BBVA Research U.S. Economic Outlook August 2018 / 1. U.S. Economic Outlook August 2018

Transcription

1 BBVA Research U.S. Economic Outlook August 2018 / 1 U.S. Economic Outlook August 2018

2 Economic Outlook Incoming data consistent with baseline of high growth and inflation in 2018 & 2019 There was no change to FOMC view on the level of accommodation, suggesting that they remain comfortable with further rates increases and additional balance sheet normalization Remaining labor market slack to be absorbed over the remainder of the year, as our baseline assumes average monthly job growth of around 200K We expect core PCE to rise meaningfully above 2% with added tailwinds from tariffs and rising nonlabor price pressures Economic outlook suggests gradual rise in 10-year Treasury yields The yield curve slope between the 10-year and 2-year Treasuries flattening on rising geopolitical frictions Oil prices to converge to long-run equilibrium despite short-term volatility

3 BBVA Research U.S. Economic Outlook August 2018 / 3 Economic activity Real-Time Economic Indicator Heat Map 3-months ago 2-months ago 1-month ago Current ISM Manufacturing Small Business Optimism Industrial Production Industrial activity strong in spite of headwinds IP-Manufacturing IP-Mining IP- Nonenergy High-Tech Producers facing price pressures from rising import Capital Goods ex Aircraft Private Construction Building Permits Core Logic Home Prices July retail sales data consistent with well above average consumption growth in 2Q18 Consumer Confidence Private Nonfarm Payrolls Prime-Age Participation On average, labor market adding over 200K jobs per month Marginally Attached (PA) Average Hourly Earnings Real Disposable Income Personal Savings Rate Ongoing Residential construction activity supported by rising home prices Productivity Below Average Above Average Source BBVA Research

4 Economic trends: Manufacturing sector trends upward despite tariffs BBVA Research U.S. Economic Outlook August 2018 / 4 Industrial Production (Year-over-year %) 10% Real Personal Consumption Expenditures (Year-over-year %) 10 8% 6% 8 6 4% 2% 4 0% 2-2% 0-4% -6% Oil & Gas High-Tech Motor Vechicles Consumer Gds Biz Equip Headline (lhs) -2-4 Avg. '00- '16 Avg. '70- '00 Source: BBVA Research, FRB & BEA

5 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 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 Feb-2015 Dec-2014 BBVA Research U.S. Economic Outlook August 2018 / 5 Economic trends: Export growth decelerates due to strengthening dollar Real Exchange Rates and Exports (Year-over-year %) 20% Real Exports (Contribution to year-over-year %) 10 15% % 4 2 5% 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 Economic trends: Above average contributions from government and exports BBVA Research U.S. Economic Outlook August 2018 / 6 Real GDP (Year-over-year %) GDP- Contribution to 2Q Growth Annualized % 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Average: '00-Current % % -3.0% PCE Nonres Inv Res Inv Inv. Net Federal State Exports -4.0% Q18 Avg Current Source: BBVA Research & BEA

7 Consumer credit cycle: Leverage metrics edging up, but remain below previous peaks BBVA Research U.S. Economic Outlook August 2018 / 7 Personal Interest Expense Year-over-year % New 30+ 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 ex

8 Q3-17 Q4-17 Q1-18 Q2-18 Baseline Atl Fed NY Fed Economic trends: Recession probability drops on yield curve decompression BBVA Research U.S. Economic Outlook August 2018 / 8 Real GDP (QoQ SAAR, %) 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% Probability of Recession in 12 Months (%) % 10 0 Forecast 3Q18 Baeline Recession 12 months before the recession Probability Source: BBVA Research, and ATL & NY Fed

9 Labor Market In July, nonfarm payrolls increased by 157K, supported by solid gains in professional and business services (51K), manufacturing (37K), health care and social assistance (34K), and food services and drinking places (26K) Revisions to May and June resulted in a combined gain of 59K more jobs than originally reported The unemployment rate edged down once again to 3.9% from 4.0%, in part reflecting a 287K drop in reentrants to the labor force For people with less than high school diploma, the unemployment rate reached 5.1%, the lowest since 1992 when data began to be collected. We continue to expect any remaining labor market slack to be absorbed over the remainder of the year, as our baseline assumes average monthly job growth of around 200K

