BBVA Research U.S. Economic Outlook March 2019 / 1. U.S. Economic Outlook March 2019

Transcription

1 BBVA Research U.S. Economic Outlook March 2019 / 1 U.S. Economic Outlook March 2019

2 Economic Outlook GDP growth to slow to 2.5% in 2019, and 2.0% in 2020 Model based recession probability reaching troubling levels, growth outlook also tilted to the downside Probability of Fed rate hike in 2019 diminished; balance sheet normalization to end in September Labor market signals remain mixed after government shutdown Core inflation stable, headline below 2.0% in 2019 Yield curve inverting, signal distorted by structural changes Oil prices converging with long-term equilibrium around $60/b

3 BBVA Research U.S. Economic Outlook March 2019 / 3 Economic activity Real-Time Economic Momentum Heat Map ISM Manufacturing Small Business Optimism Industrial Production IP-Manufacturing IP-Mining IP- Nonenergy High-Tech 3-months ago 2-months ago 1-month ago Current ISM decelerating, but continues to signal expansion Small business concerns about rising cost of labor could presage turning point despite rebound in optimism Capital Goods ex Aircraft Private Construction Building Permits Core Logic Home Prices Supply side conditions in housing sector recover after December slump Consumer Confidence Private Nonfarm Payrolls Prime-Age Participation Marginally Attached (PA) Savings rebounds as year-end 2018 uncertainty encourages precautionary savings Average Hourly Earnings Real Disposable Income Personal Savings Rate Labor productivity growth highest since 2015 Productivity Below Average Source BBVA Research Above Average

4 Economic trends: Moderation continues in industrial activity, retail sales rebound from January slump BBVA Research U.S. Economic Outlook March 2019 / 4 Industrial Production (Year-over-year %) 8% 6% 4% 2% Retail Sales (Year-over-year %) 9% 8% 7% 6% 5% 4% 0% -2% -4% -6% Oil & Gas High-Tech Motor Vechicles Consumer Gds Biz Equip Headline (lhs) 3% 2% 1% 0% Autos Health & P. Care Gas Clothing Nonstore Food Servc Headline (lhs) Source: BBVA Research, FRB & BEA

5 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Dec-2018 Oct-2018 Aug-2018 Jun-2018 Apr-2018 Feb-2018 Dec-2017 Oct-2017 Aug-2017 Jun-2017 Apr-2017 Feb-2017 Dec-2016 Oct-2016 Aug-2016 Jun-2016 Apr-2016 Feb-2016 Dec-2015 Oct-2015 Aug-2015 Jun-2015 BBVA Research U.S. Economic Outlook March 2019 / 5 Economic trends: Exchange rate pressures and weakening global growth momentum drag down exports Real Exchange Rate and Exports (Year-over-year %) 15% Real Exports (Contribution to year-over-year %) % 6 4 5% 2 0 0% -2-5% % Consumer Goods ex Food Food & Bev. Industrial Supplies Autos Real Trade Weighted FX Real Exports Other Cap Goods ex Autos Source: BBVA Research, FRB & Census

6 Q1-18 Q2-18 Q3-18 Q4-18 BBVA Atl Fed NY Fed BBVA Research U.S. Economic Outlook March 2019 / 6 Economic trends: Data revision implies much higher near-term recession risk: 50.7% in next 12-months Real GDP (QoQ SAAR, %) Probability of Recession in 12 Months (%) 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Forecast 1Q19 Baseline months ahead 24-months ahead Source: BBVA Research, and ATL & NY Fed

7 Apr-61 Nov-63 Jun-66 Jan-69 Aug-71 Mar-74 Oct-76 May-79 Dec-81 Jul-84 Feb-87 Sep-89 Apr-92 Nov-94 Jun-97 Jan-00 Aug-02 Mar-05 Oct-07 May-10 Dec-12 Jul-15 Feb-18 Consumer credit cycle: Credit conditions ease despite higher levels of consumer leverage BBVA Research U.S. Economic Outlook March 2019 / 7 Personal Interest Expense Year-over-year % New 90+ Day Consumer Delinquencies Rates % Mortgage HELOC Auto CC Student Other Total Source: BBVA Research, FRB, NY Fed & BEA Personal Interest Expense to Disp. Income Ratio, % Senior Loan Officers Lending Standards + tightening / - loosening Credit card Autos Consumer excl. credit cards

