Glenn Hutchins July 15 Glenn Hutchins 15. All rights reserved.
The Worst Economic Recovery in History Recoveries from Worst Recessions Note: Annual GDP Growth for the years subsequent to each recession 1% 1% 1% 8% 6% % % % 1.9% 8.9% 13.1% 193A 1935A 1936A.5% 7.%.1% 1983A 198A 1985A.%.5% 1.8%.% 1.9% 1A 11A 1A 13A 1A Recent Recoveries How the expansion that began in 9 compares with other recoveries, change in GDP Note: Adjusted for inflation and the seasons 3% 5 15 1 5 198 3.1% 1975.6% 1991 19.9% 1 16.8% 9 13.6% GREAT DEPRESSION 198s RECOVERY CURRENT RECOVERY 1 3 5 Duration of Post-WWII Economic Recoveries (months) 15 Months 1 75 5 5 37 Average: 59 Months 5 39 16 36 58 9 1 73 7 1 Oct 195 - Nov 198 Oct 199 - Jul 1953 May 195 - Aug 1957 Apr 1958 - Apr 196 Feb 1961 - Dec 1969 Nov 197 - Nov 1973 Mar 1975 - Jan 198 Jul 198 - Jul 1981 Nov 198 - Jul 199 Mar 1991 - Mar 1 Nov 1 - Dec 7 Jun 9 -? Sources: U.S. Bureau of Economic Analysis, The Wall Street Journal, IMF, National Bureau of Economic Research, Federal Reserve
U.S. GDP Growth Turning the Corner? GDP Growth GDP Growth Projections for 15 Note: All rates adjusted for inflation, quarterly rates adjusted for seasonality 6% GDP has averaged just under % p.a. since the end of the recession GDP ANNUAL GROWTH RATE 3.1% European Commission Forecast 3.1% International Monetary Fund Forecast - - Recession Q1 15: -.%.7% World Bank Forecast -6-8 1 3 5 6 7 8 9 1 11 1 13 1 15.5% Blue Chip Forecast Consumer Spending Net trade of goods and services Nonresidential fixed investment.% Economist Intelligence Forecast % - - -6-8 Darker bars show quarters that were as strong or stronger than the current quarter 8 9 1 11 1 13 1 8 9 1 11 1 13 1 8 9 1 11 1 13 1 Percentage-point contributions by sector ( ) to quarterly change in GDP ( ) at an annualized rate.% OECD Forecast 1.9% Federal Reserve Bank Forecast Sources: Commerce Department, Federal Reserve Bank of Minneapolis, The Wall Street Journal What will it take to grow faster than % p.a.? 3
U.S. Home Sales U.S. Real Estate Rebound U.S. Housing Starts Note: Number of units over the past 1 years, in millions 8 6 Recession Home sales edge up, but rising prices and tight supply loom as a headwind Existing home sales Home home sales Note: Number of units over the past 1 years, in millions.5 Recession. 1.5 Multifamily Single family 1..5 6 7 8 9 1 11 1 13 1 15 Case-Shiller Index: Repeat-Sales House Prices 6 7 8 9 1 11 1 13 1 15 An Historically Anemic Housing Rebound Note: Cumulative change from % 15 1 5 Recession -5 6 8 1 1 1 U.S. Average New York San Francisco Boston Percentage Point Contribution of Residential Fixed Investment to GDP Growth 1..8. -. -.8-1..9: Average post-recession contribution to GDP growth since 197 9 1 11 1 13 1 Sources: CoreLogic, National Association of Realtors, US Census Bureau, Commerce Department, Federal Reserve Bank of St. Louis, The Wall Street Journal, S&P Dow Jones Indices The real estate market has rebounded
U.S. Household Wealth and Debt HH Net Worth and Debt as a % of After-Tax Income Assets Changed Since the Crisis 65% 15% % NET WORTH 6 55 5 5 15 1 75 5 5 DEBT % % -% Real Estate $.9 Stocks & Mutual Funds $1. Deposits $9.9 Fixed-income assets $3.5 5 1 15 -% 8 1 1 1 Mortgage Debt has Flattened Median Net Worth Before and After Recession $1 trillion RECESSION 1Q 15 $8.171 trillion No change $135,7 $8,3 $81, $19,5 $138,6 $11,9 7 1 8 13 6 $19, $16,6 $11, $3,6 $16, $13,7 5 7 9 11 13 15 ALL HOUSEHOLDS WHITE BLACK HISPANIC Source: Federal Reserve, Commerce Department, Thomson Reuters, Pew Research Center, The Wall Street Journal Household wealth at highest level ever 5
