2018 Economic Outlook 2Q Update

Transcription

1 2018 Economic Outlook 2Q Update The Sky Is the Limit And the U.S. Economy Is Closer Dudley Carter Economist, Vining Sparks Craig Dismuke Chief Economist, Vining Sparks Change in GDP from Pre Crisis Peak (By Cycle) Economy Expands Another 2.5% The U.S. economy continued its sluggish growth, tacking on another 2.5% of growth in While this expansion has had durability, it has lacked velocity. 44Q / +42% 40% Change in Real GDP from Previous Cycle Peak 34Q / +35% By Economic Cycle 30% 20% 10% 0% 10% Cycle Cycle Cycle 2007 Current Cycle 26Q / +18% 40Q / +14% Quarters Since Previous Cycle s Peak Sources: BEA, Vining Sparks Previous Cycle Peak 2 1

2 Consumer - Driving Growth The growth cycle has evolved from being investment driven to consumer driven, and appears poised to benefit from all four main growth engines in Sources: BEA, Vining Sparks Consumer Strength begins with Labor Market 4 The unemployment rate is bordering on dropping below 4.00%, a rate it has only surpassed twice since WWII. 10% 9% 8% 7% 6% 5% Unemployment Rate 4% % Sources: BLS, Vining Sparks 2

3 Consumer - Confidence Booming Consumer confidence jumped to its highest levels since 2000 with stock prices setting record high after record high, gas prices remaining tame, and unemployment continuing to fall Consumer Confidence Conference Board University of Michigan Sources: U of M, Conference Board, Vining Sparks 2017 Tax Cuts and Jobs Act Consumers will benefit quickly with more disposable income while businesses are likely to be more methodical, eventually ramping up investment and then possibly wages. Consumers even stronger more disposable income ($140 billion in 2018) Business Investment likely to be methodical, but should accelerate in 2H18 Bolster balance sheets Build up cash Pay down debt Share buybacks Deferred maintenance items Repair corporate infrastructure Raise existing wages Consider new investments Equipment *Structures Labor Residential Investment stronger consumer likely to outweigh SALT implications Biggest risk is higher rates from rising growth / inflation expectations Wage growth likely to slowly stabilize closer to 3.0% Inflation expected to firm up between % over the medium term 6 3

4 Business Investment Confidence Booming 7 The last time business confidence was as high as it is today was 1983, when the economy was growing at over 9% Small Business Confidence GDP (QoQ, SAAR) Sources: NFIB, BEA, Vining Sparks Ideal Environment for Businesses Fewer small businesses cite taxes as their biggest problem than at any point in over 30 years of survey history. Additionally, sales are expected to be good and regulations are less of a concern. 35 Small Businesses Single Biggest Problem 30 Quality of Taxes 25 Labor Poor Sales Gov t Regs. and Red Tape % Sources: NFIB, Vining Sparks 4

5 Residential Investment Confidence Booming 9 Homebuilder confidence appeared to be plateauing, before soaring in the final months of 2017 to the highest level since In fact, every major housing metric improved into year end % +4% +6% +4% +27% Housing Starts Homebuilder Confidence Index Building Permits Total Home Sales Existing Home Sales New Home Sales pts YoY Sources: NAHB, NAR, Census Bureau, Vining Sparks Trade Benefitting from Weaker Dollar 10 As the Dollar has weakened, it has helped U.S. producers export more goods and services abroad. Trade to the country s biggest trade partners turned from negative to positive in % 15% 5% 5% 15% U.S. Exports to Eurozone (YoY, 3M Avg) U.S. Exports to Canada (YoY, 3M Avg) U.S. Exports to China (YoY, 3M Avg) Trade Weighted Dollar (YoY) Dollar Declining 25% % 10% 5% 0% 5% 10% 15% 20% Sources: Census Bureau, Federal Reserve, Vining Sparks 5

