Economic Update. December 2017

Transcription

1 Economic Update December 2017 If you have any questions or comments, please contact: Steven Rick, Chief Economist CUNA Mutual Group Economics , Ext CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited 2016 CUNA Mutual Group, All Rights Reserved.

2 5 Minute Federal Reserve Board Meeting

3 5 Minute Federal Reserve Board Meeting Federal Reserve s Dual Mandate

4 5 Minute Federal Reserve Board Meeting Federal Reserve s Dual Mandate 1. Stables Prices 2. Full Employment of Resources

5 5 Minute Federal Reserve Board Meeting Federal Reserve s Dual Mandate 1. Stables Prices 2. Full Employment of Resources Federal Reserve Critical Measures

6 5 Minute Federal Reserve Board Meeting Federal Reserve Critical Measures Federal Reserve s Dual Mandate 1. Stables Prices 2. Full Employment of Resources Long-Run Equilibrium Goal Actual

7 5 Minute Federal Reserve Board Meeting Federal Reserve Critical Measures Federal Reserve s Dual Mandate 1. Stables Prices 2. Full Employment of Resources Long-Run Equilibrium Goal Actual Inflation Rate 2% 1.4%

8 5 Minute Federal Reserve Board Meeting Federal Reserve Critical Measures Federal Reserve s Dual Mandate 1. Stables Prices 2. Full Employment of Resources Long-Run Equilibrium Goal Actual Inflation Rate 2% 1.4% Unemployment Rate 5% 4.1%

9 5 Minute Federal Reserve Board Meeting Federal Reserve Critical Measures Federal Reserve s Dual Mandate 1. Stables Prices 2. Full Employment of Resources Long-Run Equilibrium Goal Actual Inflation Rate 2% 1.4% Unemployment Rate 5% 4.1% Economic Output Gap 0% 0%

10 Falling GDP Output Gap in 2017 With the Economy Reaching its Potential Level of Output GDP Output Gap vs. Federal Funds Rate 6% Output Gap (Left Axis) Federal Funds Rate (Right Axis) Recession 7.0% -8% Source: CBO & Federal %

11 Falling GDP Output Gap in 2017 With the Economy Reaching its Potential Level of Output GDP Output Gap vs. Federal Funds Rate 6% Output Gap (Left Axis) Federal Funds Rate (Right Axis) Recession 7.0% -8% Source: CBO & Federal %

12 5 Minute Federal Reserve Board Meeting Federal Reserve Critical Measures Federal Reserve s Dual Mandate 1. Stables Prices 2. Full Employment of Resources Long-Run Equilibrium Goal Actual Inflation Rate 2% 1.4% Unemployment Rate 5% 4.1% Economic Output Gap 0% 0% Fed Funds Interest Rate 3% 1.40%

13 5 Minute Federal Reserve Board Meeting Federal Reserve Critical Measures Federal Reserve s Dual Mandate 1. Stables Prices 2. Full Employment of Resources Long-Run Equilibrium Goal Actual Inflation Rate 2% 1.4% Unemployment Rate 5% 4.1% Economic Output Gap 0% 0% Fed Funds Interest Rate 3% 1.40% 10-Year Treasury Rate 4% 2.3%

14 Stronger Economic Growth in 2018, around 2.4% 5% 4% 3% 1% 4.1% 1.0% 1.8% 3.8% 3.3% 2.8% 2.7% U.S. Economic Growth Rate 1.8% 2.5% 2.6% 2.6% 2.2% 2.4% 2.3% 1.6% 1.5% 1.6% 2.0% 5% 0% -1% -0.3% -1.0% -3% -4% -2.8% Economic Growth Rate Long Run Growth Rate % Source: Department of Commerce.

15 When is the Next Recession?

16 CU Growth Rate Gap Loan Growth Less Deposit Growth Area 3 Recession Growth Rate Gap Gap Forecast

17 CU Growth Rate Gap Loan Growth Less Deposit Growth Borrowing future income for current consumption Area 3 Recession Growth Rate Gap Gap Forecast

18 CU Growth Rate Gap Loan Growth Less Deposit Growth Borrowing future income for current consumption Area 3 Recession Growth Rate Gap Gap Forecast Saving current income for future consumption

19 CU Growth Rate Gap Loan Growth Less Deposit Growth Borrowing future income for current consumption Area 3 Recession Growth Rate Gap Gap Forecast Global Financial Crisis Saving current income for future consumption

