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

Transcription

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

2 Economic Outlook GDP growth to moderate in 2019 Risk of recession remains elevated over the next 24 months Fed to delay raising rates in 1H19 as it continues to engineer a soft-landing Labor market slack remains minimal Inflation expectations down, as pass-through from rising input costs muted 10-year Treasury to follow shallower path Oil prices converging with long-term equilibrium around $60/b

3 BBVA Research U.S. Economic Outlook January 2019 / 3 Economic activity Real-Time Economic Momentum Heat Map ISM Manufacturing Small Business Optimism Industrial Production IP-Manufacturing IP-Mining 3-months ago 2-months ago 1-month ago Current Some delays and potential volatility in economic releases as a result of the government shutdown Small business optimism at lowest since 4Q17 IP- Nonenergy High-Tech Capital Goods ex Aircraft Private Construction Building Permits Survey-based manufacturing indictors suggest slowing activity, industrial production sound Core Logic Home Prices Consumer Confidence Private Nonfarm Payrolls Prime-Age Participation Home prices appreciation strong despite weaker demand side conditions Marginally Attached (PA) Average Hourly Earnings Real Disposable Income Broad-based improvements in labor market Personal Savings Rate Productivity Below Average Source BBVA Research Above Average

4 Economic trends: Industrial production and consumption moderating BBVA Research U.S. Economic Outlook January 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 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 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 Apr-2015 BBVA Research U.S. Economic Outlook January 2019 / 5 Economic trends: Delay in international trade report leaves uncertainty over impact from trade frictions Real Exchange Rate and Exports (Year-over-year %) 15% Real Exports (Contribution to year-over-year %) % 6 4 5% 2 0% % % 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 BBVA Atl Fed NY Fed BBVA Research U.S. Economic Outlook January 2019 / 6 Economic trends: Modest impact from government shutdown in 4Q18. Recession probability 13% in next 12-months, 59% in 24 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 4Q18 Baseline months ahead 24-months ahead Source: BBVA Research, and ATL & NY Fed

7 ene-1961 ago-1963 mar-1966 oct-1968 may-1971 dic-1973 jul-1976 feb-1979 sep-1981 abr-1984 nov-1986 jun-1989 ene-1992 ago-1994 mar-1997 oct-1999 may-2002 dic-2004 jul-2007 feb-2010 sep-2012 abr-2015 nov-2017 Consumer credit cycle: Consumer fundamentals remain strong, but leverage increasing in rising rate environment BBVA Research U.S. Economic Outlook January 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 December, nonfarm payroll employment grew 312,000, up from 176,000 in November The unemployment rate increased 0.2pp to 3.9%, as the number of individuals voluntarily quitting or leaving their current jobs rose significantly Major industry gains: health care (50K), food service and drinking places (41K), construction (38K), and manufacturing (32K) In 2018, average monthly nonfarm payroll grew at a pace of 199,900 per month while UR dipped below 4.0%. The slightly uptick in the unemployment rate reflects higher number re-entrants and levels of confidence in job leavers The labor force participation rate and employment-to-population increased to 0.4pp to 63.1% and 60.6%, respectively In 2019, we expect the UR to decline 3.7% despite a deceleration in the pace of job growth

9 BBVA Research U.S. Economic Outlook January 2019 / 9 Labor market: Strong job growth to end the year Nonfarm Payrolls (Monthly Change, K) Industry Employment (Annualized % change) Mining Construction Transportation & Warehousing Professional & Business Services Manufacturing Education & Health Services Leisure & Hospitality Wholesale Trade Financial Activities Other Services Retail Trade Local Government Federal Government State Government Information Services Actual Forecast Monthly Change Year-over-year Source: BBVA Research & BLS

10 nov-08 may-09 nov-09 may-10 nov-10 may-11 nov-11 may-12 nov-12 may-13 nov-13 may-14 nov-14 may-15 nov-15 may-16 nov-16 may-17 nov-17 may-18 nov-18 nov-08 may-09 nov-09 may-10 nov-10 may-11 nov-11 may-12 nov-12 may-13 nov-13 may-14 nov-14 may-15 nov-15 may-16 nov-16 may-17 nov-17 may-18 nov-18 nov-2007 jun-2008 ene-2009 ago-2009 mar-2010 oct-2010 may-2011 dic-2011 jul-2012 feb-2013 sep-2013 abr-2014 nov-2014 jun-2015 ene-2016 ago-2016 mar-2017 oct-2017 may-2018 dic-2018 nov-2007 jun-2008 ene-2009 ago-2009 mar-2010 oct-2010 may-2011 dic-2011 jul-2012 feb-2013 sep-2013 abr-2014 nov-2014 jun-2015 ene-2016 ago-2016 mar-2017 oct-2017 may-2018 dic-2018 BBVA Research U.S. Economic Outlook January 2019 / 10 Labor market: Wage pressures rising, as prime age slack abates 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 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 Nov-18 Labor market: Modest declines UR amidst high labor market utilization BBVA Research U.S. Economic Outlook January 2019 / U-6 (%) Unemployment Rate (%) Pre-Crisis Avg. Source: BBVA Research & BLS