U.S. Energy Economy Estimated Net Impact of Falling Oil Prices on U.S. GDP Gasoline Spending as a Share of After-Tax Income Contribution to YoY GDP Growth Net Exports.6% 15 Net Impact: +.3% Investment (incl. inventories) Consumption Total 1% Gasoline at 1 prices 1.% 1 Gasoline at current prices.% 8 % 6 -.% -.% Q 1 Q1 15 Q 15 Q3 15 Q 15 Q1 16 Q 16 Q3 16 Lowest % Second % Third % Fourth % Highest % Source: Baker Hughes, Federal Reserve, Goldman Sachs, U.S. Energy Information Administration, Wells Fargo Falling oil prices benefit the consumer but stress the energy industry 6
U.S. Dollar Performance Against Select Currencies Strengthening Dollar U.S. Exports of Goods and Services as a % of GDP 3% 15 1 5 Euro Yen Swiss franc British pound 15% 1 13 1 11 1 9-5% 1 U.S. Net Exports in 1 15 8% 1 3 5 6 7 8 9 1 11 1 13 1 Foreign Sales as a % of Total, by S&P 5 Sector $-6 billion -8-5 -5-5 -56-58 13 Q 1 Q1 1 Q 1 Q3 1 Q 15 Q1 Information Technology Energy Materials Healthcare S&P 5 Industrials Consumer discretionary Consumer staples Financials Utilities Telecommunication Services 57% 55% 5% 51% 6% 6% 1% % 3% Less than 1% % Sources: The Wall Street Journal, World Bank, Commerce Department, IMF, U.S. Bureau of Economic Analysis The dollar strengthens and U.S. exports decline 7
Core Consumer Prices Central Bank Balance Sheets ECB Adopts QE % Note: Percent change on a year earlier, excludes energy and unprocessed food Note: Normalized Balance Sheet Asset Growth, January 7 = 1 Cyprus, Greece, Ireland, Italy, Spain, Portgual 6% 5 Bank of England 3 Switzerland Federal Reserve 3 1 Euro area ECB deposit rate, % ECB 1 Bank of Japan PROJECTION OF THE RESULT OF QE -1 1999 1 3 5 7 9 11 13 15 7 8 9 1 11 1 13 1 15 Sources: Bruegel, Thomson Source: Reuters, Always Economist, list sources Central in Banks INDD. The ECB plans to pump 6 billion per month into the Euro-Zone 8
Cumulative Loss in GDP Since Start of Crisis Europe Green Shoots? Purchasing Managers Indexes Measuring Manufacturing-Sector Activity % - - -6-8 -1-5% 8 9 1 11 1 13 1 15 Germany France Eurozone Italy Greece CONTRACTING EXPANDING 6 55 5 5 35 Growth is rebounding 1 11 1 13 1 15 Spain Italy Germany France Europe s Reliance on Banks Greece as a % of EU GDP Financial-sector breakdown as a percentage of total financial assets in 11 Banks and Credit Institutions Investment Funds Insurance Companies and pension funds 5, GDP of Greece, in Millions of GDP of Greece, as a % of EU GDP % Netherlands Ireland U.K. France Germany Italy Portugal Spain Greece U.S. 57% 1% 31% 6 13 71 5 75 9 17 78 11 11 85 86 87 11 1 9 96 1 3 8 3 9 187,5 15, 6,5 1.5 1. 1.% of 1 EU GDP.5 3 5 6 7 8 9 1 11 1 13 1 Sources: The Wall Street Journal, IMF, ECB, Markit, Eurostat, JPM, Europa Europe is experiencing modest growth, but Greece could put it at risk 9
Slowing Emerging Market Growth Emerging Market GDP Growth Regional Industrial Production Note: Annual % change Note: Volumes, three month average. Annual % change 1% % 1 5 Emerging Markets GDP CE emerging markets GDP tracker Emerging Asia Emerging Europe Latin America -1 1 5 1 15 3 1 15 Source: The Wall Street Journal Emerging markets decelerate 1
China s Slowing Economy Downshifting Growth % Change from a year earlier in annual real GDP growth 16% 1 Growth is being weighed down by slumping real estate and weaker manufacturing Target 15: 7.% 8 1995 5 1 Q1 15 Change from a year earlier in property sales, by value Change from a year earlier in industrial production 1% 75 5 5-5 1 13 1 1% 1 8 6 1 13 1 Sources: Carnegie Endowment for International Peace, National Bureau of Statistics China decelerates 11