6 Trade Global Synchronization 11 Growth is accelerating globally, largely a result of higher expectations in the U.S. and the knockon effects for emerging economies. All 46 OECD countries are projecting growth in World Growth 3.7 Advanced Economies 2.3 Emerging/Developing 4.7 Economies Est. Projected Growth Accelerating Growth Slowing Contracting Est. Projected United States Eurozone Japan United Kingdom Brazil China India Russia Sources: IMF World Economic Outlook January 2018, OECD Growth Projections, Vining Sparks Inflation Has Remained Stubbornly Low 12 Despite a tightening labor market and improving growth last year, inflation unexpectedly pulled back after nearing the Fed s 2% target FOMC Target Core CPI Inflation (YoY) % 1.5% 1.0 Core PCE Inflation (YoY) Sources: BLS, BEA, Vining Sparks 6

7 Almost All Economic Engines Firing 13 A strong consumer and more favorable business climate created a positive outlook for growth. Global growth also synchronized providing three engines of economic growth. Low Unemployment Decent Wage Growth Low Household Debt Low Gas Prices Record High Stocks Low Interest Rates Booming Confidence Booming Confidence Deregulation Expectations for Sales Record High Stocks Low Interest Rates Weaker Dollar Housing Momentum Unprecedented Monetary Stimulus Low Interest Rates Record High Stocks Synchronized Growth Strong U.S. Economy Federal: 2011 Budget Caps State and Local: Improved Tax Receipts, Property Values CONSUMPTION INVESTMENT GLOBAL GROWTH GOVERNMENT Tax Reform Tax Reform = Positive Outlook / Low Inflation / Patient Fed / Low Rates Driving longer interest rates have been 1) U.S. fiscal policy developments, 2) central bank actions, 3) geopolitical concerns, and 4) weak then improving economic data % Year Yield Remained Low on Tame Inflation Fed Talks up March Hike Fed hikes Dots unchanged Healthcare Fails in House Healthcare Weak CPI Trump sworn in Fails in Senate Weak Retail Sales Fed debate on Presidential Weak Eco Data inflation begins advisory Comey councils Memos disbanded French Election Fed hikes, hawkish slant, dots unchanged, roll off cap sizes ECB, BoE, BoC surprisingly hawkish Fed Balance Sheet Roll Off Begins 2.40% Tax Bill Passes Progress on Tax Reform Tax framework Fed announces October Roll off North Korea tests hydrogen bomb Fed hikes Dots unchanged U.S. and EU Eco Data Stronger J F M A M J J A S O N D J F M 14 Economic Surprise Index 7

8 Stocks Soared on Low Rates/Improving Growth Stocks had a sensational run in The three main U.S. indices cumulatively set 205 new record high closes amidst almost no volatility. U.S. strength also extended to global markets. 50% Percentage Gains since U.S. Election Thru Jan 26 40% Nasdaq 43.8% Dow 45.2% 30% S&P % MSCI All World Index, Ex U.S. 33.5% 15 20% 10% 0% Record High Closes Since Election N D J F M A M J J A S O N D J F M A Sources: Bloomberg, Vining Sparks Job Growth Continued to Beat Forecasts Total nonfarm payroll growth beat expectations again, rising 200k in January. The labor market has shown very few signs of slowing despite being almost nine years into the cycle. Total Nonfarm Payroll Growth Revised to 176k Revised to 326k JAN FEB MAR Sources: BLS, Vining Sparks Monthly Average by Year 8

9 Earnings Growth Showed More Traction 17 Three separate measures of wage growth showed traction in late January. While the average hourly earnings data were likely distorted by the weather, inflation fears gripped investors. 3.0% 2.5% 2.0% Average Hourly Earnings (YoY) Employee Cost Index 2.9% 2.6% 1.5% 1.0% Sources: BLS, Vining Sparks Fiscal Stimulus Added to Tailwinds 18 Washington agreed to lift spending caps, increasing defense spending by 24% and non defense spending by 29% over the next two years. This will be another deficit financed boost to GDP. 15% 10% 5% Government Expenditures by Category (QoQ, SAAR) Previous Federal Spending Caps Replaced by: Defense: +$165 Billion ($80B in 18 / $85B in 19) Non Defense: +$131 Billion ($63 B in 18 / $68 B in 19) Disaster Relief: +$84.4 Billion Total Government Federal Non Defense Federal Defense 0% 5% Projected Expected Impact to GDP: % +0.4% Sources: BEA, Vining Sparks 9

