The Outlook for the U.S. Economy. Federation of Credit & Financial Professionals Euler Hermes Economics / Dan North Hunt Valley, MD May 25 th, 2016

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1 The Outlook for the U.S. Economy Federation of Credit & Financial Professionals Euler Hermes Economics / Dan North Hunt Valley, MD May 25 th, 2016

Euler Hermes: Global Leader in Trade Credit Insurance Founded in 1893 AA- S&P Rating and A+ AM Best Rating Offices in 52 countries providing coverage in over 200 foreign markets Backed by blue-chip

2 Euler Hermes: Global Leader in Trade Credit Insurance Founded in 1893 AA- S&P Rating and A+ AM Best Rating Offices in 52 countries providing coverage in over 200 foreign markets Backed by blue-chip ownership of the Allianz Group Insure over $150 Billion in US sales and over $1 Trillion globally. International Risk Database monitors over 45 million companies worldwide Credit Insurance: Protection against bankruptcy and slow payment losses Safer sales growth in the US or overseas Knowledge to better manage risk Improved borrowing options Credit function support Reduce bad debt reserves Get paid for what you sell 2

3 Agenda 1 The Global Outlook 2 The U.S. Outlook - Positives 3 The U.S. Outlook - Negatives 4 Conclusions 3

4 The Global Outlook GDP: Everything produced by the economy, broadest measure of economic health, grows around 3.3% on average World GDP Growth Advanced Economies Eurozone Japan Canada U.S Brazil Emerging Economies China India source: IHS, Euler Hermes 4

5 Agenda 1 The Global Outlook 2 The U.S. Outlook - Positives 3 The U.S. Outlook - Negatives 4 Conclusions 5

6 GDP Positive but below average; % 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Real Gross Domestic Product (GDP) annualized quarterly growth rate 0 of 27 quarters >4.6% recovery ave... forecast: % Source: IHS, BEA, Euler Hermes 6

7 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Personal consumption, 70% of GDP Real Personal Consumption Expenditures (PCE) & Disposable Personal Income (DPI) y/y % growth rate 8% 6% Real PCE Real DPI 4% long-term average 2% 0% -2% -4% Source: IHS, BEA, Euler Hermes 7

8 Oil and gasoline prices still low, but rebounding $150 $120 Oil and Gasoline Prices gasoline -40% since 6/14... but +27% since 2/16 $5 $4 $90 $60 oil -58% since 6/14... but up +45% since 2/16 $3 $2 $30 source: EIA,IHS, Euler Hermes $1 8

9 Overall consumer confidence good, but gap between present and future situations is largest since recession, suggesting unease over election Consumer Confidence the gap between present and future is the widest since recession present situation overall a strong 96.2 future expectations Apr-06 Apr-08 Apr-10 Apr-12 Apr-14 Apr-16 Source: Conference Board, IHS, Euler Hermes 9

10 Consumer debt: cleaner balance sheet for the future, but less consumption for the past and present 20% Consumer Debt Burden Debt Service Payments as Percent of Disposable Personal Income (RHS) 14% 13% 15% 12% 11% 10% Source: IHS, Fed, Euler Hermes Mortgage + Consumer Debt as a % of Total Assets (LHS) 4Q85 4Q90 4Q95 4Q00 4Q05 4Q10 4Q15 10% 9% 10

11 Retail sales in 2015 weakest since 2009, but improving a bit recently 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% Source: Census, Euler Hermes Retail Sales, y/y ex auto & gas 4.4% vs ave 4.4% total 3.0% vs ave 6.2% Apr-06 Apr-08 Apr-10 Apr-12 Apr-14 Apr-16 11

12 (F) 2017(F) 2018(F) 2019(F) Auto sales have been strong and are forecasted to continue being strong millions of units (left axis) Auto Sales and Age of Fleet median age, years, US light vehicles (right axis) Source: IHS, Autodata, Consensus Forecasts, Euler Hermes 12