China s Growing Debt Debt as a Percentage of GDP Debt levels for the 5 years preceding major global crises Since 8, Chinese domestic debt has grown to 5%+ of GDP from 18% U.S. U.K. Japan China 5% 15 1 5 3 7 3 7 1986 9 1 1 Sources: People s Bank of China, IMF International Financial Statistics, Fitch Ratings China s Shanghai Stock Exchange down over % in the last 3 weeks 1
Russian Rouble vs. U.S. Dollar Crisis in Russia and Brazil Brazilian Real vs. U.S. Dollar.35.3 The rouble has plunged in value since the Ukraine crisis began $.5.5 Dollars per rouble.5..15..35.3.1 1 Russia s GDP Growth 15.5 1 Brazil s GDP Growth 15 Note: Annual Change Note: Annual Change 1% 8% 6 5-5 -1.% -1-1 11 1 13 1 15 1 11 1 13 1 15 Source: Bank of Russia; Russia s Federal State Statistical Service; The Wall Street Journal; Telegraph; Brazil s Ministry of Development, Industry & Trade; National Statistics Agency; IBGE; Central Bank; Tullett Prebon Crisis in Russia and Brazil from falling commodity prices, economic sanctions, and political turmoil 13
Breakeven Oil Prices of Major Oil Producers Crude Oil Brent Note: Price per barrel What Prices Do Oil-Producing Countries Need To Sell At To Balance Their Budgets? $1. $. 11. $18.1 Libya 1. 9. 8. Iran $13.7 Nigeria $1.7 Saudi Arabia $16. Russia $98. $13.5 Libya $117.5 Venezuela $1.6 Iraq 7. BRENT CRUDE ~$58 a barrel (as of Feb 15) $77.3 UAE 6. Qatar $6. $5. Kuwait 5. Norway $.. Mar 1 May 1 Jul 1 Sep 1 Nov 1 Jan 15 Mar 15 May 15 $. Source: The Wall Street Journal, Nasdaq Low oil prices put pressure on oil-producing countries 1
The Federal Reserve Assets Held by the Federal Reserve Note: In Trillions of Dollars $5.T QE1 QE QE3.5T.T 3.5T 3.T MORTGAGE-BACKED SECURITIES.5T.T OTHER ASSETS 1.5T 1.T TREASURYS.5T 3 5 6 7 8 9 1 11 1 13 1 15 Source: Federal Reserve Bank of St. Louis The Federal Reserve s balance sheet is no longer expanding 15
U.S. Inflation Below Target Measures of Inflation YoY Changes 6% Revised FRB Cleveland Median CPI Revised FRB Cleveland 16% trimmed mean Core PCE Core CPI 5% Core PCE growth, which the Fed emphasizes as a measure of inflation, is near the lowest level since the index was created in 196 Year-over-year Change % 3% % 1% Recessions % Jan-9 Jan-91 Jan-9 Jan-93 Jan-9 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan- Jan-1 Jan- Jan-3 Jan- Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-1 Jan-13 Jan-1 Jan-15 Sources: Calculated Risk, Federal Reserve Bank of Cleveland, Bureau of Labor Statistics, Bureau of Economic Analysis Inflation is currently at historical lows 16
Interest Rate Impact on Stocks Correlations Between Weekly Stock Returns and Interest Rates Movements Weekly S&P 5 returns, 1-year Treasury yield, rolling -year correlation, May 1963 - September 1 Correlation Coefficient.8.6.. -. Positive relationship between yield movements and stock returns When yields are below 5%, rising rates are generally associated with rising stock prices Last 1 Months 1963 -> 1 Months Ago -. Negative relation ship between yield movements and stock returns -.6 -.8 % % % 6% 8% 1% 1% 1% 16% 1-Year Treasury Yield Sources: Standard & Poor s, U.S. Treasury, FactSet, J.P. Morgan Asset Management Historical correlations between interest rates and stock prices is instructive 17