20 Growth Rate Gap Loan Growth Less Deposit Growth Forecast Growth Rate Gap Recession Gap Forecast

21 What could cause faster economic growth? 5% 4% 3% 1% 0% -1% -3% -4% 4.1% 3.8% 3.3% 2.8% 2.7% 1.8% 1.8% 1.0% U.S. Economic Growth Rate -2.8% Economic Growth Rate Long Run Growth Rate Source: Department of Commerce. -0.3% 2.5% 2.2% 2.4% 2.6% 2.3%2.4% 1.6% 1.5% 1.6% -1.0% 2.0% 5% -4%

22 What could cause faster economic growth? 1. Infrastructure and military spending 5% 4% 3% 1% 0% -1% -3% -4% 4.1% 3.8% 3.3% 2.8% 2.7% 1.8% 1.8% 1.0% U.S. Economic Growth Rate -2.8% Economic Growth Rate Long Run Growth Rate Source: Department of Commerce. -0.3% 2.5% 2.2% 2.4% 2.6% 2.3%2.4% 1.6% 1.5% 1.6% -1.0% 2.0% 5% -4%

23 What could cause faster economic growth? 1. Infrastructure and military spending 2. Lower personal taxes => rising consumer spending 5% 4% 3% 1% 0% -1% -3% -4% 4.1% 3.8% 3.3% 2.8% 2.7% 1.8% 1.8% 1.0% U.S. Economic Growth Rate -2.8% Economic Growth Rate Long Run Growth Rate Source: Department of Commerce. -0.3% 2.5% 2.2% 2.4% 2.6% 2.3%2.4% 1.6% 1.5% 1.6% -1.0% 2.0% 5% -4%

24 What could cause faster economic growth? 1. Infrastructure and military spending 2. Lower personal taxes => rising consumer spending 3. Lower corporate taxes => rising business investment 5% 4% 3% 1% 0% -1% -3% -4% 4.1% 3.8% 3.3% 2.8% 2.7% 1.8% 1.8% 1.0% U.S. Economic Growth Rate -2.8% Economic Growth Rate Long Run Growth Rate Source: Department of Commerce. -0.3% 2.5% 2.2% 2.4% 2.6% 2.3%2.4% 1.6% 1.5% 1.6% -1.0% 2.0% 5% -4%

25 What could cause faster economic growth? 1. Infrastructure and military spending 2. Lower personal taxes => rising consumer spending 3. Lower corporate taxes => rising business investment 4. Rising animal spirits => rising consumer and business spending 5% 4% 3% 1% 0% -1% -3% -4% 4.1% 3.8% 3.3% 2.8% 2.7% 1.8% 1.8% 1.0% U.S. Economic Growth Rate -2.8% Economic Growth Rate Long Run Growth Rate Source: Department of Commerce. -0.3% 2.5% 2.2% 2.4% 2.6% 2.3%2.4% 1.6% 1.5% 1.6% -1.0% 2.0% 5% -4%

26 Labor Market Beyond Full Employment CU Delinquency Rate Versus Unemployment Rate Unemployment (Left Axis) Recession Area 1 4.7% Full Employment Target (Left Axis)

27 Wisconsin Unemployment Rate at 3.5%, down from 4.2% Last Year (Percent) Unemployment Rate Minnesota Vs Wisconsin U.S. Recession Area 1 Minnesota Wisconsin DISCOVERY CONFERENCE 27

28 Federal Reserve will Raise Fed Funds Interest Rate 0.75 pp in Year Treasury will increase 0.40 percentage point in Interest Rates and Recessions Fed Funds 10-yr Treas Recession Forecast Forecast

29 Federal Reserve will Raise Fed Funds Interest Rate 0.75 pp in Year Treasury will increase 0.40 percentage point in Interest Rates and Recessions Fed Funds 10-yr Treas Recession Forecast Forecast Rising Long-term Interest Rates in 2018:

30 Federal Reserve will Raise Fed Funds Interest Rate 0.75 pp in Year Treasury will increase 0.40 percentage point in Interest Rates and Recessions Fed Funds 10-yr Treas Recession Forecast Forecast Rising Long-term Interest Rates in 2018: 1. U.S. inflation ( P oil, Wages)

31 Federal Reserve will Raise Fed Funds Interest Rate 0.75 pp in Year Treasury will increase 0.40 percentage point in Interest Rates and Recessions Fed Funds 10-yr Treas Recession Forecast Forecast Rising Long-term Interest Rates in 2018: 1. U.S. inflation ( P oil, Wages) 2. Fiscal Package (more inflation than growth)

