLC 20

21 Corporate Credit Issuance is strong, spreads are declining Issuance Spread $40 Investment Grade Corporate Issuance 4-Week Moving Average, Billions of USD $ Investment Grade Corporate Spread Basis Points 600 Issuance: $28.2 B $35 $ $30 $30 $25 $ $20 $ $15 $ $10 $10 $5 $5 100 IG Corporate Spread: 176 Bps 100 $ $ Source: Wells Fargo Securities, LLC 21

22 Foreign Investment $600 $500 $400 Foreign Private Purchases of U.S. Securities 12-Month Moving Sum, Billions of Dollars Treasury: $234 Billion Equity: $21 Billion Agency: $58 Billion Corporate: -$44 Billion $600 $500 $400 Foreigners continue to invest heavily in Treasuries; recent uptick in agency debt to watch $300 $200 $100 $300 $200 $100 $0 $0 -$ $100 Source: U.S. Department of the Treasury and Wells Fargo Securities, LLC 22

23 Housing: Structural 2.4 Housing Starts Millions of Units Structural Challenge: What is the new sustainable pace? Forecast Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 23

24 Housing: Cyclical 8.0% 7.0% Conventional Mortgage Delinquency Percent of Loans Past Due, Seasonally Adjusted Total Prime: 4.8% (Left Axis) Total Subprime: 20.8% (Right Axis) 30.0% 26.0% 6.0% 22.0% Delinquencies are falling from all-time highs, but are still elevated by historic standards 5.0% 4.0% 18.0% 14.0% 3.0% 10.0% 2.0% % Source: Mortgage Bankers Association and Wells Fargo Securities, LLC 24

25 Home Prices $70 $60 Median New Minus Existing Sale Price In Thousands, Single-Family 12-Month Moving Average: $57,533 Average From 1997 to 2006 = $18,705 $70 $60 $50 $50 The high inventory of discounted existing homes has led to a large price premium for new homes $40 $30 $40 $30 $20 $20 $ $10 Source: U.S. Department of Commerce, National Association of Realtors and Wells Fargo Securities, LLC 25

26 Housing Demographics: Structural 2,400 Median Home Size vs. Average Household Size Square Feet; Number of Persons , Secular Shift? Households are living in smaller homes with more people since the recession, but longer-term trends may win out 2,000 1,800 1, ,400 1,200 Median Square Footage: 2,235 (Left Axis) Number of Persons per Household: 2.58 (Right Axis) Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 26

27 CMBS 1,800 1,600 5-Year and 10-Year AAA CMBS Spreads Basis Points 5-Year AAA CMBS: 235 Bps 10-Year AAA CMBS: 250 Bps 1,800 1,600 1,400 1,400 1,200 1,200 1,000 1,000 Spreads have stabilized Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 27

28 Inflation: Were the 1970s an Aberration? 15% Headline CPI vs. "Core" CPI Year-over-Year Percent Change 15% 12% 12% 9% 9% Rising volatility for headline inflation as food and energy prices are increasingly dependent on global demand 6% 3% 6% 3% 0% -3% Core CPI: 2.3% CPI: 2.9% % -3% Source: U.S. Department of Labor and Wells Fargo Securities, LLC 28

29 Inflation Expectations 3.0% 10-Year Implied Inflation Expectations 10-Year Treasury Yield Less 10-Year TIPS Yield 10-Year Treasury - 10-Year TIPS: 2.21% 3.0% 2.5% 2.5% 2.0% 2.0% Inflation expectations are rising 1.5% 1.5% 1.0% 1.0% 0.5% 0.5% 0.0% % Source: Federal Reserve Board and Wells Fargo Securities, LLC 29

30 Global Inflation: Structural 40% 35% Global Inflation Average Consumer Price Inflation Global Inflation: 4.9% 40% 35% 30% 30% 25% 25% Moderating global inflation 20% 15% 20% 15% 10% 10% 5% 5% 0% % Source: International Monetary Fund and Wells Fargo Securities, LLC 30

31 Inflation vs. Yields: Negative Real Yields Three Non-market Buyers 8.0% 7.0% Inflation and the Real Yield Percent 5-Year Treasury Note Yield: 0.8% Median Inflation Expect. for 5-10 Yrs: 2.9% 8.0% 7.0% 6.0% 6.0% 5.0% 5.0% Inflation expectations exceed nominal returns. What is the real risk-free rate? 4.0% 3.0% 4.0% 3.0% 2.0% 2.0% 1.0% 1.0% Average Median Inflation Expectation for 5-10 Years: 2.9% 0.0% 0.0% Source: Federal Reserve Board and Wells Fargo Securities, LLC 31

