Economic Outlook Whitley Penn Nathaniel Karp Chief Economist BBVA Compass Ft. Worth, TX December 218
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Global Economy Subpar global economic growth amid elevated uncertainty World GDP YoY % Change 6. 5. 4. 3. 2. 1.. -1. -2. 5.5 3. -.1 5.4 4.3 Source: BBVA Research, WB, FH, IMF and Haver Advanced Developing 3.5 3.5 3.6 3.4 3.4 3.7 3.7 3.6 3.6 3.6 27 28 29 21 211 212 213 214 215 216 217 218 219 22 221 Growth moderating & less synchronized Monetary policy normalization at different stages Structural imbalances remain Pressures on emerging markets with greater vulnerabilities Rebalancing of risk appetite impacting all asset classes Elevated policy uncertainty and geopolitical risks 3
Global Economy Global economic activity losing momentum Industrial Production and Trade YoY % Change 2 1 Industrial Production Trade World GDP QoQ % Change 1.2-1 -2 7 8 9 1 11 12 13 14 15 16 17 18 1..8.6.4 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Industrial Output YoY % change 8 6 4 2-2 -4 CI 2% CI 4% CI 6% Point Estimates Period average Source: BBVA Research, WB, FH, IMF and Haver 4
Global Economy FX vs. USD YTD Change: Exchange rate per USD Argentina Turkey Brazil India Chile Sweden Indonesia Australia Colombia Israel China Philippines N Zealand Denmark EMU Peru Canada Taiwan Mexico Malaysia Singapore UK Switzerland Norway Thailand Japan Hong Kong 2 4 6 8 1 Source: BBVA Research, Haver, Bloomberg, FT, WSJ Global Stock Markets, Jan-18=1 115 11 15 1 95 9 85 8 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 1Y Government Bond Yields, % 3.5 3. 2.5 2. 1.5 1..5 Emerging US Developed ex US Sep-18 U.S. Developed Emerging (rhs) Oct-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 Sep-18 Oct-18 Nov-18 Nov-18 9. 8. 7. 6. 5. 4. 5
U.S. Financial Markets Financial Stress Indicators > = stress above average 4 2-2 -4-6 Oil & Real Effective Exchange Rate Dpb and Broad Index (CPI based 21=1) 14 12 1 8 6 4 2 Credit Equities Safe assets WTI Last (+/- 2sd) Funding Volatility Risk Nonfin Leverage REER (rhs) 8 9 1 11 12 13 14 15 16 17 18 Source: BBVA Research, FRBKC, Treasury OFR, R. Shiller, ICE and Haver 12 115 11 15 1 95 9 Financial Stress Index Above = above average stress 6 4 2-2 94 96 98 2 4 6 8 1 12 14 16 18 Corporate Spreads Basis points 29 25 21 17 13 9 5 AAA BBB (rhs) 1 11 12 13 14 15 16 17 18 475 425 375 325 275 225 175 6
U.S. Business Cycle Budget deal and personal income tax cuts boosting government spending and private consumption Real GDP Growth YoY % CHange Contribution to GDP Growth 218 vs. 217, pp, first 3 quarters 5.% 4.% 3.% 2.% 1.% Cons Inv Net X Gov't GDP State & Local PCE Inventories Federal Eqpt+IP.% Struc+Resid -1.% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Net Exports -.3 -.2 -.1.1.2.3.4 Source: BBVA Research, BEA & Haver 7
Business Cycle Worse Activity Index ISM Manufacturing ISM Nonmanufacturing Small Business Optimism Industrial Production Capacity Utilization New Orders Nonfarm Payroll Unemployment Rate Consumer Confidence Personal Income Personal Consumption Retail Sales Auto Sales Housing Starts New Home Sales Existing Home Sales Home Prices Bank Credit Heatmap: 3m change, normalized 1994-218, 1 th vs. 9 th percentile Source: BBVA Research, CBI & Haver Better Last 3m ago 6m ago 12m ago Leading Indicators YoY % Change 15 1 5-5 -1-15 Solid economic conditions -2 63 68 73 78 83 88 93 98 3 8 13 18 8
