Economic Outlook Lauren Bresnahan, Ph.D. Deputy Chief Economist, KPMG lbresnahan@kpmg.com May 17, 2018
Today s Outline 1 Global Economic Backdrop 2 U.S. Economic Backdrop 3 Economic Outlook 4 Economic Implications of Tax Change 1
Global Economic Backdrop
Global expansion trending higher Note: Data in three-month moving average 3
Global growth is synchronized and wide spread 45 40 35 30 25 20 15 10 5 0 Growth Prospects of Major Economies Number of Countries OECD Forecast Contraction Slowing Growth Accelerating Growth Note: 2017, 2018, 2019 estimates are the OECD forecast from Nov. 2017 Source: KPMG Economics, WSJ, OECD Economic Outlook Nov 2017 4
Low interest rates have supported global growth 5
Easy money is not going away anytime soon $18 $16 Central Bank Balance Sheet Assets US$ Tn Fed ECB BoJ Forecast $18 $16 $14 $14 $12 $12 $10 $10 $8 $8 $6 $6 $4 $4 $2 $2 $0 $0 Source: KPMG Economics, Federal Reserve, ECB, BoJ, Central Bank 6
Inflation remains persistently low, but trending upward 7
U.S. Economic Backdrop
Second longest expansion in post-war era Expansion 1991-2001 2009-Present 1961-1969 1982-1990 2001-2007 1975-1980 1949-1953 1954-1957 1945-1948 1970-1973 1958-1960 1980-1981 Longest Expansions in U.S. History Duration in Months 0 20 40 60 80 100 120 140 Months Source: KPMG Economics, NBER, Haver Analytics 9
The economy finally reaching its potential growth rate $Tn $19 Growth Reaching Potential $Tn $19 $18 $18 $17 $17 $16 $16 $15 $15 $14 $14 $13 07 08 09 10 11 12 13 14 15 16 17 18 Real GDP Forecast Real Potential GDP Forecast Note: Real GDP Forecast is KPMG Economics. Real Potential GDP and Forecast is CBO Source: KPMG Economics, Macroeconomic Advisers by HIS Markit, CBO, BEA $13 10
Rates remain low despite stronger growth Source: KPMG Economics, Federal Reserve, FOMC projections March 2018 11
The consumption engine is strong Note: Real GDP measured year-on-year 12
Business investment on an upswing 13
Business and consumer confidence trends upward Index 140.0 120.0 100.0 80.0 60.0 Economic Confidence Indicators 100 = Most Optimistic 75.0 70.0 65.0 60.0 55.0 50.0 40.0 20.0 Consumer Confidence (LHS) Business Optimism (RHS) 06 07 08 09 10 11 12 13 14 15 16 17 18 45.0 40.0 Note: 4-Quarter Moving Average Source: KPMG Economics, Conference Board, Duke Fuqua School of Business, CFO Magazine, Haver Analytics 14
Jobs growth in longest post-war streak 91 consecutive months of jobs growth 15
Labor market continues to tighten % Unemployment Rate vs. Natural Rate 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 2007 2009 2011 2013 2015 2017 Natural Rate of Unemployment Unemployment Rate Source: KPMG Economics, BLS, CBO, Haver Analytics % 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 16
Labor market tight enough to translate into inflation? Note: Inflation is measured by the Consumer Price Index (CPI); Core CPI excludes volatile food and energy prices 17
Economic Outlook
Fiscal stimulus - trade tensions - tighter labor market Real GDP Forecast % Annual Rate 4.0% 3.0% Historical Forecast 4.0% 3.0% 2.0% 2.0% 1.0% 1.0% 0.0% 0.0% Source: KPMG Economics, Macroeconomic Advisors by IHS Markit, BEA 19
Rising trade tensions unlikely to have direct effect U.S Goods Exports (2017, $b, % of total) U.S Goods Imports (2017, $b, % of total) China, $130, 8% China, $506, 22% Other Canada, $282, 18% Other Mexico, $243, 16% Italy Canada, $300, 13% Italy India France UK S. Korea Japan Germany India France UK S. Korea Germany Japan Mexico, $314, 13% Source: KPMG Economics, US Census 20
Rising trade tensions unlikely to have direct effect Exports Average Contribution: 0.37% Imports Average Contribution: -0.56% 21
Trade tensions will likely increase market volatility % BAA Corporate Bond Yield % 5.8 5.6 5.4 5.2 5.0 4.8 4.6 4.4 4.2 4.0 Original Forecast Trade Tensions, Elevated VIX Even Higher VIX 2017.4 2018.1 2018.2 2018.3 2018.4 2019.1 2019.2 2019.3 2019.4 Source: KPMG Economics, Macroeconomic Advisors by IHS Markit, Bureau of Economic Analysis 22
Labor market to continue tightening through 2020 % 10.0 Unemployment rate with median FOMC projections 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Civilian Unemployment Rate (%) FOMC Longer Run FOMC Short Run Source: KPMG Economics, FOMC projections March 2018, Janet Yellen s Remarks at the NABE 2017 Annual Meeting, BLS 23
Economic Effects of Tax Change
Economic goals of Public law no. 115-97 (TCJA) Increase investment by U.S. and foreign firms Increase wages Broaden the U.S. tax base 25
Passage of TCJA had little influence on investment plans 80% 70% How has the TCJA affected your plans for capital expenditures? Nov. 2017 Feb. 2018 60% 50% 40% 30% 20% 10% 0% Decrease by 10% or more Decrease by less than 10% No material change Increase by less than 10% Increase by 10% or more Source: KPMG Economics, Survey of Business Executives (SBE): Federal Reserve Bank of Atlanta, Stanford University, and the University of Chicago 26
TCJA long-term consequence is increased debt 150 Federal Debt Held by the Public % of GDP CBO Baseline Projection 150 125 100 World War II 125 100 75 50 25 Great Depression Civil War World War I 75 50 25 0 1790 1797 1804 1811 1818 1825 1832 1839 1846 1853 1860 1867 1874 1881 1888 1895 1902 1909 1916 1923 1930 1937 1944 1951 1958 1965 1972 1979 1986 1993 2000 2007 2014 2021 2028 2035 2042 2049 0 Source: KPMG Economics, CBO Long-Term Budget Projections 27
Higher interest is a potential boomerang effect 28
Productivity is the holy grail as labor force disappears Potential GDP: 1.8 % by 2027 29
Conclusion Global growth tailwinds mostly in force Rising trade tensions risk derailing the positive global growth trajectory Tightening labor conditions suggest a potential slowdown in 2020 U.S. tax reform could spur business investment and drive productivity growth 30
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