10 Labor market: Another month of solid employment growth ex mining sector BBVA Research U.S. Economic Outlook August 2018 / 10 Nonfarm Payrolls (Monthly Change, K) Industry Employment (Annualized % change) Mining Construction Transportation & Warehousing Manufacturing Professional & Business Services Education & Health Services Leisure & Hospitality Other Services Wholesale Trade Financial Activities Retail Trade Local Government Federal Government State Government Information Services Actual Forecast Monthly Change Year-over-year Source: BBVA Research & BLS

11 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Jun-07 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 Jun-07 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 Labor market: Real wage growth flat with increasing price pressures BBVA Research U.S. Economic Outlook August 2018 / 11 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

12 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 BBVA Research U.S. Economic Outlook August 2018 / 12 Labor market: UR to reach 3.7% by December U-6 (%) Unemployment Rate (%) Pre-Crisis Avg. Source: BBVA Research & BLS

13 Inflation Headline CPI accelerated to 2.9% year-over-year, the highest in six years, while core CPI surged to 2.3% Core prices reached their highest level since prior to 2008 financial crisis. Home price appreciation supporting growth in OER and rents, which were up 3.4% and 3.5% year-over-year, respectively Nonlabor cost pressures rising on the back of high resource utilization and increasing tariffs Probability of entering high-inflation regime is less than 1% With the additional tailwinds from the expansionary fiscal policy and rising titfor-tat tariffs, we expect core PCE to rise to 2.2% by 2019

14 Apr-00 Mar-01 Feb-02 Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 May-10 Apr-11 Mar-12 Feb-13 Jan-14 Dec-14 Nov-15 Oct-16 Sep-17 BBVA Research U.S. Economic Outlook August 2018 / 14 Inflation: Consumer prices continuing to trend upwards Consumer Price Inflation (12m change) 14% 12% 10% 8% Energy Core Inflation Measures (12m change) 4.0% 3.5% 3.0% 2.5% 2.0% 6% 4% 2% 0% -2% OER Comm. ex Food/ Energy Food Rent Relative Importance Trans. Services Med Services Edu & Comm. Services Other Services 1.5% 1.0% 0.5% 0.0% Core CPI Core PCE Weighted Median Source: BBVA Research, BLS & BEA

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: Building inflation pressures pushing up inflation expectations, outlook remains rooted around 2% BBVA Research U.S. Economic Outlook August 2018 / 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 FOMC maintained the target range for the federal funds at 1.75% to 2.0% at their July meeting The statement strengthened the language surrounding their outlook to strong from solid, which is no surprise given that quarterly GDP growth in the 2Q18 was 4.1% SAAR, the unemployment rate is at 4.0% and inflation is effectively at the Fed s 2% target In terms of the outlook, there was no change to their view on the level of accommodation, suggesting that they remain comfortable with further rates increases and additional balance sheet normalization For the FOMC, there remain a set of key issues that will present risks to their outlook, including the ongoing trade disputes and building political headwinds We continue to expect that the committee will raise rates 25bp in September and again in December, and three more times in 2019

17 BBVA Research U.S. Economic Outlook August 2018 / 17 Fed: No change to outlook, two rate increases this year and 3 rate increases next BBVA & Dealers Projections of Fed Funds (%, Effective) 6 FOMC Projections of Fed Funds (Year-over-year %, Mid-point) L-Term BBVA-Baseline Median 75th Percentile 25th Percentile BBVA-Upside BBVA-Downside Median-2018 Median-2017 Source: BBVA Research & FRB

18 13/02/ /02/ /03/ /03/ /04/ /04/ /05/ /05/ /06/ /06/ /07/ /07/ /07/2018 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 August 2018 / 18 Monetary policy: Global financial tightening dampening market expectations Fed Funds Implied Probability (%) 100% 90% 80% 70% 60% 50% 40% 30% 20% Fed Funds Futures & BBVA Baseline (%) % 0% September (2.25%) December(2.5%) FFR + BBVA Forecast 7/12/ /28/2017 6/14/2018 8/9/2018 Source: BBVA Research & Bloomberg