Business Cycle Will the current expansion become the longest in modern history? Duration of Expansion Cycles Months Real GDP Per Capita Growth Annual rate, %, 1-year average 14 4. 12 1 8 6 4 2 3.5 3. 2.5 2. 1.5 1..5. 1958 1968 1978 1988 1998 28 218 Aug21-May23 Aug24-Oct26 Dec27-Aug29 Apr33-May37 Jul38-Feb45 Nov45-Nov48 Nov49-Jul53 Jun54-Aug57 May58-Apr6 Mar61-Dec69 Dec7-Nov73 Apr75-Jan8 Aug-8-Jul81 Dec82-Jul9 Apr-91-Mar1 Dec1-Dec7 Jun9-Present 9 Source: BBVA Research, BEA, NBER & Haver
.1.1.1.1.1.1..... Economic Outlook Households Liabilities/Disposable Income Ratio 1.5 1.3 1.1.9.7.5 7 74 78 82 86 9 94 98 2 6 1 14 18 Hours Worked and Real Personal Income YoY % Change 1 5-5 -1 Hours Income 82 85 88 91 94 97 3 6 9 12 15 18 Source: BBVA Research, Federal Reserve, BLS, BEA and Haver Interest Payments/Personal Income % 2.7 2.5 2.3 2.1 1.9 1.7 1.5 7 74 78 82 86 9 94 98 2 6 1 14 18 Consumer Delinquency Rate % 8 7 6 5 4 3 Credit Card Other 2 88 9 92 94 96 98 2 4 6 8 1 12 14 16 18 1
Business Sector Nonfinancial Corporate Profits and Tax Rate % of GDP and % of Profits 8 45 Nonfinancial Business Debt % of GDP 5 6 35 4 $9.4t 4 25 2 15 Profits Tax rate (rhs) 5 7 74 78 82 86 9 94 98 2 6 1 14 18 Nonfarm Cost / Unit of Real Value Added YoY % change, Nonfinancial Corporate Business Sector 6 4 2-2 -4 84 86 88 9 92 94 96 98 2 4 6 8 1 12 14 16 18 Source: BBVA Research, Federal Reserve, BEA and Haver 3 Corporate NonCorporate $5.4t 2 1 7 73 76 79 82 85 88 91 94 97 3 6 9 12 15 18 Business Confidence Index 65 12 6 55 11 5 45 1 4 9 35 Manufacturing NFIB (rhs) 3 8 87 88 9 92 94 96 98 99 1 3 5 7 9 1 12 14 16 18 11
Labor Markets Labor Force Participation Rate by Age % 68 67 66 65 64 63 62 Not in the Labor Force Thousands 7 6 5 4 Want Job Prime-age (rhs) 2 4 6 8 1 12 14 16 18 Source: BBVA Research, BLS & Haver Total 25-54 (rhs) 2 4 6 8 1 12 14 16 18 85 84 83 82 81 8 26 24 22 2 18 Unemployment and Job Openings Rate % 18 16 14 12 1 8 6 6 5 4 3 2 1 U6 Openings (rhs) 2 4 6 8 1 12 14 16 18 Average Hourly Earnings YoY % Change Goods Servcies 7 8 9 1 11 12 13 14 15 16 17 18 5. 4.5 4. 3.5 3. 2.5 2. 1.5 12
Real Estate Housing Starts and New Home Sales Thousand units, annualized 25 2 15 1 5 Delinquency Rate % 12 1 8 6 4 2 Starts Sales 74 78 82 86 9 94 98 2 6 1 14 18 Residential CRE 91 93 95 97 99 1 3 5 7 9 11 13 15 17 Source: BBVA Research, Federal Reserve, Census, BEA and Haver. Housing Affordability and Prices Index and YoY % Change 2 1-1 -2 74 78 82 86 9 94 98 2 6 1 14 18 Nonresidential Construction YoY % Change 3 2 1-1 -2 HPI Affordability (rhs) 25 2 15 1 5 13
Inflation Distribution of Inflation %, PCE 1. 5. 1th Median 9th Share of Expenditures with Price: %, PCE 1 75. 5 Declines Increases -5. 25-1. 12345678911112131415161718 CPI Inflation 12M % Change 6. 4. 2.. -2. Core Source: BBVA Research, BEA, BLS and Haver Headline 2 4 6 8 1 12 14 16 18 12345678911112131415161718 Core CPI 12M % Change 5. 4. 3. 2. 1.. -1. -2. -3. Core Srvs ex Shelter Core Goods Shelter 2 4 6 8 1 12 14 16 18 14