10 More Traction for Core Consumer Inflation 19 Core CPI inflation showed the strongest monthly gain in prices since 2005, rising 0.35% MoM. While some of the increase should prove temporary, it exacerbated investors fears. 0.40% 0.349% 3.00% 0.30% 0.20% 0.10% 0.00% 0.10% Core CPI (YoY) Core CPI (MoM) % 2.00% 1.50% 1.00% 0.50% 0.00% Sources: BLS, Vining Sparks All Economic Engines Firing Paradigm Shift 20 Add the boost from tax reform and more fiscal stimulus (deficit spending) to an already stable backdrop, and markets began to fear the economy over heating. Low Unemployment Decent Wage Growth Low Household Debt Low Gas Prices Record High Stocks Low Interest Rates Booming Confidence Booming Confidence Deregulation Expectations for Sales Record High Stocks Low Interest Rates Weaker Dollar Housing Momentum Unprecedented Monetary Stimulus Low Interest Rates Record High Stocks Synchronized Growth Strong U.S. Economy Federal: Raised Budget Caps State and Local: Improved Tax Receipts, Property Values CONSUMPTION INVESTMENT GLOBAL GROWTH GOVERNMENT Tax Reform Tax Reform Fiscal Stimulus = Hot = Stable Outlook Outlook / Risks / Balanced to Inflation Risks / Reactive / Patient Fed // Higher Low Rates 10

11 2.45% Yields Rise on Optimism and Inflation Fear Driving longer interest rates have been 1) U.S. fiscal policy developments, 2) central bank actions, 3) geopolitical concerns, and 4) weak then improving economic data Fed Talks up March Hike Fed hikes Dots unchanged Healthcare Fails in House Healthcare Weak CPI Trump sworn in Fails in Senate Weak Retail Sales Fed debate on Presidential Weak Eco Data inflation begins advisory Comey councils Memos disbanded French Election Fed hikes, hawkish slant, dots unchanged, roll off cap sizes ECB, BoE, BoC surprisingly hawkish Fed Balance Sheet Roll Off Begins U.S. and EU Eco Data Stronger Tax framework Fed announces October Roll off North Korea tests hydrogen bomb Fed hikes 2.99% Dots unchanged Strong CPI Tariff Talk Fiscal Boost Strong Jobs and Earnings Data Tax Cuts Push Stocks Higher, Yields Rise 2.40% Tax Bill Passes Progress on Tax Reform J F M A M J J A S O N D J F M 21 Economic Surprise Index And Higher Interest Rates (Etc) Roiled Stocks Market volatility increased dramatically after January 26 and the run of inflationary data. Faster inflation implies higher interest rates and low interest rates have proven critical to asset valuations. Inflation Trade 50% Percentage Gains since U.S. Election Thru Jan 26 Jan 26 Apr 11 Fears Tariffs Nasdaq 43.8% 5.8% 40% Dow 45.2% 7.5% S&P % 7.5% 30% MSCI All World Index, Ex U.S. 33.5% 6.9% 22 20% 10% 0% Record High Closes Since Jan N D J F M A M J J A S O N D J F M A Sources: Bloomberg, Vining Sparks 11

12 Growing Risks to Stable Growth in The risks to economic stability are growing. As the economy begins to heat up, imbalances are likely to become more pronounced with the largest risk coming from an asset price correction. Inflation runs hotter than expected Fed hikes too aggressively, or gets behind the curve Asset price recalibration stock prices, bond yields, credit spreads, cap rates Volatility excessively suppressed in financial markets, exacerbating future moves Global central banks simultaneously shift to less accommodative posture Geopolitical tensions and trade tensions Mid term elections creating more political uncertainty Longer term obstacles Aging population, Federal debt, Weak productivity Expectations for Short Interest Rates 24 The markets are now pricing in three hikes in 2018, but only one or two additional hikes through the end of The Fed continues to project a longer period of rate hikes % Fed Projections March SEP Fed Funds Futures December 29, % Fed Funds Futures March 29, % % 2.125% % Sources: Fed Funds Futures Contracts, March 2018 Fed SEP Projections, Vining Sparks 12