12 Inflation The headline consumer price index (CPI) fell 0.1% in December driven by 3.5% decrease in energy prices and declines for used cars, drugs, airline fares and tobacco Core CPI increased 0.2%, the same gain as in October and November, suggesting modest pass-through from volatile energy costs The probability of entering high-inflation regime remains remote Over the last 12 months, headline CPI increased 1.9% while core CPI has increased 2.2% Implied 5-year and 10-year inflation expectations have declined to 1.6% and 1.9%, respectively Despite signs of tighter labor markets, ongoing trade disputes, and pressures on profit margins, inflationary pressures remain well contained

13 Sep-00 Aug-01 Jul-02 Jun-03 May-04 Apr-05 Mar-06 Feb-07 Jan-08 Dec-08 Nov-09 Oct-10 Sep-11 Aug-12 Jul-13 Jun-14 May-15 Apr-16 Mar-17 Feb-18 BBVA Research U.S. Economic Outlook January 2019 / 13 Inflation: Although core prices remains stable, headline dropping due to decline in energy prices Consumer Price Inflation (12m change) 4% 4% 3% Trans. Services Core Inflation Measures (12m change) 4.0% 3.5% 3.0% 3% 2% Rent Med Services 2.5% 2.0% 2% 1% 1% OER 1.5% 1.0% 0% -1% Comm. ex Food/ Energy Food Food Energy Other Edu & Services Comm. Services 0.5% 0.0% -1% 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 January 2019 / 14 Inflation: Probability of high inflation regime extremely low Core PCE Price Index & Inflation Regimes Month-over-month % 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: Baseline for faster convergence to 2% in 2019 BBVA Research U.S. Economic Outlook January 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 The Fed to keep rates unchanged at their January meeting FOMC will use the January 29th-30th statement and press conference to communicate a slightly dovish shift in policy The Fed is trying to calibrate the remaining stretch of its normalization path in order to ensure a soft-landing amidst an uptick in market volatility and growing concerns about financial stability In an effort to remain careful and patient, we expect the Fed to pause in 1Q19 Baseline now assumes 2 rate increases in 2019, terminal level 3.0% Markets no longer pricing rate increases in 2019 while likelihood of rate cuts has edged up

17 BBVA Research U.S. Economic Outlook January 2019 / 17 Fed: Delayed rate increases in effort to engineer soft-landing BBVA & Dealers Projections of Fed Funds (%, Effective) FOMC Projections of Fed Funds (Year-over-year %, Mid-point) BBVA-Baseline Median 75th Percentile L- Term 25th Percentile BBVA-Upside BBVA-Downside 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 Monetary policy: Markets discounting prolonged pause in interest rate normalization BBVA Research U.S. Economic Outlook January 2019 / 18 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 Effective Fed Funds Rate 5/28/2018 7/23/ /15/ /10/2018 Source: BBVA Research & Bloomberg

19 BBVA Research U.S. Economic Outlook January 2019 / 19 Monetary Policy: In short-term, balance sheet strategy unlikely to deviate from current path Fed Funds & Repo Rates (%) Apr-15 Nov-15 Jun-16 Jan-17 Aug-17 Mar-18 Oct-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 Lower Fed Funds expectations and weaker inflation outlook slows upward momentum in short end of the yield curve 10-yr Treasury at 2.75%, 50bp below 4Q18 peak Downward pressure on term premium renewed due to increased global uncertainty, flight-to-safety, and rebalancing of expectations Downward revision to 10-year Treasury yields based on more moderate macro outlook, dovish shift in monetary policy and term premium headwinds Downward revision in long-term yields matched by shallower short-term rate path Yield curve slope remains positive in our baseline scenario

