Old Dominion University 2013 National Economic Outlook January 30, 2013 Professor Vinod Agarwal Professor Mohammad Najand Professor Gary A. Wagner www.odu.edu/forecasting 1
Presentation Outline 2012 Scorecard Current economic conditions Outlook for 2013 What are the likely sources for growth? Monetary Policy Downside Risks Upside risks 2
2012 Scorecard 2012 Forecast 2012 Actual Real Gross Domestic Product (GDP) 2.40% 2.26% Employment 2.00% 1.38% Unemployment rate 7.9% 8.1% Consumer Price Index (CPI) 2.30% 1.74% CPI Core 2.10% 1.89% 3 - month Treasury bill 0.50% 0.09% 10 - year Treasury bond 1.90% 1.80% 30 - year conventional mortgage 3.80% 3.66%
Billions of 2005 Dollars Potential and Actual (Real) Gross Domestic Product, 2000-2015 $16,000 $14,000 $12,000 $10,000 $8,000 Potential GDP Actual GDP Source: Bureau of Economic Analysis and Old Dominion University Economic Forecasting Project. 4
1/1/2006 4/1/2006 7/1/2006 10/1/2006 1/1/2007 4/1/2007 7/1/2007 10/1/2007 1/1/2008 4/1/2008 7/1/2008 10/1/2008 1/1/2009 4/1/2009 7/1/2009 10/1/2009 1/1/2010 4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011 10/1/2011 1/1/2012 4/1/2012 7/1/2012 10/1/2012 Percentage Growth in Real Gross Domestic Product (GDP), 2006:Q1 2012:Q4 Seasonally adjusted annualized rate *100 6 2012:Q4 is forecasted. 4 2 0-2 -4-6 2012 Growth Rates: Q1 = 2.0% Q2 = 1.3% Q3 = 3.1% Q4 = 1.2% -8-10 Source: Bureau of Economic Analysis and Old Dominion University Economic Forecasting Project. 5
Where has GDP growth been coming from? 5% 4% 3% 2% 1% 0% Last Four Quarters, seasonally adjusted annualized rate 4.1% Change in inventories = 2.5% 2.0% 1.3% 3.1% Defense spending increased by 12.9% GDP Consumption Nonresidential investment Residential investment Change in inventories Government Exports Imports -1% -2% 2011:Q4 2012:Q1 2012:Q2 2012:Q3 Source: Bureau of Economic Analysis and Old Dominion University Economic Forecasting Project. 6
1/1/2004 4/1/2004 7/1/2004 10/1/2004 1/1/2005 4/1/2005 7/1/2005 10/1/2005 1/1/2006 4/1/2006 7/1/2006 10/1/2006 1/1/2007 4/1/2007 7/1/2007 10/1/2007 1/1/2008 4/1/2008 7/1/2008 10/1/2008 1/1/2009 4/1/2009 7/1/2009 10/1/2009 1/1/2010 4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011 10/1/2011 1/1/2012 4/1/2012 7/1/2012 10/1/2012 Thousands Month-to-Month Change in US Total Nonfarm Employment January 2004 December 2012 600 Average last 12 months: +141,800 Average last 6 months: +159,700 400 200 0-200 -400 Average monthly change 2004-2006: + 184,000 jobs -600-800 Losing roughly 800,000 per month -1000 Private Sector Public Sector Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project. 7
1/1/2005 4/1/2005 7/1/2005 10/1/2005 1/1/2006 4/1/2006 7/1/2006 10/1/2006 1/1/2007 4/1/2007 7/1/2007 10/1/2007 1/1/2008 4/1/2008 7/1/2008 10/1/2008 1/1/2009 4/1/2009 7/1/2009 10/1/2009 1/1/2010 4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011 10/1/2011 1/1/2012 4/1/2012 7/1/2012 10/1/2012 Percent US Unemployment Rate, January 2005 December 2012 18 16 14 12 10 8 6 4 December 2012: 7.8% Average from 1984-2008: 5.7% 2 0 Unemployment Rate U6 Rate Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project. 8