13 March FOMC Dot Plot Projections 34 of 45 dots through 2020 were raised in the March Summary of Economic Projections. 4.0 Raised Dot *Based on estimation of which dot corresponds with each FOMC participant Longer Run Sources: Fed SEP Projections, Vining Sparks Financial Conditions Tightening 26 Financial conditions have tightened in 2018 as fears of inflation and higher interest rates have roiled markets. This is the most likely factor to limit Fed hikes. 3.0 Overall Financial Conditions Bloomberg Index (Inverted) Tighter Financial Conditions Interbank Liquidity TED Spread 2.5 Normalized Versus Median* Easier Financial Conditions A M J J A S O N D J F M A Health of Financial System/Banks Libor/OIS Spread Short Term Corporate Borrowing CP/3M TBill Spread Long Term Corporate Borrowing Corp 10Y Baa/Treasury Spread Municiapl Borrowing Muni 10Y Aa/Treasury Spread Stock Values S&P 500 YoY (Inverted) Stock Volatility S&P 500 VIX Expected Bond Market Volatility Swaption Volatility Chicago Fed Adj. National Financial Conditions Index St. Louis Fed Financial Stress Index Bloomberg Financial Conditions Index (Inv) Sources: Chicago Fed, St. Louis Fed, Bloomberg, Vining Sparks 13

14 Longer Yields Remain Anchored Treasury yields continue to we weighed down by global yields, generally, and the impact of stilleasy monetary policy from the ECB and BoJ. 6.0 $ Year Treasury Fed, ECB, BOE, and BoJ Assets (Inverted, USD) $3 $5 $7 $ Y German Bund 10Y Japan JGB Trillions $11 $13 $15 Sources: Federal Reserve, BOE, ECB, BoJ, Bloomberg, Vining Sparks Global Inflation Firming, but Remains Low Inflation in Japan and the Eurozone continue to run below target despite the improving economic data and financial asset prices. This is likely to limit adjustments to monetary policy. 4.0 Core Inflation Measures by Country 3.0 U.K. 2.7% U.S. 1.6% 1.0% Eurozone 0.5% Japan Sources: BoJ, CEIN, UK ONS, Eurostat, BLS, Vining Sparks 14

15 U.S. Inflation Outlook Remains Anchored 29 The biggest risk to longer yields rising more than expected appears to be an increase in inflation. While the New York Fed s UIG points to an imminent increase, market expectations remain tame Underlying Inflation Gauge New York Fed UIG (Adv. 18M) Core CPI (YoY) TIPS Implied Inflation Expectations 5Y/5Y Forward Implied Inflation 10 Year Implied Inflation 5 Year Implied Inflation M A M J J A S O N D J F M Sources: New York Fed, Bloomberg, Vining Sparks Housing Proven to Be Rate Sensitive Home sales have proven historically to be very rate sensitive. The higher the 10 year yield rises above 3.00% (mortgage rates above 4.50%), residential investment is more likely to weaken Homeowners Average Outstanding Mortgage Rate Homeowners Mortgage Current 30 Year Mortgage Rate Rates above Prevailing Market Rates Δ Economics Work to Buy More House Average Outstanding Mortgage Rate Minus Current 30 Year Mortgage Rate Sources: Census Bureau, NAR, Freddie Mac MMS 30 Year Mortgage Rate, Vining Sparks 15