32 Interest Rates and Euro Risk Month LIBOR-OIS Spread Basis Points U.S. 3-Month LIBOR-OIS Spread: 38 Bps Euro 3-Month LIBOR-OIS Spread: 66 Bps Risk remains elevated despite falling in recent weeks Jan-10 Jan-11 Jan Source: Federal Reserve Board and Wells Fargo Securities, LLC 32

33 Corporate Spreads: Positive for Issuance Aaa and Baa Corporate Bond Spreads Over 10-Year Treasury, Basis Points Baa Spread: 327 bps Aaa Spread: 195 bps Spreads have returned to a more normal level; bond issuance is strong Source: Federal Reserve Board and Wells Fargo Securities, LLC 33

34 GDP & Interest Rates 20% 5-Year Treasury Yield and Nominal GDP 5-Year Treasury Yield: 0.8% Nominal GDP Year-over-Year Percent Change: 3.7% 20% 15% 15% 10% 10% Disconnect: cyclical or secular? 5% 5% 0% 0% -5% % Source: Federal Reserve Board, U.S. Department of Commerce and Wells Fargo Securities, LLC 34

35 TED Spread TED Spread 3-Month LIBOR minus T-Bill Yield in Basis Points TED Spread: 54 Bps Uncertainty driven by the Eurozone debt crisis is keeping risk heightened Source: Federal Reserve Board and Wells Fargo Securities, LLC 35

36 Global Growth: Structural Shift? GDP Growth Post-Recession Average Annual Percent Change for 2010 and 2011 United Kingdom Euro area Japan United States South Africa 1.2% 1.7% 1.7% 2.3% 3.1% The global recovery is being driven by emerging markets Russia Brazil 4.1% 5.6% Indonesia 6.3% Turkey 7.8% India China 9.0% 9.9% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% Source: International Monetary Fund and Wells Fargo Securities, LLC 36

37 Difficult Choices: Structural 4.0% Federal Budget Balance Percentage of GDP 4.0% 2.0% 2.0% 0.0% 0.0% -2.0% Forecast -2.0% The nation has entered uncharted waters in fiscal policy -4.0% -6.0% -8.0% -4.0% -6.0% -8.0% -10.0% -10.0% -12.0% Budget Balance: -8.3% -14.0% % -14.0% Source: U.S. Department of Commerce, U.S. Department of the Treasury and Wells Fargo Securities, LLC 37

38 Difficult Choices: Structural Deficit 26% U.S. Budget Gap CBO Baseline Budget Gap, Percent of GDP 26% 24% 24% 22% 22% Even with the automatic budget stabilization measures, outlays are projected to run above revenues over the next decade 20% 18% 20% 18% 16% 14% Baseline Projected Revenues: 20.9% Baseline Projected Outlays: 22.7% Sequester Projected Revenues: 20.9% Sequester Projected Outlays: 22.1% % 14% Source: Congressional Budget Office and Wells Fargo Securities, LLC 38

39 Fiscal Policy: Structural 10% Real State & Local Government Expenditure Bars = Compound Annual Rate Line = Yr/Yr % Change 10% 8% 8% 6% 6% 4% 4% State and local fiscal conditions will limit expenditures and will be a drag on GDP 2% 0% 2% 0% -2% -2% -4% -6% Real State and Local Government Expenditure: -2.60% Real State and Local Government Expenditure: -2.58% % -6% Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 39

40 Outlook Risks Potential Challenges to the Outlook Easier monetary policy brings questions for the dollar, inflation, interest rate and outlook Stronger job recovery takes hold What are the primary risks to the outlook? Fiscal policy: spending completely unconstrained Housing: unable to sustain growth on its own European debt crisis weighs on global growth Rising oil and gasoline prices drag down real consumption 40

41 Outlook Summary Wells Fargo U.S. Economic Outlook Actual Forecast Real Gross Domestic Product Personal Consumption Equipment and Software Government Purchases Consumer Price Index Corporate Profits Before Taxes Year Treasury Note Forecast as of: February 24, C ompound Annual Growth Rate Quarter-over-Quarter 2 Year-over-Year Percentage Change Source: U.S. Department of Commerce, U.S. Department of Labor, Federal Reserve Board and Wells Fargo Securities, LLC 41