1/1/1990 8/1/1990 3/1/1991 10/1/1991 5/1/1992 12/1/1992 7/1/1993 2/1/1994 9/1/1994 4/1/1995 11/1/1995 6/1/1996 1/1/1997 8/1/1997 3/1/1998 10/1/1998 5/1/1999 12/1/1999 7/1/2000 2/1/2001 9/1/2001 4/1/2002 11/1/2002 6/1/2003 1/1/2004 8/1/2004 3/1/2005 10/1/2005 5/1/2006 12/1/2006 7/1/2007 2/1/2008 9/1/2008 4/1/2009 11/1/2009 6/1/2010 1/1/2011 8/1/2011 3/1/2012 10/1/2012 Percentage of those Unemployed Long-Term Unemployment, 1990-present Of Total Unemployed, Percentage Unemployed for 27 Weeks or Longer 50 40 Peak: 45.5% (March 2011) Currently: 39.1% 4 consecutive months of decline 30 20 10 0 Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project. 9
% of Pre-Recession Peak Employment The 2007-2009 Recession in Perspective % Decline in Total US Non-farm Payroll Employment from Pre-Recession Peak 1% 0% 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93-1% -2% -3% -4% Back to pre-recession peak around April 2015 (87 months) -5% -6% -7% Months after Pre-Recession Peak Employment March 1980 July 1981 June 1990 February 2001 Current (January 2008) Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project 10
% of Pre-Recession Peak Employment The 2007-2009 Recession Including Virginia and Hampton Roads % Decline in Total US Non-farm Payroll Employment from Pre-Recession Peak 1% 0% 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93-1% -2% -3% Pre-Recession Peak Dates: US: January, 2008 Virginia: February, 2008 Hampton Roads: July, 2007-4% -5% -6% -7% Months after Pre-Recession Peak Employment US Virginia Hampton Roads Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project 11
ND TX LA OK NY AK UT MD VA SD MA MN PA CO KY VT IN NE HI WA TN SC IA NC GA MT ID OH CA KS AZ IL NJ OR DE AR WV WY MI FL CT NV MO NH AL MS WI RI NM ME Percentage of Great Recession Job Losses Recovered, by State 250% As of December 2012 200% 150% 100% VA = 75% All recession job losses recovered 50% 0% Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project 12
1/1/2002 5/1/2002 9/1/2002 1/1/2003 5/1/2003 9/1/2003 1/1/2004 5/1/2004 9/1/2004 1/1/2005 5/1/2005 9/1/2005 1/1/2006 5/1/2006 9/1/2006 1/1/2007 5/1/2007 9/1/2007 1/1/2008 5/1/2008 9/1/2008 1/1/2009 5/1/2009 9/1/2009 1/1/2010 5/1/2010 9/1/2010 1/1/2011 5/1/2011 9/1/2011 1/1/2012 5/1/2012 9/1/2012 CPI and CPI-Core, January 2002 December 2012 6% 12-Month Percentage change 4% 2% 0% -2% -4% CPI CPI-Core Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project 13
National Outlook for 2013 2013 Forecast Real Gross Domestic Product (GDP) 2.10% Employment 1.15% Unemployment rate 7.6% Consumer Price Index (CPI) 1.73% CPI Core 1.51% 3 - month Treasury bill 0.20% 10 - year Treasury bond 1.95% 30 - year conventional mortgage 3.80% 14
What are the likely sources for growth? Gross Domestic Product (GDP) is comprised of 4 components: 1. Consumption 2. Investment 3. Net exports 4. Government 15
Consumption (or Personal Consumption Expenditures ) Almost 71% of GDP Primarily driven by income, employment, wealth We expect consumption will continue to limp along in 2013 16
1/1/2000 5/1/2000 9/1/2000 1/1/2001 5/1/2001 9/1/2001 1/1/2002 5/1/2002 9/1/2002 1/1/2003 5/1/2003 9/1/2003 1/1/2004 5/1/2004 9/1/2004 1/1/2005 5/1/2005 9/1/2005 1/1/2006 5/1/2006 9/1/2006 1/1/2007 5/1/2007 9/1/2007 1/1/2008 5/1/2008 9/1/2008 1/1/2009 5/1/2009 9/1/2009 1/1/2010 5/1/2010 9/1/2010 1/1/2011 5/1/2011 9/1/2011 1/1/2012 5/1/2012 9/1/2012 2005 Dollars Real Disposable Income Per Person, 2000 present $35,000 $34,000 $33,000 $32,000 $31,000 $30,000 $29,000 $28,000 End of recession Source: Bureau of Economic Analysis. 17