16 YoY Change in Home Sales Housing Proven to Be Rate Sensitive Home sales have proven historically to be very rate sensitive. The higher the 10 year yield rises above 3.00% (mortgage rates above 4.50%), residential investment is more likely to weaken New Home Sales (YoY) Existing Home Sales (YoY) Outstanding Rate Less Available Rate Sources: Census Bureau, NAR, Freddie Mac MMS 30 Year Mortgage Rate, Vining Sparks Larger Deficit for a Little Growth Comparing CBO s 2017 budget projections to their 2018 projections, the economy is now expected to be $678 billion larger by 2027 at a cost of $1.56 trillion in additional debt. 25% 23% Outlays as % GDP Revenues as % GDP 8% 6% Real GDP (YoY) Potential GDP 21% 19% 17% 15% 13% % 2% 0% 2% 4% Sources: Congressional Budget Office 2018 Budget Projections, Vining Sparks 16

17 Deficit Growth Projected to Exceed GDP Growth An already excessive budget deficit is expected to be even more excessive, growing at over a 5% rate while economic growth is expected to average just 1.9%. 10% 8% 6% 4% 2% 0% 2% Budget Deficit as % GDP GDP Growth Rate 4% Sources: Congressional Budget Office 2018 Budget Projections, Vining Sparks Billions Federal Interest Expense Politicians have significant incentive to keep interest rates anchored now more than ever. Using modest projections, annual interest expense is expected to rise $651 billion by $1,000 Underlying Rate Assumptions $914 B $ % 10Y Treasury and CBO Projection Annual Interest Expense $ % 3M Bill and CBO Projection $ % 3.0% 2.90% 3.70% $ % 2.0% $ % $400 $300 $200 $ % 0.0% $263 B $ Sources: Congressional Budget Office 2018 Budget Projections, Vining Sparks 34 17

18 $ Billions Entitlement Programs and Interest Expense Interest expense is expected to continue displacing productive government spending while growth in entitlement programs will make it difficult to find spending to cut. 2,000 1,800 1,600 1,400 1,200 1, Defense Non Defense Discretionary Social Security Major Healthcare Other Mandatory Spending Interest Sources: Congressional Budget Office 2018 Budget Projections, Vining Sparks Interest Rate Projections 36 Short end of yield curve likely to be pressured higher from Fed hikes while longer end responds to inflation expectations, supply/demand, global yields, and other limiting factors April Vining Sparks Projections April 11 Forward Curve April Bloomberg Survey (Avg) April 11 Current Yield Curve Risk to Financial Conditions Inflation Remains below Target Somewhat Fragile Economy 2.125% 2.35% Historically Low Unemployment Signs of Potential Inflation Continued Inflation of Asset Prices 2.75% Easy Monetary Policy Globally Weak Inflation Outlook Slower Rate of Future Growth Risk to Financial Conditions Risk to Housing Sector Risk to Federal Interest Expense Geopolitical Fears / Trade Fears 3.00% Stronger U.S. Growth Outlook Improved Global Outlook Signs of Potential Inflation Expectations for More Hawkish FOMC Year End 2018 Interest Rate Projections FF 3M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y Sources: Bloomberg Survey (April), Vining Sparks Projections (April), Forward Curve (April 11) 18

19 2018 Economic Outlook 37 Consumer Firmer wages, stronger labor market, and $140 billion boost from tax cuts Business Investment Improved capex as a result of tax reform, particularly structures Housing Tax reform diminishes some incentives to homeownership; however, housing should see another year of growth in 2018 presuming mortgage rates remain anchored Government Spending More deficit spending will yield better growth in the near term but may tip the inflation scale; adds to the already excessive debt burden Risks to Growth Rising inflation biggest risk to outlook (higher interest rates, asset price correction, etc ) Too much of a good thing leads to correction inducing imbalances Fed walking tightrope in removing support without roiling markets Interest Rates (Short Maturities) Fed likely to remain hawkish so long as financial conditions remain easy, particularly with unemployment below target Interest Rates (Longer Maturities) Longer yields likely to rise moderately on tug of war between stabilizing inflation, improving growth, and global supply/demand Longer Term Outlook Aging population Weak productivity Excessive debt 19

20 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. 20