Monetary Policy Debate within the FOMC to intensify as rates approach neutral FOMC Fed Funds Expectations EOY, %, dots and median Fed Funds Expectations EOY, % 4.5 4. Sept Jun 4.5 4. 3.5 FOMC Dovish FOMC Median 3.5 3. 2.5 3. 2.5 2. 1.5 1..5 FOMC Hawkish Consensus Dealers 2.. Source: BBVA Research, Bloomberg, FRB & Haver 15
Treasury Yields Upward pressures contained by negative term-premium 1-Year Yield Decomposition % 4.5 4. 3.5 3. 2.5 2. 1.5 1..5. -.5-1. -1.5 Source: BBVA Research & Haver Risk premium Real rate Inflation exp Yield 13 14 15 16 17 18 Distribution of Treasury Holdings 1 9 8 Foreign 7 Financial 6 5 Fed 4 Government 3 2 Private 1 9 92 94 96 98 2 4 6 8 1 12 14 16 18 16
Fiscal Policy USD reserve status tolerating fiscal profligacy Federal Outlays % of GDP, CBO Baseline Fiscal Balance and Debt % of GDP, CBO Baseline 6.6 Discretionary Mandatory (rhs) 15.5 1 Balance (rhs) Debt 4 6.4 6.2 6. 5.8 5.6 5.4 5.2 5. 15. 14.5 14. 13.5 13. 9 8 7 6 5 4 2-2 -4-6 -8-1 4.8 17 18 19 2 21 22 23 24 25 26 27 28 12.5 3 2 4 6 8 1 12 14 16 18 2 22 24 26 28-12 Source: BBVA Research, CBO & Haver 17
Risks: Asset Prices S&P Price Earnings Ratio Cyclically Adjusted 5 4 3 2 1 84 86 88 9 92 94 96 98 2 4 6 8 1 12 14 16 18 Corporate Spreads Basis points vs. 1MTN 6 55 5 45 4 B Source: BBVA Research, R. Shiller, BEA and Haver CCC (rhs) 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 Sep-18 Oct-18 Nov-18 11 1 9 8 7 BBVA Residential Price Misalignment Index 199=1 13 115 1 85 7 74 78 82 86 9 94 98 2 6 1 14 18 BBVA CRE Prices Misalignment Index 199=1 16 145 13 115 1 85 7 74 78 82 86 9 94 98 2 6 1 14 18 18
Risks: Business Leverage Nonfinancial Corporate ST Liabilities YoY % Change 2 1-1 -2 82 84 86 88 9 92 94 96 98 2 4 6 8 1 12 14 16 18 BBVA Debt Distress and C&I Delinquencies Index (1=Average) and % 1.7 1.2.7.2 LCDDI Source: BBVA Research, FRB, FDIC and Haver C&I loan delinquency rate (rhs) 6. 96 98 2 4 6 8 1 12 14 16 18 4. 2.. Leveraged Loans & HY Bond Ratings % of issuance 1% 8% 6% 4% 2% C&I Past Due Loans and Interest Rates % 16 14 12 1 8 6 % 53 45 42 35 44 Past Due 5 44 3 5 14 15 Fed Funds (rhs) 4 86 88 9 92 94 96 98 2 4 6 8 1 12 14 16 18 5 217 218 217 218 Leveraged Loans High-Yield Bonds Ba B Caa- Ca 1. 8. 6. 4. 2.. 19
Recession Probability, Timing and Severity BBVA TSTPA Recession Probability %, 12m-ahead 1..8.6.4.2. 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216 218 BBVA Recession Timing Index Above = longer lag to recession 1.5 1..5. -.5-1. -1.5-2. 7 73 76 79 82 85 88 91 94 97 3 6 9 12 15 18 Source: BBVA Research, Federal Reserve Board, FRBSL and Haver BBVA TSTPA Risk Factors Percentile Rank 1 9 8 7 6 5 4 3 2 1 Wages Shadow Banking BBVA Credit Cycle Risk Index Above = above average risk 1..5. -.5 Tipping Point Slope Personal Int Expense CAPE -1. 82 85 88 91 94 97 3 6 9 12 15 18 2
Regional: Economic Conditions All states expanding above post-crisis average amid greater convergence GDP Growth 217-Present % State GDP Distribution % change, 5 States plus DC 6 4 2 Post Crisis 218-2 1 4 7 1 13 16 19 22 25 28 31 34 37 4 43 46 49 State GDP Volatility Standard deviation real GDP growth 5. 4. 3. 2. 1.. 1981 1984 1987 199 1993 1996 1999 22 25 28 211 214 217 Source: BBVA Research and Haver 21