New Delinquent Balances by Loan Type, 2003:Q1 2012:Q3 Billions of Dollars Billions of Dollars 450.00 MORTGAGE HOME EQUITY AUTO CREDIT CARD STUDENT LOAN OTHER 450 400.00 400 350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00 03:Q3 04:Q2 05:Q1 05:Q4 06:Q3 07:Q2 08:Q1 08:Q4 09:Q3 10:Q2 11:Q1 11:Q4 12:Q3 350 300 250 200 150 100 50 0 Source: FRBNY Consumer Credit Panel/Equifax Source: Federal Reserve Bank of New York Quarterly Report on Household Debt and Credit. Note: 30 or more days delinquent 18
1/1/2011 2/1/2011 3/1/2011 4/1/2011 5/1/2011 6/1/2011 7/1/2011 8/1/2011 9/1/2011 10/1/2011 11/1/2011 12/1/2011 1/1/2012 2/1/2012 3/1/2012 4/1/2012 5/1/2012 6/1/2012 7/1/2012 8/1/2012 9/1/2012 10/1/2012 Percent Nominal Home Price Growth in 2011 and 2012 Monthly Percentage Change in Selected Indices, Jan. 2011 Oct. 2012 1.25 0.75 0.25-0.25-0.75 9 consecutive months of positive growth -1.25 Case-Schiller 20 Case-Schiller 10 FHFA Purchase Only Source: Standard and Poor s, FHFA, and Old Dominion University Forecasting Project. 19
Year-Over-Year Nominal Home Prices, 2011:Q3-2012:Q3 % Change in FHFA All Transactions Index (Seasonally Adjusted) Less than 0% 0 2.5% 2.5 5% 5 10% 10% and higher Source: FHFA and Old Dominion University Economic Forecasting Project 20
Number of Consumers with New Foreclosures and Bankruptcies 2003:Q1 2012:Q3 Thousands Thousands 1,200 Foreclosures Bankruptcies 1,200 900 Foreclosures Peaked: 2009:Q2 at 566,000 Currently: 241,000 Bankruptcies Peaked: 2010:Q2 at 621,000 Currently: 354,000 900 600 600 300 300 0 0 Source: Federal Reserve Bank of New York Quarterly Report on Household Debt and Credit. 21
Trillion of Dollars Total Household Debt Balance, 2003:Q1 2012:Q3 15 Mortgage HE Revolving Auto Loan Credit Card Student Loan Other 2012Q3 Total: $11.31 Trillion 12 9 (3%) (8%) (6%) (7%) (5%) 6 (71%) 3 0 Source: Federal Reserve Bank of New York Quarterly Report on Household Debt and Credit. 22
1/1/1980 11/1/1980 9/1/1981 7/1/1982 5/1/1983 3/1/1984 1/1/1985 11/1/1985 9/1/1986 7/1/1987 5/1/1988 3/1/1989 1/1/1990 11/1/1990 9/1/1991 7/1/1992 5/1/1993 3/1/1994 1/1/1995 11/1/1995 9/1/1996 7/1/1997 5/1/1998 3/1/1999 1/1/2000 11/1/2000 9/1/2001 7/1/2002 5/1/2003 3/1/2004 1/1/2005 11/1/2005 9/1/2006 7/1/2007 5/1/2008 3/1/2009 1/1/2010 11/1/2010 9/1/2011 7/1/2012 Household Debt-to-Income, 1980:Q1 2012:Q3 140% 120% 100% Mortgage & Consumer Credit Debt to Disposable Income Average 1980-2000: 72% Average: 2001-present: 110% Currently: 103% 80% 60% 40% 20% 0% 2000:Q1 - present Source: Board of Governors of the Federal Reserve and Bureau of Economic Analysis. 23
Investment (or Private Fixed Investment ) Residential investment (2.5% of GDP) Construction of single- and multi-family housing units Nonresidential investment (10% of GDP) Firm purchases of structures, equipment, and software that are used in the production of goods and services Change in inventories (0.3% of GDP) Primarily driven by interest rates, expectations, and the availability of credit 24