13 Positive: Housing measures have grown rapidly since trough, but 2,500 U.S. Housing Market Fundamental Measures, Seasonally Adjusted Annualized Rates 7,000 2,000 Existing Home Sales (R) 6,000 5,000 1,500 4,000 1,000 Permits Starts 3,000 2, New Home Sales 1,000 0 Source: IHS, Census, Euler Hermes 13

14 it s a long way back 2,500 U.S. Housing Market Fundamental Measures, Seasonally Adjusted Annualized Rates 7,000 2,000 Existing Home Sales (R) 6,000 5,000 1,500 4,000 1,000 Permits 3,000 Starts 2, Crash sent new home sales, starts, and permits back to levels of 23+ years ago New Home Sales 1,000 0 Source: IHS, Census, Euler Hermes 14

15 Positive: Construction has been a big contributor 800, ,000 Construction, $ Millions, Annualized non-residential: strong 8.3% y/y pace, almost recovered from recession 600, , , ,000 residential construction: strong 7.6% y/y pace, but still not recovered 200,000 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Source: IHS, Census, Euler Hermes 15

16 Q1-72 Q1-76 Q1-80 Q1-84 Q1-88 Q1-92 Q1-96 Q1-00 Q1-04 Q1-08 Q1-12 Q1-16 Positive: Leading indicator driven by Fed policy 10% 8% 6% 4% 2% 0% -2% -4% The Treasury Yield Spread vs. GDP Yield spread: 10yr-3 mo Treasuries (bps) % -300 Source: IHS, Federal Reserve, BEA, Euler Hermes 16

17 Q1-72 Q1-76 Q1-80 Q1-84 Q1-88 Q1-92 Q1-96 Q1-00 Q1-04 Q1-08 Q1-12 Q1-16 Positive: Leading indicator driven by Fed policy 10% 8% 6% 4% 2% 0% -2% -4% The Treasury Yield Spread vs. GDP Real GDP Growth, Y/Y % Change Yield spread: 10yr-3 mo Treasuries (bps) % -300 Source: IHS, Federal Reserve, BEA, Euler Hermes 17

18 Recap Positives: Income, consumption still growing Energy prices still low Confidence strong Consumer debt falling Auto sector strong Housing contributing Construction robust Positive yield spread 18

19 Recap Positives: Income, consumption still growing Energy prices still low Confidence strong Consumer debt falling Auto sector strong Housing contributing Construction robust Positive yield spread Negatives: Monetary policy Falling yield spread Strong USD, weak exports Slump in manufacturing Shrinking corporate profits & investment Weak Q1 Structural unemployment Low productivity Slow pay, bankruptcies, defaults rising Long term - student debt, entitlements 19

20 Agenda 1 The Global Outlook 2 The U.S. Outlook - Positives 3 The U.S. Outlook - Negatives 4 Conclusions 20

21 Monetary Policy Fed set interest rates to 0% in Dec 2008 for emergency conditions. 3 months later the stock market bottomed, 6 months later the recession ended. Yet the Fed has kept rates at 0% for 7 years after the emergency ended, and also printed money through QE. But still we are in 2% growth-land. Monetary policy reached the limits of its effectiveness. Retirees, savers have suffered, and assets have been (over?) inflated. Fed now starting first tightening cycle in 10 years. Some market participants have never seen anything but 0% rates, or a Fed hike. At same time Europe, Japan, China, Canada central banks (50% of world GDP) are loosening or becoming more accommodative. Fed painted itself into corner, had to raise at wrong time. How to raise rates without deflating assets too quickly, upsetting global financial markets, harming EM economies, spurring currency devaluations, strengthening the $US too much, and flattening the yield spread? 21

22 Fed raises interest rates, sending the yield spread the wrong way 250 The Treasury Yield Spread (10yr-3mo, daily) Yellen: "this year" (2015) Jan 4, flight to safety 125 1/15 2/15 3/15 5/15 6/15 7/15 9/15 10/15 11/15 1/16 2/16 3/16 5/16 Source: Federal Reserve, Euler Hermes 22