19 BBVA Research U.S. Economic Outlook August 2018 / 19 Interest rates: Fed sensitivity to rate corridor and balance sheet wind down increasing Fed Funds & Repo Rates (%) Balance Sheet Attrition (US$bn, Cumulative) Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Apr Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Upper Bound Effective Lower Bound SOFR U.S Govt Securities MBS Source: BBVA Research & FRB

20 Interest Rates Short-term rates continue to upward trend despite headwinds from global financial volatility and geopolitical uncertainty Global uncertainty and nontraditional monetary policy continue to compress term-premium Concerns of growing instability in emerging markets and spillovers to the developed world containing long-term rates Baseline continues to assume 10-year Treasury yield at 3.1% by year-end 2018 and 3.6% by year-end 2019 The yield curve slope between the 10-year and 2-year Treasuries to flatten further, but remain positive

21 Interest rates: Inflation expectations and term premium holding ten-year below 2018 peak BBVA Research U.S. Economic Outlook August 2018 / 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 August 2018 / 22 Interest rates: 10-year treasury yield to reach 3.1% by year-end 2018 and 3.6% in 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 August 2018 / 23 Interest rates: Baseline scenario continues to assume no yield curve inversion Yield Curve Slope (Bp) Yield Curve (%, eop) Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y 30Yr-10yr 10Yr-2Yr 10-Year Average (f) 2019 (f) 2020 (f) Source: BBVA Research

24 BBVA Research U.S. Economic Outlook August 2018 / 24 Economic Scenarios Probability (%) Current Previous Macro Scenarios Upside Baseline Downside GDP Upside Downside UR Upside Downside CPI Upside Downside Fed [eop] Upside Downside Yr [eop] Upside Downside Subject to revision without notice

25 Energy Prices Geopolitics, concerns on OPEC spare capacity and the potential impact of trade wars will continue to add volatility Prices will remain supported by robust demand from China, India and the U.S. We continue to expect convergence to long-term equilibrium as demand returns to its historical trend and U.S. export capacity increases The main uncertainty to oil prices arises from the effect of subpar CAPEX on supply

26 03/21 03/28 04/04 04/11 04/18 04/25 05/02 05/09 05/16 05/23 05/30 06/06 06/13 06/20 06/27 07/04 07/11 07/18 07/25 08/01 08/08 BBVA Research U.S. Economic Outlook August 2018 / 26 Oil prices under pressure due to ample supply and concerns on the potential impact of trade wars on demand Brent crude oil prices ($ per barrel) April 10. U.S. trims 2018 production forecast May 8. U.S. abandons the nuclear deal with Iran May 26. Saudi Arabia and Russia agree to increase output June 22 OPEC+ agreed to increase production by 1Mb/d July 1-18 Rising concerns on the impact of trade wars May 29. OPEC may keep output cuts through the year June 26 US state department urges countries to eliminate Iranian oil imports August 8 U.S. stockpiles of oil and fuel hit a seven-month high 65 April 11. Ballistic missiles fired by Yemen s Houthi rebels at Riyadh and Jizan 60 Source: BBVA Research and Haver Analytics`

27 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 In the U.S., transportation bottlenecks limit impact on international prices BBVA Research U.S. Economic Outlook August 2018 / 27 U.S. Crude oil inventories (Excluding SPR, million barrels) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec U.S. Crude oil exports (Million barrels/day) 2018 Average 5-yr high 5-yr low WTI Midland-Cushing differential ($/b) U.S. Estimated crude oil production (Thousand barrels/day) Source: BBVA Research and Haver Analytics

28 BBVA Research U.S. Economic Outlook August 2018 / 28 Forecasts Short-term oil prices forecast (Brent, $/b) Short-term oil prices forecast (Brent, $/b) Actual BBVA Forecasts 95% futures upper confidence interval 95% futures lower confidence interval BBVA Research (August) Bloomberg (August) Source: BBVA Research, Bloomberg and EIA Rystad Energy (August)

29 BBVA Research U.S. Economic Outlook August 2018 / 29 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.

30 BBVA Research U.S. Economic Outlook August 2018 / 30 U.S. Economic Outlook August 2018