1/1/1960 6/1/1961 11/1/1962 4/1/1964 9/1/1965 2/1/1967 7/1/1968 12/1/1969 5/1/1971 10/1/1972 3/1/1974 8/1/1975 1/1/1977 6/1/1978 11/1/1979 4/1/1981 9/1/1982 2/1/1984 7/1/1985 12/1/1986 5/1/1988 10/1/1989 3/1/1991 8/1/1992 1/1/1994 6/1/1995 11/1/1996 4/1/1998 9/1/1999 2/1/2001 7/1/2002 12/1/2003 5/1/2005 10/1/2006 3/1/2008 8/1/2009 1/1/2011 6/1/2012 Thousands Housing Starts: New Privately Owned Units, 1960 present Seasonally adjusted annual rate, 1960:Q1 2012:Q4 3000 2500 Consecutive months below 800,000: 47 Currently: 954,000 2000 1500 1000 500 800,000 0 Recession Housing Starts Source: US Department of Commerce. 25
Rate (*100) Commercial Bank Loan Delinquency Rates 2000:Q1 2012:Q3 12 10 8 6 Peak Rate Currently Business 4.4% 1.2% Consumer 4.9% 2.8% Mortgages 11.3% 10.8% Credit Cards 6.8% 2.8% 4 2 0 Business Loans Consumer Loans Residential Mortgages Credit Card Loans Source: Federal Reserve Board of Governors and Old Dominion University Economic Forecasting Project. 26
Percentage Responding Bank-Reported Lending Standards Federal Reserve Senior Loan Officer Opinion Survey, 2001:Q1 to 2012:Q3 100 80 60 DEMAND over the last 6 months: Traditional mortgages up 5 months Non-traditional mortgages up 4 months Auto loans up 6 months Commercial up 4 months 40 20 Harder to obtain loans 0-20 Easier to obtain loans -40 Commerical and Industrial Loans Traditional Mortgage Loans Non-Traditional Mortgage Loans Source: Federal Reserve Board of Governors and Old Dominion University Economic Forecasting Project. 27
Corporate After-Tax Profits, 1995:Q1 2012:Q3 As a percentage of GDP 12% 10% 8% 6% 4% 2% 0% Source: Bureau of Economic Analysis and Old Dominion University Economic Forecasting Project. 28
Nonfinancial Corporate Cash Holdings, 1995:Q1 2012:Q3 14% As a percentage of GDP 12% 10% 8% 6% Current cash holdings: Dollar amount = $1.7 trillion As a share of GDP = 11% 4% 2% 0% Source: Federal Reserve Board of Governors and Old Dominion University Economic Forecasting Project. 29
1/1/2003 4/1/2003 7/1/2003 10/1/2003 1/1/2004 4/1/2004 7/1/2004 10/1/2004 1/1/2005 4/1/2005 7/1/2005 10/1/2005 1/1/2006 4/1/2006 7/1/2006 10/1/2006 1/1/2007 4/1/2007 7/1/2007 10/1/2007 1/1/2008 4/1/2008 7/1/2008 10/1/2008 1/1/2009 4/1/2009 7/1/2009 10/1/2009 1/1/2010 4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011 10/1/2011 1/1/2012 4/1/2012 7/1/2012 10/1/2012 Limping Out of 2012? 120 100 80 60 40 20 October 2012 to December 2012 Conference Board = -10.9% Small Business = -5.4% 0 Conference Board Consumer Confidence Index (1985=100) NFIB Small Business Optimism Index (1986=100) Sources: Conference Board, National Federal of Independent Business, and Old Dominion University Economic Forecasting Project. 30
Net Exports (or exports less imports ) Primarily driven by domestic economic conditions, economic conditions of our trading partners, and exchange rates Top Trading Partners in Goods, 2012 (through November) Exports (billions) Imports (billions) Percent of Total Trade Canada 270.1 298.4 16.2% China 100.2 390.8 14.0% Mexico 199.9 257.3 13.0% Japan 64.0 134.6 5.7% Germany 45.0 99.3 4.1% United Kingdom 50.8 50.6 2.9% South Korea 38.9 54.3 2.7% Brazil 40.2 29.9 2.0% Saudi Arabia 16.2 52.0 1.9% France 28.4 38.3 1.9% 31