8 Labor Market In February, nonfarm payroll employment grew 20,000; down significantly from 311,000 in December Major industry weakness: construction (-31K), education (-18.7K), retail trade (- 6.1K), transportation and warehousing (-3.0K), mining (-2.8K) The unemployment rate (UR) dropped to 3.8%, whipsawing as the impact from the government shutdown fades out of the data The labor force participation rate and employment-to-population remained unchanged at 63.2% and 60.7%, respectively We expect the UR to reach its low point in this business cycle soon (3.6%). Average monthly job growth to slow to 165K this year, from 223K in 2018

9 Labor market: Volatile 1Q19 reports consistent with past government shutdowns BBVA Research U.S. Economic Outlook March 2019 / 9 Nonfarm Payrolls (Monthly Change, K) Industry Employment (Annualized % change) Mining Transportation & Warehousing Construction Professional & Business Services Leisure & Hospitality Education & Health Services Manufacturing Wholesale Trade Other Services Financial Activities State Government Local Government Federal Government Information Services Retail Trade Actual Forecast Monthly Year-over-year Source: BBVA Research & BLS

10 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 Oct-16 May-17 Dec-17 Jul-18 Feb-19 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 Oct-16 May-17 Dec-17 Jul-18 Feb-19 BBVA Research U.S. Economic Outlook March 2019 / 10 Labor market: Wage pressures continue to rise, as slack diminishes Average Weekly Hours (number & 5mcma) Average Hourly Earnings (YoY% & 5mcma) % 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Prime Age Labor Force Participation (%) Prime Age Employment-to-Population (%) Pre-Crisis Avg. Pre-Crisis Avg. Source: BBVA Research & BLS

11 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Labor market: Indicators signal unemployment rate close to nadir BBVA Research U.S. Economic Outlook March 2019 / 11 U-6 (%) Unemployment Rate (%) Pre-Crisis Avg. Source: BBVA Research & BLS

12 Inflation Headline consumer price index (CPI) increased 0.2% MoM in February, as a rebound in owner equivalent rent (OER) offset declines in energy prices On a year-over-year basis, headline CPI decelerated to 1.5% while core remained stable at 2.1% The probability of entering high-inflation regime is nonexistent; deflation risks are also low Implied 5-year spot and forward inflation expectations have stabilized at or slightly below 2.0% Baseline assumes headline inflation to decelerate to 1.7% in 2019, before rebounding in 2020; core inflation to average 2.1% in 2019

13 Nov-00 Oct-01 Sep-02 Aug-03 Jul-04 Jun-05 May-06 Apr-07 Mar-08 Feb-09 Jan-10 Dec-10 Nov-11 Oct-12 Sep-13 Aug-14 Jul-15 Jun-16 May-17 Apr-18 Inflation: Drop in energy prices offset by rising OER and rental prices BBVA Research U.S. Economic Outlook March 2019 / 13 Consumer Price Inflation (12m change) 4% Core Inflation Measures (12m change) 4.0% 3% 2% 1% 0% -1% -2% OER Comm. ex Food/ Energy Food Rent Med Services Trans. Services Edu & Comm. Services Other Services 3.5% 3.0% 2.5% 2.0% 1.5% -3% 1.0% -4% 0.5% -5% -6% Energy % Relative Importance Core CPI Core PCE Weighted Median Source: BBVA Research, BLS & BEA