U.S. Employment Markets Full vs. Part-Time Employment Note: Percentage of employed by job type, seasonally adjusted 8% Recessions 35 hours or more Less than 35 hrs 1% Part Time employment remains at all time highs Labor Force Participation Rate Note: Share of loans outstanding delinquent by 9 days or more 68% 83% % 66% 8% 81% 19% 18% 6% Labor Force Participation rate is at a 35 year low 8% 17% 6% 79% 1 3 5 6 7 8 9 1 1 11 13 1 15 16% 6% 1978 198 198 198 1986 1988 199 199 199 1996 1998 6 8 1 1 1 Short vs. Long-Term Unemployment Labor Productivity (Output per Hour) Note: Percentage of population unemployed by duration 5% % of Civilian Labor Force 8 7 6 5 3 1 Long-term unemployment remains well above historical averages 1-7 Average 1-7 Average Unemployed for 6 Weeks or Less Unemployed for 7 Weeks & Over 15 1 5 Current Recovery 1 9 8 7 199 199 1998 6 1 1-5 8 1 16 8 Quarters since recession began Sources: Labor Department, Federal Reserve Bank of New York, Bureau of Labor Statistics, The Wall Street Journal Weak and fundamentally changed post-crisis 18
Average Hourly Wage Note: Change from a year earlier for private industry workers 5.%.% 3.%.% 1.%.% Lower-Wage Jobs Hourly earnings growth has slowed, stagnating at ~% per year 1996 1997 1998 1999 1 3 5 Note: Categories derived from the 366 occupations tracked by the Labor Department LOWER WAGE JOBS Median hourly wage $9.8 - $13.33 MIDWAGE JOBS $13.73 - $. Jobs Lost From employment peak (Jan 8) to low (Feb 1) Jobs Gained From employment low (Feb 1) through Feb 1 6 7 8 9 1 11 1 13 1 15 May $.96/hr Stagnant, Uncertain Incomes Median Household Income Note: Change in U.S. median household income since December 7 +.% -.% -. -6. -8. -1. $55,5 Dec 7 Recession $5,5 Jun 9 $5,7 Aug 11 $5,17 Jan 15 8 9 1 11 1 13 1 15 Shock Absorption $15, 1, 9, 6, 3, A middle-class household had about $3, on hand But would need $,8 if both income fell and spending jumped in the same month Median value in savings (13) Possible major shocks: (1 in chance of each) Large drop in income Large jump in spending HIGHER-WAGE JOBS $.3 - $3.6 3 1 MILLIONS OF JOBS 1 3 Poorest $ - $3,3 annual income nd lowest $3,3 to $, 5 Middle $,51 to $63,1 nd highest $63,11 to $1, 5 Richest $1,51 to $15,6 Source: Federal Reserve, The Wall Street Journal, Bureau of Labor Statistics, Bureau of Economic Analysis, JP Morgan Chase Institute, NY Times, Advisor Perspectives Annual U.S. compensation growth: 1-7 = 3.5%, 9 - Today = 1.9% 19
Stagnant Wages and Spending Real Discretionary Services PCE in Recoveries Spending vs. Income Note: Per Capita, Series Indexed at 1 at Trough Index 1 The current recovery has seen much weaker spending than in the past Note: Change over the course of the past year % Disposable personal income 115 Average of fast recoveries 3 11 Average of slow recoveries 15 1 95 Current Recovery 1 Consumer spending 9-8 -6 - - 6 8 1 1 1 16 18 Quarters after NBER Trough Theses for Slow Wage Growth A M J J A S O N D J F M A 1 15 1 Companies tapping workers who have dropped out of the labor force Overseas competition for wages 3 Lingering psychological scars of the recession Meager productivity growth 5 Limited growth in state and local budgets Source: Labor Department, The Wall Street Journal, U.S. Bureau of Economic Analysis, Commerce Department Wage growth in the U.S. is trailing its pre-recession pace
Consumer Behavior U.S. Consumer Spending Patterns Note: As of 13 Decrease from 7-3% -% -1% % Residential phone Household textiles Women s apparel (16+) Homes (owned)* Major appliances Entertainment Alcohol Food away from home Furniture Income Total spending Pets Food at home Education Health care Homes (rent) Health insurance Cellular phones Home Internet -3.7% -6.5% -17.7% -11.5% -8.3% -5.% -.5% -3.8% -3.8%.%.3% 1.5% 1.5%.9%.%.%.1% 9.1% Increase from 7 81.3% % 1% % 3% % 5% 6% 7% 8% Sources: Federal Reserve, Commerce Department, Thomson Reuters, The Wall Street Journal Consumption patterns in the U.S. have fundamentally changed 1
Q&A Glenn Hutchins July 15 Glenn Hutchins 15. All rights reserved.