Outlook for Net Exports in 2013 Slowing growth around the world China, Japan, India, Latin America Reasons to be concerned about Europe Recession/near-zero growth Are they committed to their sovereign debt solutions? Canada and Mexico are performing about the same as US No MAJOR stimulus likely 32
Government ( Government Consumption & Investment ) State and local sector (12% of GDP) 50% larger than Federal government Good news: budgets are starting to grow (slowly) Bad news: FY13 spending projected to be lower in 24 states than in 2008 Federal government (8% of GDP) Stimulus packages of 2008 and 2010 have been fully exhausted The largest source of economic uncertainty? American Taxpayer Relief Act of 2012 Debt limit 33
American Taxpayer Relief Act of 2012 ( fiscal cliff deal) Major revenue changes For individuals earning over $400,000 per year (couples over $450K): Marginal tax rates increased from 35% to 39.6% Long-term capital gains & dividends increased from 15% to 20% Top tax rate on estates over $5.12 million will be 40% AMT exemption is indexed to inflation Social Security payroll tax reduction expired Child tax credit, EITC, and education credits extended until 2017 R&D and investment expensing allowances extended to 2013 34
American Taxpayer Relief Act of 2012 ( fiscal cliff deal) Major expenditure changes Federal unemployment insurance extensions carry into 2013 Extend Medicare physician payments (would have reduce payments by 27% in FY13) Planned spending reductions of $109.4 billion in FY2013 (Sequestration) A one-time $54.7 billion in defense and $54.7 billion in non-defense Changed to a $42.5 billion reduction in FY2013 and a $12.2 reduction in FY2014 Initial impact delayed until March 1, 2013 35
Federal Budget Deficits, 1970 2022 As a percentage of GDP 4% 2% 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 Actual Projected 0% -2% -4% -6% -8% -10% -12% Actual Deficit Deficit with no fiscal cliff deal Deficit with fiscal cliff deal Sources: Congressional Budget Office and Old Dominion University Economic Forecasting Project. 36
Federal Revenues and Outlays, 1975 2035 40% 35% 30% As a percentage of GDP Historical averages from 1950-2011: Revenue = 18% of GDP Spending = 20% of GDP Actual Projected 25% 20% 15% 10% 5% 0% Revenues Outlays Sources: Congressional Budget Office and Old Dominion University Economic Forecasting Project. 37
Federal Entitlement Spending, 1975 2035 As a percentage of GDP Actual Projected 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Social Security Medicare Medicaid Sources: Congressional Budget Office and Old Dominion University Economic Forecasting Project. 38
Debt Held by the Public, 1975 2035 200% As a percentage of GDP Actual Projected 175% 150% 125% 100% 75% 50% 25% 0% Debt Held by the Public (Actual) Debt Held by the Public (alternative fiscal scenario) Sources: Congressional Budget Office and Old Dominion University Economic Forecasting Project. 39
What exactly is the statutory debt limit (or debt ceiling)? A limit on the total amount of federal debt that can be outstanding at any point in time Began with the Second Liberty Bond Act of 1917 Office of Management & Budget: 76 authorized increases since 1962 Total federal debt will increase if the government: Issues debt to government accounts in exchange for their surpluses Examples: Social Security Trust Fund, Medicare Trust Fund Called debt held by government accounts Sells debt to the public to finance current operations Called debt held by the public 40