23 Fed raises interest rates, over-inflated global stock markets fall Stock Markets Since July 1, % China -19% Japan -11% Germany -9% India -7% -6% -6% U.K. S. Korea Canada -3% Australia -2% Brazil -1% U.S. -1% Russia -25% -20% -15% -10% -5% 0% Sources: IHS, National Exchanges, Euler Hermes 23

24 Jul-14 Aug-14 Sep-14 Oct-14 Dec-14 Jan-15 Feb-15 Apr-15 May-15 Jun-15 Aug-15 Sep-15 Oct-15 Dec-15 Jan-16 Feb-16 Apr-16 May-16 Fed raises interest rates, making $US more attractive, weakening other currencies Value of the USD since July % 35% 30% $US strengthening Yellen: this year (2015) $M +41% $C +32% 25% 20% +26% ave +23% 15% +17% 10% 5% C 6% 0% -5% Sources: IHS, Federal Reserve, Euler Hermes 24

25 Jul-14 Aug-14 Sep-14 Oct-14 Dec-14 Jan-15 Feb-15 Apr-15 May-15 Jun-15 Aug-15 Sep-15 Oct-15 Dec-15 Jan-16 Feb-16 Apr-16 May-16 Fed raises interest rates, making $US more attractive, weakening other currencies 40% 35% 30% 25% 20% 15% Value of the USD since July 2014 $US strengthening Yellen: this year (2015) $M +42% $C +23% +22% ave +20% 10% 5% 0% BOJ neg +8% C 6% -5% Sources: IHS, Federal Reserve, Euler Hermes 25

26 Exports are still down y/y because of strong $, and the recent reversal isn t likely to last 30% $U.S. Broad Index vs. Merchandise Exports, y/y % Growth -20% 20% 10% weaker exports -10% 0% 0% -10% -20% Source: IHS, Federal Reserve, Census, Euler Hermes Exports (left) $US (right, inverted) stronger $US 10% -30% 20% 4/06 4/08 4/10 4/12 4/14 4/16 26

27 Oil prices are still down y/y because of strong $, and the recent reversal isn t likely to last 100% 75% 50% 25% 0% -25% -50% $U.S. Broad Index vs. WTI Oil, y/y % Growth stronger $US falling oil -20% -10% 0% 10% -75% -100% 20% 4/06 4/08 4/10 4/12 4/14 4/16 27 Source: EIA, Federal Reserve, Euler Hermes WTI (left) $US (right, inverted)

28 A Wash: Effects of a Stronger $US Negatives makes imports cheaper - bad for competitors makes imports cheaper - bad for wage earners lowers commodity prices - bad for producers makes exports less competitive decreases repatriated profits Positives makes imports cheaper - good for consumers and mfgs using imports makes imports cheaper - good for wage payers lowers commodity prices - good for consumers increases capital inflow decreases inflation decreases tourism to U.S. puts downward pressure on interest rates - bad for lenders puts downward pressure on foreign investment assets puts downward pressure on GDP Source: Euler Hermes increases tourism from U.S. puts downward pressure on interest rates - good for borrowers puts upward pressure on U.S. investment assets associated with strong economy, enhances $ status 28

29 Exports are still down y/y because of strong $, and the recent reversal isn t likely to last 30% $U.S. Broad Index vs. Merchandise Exports, y/y % Growth -20% 20% 10% weaker exports -10% 0% 0% -10% -20% Exports (left) $US (right, inverted) stronger $US 10% -30% 20% 4/06 4/08 4/10 4/12 4/14 4/16 29 Source: IHS, Federal Reserve, Census, Euler Hermes

30 Manufacturing struggling due to fall in machinery orders from the oil patch, weak export orders 60 Institute of Supply Management Manufacturing Index and Manufacturing Industrial Production (y/y) 4% 55 3% ISM (L) 2% 50 1% 45 mfg industrial production (R) 0% 40 Apr-13 Apr-14 Apr-15 Apr-16 Source: IHS, Federal Reserve, ISM, Euler Hermes -1% 30