14 Jan-70 Jul-72 Jan-75 Jul-77 Jan-80 Jul-82 Jan-85 Jul-87 Jan-90 Jul-92 Jan-95 Jul-97 Jan-00 Jul-02 Jan-05 Jul-07 Jan-10 Jul-12 Jan-15 Jul-17 BBVA Research U.S. Economic Outlook March 2019 / 14 Inflation: Concerns shifting to lack of inflationary pressures, as inflation headwinds build in 1Q19 Core PCE Price Index & Inflation Regimes Month-over-month % 1 Inflation Regime Change Probability % Core PCE Low Inflaiton Regime High Inflaiton Regime Source: BBVA Research & BLS

15 Mar-00 May-01 Jul-02 Sep-03 Nov-04 Jan-06 Mar-07 May-08 Jul-09 Sep-10 Nov-11 Jan-13 Mar-14 May-15 Jul-16 Sep-17 Nov-18 Jan-20 Mar-21 May-22 Inflation: Modest undershoot for headline in 2019, core to decelerate throughout the year BBVA Research U.S. Economic Outlook March 2019 / 15 Inflation Expectations (%) 3.5% Headline & Core CPI (Year-over-year %) 6 3.0% % 2.0% % 1.0% 0.5% % Y Implicit 5Y Forward Core Headline Source: BBVA Research & Haver Analytics

16 Monetary Policy: Federal Reserve At the March meeting, the Fed left rates unchanged, maintained their patient bias and strengthened their dovish signal with the dramatic downshift in path of Fed Funds rate End to Balance Sheet Normalization (BSN) in September and a slight adjustment to the caps on Treasury securities between May and September BSN: For a time, Fed plans to hold the size of the portfolio constant, allowing for a more gradual decline in reserves. At the end of normalization the portfolio would be around 17% of GDP, or $3.5 trillion to $3.8 trillion BSN: In the short term, the Fed will reinvest proceeds from its MBS portfolio into Treasuries that will roughly match the maturity distribution of outstanding Treasury debt; no commitment to a specific composition in the long run Possibility of rate increase in 2019 diminished after March meeting

17 Fed: Dramatic shift in Fed projections suggests possibility of no rate increases in 2019 BBVA Research U.S. Economic Outlook March 2019 / 17 BBVA & Dealers Projections of Fed Funds (%, Effective) 6 FOMC Projections of Fed Funds (Year-over-year %, Mid-point) BBVA-Baseline Median 75th Percentile 25th Percentile BBVA-Upside BBVA-Downside L- term Sep-18 Current Source: BBVA Research & FRB

18 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 BBVA Research U.S. Economic Outlook March 2019 / 18 Monetary policy: Markets almost fully priced in rate cut in 2020 Fed Funds Implied Probability (Number of rate increases through 2019, %) Fed Funds Futures & BBVA Baseline (%) <2.25% Cut Zero One Two Three Last 1M Ago 2M Ago FFR + BBVA Forecast 9/5/ /31/2018 1/23/2019 3/20/2019 Source: BBVA Research & Bloomberg

19 BBVA Research U.S. Economic Outlook March 2019 / 19 Monetary Policy: Fed announces end of Balance Sheet normalization in September; terminal size of portfolio at $3.5 to $3.8 Trillion Fed Funds & Repo Rates (%) Jun-15 Jan-16 Aug-16 Mar-17 Oct-17 May-18 Dec-18 Balance Sheet Attrition (US$bn, Cumulative) Upper Bound Effective Lower Bound SOFR U.S Govt Securities MBS Source: BBVA Research & FRB

20 Interest Rates 10-yr Treasury at 2.46%, 80bp below 4Q18 peak, 2-yr Treasury 65bp below peak at 2.33% Dramatic shift in Fed s balance sheet strategy and the U-turn on their guidance for policy rates suggests further compression in the term premium in medium-term, shift in the level and narrowing of slope Rising global uncertainty and dovish monetary policy abroad could add to the compression on the term premium, meaning a flatter-for-longer scenario for the yield curve and potential for full inversion Central bank balance sheet expansion and changes in savings preferences could distort interpretation of yield curve inversion 10-yr Treasury to reach 2.8% by end of 2019, downside risks growing