More on the debt limit Current debt limit is $16.2 trillion Reached on December 31, 2012 Current revenues fund roughly 75% of current spending Consequences to not raising the debt limit: Federal spending will fall by 25% immediately (roughly 6% of GDP) US economy will almost certainly enter a recession Our default risk will increase 41
Monetary Policy Federal funds rate target: 0 to 0.25% (November 2008) Expected to stay at this level while unemployment is above 6.5% and while inflation expectations are anchored Announced in their December, 2012 meeting Non-traditional forms of monetary policy Balance sheet has expanded from $1 trillion to nearly $3 trillion 42
Non-traditional Monetary Policy Quantitative easing Large-scale purchases of mortgage-backed securities and other agency debt QE1: 3/2009 3/2010 QE2: 11/2010 6/2011 QE3: 9/2012 -? Maturity Extension Program and Reinvestment Policy Operation Twist (ended in 2012) Goal: extend the average maturity of the Fed s Treasury portfolio Term deposit facility Program to lower reserve balances of depository institutions Foreign currency swap lines Currently extended until February 2014 43
Billions of dollars Federal Reserve Balance Sheet, January 2007 January 2013 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Traditional Security Holdings Lending to Financial Institutions Federal Agency Debt & Mortgage-Backed Securities Long Term Treasury Purchases Liquidity to Key Credit Markets Source: Board of Governors of the Federal Reserve. 44
Areas of Primary Concern with the Federal Reserve s policies Is inflation going to be a short-term problem? Rapid growth in Fed s balance sheet Excess capacity may help keep inflation in check How will the Fed unwind their balance sheet? Too fast could slow down the (sluggish) recovery Too slow inflation Are additional and/or new stimulus plans on the horizon? 45
1/1/2005 4/1/2005 7/1/2005 10/1/2005 1/1/2006 4/1/2006 7/1/2006 10/1/2006 1/1/2007 4/1/2007 7/1/2007 10/1/2007 1/1/2008 4/1/2008 7/1/2008 10/1/2008 1/1/2009 4/1/2009 7/1/2009 10/1/2009 1/1/2010 4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011 10/1/2011 1/1/2012 4/1/2012 7/1/2012 10/1/2012 Inflation expectations 6% 10-Year Time Horizon, 2005:Q1 2012:Q4 5% 4% 3% 2% 1% 0% 10-Year TIPS Spread U Michigan Inflation Expectations Cleveland Fed 10-Year Source: Federal Reserve Bank of St. Louis, FRED. 46
Expectations of Fed policy-firming Survey Results of FOMC Members, December 11-12, 2012 Appropriate timing of policy firming 13 3 2 1 2013 2014 2015 2016 Source: Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2012. 47
Downside risks Inflation picks up and the Federal Reserve is forced to act Recovery in housing slows/stops European recession/sovereign debt crisis turns for the worse Political uncertainty Regulatory uncertainty Dodd-Frank Affordable Care Act 48
Upside risks The Mayans were wrong! Energy prices Sovereign debt crisis abates Housing market stabilizes 49