31 Corporate profits and investment shaky 60% Real Corporate Profits and Investment, y/y profits investment 30% 0% -30% -60% Sources: IHS, BEA, Euler Hermes shaded areas are recessions 31

32 Q1 weakness again this year Real Gross Domestic Product (GDP) During Recoveries, annualized quarterly growth rate Why? Common themes: weather, oil, gov t finances 6% 5% 4% 3% 2% 1% 0.7% 3.1% 2.2% 2.4% 5.1% 4.4% 4.1% 4.2% 2010: Oil in Q was $79/bbl, more than 80% higher than the Q : High oil prices. Near record snowfalls. Budget battles, S&P lowered its outlook on U.S. debt. Arab Spring. Fears of euro disintegration. Tsunami and nuclear accident in Japan. 2013: Higher taxes went into effect on January 1 st, including expiration of the payroll tax break, impacting 80% of American families. 2014: Near records snowfall. 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Sources: IHS, BEA, Euler Hermes 2015: Record snowfalls, port strike 2016: Record snowfalls, floods, tornadoes, sharp move in oil prices down. 32

33 Structural Unemployment is a Major Impediment to Growth Plunging participation rate weak economy, Boomers not being replaced fast enough. Need more skilled legal immigration 33

34 Structural Unemployment is a Major Impediment to Growth Labor force participation rate falling because of ageing population (in part) 68% 25% From 1990 to % recession starts 20% fewer young people more old people 64% 15% 62% 10% 60% 5% >65 age bracket Source: BLS, Euler Hermes 34

35 Structural Unemployment is a Major Impediment to Growth Plunging participation rate weak economy, Boomers not being replaced fast enough. Need more skilled legal immigration Skills mismatch due in part to education / training. Near record high job openings rate. Need more vocational education / training Need more skilled legal immigration 35

36 Openings rising faster than hirings suggest employers can t find the right people the skills gap 4.5% Job Opening and Hiring Rates 4.0% 3.5% 3.0% 2.5% 2.0% openings rate hiring rate 1.5% Source: IHS, Federal Reserve, ISM, Euler Hermes 36

37 Structural Unemployment is a Major Impediment to Growth Plunging participation rate weak economy, Boomers not being replaced fast enough. Need more skilled legal immigration Skills mismatch due in part to education / training. Near record high job openings rate. Need more vocational education / training Need more skilled legal immigration Long time unemployed become unemployable. 37

38 Negative: Productivity, due in part to skills gap, has been very weak, impeding growth 6% Productivity, y/y 4% Productivity, y/y 5% 4% 3% 3.3% GDP Productivity 3% 2% 2% 2.3% 2.1% 1% 0% -1% 1% 0.9% -2% Sources: IHS, Fed, Euler Hermes 0%

39 Lending conditions tighten with Fed hikes, suggesting bankruptcies may have bottomed. EH forecasts 3% increase in insolvencies in % 50% Lending Conditions vs Bankruptcies net % of banks widening spreads (L) bankruptcies y/y ( R) 100% 75% 50% 0% 25% -50% 0% -25% -100% Q4-91 Q4-96 Q4-01 Q4-06 Q4-11 Q4-16 Sources: IHS, U.S. Courts, Fed, Euler Hermes -50% 39

40 Lending conditions tighten with Fed hikes, suggesting bankruptcies may have bottomed. EH forecasts 3% increase in insolvencies in % 50% Fed Funds Rate vs. Lending Conditions net % of banks widening spreads (L) Fed Funds target ( R) 10% 8% 6% 0% 4% -50% 2% -100% Q4-91 Q4-96 Q4-01 Q4-06 Q4-11 Q4-16 Sources: IHS, U.S. Courts, Fed, Euler Hermes 0% 40

41 Long-term negative: student loans are out of control 120 Delinquent Loans (30 days), $bn Education (8.7% delinquency rate) Auto (1%) Bank Card (2.6%) Home equity & 2nd mortgage (2.9%) Q4-03 Q4-05 Q4-07 Q4-09 Q4-11 Q4-13 Q4-15 Sources: IHS, Fed, Euler Hermes 41