32 Federal Reserve will Raise Fed Funds Interest Rate 0.75 pp in Year Treasury will increase 0.40 percentage point in Interest Rates and Recessions Fed Funds 10-yr Treas Recession Forecast Forecast Rising Long-term Interest Rates in 2018: 1. U.S. inflation ( P oil, Wages) 2. Fiscal Package (more inflation than growth) 3. Federal Reserve shrinking balance sheet

33 Federal Reserve will Raise Fed Funds Interest Rate 0.75 pp in Year Treasury will increase 0.40 percentage point in Interest Rates and Recessions Fed Funds 10-yr Treas Recession Forecast Forecast Rising Long-term Interest Rates in 2018: 1. U.S. inflation ( P oil, Wages) 2. Fiscal Package (more inflation than growth) 3. Federal Reserve shrinking balance sheet 4. ECB exiting QE

34 13 Risks to Markets and Economy in 2018

35 13 Risks to Markets and Economy in U.S. inflation moving higher => interest rate moving up faster than expected.

36 13 Risks to Markets and Economy in U.S. inflation moving higher => interest rate moving up faster than expected. 2. ECB exiting QE in 2018 Qtr. 2.

37 13 Risks to Markets and Economy in U.S. inflation moving higher => interest rate moving up faster than expected. 2. ECB exiting QE in 2018 Qtr Negative EU government bond rates coming to an end, impacting global bond markets.

38 13 Risks to Markets and Economy in U.S. inflation moving higher => interest rate moving up faster than expected. 2. ECB exiting QE in 2018 Qtr Negative EU government bond rates coming to an end, impacting global bond markets. 4. U.S. Investment Grade and High Yield bond spreads to widen because of lower foreign appetite.

39 13 Risks to Markets and Economy in U.S. inflation moving higher => interest rate moving up faster than expected. 2. ECB exiting QE in 2018 Qtr Negative EU government bond rates coming to an end, impacting global bond markets. 4. U.S. Investment Grade and High Yield bond spreads to widen because of lower foreign appetite. 5. New Fed leadership to be tested (will Jerome Powell be politically driven, or driven by incoming data).

40 13 Risks to Markets and Economy in U.S. inflation moving higher => interest rate moving up faster than expected. 2. ECB exiting QE in 2018 Qtr Negative EU government bond rates coming to an end, impacting global bond markets. 4. U.S. Investment Grade and High Yield bond spreads to widen because of lower foreign appetite. 5. New Fed leadership to be tested (will Jerome Powell be politically driven, or driven by incoming data). 6. Rising term premia in Treasuries as global central bank QE comes to an end.

41 13 Risks to Markets and Economy in U.S. inflation moving higher => interest rate moving up faster than expected. 2. ECB exiting QE in 2018 Qtr Negative EU government bond rates coming to an end, impacting global bond markets. 4. U.S. Investment Grade and High Yield bond spreads to widen because of lower foreign appetite. 5. New Fed leadership to be tested (will Jerome Powell be politically driven, or driven by incoming data). 6. Rising term premia in Treasuries as global central bank QE comes to an end. 7. Valuation and fundamentals mismatch in US equities, are markets ready for a small correction.

42 13 Risks to Markets and Economy in U.S. inflation moving higher => interest rate moving up faster than expected. 2. ECB exiting QE in 2018 Qtr Negative EU government bond rates coming to an end, impacting global bond markets. 4. U.S. Investment Grade and High Yield bond spreads to widen because of lower foreign appetite. 5. New Fed leadership to be tested (will Jerome Powell be politically driven, or driven by incoming data). 6. Rising term premia in Treasuries as global central bank QE comes to an end. 7. Valuation and fundamentals mismatch in US equities, are markets ready for a small correction. 8. Bitcoin crash, confidence impact on retail investors.

43 13 Risks to Markets and Economy in U.S. inflation moving higher => interest rate moving up faster than expected. 2. ECB exiting QE in 2018 Qtr Negative EU government bond rates coming to an end, impacting global bond markets. 4. U.S. Investment Grade and High Yield bond spreads to widen because of lower foreign appetite. 5. New Fed leadership to be tested (will Jerome Powell be politically driven, or driven by incoming data). 6. Rising term premia in Treasuries as global central bank QE comes to an end. 7. Valuation and fundamentals mismatch in US equities, are markets ready for a small correction. 8. Bitcoin crash, confidence impact on retail investors. 9. Bigger than expected positive economic impact of U.S. tax reform than expected.