21 Interest rates: Term premium decompression short-lived, as 10-year Treasury drops to 2.75% BBVA Research U.S. Economic Outlook January 2019 / 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 January 2019 / 22 Interest rates: Nontrivial downward revisions to 10-year 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 January 2019 / 23 Interest rates: Slope in yield curve positive with fewer rate hikes and modest decompression in term premium 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+ decision to reduce output prevented prices from declining further The expiration of import waivers of Iranian oil could have a positive effect on prices U.S. production is expected to remain robust through the year Demand is projected to slow down as global economic growth weakens Prices could move between $60 and $70 in 2019, but may decelerate further in 2020 We maintain our forecasts of convergence to long-term equilibrium around $60/b Elevated uncertainty around long-term equilibrium: CAPEX, protectionism, alternative energy sources, EM convergence, EVs, climate change, efficiency and technology

25 BBVA Research U.S. Economic Outlook January 2019 / 25 Oil prices increased after OPEC+ committed to curtail production and markets perceived some progress in the U.S.-China trade negotiations Crude oil prices August 2018 to January 2019 ($ per barrel) August 6 First set of U.S. sanctions against Iran come back into full effect September 25 India may cut imports of Iranian oil to zero in November September 23 OPEC and allies agree not to further increase oil production November 2 U.S. issue waivers to Iran s oil buyers October 8-12 Stock market chaos. Concerns on weaker demand emerge 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 November 6 EIA expects U.S. crude oil production to surpass 12 million b/d by 2019 Jan 20 China post slowest economic growth Jan 4-19 since 1990 U.S China trade talks, expectation of OPEC+ cuts 40 Aug Sep Oct Nov Dec Jan WTI Brent Source: BBVA Research and Haver Analytics

26 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 BBVA Research U.S. Economic Outlook January 2019 / 26 OPEC+ adjustments have yet to fully materialize. The expiration of waivers to importers of Iranian oil would tighten supply even further 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) Other China India Turkey South Korea Japan Europe Source: BBVA Research, Haver Analytics, and Bloomberg

27 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 BBVA Research U.S. Economic Outlook January 2019 / 27 In the meantime, U.S. production will remain solid. Transportation bottlenecks may ease in 2019 U.S. Crude oil inventories (Excluding SPR, million barrels) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec WTI Midland-Cushing differential ($/b) U.S. Real private investment in E&P (yoy $billion ) Average 5-yr high 5-yr low WTI (lhs) Investment (rhs) U.S. Estimated crude oil production (Thousand barrels/day) Source: BBVA Research and Haver Analytics

28 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 BBVA Research U.S. Economic Outlook January 2019 / 28 Demand supported by China, India and the U.S. Oil product demand: total world (Thousand barrels per day, yoy change) Oil product demand (Million barrels per day) non-oecd OECD (rhs) Western Europe United States China India Total World (rhs) China: imports and production of crude oil (Million metric tons SA, and million b/d) Sharp increase induced by Iranian sanctions and expiration of small refineries import quotas Source: BBVA Research and Haver Analytics Production (lhs) Imports (rhs)

29 BBVA Research U.S. Economic Outlook January 2019 / 29 A weaker economic outlook points to slower demand growth Oil product demand (YoY change, million b/d) Oil product demand (million b/d) BBVA Research forecasts Average Actual BBVA Research forecasts Source: BBVA Research Source: BBVA Research

30 BBVA Research U.S. Economic Outlook January 2019 / 30 Short-term risks are now tilted to the downside >= $65/b* < $65/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. *Brent crude prices. Source: BBVA Research

31 $USD/bbl BBVA Research U.S. Economic Outlook January 2019 / 31 Prices could move between $60/b and $70/b in 2019, but may decelerate further in We maintain our forecasts of convergence to long-term equilibrium around $60/b Brent Futures ($ per barrel) Brent prices forecast ($ per barrel) BBVA Research (baseline) Bloomberg Survey (as of Jan 21) EIA (STEO, Jan 15) Months Ahead Source: BBVA Research and Bloomberg 01/24/19 1 month ago 3 months ago 6 months ago BBVA Research Bloomberg Survey (as of Jan 21) EIA STEO (as of Jan 15) Actual

32 BBVA Research U.S. Economic Outlook January 2019 / 32 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) Brent Oil Prices (dpb, average) Source: BBVA Research *Forecasts subject to change

33 BBVA Research U.S. Economic Outlook January 2019 / 33 Economic Scenarios Probability (%) Current Previous Macro Scenarios Upside 5 10 Baseline Downside GDP Upside Downside UR Upside Downside CPI Upside Downside Fed [eop] Upside Downside Yr [eop] Upside Downside Subject to revision without notice

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

35 BBVA Research U.S. Economic Outlook January 2019 / 35 U.S. Economic Outlook January 2019