42 Long-Term Negative: Fiscal Policy - Debt 110% Federal Debt as a % of GDP 100% 90% 80% 70% 60% 50% US 63% Italy 110% Germ. 58% UK 42% 40% 30% 20% Source: CBO, Euler Hermes 42

43 Long-Term Negative: Fiscal Policy HUD, Labor, Edu. Ag., State, Justice, Trans., Energy, Homeland Sec, Treasury, Commerce, Interior, EPA 2015 Budget Outlays, $3.7T Discretionary, 12% Health, 26% Defense, 17% Interest, 7% Income Security, 15% Social Security, 23% Source: CBO, Euler Hermes 43

44 Long-Term Negative: Fiscal Policy HUD, Labor, Edu. Ag., State, Justice, Trans., Energy, Homeland Sec, Treasury, Commerce, Interior, EPA 2015 Budget Outlays, $3.7T Discretionary, 12% Health, 26% Defense, 17% Interest, 7% Income Security, 15% Social Security, 23% Source: CBO, Euler Hermes 44

45 Long-Term Negative: Fiscal Policy Entitlement spending will be one the major issues for our time. One generation is not going to get all their benefits. The next generation will be taxed to exhaustion to provide them Medicare can only pay 85% of claims Social Security can only pay 77% of benefits. But it is not hopeless, it can be fixed, the math is simple, skilled legal immigration could help. Just no political will to fix it. No substantive reform in any budget proposal. Source: CBO, Euler Hermes 45

46 Not much of a negative: direct effects of Chinese slowdown U.S. $ 000 s % of GDP GDP 17,348, % Exports 2,341, % Exports to China 123, % But financial market contagion always a concern, As is downward pressure on commodity prices, and Expansion into other markets (dumping) Sources: IHS, BEA, Euler Hermes 46

47 Not necessarily a negative: the stock market it s not the same thing as the economy 15% 10% S&P 500 vs. Real GDP, y/y Real GDP y/y (L) S&P 500 y/y (R) 60% 40% 5% 20% 0% 0% -5% -10% false signal: 2nd energy crisis, Iran Arab oil embargo false signal: S&L crisis double-dip recession infl = 16% 1st Gulf war false signal: October 1987 false signal: tech bubble burst, 9/11, very mild recession housing bubble burst -20% -40% Sources: IHS, S&P, BEA, Euler Hermes 47

48 Agenda 1 The Global Outlook 2 The U.S. Outlook - Positives 3 The U.S. Outlook - Negatives 4 Conclusions 48

49 Recap Positives: Income, consumption still growing Energy prices still low Confidence strong Consumer debt falling Auto sector strong Housing contributing Construction robust Positive yield spread Negatives: Monetary policy Falling yield spread Strong USD, weak exports Slump in manufacturing Shrinking corporate profits & investment Weak Q1 Structural unemployment Low productivity Slow pay, bankruptcies, defaults rising Long term - student debt, entitlements GDP growth a very limited 2.1% in Prescriptions? Lower corporate taxes / holiday, broaden tax base & eliminate subsidies, reduce red tape delays and regulation, entitlement reform, debt reduction, passage of trade agreements, skilled legal immigration, political compromise. 49

50 Thank you for your attention! For additional information, visit This material is published by Euler Hermes SA, a Company of Allianz, for information purposes only and should not be regarded as providing any specific advice. This publication and its contains are proprietary to Euler Hermes SA. Euler Hermes and Euler Hermes logo are trademarks or registered trademarks belonging to Euler Hermes Group, Worldwide Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by Euler Hermes and Euler Hermes makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the Euler Hermes Economics Department, as of this date and are subject to change without notice. The classification of this document is PUBLIC. Euler Hermes SA. Registered in Nanterre ( ).Euler Hermes SA is authorized and regulated by the Financial Markets Authority of France. Copyright 2014 Euler Hermes. All rights reserved

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