Texas: Economic Conditions BBVA State Monthly Activity Index YoY % change.6.4.2. -.2 -.4 -.6 Retail Sales YoY % change, nominal 2 1-1 -2 7 8 9 1 11 12 13 14 15 16 17 18 Source: BBVA Research & Haver US US Texas Texas 7 8 9 1 11 12 13 14 15 16 17 18 Mining Nonfarm Payroll YoY % change 2 1-1 -2-3 US ex TX 7 8 9 1 11 12 13 14 15 16 17 18 Unemployment Rate % 12. 1. 8. 6. 4. 2.. US Texas Texas 7 8 9 1 11 12 13 14 15 16 17 18 22
Texas: GDP Real GDP 26=1 14 13 12 11 1 Manufacturing, professional services, wholesale trade and mining contributing with 6% to GDP growth 9 8 New York California Florida Illinois Texas U.S. 6 7 8 9 1 11 12 13 14 15 16 17 18 Real GDP Contribution PP contribution YoY Manufacturing Professional, scientific, Wholesale trade Mining Retail trade Information Administrative and waste Real estate and rental and Management of companies Utilities Construction Transportation and Health care and social Agriculture, forestry, Other services, except Accommodation and food Educational services Arts, entertainment, and Government Finance and insurance -4-2 2 4 6 8 1 12 14 Source: BBVA Research and Haver 23
Texas: Employment Nonfarm payroll hits an all-time high of 12.7M Nonfarm Payroll Thousands Nonfarm Payroll Thousands 9 88 86 84 Total ex Selected (rhs) Trade, Health & Prof Srvcs (rhs) 41 39 37 9 8 7 6 5 Last 12M ago 82 8 78 35 33 4 3 2 1 76 74 72 31 29-1 7 678911112131415161718 27 Source: BBVA Research & Haver 24
Texas: Risks Weaker Global Demand Lower Higher Stronger USD Higher Interest Rates Automation Source: BBVA Research 25
Ft. Worth: Employment Employment at 1.1M sets a new record-high Nonfarm Payroll Thousands Nonfarm Payroll Thousands 67 65 63 61 59 Total Ex Selected Edu+Health+Trade (rhs) 42 4 38 36 34 8 7 6 5 4 3 2 1-1 Last 12M ago 57 32 55 56 7 89 1 11 1213 14 1516 17 3 Source: BBVA Research & Haver
Ft. Worth: Labor Markets Solid job creation and low unemployment Employment Index 27=1 Unemployment Rate % 125 Ft. Worth Chicago 12 Los Angeles Miami 115 New York 11 15 1 95 9 27 28 29 21 211 212 213 214 215 216 217 218 1. 9. 8. 7. 6. 5. 4. 3. 2. U.S. Dallas Texas Houston Ft. Worth Austin 5 6 7 8 9 1 11 12 13 14 15 16 17 18 Source: BBVA Research & Haver
Ft. Worth: Residential Market House Price Index 27=1 175 15 125 1 75 Home Sales and Months Supply 12mma, FWD 6, 5, 4, US Houston Austin Texas Ft. Worth San Antonio 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 2 15 Vacancy Rates: FWD % 16 14 12 1 8 6 Household Debt Per Capita: Texas US$ Thousand 4 3 Rental Homeowner (rhs) 6 7 8 9 1 11 12 13 14 15 16 17 18 Mortgage C Card Auto 3. 2.5 2. 1.5 1..5. 3, 1 2 2, 1, Sales Months (rhs) 92 94 96 98 2 4 6 8 1 12 14 16 18 Source: BBVA Research & Haver 5 1 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 28
Ft. Worth: Economic Outlook We expect economic performance to remain above national average Real GDP Index, 29=1 Real GDP Growth %, FWD 14 135 TX FWD Houston Miami 7. 6. U.S. Average 13 125 NYC LA 5. 12 4. 115 3. 11 15 2. 1 1.. 213 214 215 216 217 218 219 Source: BBVA Research & Haver 29
Summary Downside risks to global growth Solid U.S. economic performance Recession risk still low but edging up Structural challenges require attention Positive outlook for Texas and Ft. Worth
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Economic Outlook Whitley Penn Nathaniel Karp Chief Economist BBVA Compass Ft. Worth, TX December 218