2012 Economic Outlook: Overview of U.S. Economy. Presented by: Mark Evans, CFA Director of Investment Strategies

Transcription

1 2012 Economic Outlook: Overview of U.S. Economy Presented by: Mark Evans, CFA Director of Investment Strategies

2 A Recovery of Sorts Rates have fallen even further Economy is getting its footings Recovery poised to continue despite headwinds Inflation ex-commodities is tame, aided by slack Shift at the Fed is in its early stages INTENDED FOR INSTITUTIONAL INVESTORS ONLY. The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC. 2

3 Yields Have Fallen Further Over the Past Year 3

4 Why? 2011 s Q1 recovery proved soft Housing prices continued down Payroll growth was anemic Growth was very weak an inflation non-existent Government spending shifted toward a drag on economy Q2-Q3 External shocks Japan Europe Results Market concluded recovery and inflation were distant More easing from Fed 4

5 GROSS DOMESTIC PRODUCT GREW 1.7% IN GDP QoQ Change Attribution Sources: Bureau of Economic Analysis, Vining Sparks Personal Consumption (L-Axis) Government Spending (L-Axis) Gross Private Investment (L-Axis) Net Exportation (L-Axis) Total QoQ Annualized (R-Axis) 3/31/2010 6/30/2010 9/30/ /31/2010 3/31/2011 6/30/2011 9/30/ /31/2011 5

6 HOUSING SECTOR CONTINUES TO WEIGH ON GROWTH 20% Home Price Index Comparison (YoY) Source: NAR, FHFA, CaseShiller, CoreLogic, Vining Sparks 15% 10% 5% 0% -5% -10% -15% -20% NAR (NSA) FHFA (SA) CaseShiller (SA) CoreLogic (SA) -25%

7 Economy Is Getting Its Footings Job growth is continuing Output gap is slowly closing Consumers are repairing balance sheets Shocks appear to be fading 7

8 Private Payroll Growth (3mo Average) 8

9 Unemployment Rate Has Fallen 12% Headline Unemployment Rate Source: Bureau of Labor Statistics, Vining Sparks 10% 8% 6% 4% 2% 0%

10 ISM Manufacturing Index 10

11 Flow of Credit is Improving, Solid Expectations for Loan Portfolio (12 Months) Source: Vining Sparks Bank Survey January 2012 Survey October 2011 Survey 35.1% 35.1% 41.1% 26.2% 17.3% 13.8% 15.2% 8.2% 1.7% 0.6% Shrink More than 5% Shrink up to 5% Unchanged Grow up to 5% Grow More than 5% 11

12 Positives Outweigh Negatives Positives Growth continues momentum matters Payrolls, manufacturing growing Consumers repairing balance sheets Global growth continuing Significant accommodation with lagged effect Negatives Growth is slow across all measures Deep hole from which to recover Government fiscal issues loom large Risks Significant external shock Recovery runs out of steam 12

13 U.S. Exposure to Europe is Not Excessive U.S. Exposure to Eurozone Sources: Capital Economics, Vining Sparks Export Shares (% of Total) Bank Exposure to Debt (% of Tier 1 Capital) 59.9% 30.1% 24.1% 9.9% 6.3% 13.8% 2.6% 15.7% Mexico 1994 Asia 1997 Eurozone Portugal, Ireland, Italy, Greece, Spain 13

14 Considerable Slack Remains Excess capacity is widespread Labor Plant/Equipment Housing Capacity constrains inflation Obsolescence is concern 14

15 Millions Plenty of Room for More Jobs July 1981 Recession July 1990 Recession Change in Nonfarm Payrolls from Beginning of Recessions Source: Bureau of Labor Statistics, Vining Sparks March 2001 Recession December 2007 Recession million Months from Beginning of Recession 15

16 Unemployment Rate Understates Sidelined Workers 65% Jobs/Population Ratio Source: Bureau of Labor Statistics, Vining Sparks 64% 63% 62% 61% 60% 59% 58% 57.26% 57% 56%

17 Millions Decline in Homes For Sale Understates Supply 10 Home Inventory by Type Sources: NAR, MBA, Vining Sparks 9 8 Shadow Home Inventory (MBA) Existing Home Inventory New Home Inventory million units

18 Looming Drags on US Economy Fiscal situation Federal, State, and Local Monetary policy 18

19 FISCAL AUSTERITY: TWO OPTIONS Source: KPCB, OMB 19

20 Entitlement Programs Represent 41% of Budget 20

21 Inflationary Threats to US Are Small Slack Headwinds Global containment / China 21

22 What Has the Fed Done? Lowered rates to zero Expanded its balance sheet via QE1, QE2 Operation Twist to bring down longer rates Markets have been impacted significantly by both conditions requiring Fed action and by the actions 22

23 Q1 Shift January Deep hole, slow recovery, and Europe had QE3 on table Highlights inflation target of 2% (PCE) More extensive forecasts from Fed Districts & Board February / March Improving economic data, especially labor & manufacturing Europe appeared to be on a decent track QE3 sliding below 50/50 April Despite soft March employment data, economy still well Tightening timeline accelerating? 23

24 Vocal Fed Officials Minneapolis Fed President Kocherlakota (April 12, voting 2014) My own belief is that we will need to initiate our somewhat lengthy exit strategy sometime in the next six to nine months or so, and that conditions will warrant raising rates sometime in 2013 or, possibly, late Richmond Fed President Lacker (April 4, voting 2012) I was surprised a couple months ago at the probability market participants seemed to ascribe to further easing While further easing is obviously something that s conceivable, I wouldn t favor it unless conditions deteriorated quite substantially. St. Louis Fed Chairman Bullard (April 11, voting 2013, on the late-2014 date) So far in 2012 the economy has surprised on the upside As we get closer to the actual date, we re going to have to move it around because the situation will have changed I wouldn t be reluctant to revise it. Philadelphia Bank President Plosser (April 12, voting 2014) Given that the unemployment rate has fallen and the inflation rate is rising, that s not a signal that most reaction functions would tell you ease more. 24

25 More Recent Fed Comments Atlanta Fed President Lockhart (April 11, voting 2012, discussing another round of quantitative easing) I am still not convinced that another round in this time frame would achieve a great deal. FOMC Governor Raskin (April 12, permanent voter) Nationally, some economic news has been encouraging and may be suggesting that the pace of the recovery is picking up However, the national economic recovery clearly has a long way to go. San Francisco Fed President Williams (April 4, voting 2012) The probability of needing to do additional stimulus is lower. 25

26 Fed Comments Continued New York Fed President Dudley (April 12, permanent voter) The recovery may be getting better established it is still too soon to conclude that we are out of the woods, as underlined by the March labor-market release. Referring to the late-2014 date set by the Fed, Dudley said I haven t seen any set of information that should suggest to me we should change that view. FOMC Vice Chairman Yellen (April 11, permanent voter) I consider a highly accommodative policy stance to be appropriate in present circumstances. But considerable uncertainty surrounds the outlook, and I remain prepared to adjust my policy views in response to incoming information In particular, further easing actions could be warranted if the recovery proceeds at a slower-than-expected pace, while a significant acceleration in the pace of recovery could call for an earlier beginning to the process of policy firming than the FOMC currently anticipates. 26

27 What to Watch Next week s FOMC meeting Economic Forecast Changes vs January Fed Funds expectations Timing Long-run How will Q2 and Q3 play out? 2010 & 2011 slowdowns 27

28 Fed s New Communications & January s Forecast 28

29 Expectations Now Q1 '13 Q3 '13 Fed Funds Target yr Treasury yr Treasury