21 BBVA Research U.S. Economic Outlook March 2019 / 21 Interest rates: Risk aversion and savings preferences lowering term premium, decompression unlikely in short-term 10-Year Treasury Yield Decomposition (%) Real Rate Term Premium Inflation Expectations Yield Source: BBVA Research, ACM & Haver Analytics

22 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 BBVA Research U.S. Economic Outlook March 2019 / 22 Interest rates: 10-year yields to remain lower for longer 10-Year Treasury Yield (%) Historic Baseline upside Downside Risk NABE (EOP) SPF(EOP) Blue Chip(Yr. Avg) OMB (Yr.Avg) CBO(Yr. Avg) Source: BBVA Research, ACM & Haver Analytics

23 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 BBVA Research U.S. Economic Outlook March 2019 / 23 Interest rates: Yield curve slope edging closer to full inversion. Structural changes distort traditional inversion signal Yield Curve Slope (Bp) 2.5 Yield Curve (%, eop) Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y 30Yr-10yr 10Yr-1Yr 10-Year Average (f) 2020 (f) Source: BBVA Research

24 Oil Prices OPEC+ cuts are tightening the market and driving up prices. The deal could be extended throughout the entire year Sanctions to Venezuela and Iran could tighten supply further. However, OPEC has significant spare capacity to offset upward price pressures In 2019, U.S oil production will expand 1 million b/d while substantial transportation capacity will be added Our prospects for lower prices in 2H19 and 2020 assume slower global growth. Crude oil demand is contracting in Europe but remains supportive in U.S. & Asia We maintain our view of convergence to long-term equilibrium of around $60/b Elevated uncertainty around long-term equilibrium: CAPEX, protectionism, transportation infrastructure, alternative energy sources, EM convergence, EVs, climate change, efficiency and technology

25 BBVA Research U.S. Economic Outlook March 2019 / 25 Oil Prices: Concerns on global economic outlook keep prices contained despite OPEC+ output cuts Crude oil prices October 2018 to March 2019 ($ per barrel) October 8-12 Stock market chaos. Concerns on weaker demand emerge November 2 U.S. issue waivers to Iran s oil buyers November 12 OPEC lowers oil demand growth forecasts and anticipates oversupply December 6 OPEC hints a lower than expected cut December 7 OPEC+ decide to cut output by 1.2 Mb/d Jan 20 China post slowest economic growth since 1990 Feb 18 U.S. and China signal a deal or extend talks to end their trade war March 18 OPEC+ reaffirms commitment to output cuts November 6 Feb 13 EIA expects U.S. crude oil Jan 4-19 Fears of market 45 production to surpass 12 U.S China trade disruptions from million b/d by 2019 talks, expectation of political crisis in OPEC+ cuts Venezuela 40 Oct Nov Dec Jan Feb Mar WTI Brent March 22 Eurozone s manufacturing activity shows the worst performance in 5 years Source: BBVA Research and Haver Analytics

26 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 Nov-08 Jun-09 Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13 Feb-14 Sep-14 Apr-15 Nov-15 Jun-16 Jan-17 Aug-17 Mar-18 Oct-18 Consumption: Demand has declined in Europe, but remains supportive in China, India and the U.S. BBVA Research U.S. Economic Outlook March 2019 / 26 Oil product demand: total world (Thousand barrels per day, yoy change) Oil product demand (Million barrels per day) non-oecd OECD exus U.S. (rhs) Western Europe China Total World (rhs) United States India Source: BBVA Research and Haver Analytics

27 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Millares BBVA Research U.S. Economic Outlook March 2019 / 27 U.S. production: output remain solid despite decline in rig count U.S. Crude oil inventories (Excluding SPR, million barrels) U.S. Active Rig Count (units) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average 5-yr high 5-yr low U.S. Real private investment in E&P (yoy $billion ) U.S. Estimated crude oil production (Thousand barrels/day) WTI (lhs) Investment (rhs) Source: BBVA Research and Haver Analytics