44 13 Risks to Markets and Economy in U.S. inflation moving higher => interest rate moving up faster than expected. 2. ECB exiting QE in 2018 Qtr Negative EU government bond rates coming to an end, impacting global bond markets. 4. U.S. Investment Grade and High Yield bond spreads to widen because of lower foreign appetite. 5. New Fed leadership to be tested (will Jerome Powell be politically driven, or driven by incoming data). 6. Rising term premia in Treasuries as global central bank QE comes to an end. 7. Valuation and fundamentals mismatch in US equities, are markets ready for a small correction. 8. Bitcoin crash, confidence impact on retail investors. 9. Bigger than expected positive economic impact of U.S. tax reform than expected. 10.Continued rise in US inequality => more dissatisfied voters => more populism coming.

45 13 Risks to Markets and Economy in U.S. inflation moving higher => interest rate moving up faster than expected. 2. ECB exiting QE in 2018 Qtr Negative EU government bond rates coming to an end, impacting global bond markets. 4. U.S. Investment Grade and High Yield bond spreads to widen because of lower foreign appetite. 5. New Fed leadership to be tested (will Jerome Powell be politically driven, or driven by incoming data). 6. Rising term premia in Treasuries as global central bank QE comes to an end. 7. Valuation and fundamentals mismatch in US equities, are markets ready for a small correction. 8. Bitcoin crash, confidence impact on retail investors. 9. Bigger than expected positive economic impact of U.S. tax reform than expected. 10.Continued rise in US inequality => more dissatisfied voters => more populism coming. 11.Special prosecutor Robert Mueller s Russia investigation.

46 13 Risks to Markets and Economy in U.S. inflation moving higher => interest rate moving up faster than expected. 2. ECB exiting QE in 2018 Qtr Negative EU government bond rates coming to an end, impacting global bond markets. 4. U.S. Investment Grade and High Yield bond spreads to widen because of lower foreign appetite. 5. New Fed leadership to be tested (will Jerome Powell be politically driven, or driven by incoming data). 6. Rising term premia in Treasuries as global central bank QE comes to an end. 7. Valuation and fundamentals mismatch in US equities, are markets ready for a small correction. 8. Bitcoin crash, confidence impact on retail investors. 9. Bigger than expected positive economic impact of U.S. tax reform than expected. 10.Continued rise in US inequality => more dissatisfied voters => more populism coming. 11.Special prosecutor Robert Mueller s Russia investigation. 12.Rising commodity prices.

47 13 Risks to Markets and Economy in U.S. inflation moving higher => interest rate moving up faster than expected. 2. ECB exiting QE in 2018 Qtr Negative EU government bond rates coming to an end, impacting global bond markets. 4. U.S. Investment Grade and High Yield bond spreads to widen because of lower foreign appetite. 5. New Fed leadership to be tested (will Jerome Powell be politically driven, or driven by incoming data). 6. Rising term premia in Treasuries as global central bank QE comes to an end. 7. Valuation and fundamentals mismatch in US equities, are markets ready for a small correction. 8. Bitcoin crash, confidence impact on retail investors. 9. Bigger than expected positive economic impact of U.S. tax reform than expected. 10.Continued rise in US inequality => more dissatisfied voters => more populism coming. 11.Special prosecutor Robert Mueller s Russia investigation. 12.Rising commodity prices. 13.Housing bubble burst in china => China equity market correction => slower Chinese economic growth.

48 Rising Deficits Over Next 4 Years and Rising Long-term Interest Rates Federal Government Surplus/Deficit (Billions of Dollars) $400 $200 $0 -$200 -$400 -$600 -$ % -$1,000 -$1,200 -$1,400 -$1,600 -$1,800 Deficit (LHS) Deficit-to-GDP (RHS) -3% Deficit Ratio Limit (RHS) -1,294-1, ,413-1,087 Source: Congressional Budget Office. -9%

49 Rising Deficits Over Next 4 Years and Rising Long-term Interest Rates 12.0 Nominal Interest Rates, Real Interest Rates and Inflation Expectations TIPS (10-Yr) Line 2 10-yr Treas Inflation Expectations DISCOVERY CONFERENCE 49