42 Appendix

43 Wells Fargo Economics Group Publications A Sampling of Our Recent Special, Regional & Industry Commentary To join any of our research distribution lists please visit our website: economics Recent Special Commentary Date Title Authors February-16 Does the New LEI Alter Recession Predictability Accuracy? Silvia & Iqbal February-13 Disparities of Education and Structural Unemployment Silvia, Brown & Swankoski February-13 WTI: No Longer A Benchmark For Oil Prices Aleman February-08 Bank Lending: Fed's Survey Suggests Support for Growth Silvia & Watt February-02 The Fragile Fiscal Policy Outlook: I Silvia & Brown January-31 Housing Chartbook: January 2011 Vitner, Khan & Seydl January-31 How Does The Recent Drop In The Unemployment Rate Square With Okun s Law? Vitner & Seydl January-25 FOMC: Why the Recent Past Seldom Predicts the Future Silvia January-19 Vacancies and the Housing Recovery Vitner & Seydl January-13 How Might Fiscal Restraint Generate Economic Growth? Silvia & Watt January-13 Eastern Europe Faces Monetary Policy Dilemma Anderson & Kashmarek January-12 Global Chartbook: January 2012 January-11 Bank Credit: A Surprisingly Typical Cycle Silvia & Watt January-05 The Charlotte Economy: Improvement Ahead Silvia & Brown December-30 Commodity Price Volatility to Continue Aleman December-28 Colorado Outlook: December 2011 Anderson & Kashmarek December-22 South Korea Moves Forward on Free Trade Anderson December-21 Indian Economy: Still Deteriorating at the Margin Bryson December-21 Georgia Economic Outlook: December 2011 Vitner & Seydl December-20 What's Behind the Upward Trend in Housing Activity? Vitner & Khan December-14 New Jersey Faces Additional Hurdles Vitner, Khan & Watt December-14 Russia: Black Gold and Political Stranglehold Anderson & Kashmarek December-20 Arizona: Growth, but at a Lower Gear Aleman & Swankoski December-19 Europe in 2012: Renaissance or More Dark Ages Bryson, Quinlan, & Seydl December-12 Thunder Down Under: Australia Braces for a Storm Quinlan December-09 Pennsylvania Economic Update and Outlook Bryson, Quinlan, & Seydl December-08 Minnesota Economic Outlook: December 2011 Anderson & Kashmarek December-08 Credit Quality Monitor - December 2011 Anderson & Kashmarek December-05 What is Driving Construction Spending? Vitner & Khan November-30 Coordinated Action by Major Central Banks Bryson November-30 California Outlook: November 2011 Anderson & Watt November-22 The Deficit Reduction Committee: A Successful Failure Silvia, Bullard, Brown & Watt November-22 Giddy-Up Jingle Horse: Holiday Sales Preview Vitner, Quinlan, & Seydl November-16 Global Chartbook: November 2011 November-15 Has the Fed s Unconventional Approach Been Successful? Silvia & Khan November-15 Economic Mobility: Is Rags to Riches Still Possible? Silvia, Quinlan & Seydl November-14 U.S. States with Exposure to a European Recession Vitner & Brown November-07 North Carolina: A Story of Uneven Progress Silvia & Brown November-03 Is U.S. Manufacturing in Decline? Anderson, Brown & Swankoski November-02 ASEAN-5 Economies Fundamentally Sound Bryson November-02 Employment: Beyond the Sound Bites Reading the Signals IV Silvia & Watt November-01 Character of Recovery V: Sector and Employment Differences Silvia & Iqbal 43

44 Wells Fargo Securities, LLC Economics Group a Senior Economists Global Head of Research and Economics: Diane Schumaker-Krieg Chief Economist: John Silvia 301 S. College Street MAC D Charlotte, NC John Silvia, Chief Economist john.silvia@wellsfargo.com Mark Vitner, Senior Economist mark.vitner@wellsfargo.com Jay Bryson, Global Economist jay.bryson@wellsfargo.com Scott Anderson, Senior Economist scott.a.anderson@wellsfargo.com Eugenio Aleman, Senior Economist eugenio.j.aleman@wellsfargo.com Sam Bullard, Senior Economist sam.bullard@wellsfargo.com Economists Anika Khan, Economist anika.khan@wellsfargo.com Azhar Iqbal, Econometrician azhar.iqbal@wellsfargo.com Ed Kashmarek, Economist ed.kashmarek@wellsfargo.com Tim Quinlan, Economist tim.quinlan@wellsfargo.com Michael Brown, Economist michael.a.brown@wellsfargo.com Economic Analysts Joe Seydl, Economic Analyst joseph.seydl@wellsfargo.com Sarah Watt, Economic Analyst sarah.watt@wellsfargo.com Kaylyn Swankoski, Economic Analyst kaylyn.swankoski@wellsfargo.com Executive Assistants Peg Gavin (Charlotte), Executive Assistant peg.gavin@wellsfargo.com Carol Nightengale (Minneapolis), Executive Assistant carol.nightengale@wellsfargo.com Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company 2012 Wells Fargo Securities, LLC. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE 44