28 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 OPEC+ supply: Adjustments and U.S. sanctions to Iran and Venezuela will tighten supply throughout 1H19 BBVA Research U.S. Economic Outlook March 2019 / 28 Crude oil production (Million barrels per day) Iran: exports of crude oil (million barrels per day) Wellhead Production: Non OPEC: Russia (Ths b/d) Wellhead Production: OPEC: Saudi Arabia (Ths b/d) Venezuela: crude oil production (million barrels per day) Source: BBVA Research, Haver Analytics, and Bloomberg

29 $USD/bbl BBVA Research U.S. Economic Outlook March 2019 / 29 Forecasts: WTI prices could linger between upper $50s and lower $60s in 2019, but will decelerate in 2020; convergence to long-term equilibrium around $60/b WTI Futures ($ per barrel) WTI prices forecast ($ per barrel) BBVA Research Bloomberg Survey (as of March 25) EIA (STEO, Mar 12.) Months Ahead 03/25/19 02/22/19 3 months ago 6 months ago Source: BBVA Research and Bloomberg BBVA Research Bloomberg Survey (as of March 25) EIA (STEO, Mar 12.)

30 BBVA Research U.S. Economic Outlook March 2019 / 30 Uncertainty: Short-term risks tilted to the downside >= $55/b* < $55/b* OPEC+ expands output deal to 2H19 Oil waivers to importers of Iranian oil expire and are not renewed Additional negative supply shocks (e.g. Venezuela, Libya, Nigeria) Consistent signs of progress in trade negotiations between the U.S. and China Milder-than-expected deceleration of global demand Takeaway issues preventing U.S. crude to reach global markets Weaker global economic outlook Persistent deadlock in trade talks between U.S. and China Dollar appreciation President Trump s pressure on OPEC Limited enforcement of Iranian sanctions Higher-than-expected crude oil production in the U.S. *WTI crude prices. Source: BBVA Research

31 BBVA Research U.S. Economic Outlook March 2019 / 31 Macroeconomic Outlook (f) 2020 (f) 2021 (f) 2022 (f) Real GDP (% SAAR) Real GDP (Contribution, pp) PCE Gross Investment Non Residential Residential Exports Imports Government Unemployment Rate (%, average) Avg. Monthly Nonfarm Payroll (K) CPI (YoY %) Core CPI (YoY %) Fiscal Balance (% GDP, FY) Current Account (bop, % GDP) Fed Target Rate (%, eop) Core Logic National HPI (YoY %) Yr Treasury (% Yield, eop) WTI Oil Prices (dpb, average) Source: BBVA Research *Forecasts subject to change

32 BBVA Research U.S. Economic Outlook March 2019 / 32 Economic Scenarios Probability (%) Current Previous Upside 2 5 Baseline Downside Macro Scenarios GDP Upside Downside UR Upside Downside CPI Upside Downside Fed [eop] Upside Downside Yr [eop] Upside Downside Subject to revision without notice

33 BBVA Research U.S. Economic Outlook March 2019 / 33 DISCLAIMER This document was prepared by Banco Bilbao Vizcaya Argentaria s (BBVA) BBVA Research U.S. on behalf of itself and its affiliated companies (each BBVA Group Company) for distribution in the United States and the rest of the world and is provided for information purposes only. Within the US, BBVA operates primarily through its subsidiary Compass Bank. The information, opinions, estimates and forecasts contained herein refer to the specific date and are subject to changes without notice due to market fluctuations. The information, opinions, estimates and forecasts contained in this document have been gathered or obtained from public sources, believed to be correct by the Company concerning their accuracy, completeness, and/or correctness. This document is not an offer to sell or a solicitation to acquire or dispose of an interest in securities.

34 BBVA Research U.S. Economic Outlook March 2019 / 34 U.S. Economic Outlook March 2019