50 Vehicle Sales over17 million in 2018 Millions of Units U.S. Vehicles Sales Seasonally Adjusted Annual Rate Source: Autodata Corp. New Auto Sales Recession Inherent Demand Auto Sales Forecast

51 Home Sales will Accelerate to 5.6 million in ,000 7,500 7,000 6,500 Existing Home Sales (annual rate) & Inventories Sales (Left Axis) Recession Healthy Housing Market Home Sales Foecast (Left Axis) Thousands 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,

52 Home Sales will Accelerate to 5.6 million in 2018 Thousands 8,000 7,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 Existing Home Sales (annual rate) & Inventories Sales (Left Axis) Recession Inventories (Right Axis) Healthy Housing Market Home Sales Foecast (Left Axis) 4,250 4,000 3,750 3,500 3,250 3,000 2,750 2,500 2,250 2,000 1,750 Thousands 2, ,500

53 High Stock Prices Producing Wealth Effect among High-Income Households Home Prices will Rise 6% in 2018 S&P 500 Stock Index (monthly average) 6,000 4,500 3,000 1,500 0 Price-Earnings Ratio (Right Axis) Recession Real S&P Index (Left Axis) Nominal S&P Index (Left Axis)

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55 High Stock Prices Producing Wealth Effect among High-Income Households Home Prices will Rise 6% in Recession U.S. OFHEO House Price Index (4-Qtr Percent Change) Seasonally-Adjusted Purchase-Only Index

56 Wisconsin Home Prices will Rise 6% in OFHEO House Price Index (4-Qtr Percent Change) Minnesota U.S. Wisconsin Recession U.S. home prices rose 6.6% over the last year. Wisconsin s home prices rose 6.2% over the last year. Minnesota s home prices rose 7.2% over the last year

57 National Savings Rate is Falling 10 National Savings Rate [3-month moving average (Personal Savings/DPI)]

58 Confidence at 17 year Highs Consumer Confidence & Sentiment Index Recession Confidence Sentiment

59 Confidence at 17 year Highs Consumer Confidence & Sentiment Index December 2000 Recession Confidence Sentiment

60 Optimism:

61 Optimism: 1. sustained low gas prices

62 Optimism: 1. sustained low gas prices 2. low interest rates

63 Optimism: 1. sustained low gas prices 2. low interest rates 3. low retail inflation

64 Optimism: 1. sustained low gas prices 2. low interest rates 3. low retail inflation 4. rising stock and home prices

65 Optimism: 1. sustained low gas prices 2. low interest rates 3. low retail inflation 4. rising stock and home prices 5. labor market at full employment & rising job openings

66 Optimism: 1. sustained low gas prices 2. low interest rates 3. low retail inflation 4. rising stock and home prices 5. labor market at full employment & rising job openings 6. low debt burdens

67 Optimism: 1. sustained low gas prices 2. low interest rates 3. low retail inflation 4. rising stock and home prices 5. labor market at full employment & rising job openings 6. low debt burdens 7. improving credit availability

68 Optimism: 1. sustained low gas prices 2. low interest rates 3. low retail inflation 4. rising stock and home prices 5. labor market at full employment & rising job openings 6. low debt burdens 7. improving credit availability 8. possible tax cuts.

69 Pessimism:

70 Pessimism: 1. worries over pace of job growth

71 Pessimism: 1. worries over pace of job growth 2. political uncertainty, dysfunction and gridlock

72 Pessimism: 1. worries over pace of job growth 2. political uncertainty, dysfunction and gridlock 3. slow wage growth

73 Pessimism: 1. worries over pace of job growth 2. political uncertainty, dysfunction and gridlock 3. slow wage growth 4. fears of financial market bubbles (i.e. non investment grade corporate bond market)

74 The Dollar is Falling and Oil Prices are Rising U.S. Dollar Exchange Rate Major Currency Index Nominal & Real (1973 = 100) D Column 4 3-D Column 3 Real Nominal

75 The Dollar is Falling and Oil Prices are Rising Oil Price per Barrel (West Texas Intermediate Crude) Nominal Recession Area 1 Real

76 Wisconsin Economic Growth 6% 5% 3% 2% 0% -2% -3% -5% -6% 4.3% % % % WI Economic Growth WI Growth Rate Gap WI Economic Growth vs WI CU Growth Rate Gap (Loan Growth less Deposit Growth) 3.3% % 0.2% % % % % % % % % Source: Department of Commerce. 76

77 Questions?

78 The End

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