U.S. Economic Outlook with Focus on Maine: Shining Amidst Global Gloom Michael Dolega Senior Economist, TD Economics 15 Annual MEREDA Forecast Conference Portland, Maine January, 15 Key Themes Global economic backdrop; uneven and not supportive Oil price plunge; consumers big winners, producers under threat U.S. inflation muted; Europe on the cusp of deflation Fed to raise rates later this year; ECB, BOJ to stimulate more Long rates to stay low on global weakness; dollar a big winner U.S. economy to strengthen; consumers, housing to drive growth Maine will accelerate, but underperform on demographics, industry mix
Global economic backdrop not very supportive Growth in the Eurozone continues to languish. Abenomics not living up to the hype in Japan. China slowing as economy evolves and housing cools. Emerging markets faced with lower commodity revenues and capital flight. 9. 8. 7. 6.. Real GDP (y/y % chng.) 13 1 15 16 Disinflation and deflation worries across advanced economies. World Eurozone Japan China Source: International Monetary Fund, TD Economics 3 U.S. economy looking increasingly resilient After several false dawns, growth in the U.S. has strengthened. Real GDP (q/q % ann. chng.) Recovery through mid 13 averaged just.1%, due to Eurozone crisis, sequester, etc. Since then, growth has averaged over 3%, despite the polar vortex induced slowdown a year ago. The near 3% momentum should be sustained over coming quarters despite headwinds... Jul 9 Jul 1 Jul 11 Jan 1 Jul 1 Jul 13 Jul 1 Jul 15 Jul 16 Jan 17 Jul 17 Source: Bureau of Economic Analysis, TD Economics
Job growth has ramped up Economy adding nearly 3, nonfarm jobs per month. Best pace of job gains since 1999.. Nonfarm payrolls; (y/y % chng.) Gains are widespread, with private services, construction, manufacturing all contributing. Even state & local gov't adding. Employment in Maine at half the pace, but still strongest since with over 7, new jobs. Portland growth strongest at around 1.6% while Lewiston slowed to.% recently.. Source: Bureau of Labor Statistics, TD Economics U.S. Maine 5 And the labor market continues to tighten Jobless rate falling sharply, from 7.9% at end of 1, to 6.7% in 13 to 5.6% to end 1. 1 9. Unemployment rate (%) U.S. Maine Stronger job gains are a key factor, but demographics also playing a part. 8. 7. Jobless rate in Maine rose slightly recently but should continue to improve. 6. Labor market tightest in Portland (.7%), while Lewiston (5.%) and Bangor (6.5%) softer. Source: Bureau of Labor Statistics, TD Economics 6
Improving labor market should manifest in stronger income gains and confidence Despite stronger job market wage gains remain elusive. Large share of new jobs created in lower paying industries. 1 9. 8. 7. Avg. hourly earnings (y/y % chng.) Unemployment rate (%) FCAST Demographics could also be impacting wage growth. 6. Some industries are showing wage pressures. Broader gains should manifest as labor market tightens further. For now, incomes supported by increases in hours worked.. Jan 87 Jan 91 Jan 95 Jan 99 Jan 3 Jan 7 Note: Avg. hourly earnings are for production & non supervisory employees. Source: Bureau of Labor Statistics, TD Economics 7 Plunge in oil prices a boon for consumers, but problem for producers Oil prices fell more than half since mid 1 levels. Decline partly related to sluggish global growth, but mostly to oversupply. 15 13 11 $/bbl. WTI (LHS) Gasoline (RHS) $/gal..5 3.5 Rapid U.S. shale production and unwillingness of OPEC to cut. 9 7 3.5 Gasoline down nearly % across the country. Heating oil lower. Big benefit to consumers. 5 3 1.5 Producers increasingly under pressure. Possible downside risk. Source: Energy Information Administration, TD Economics 8
Inflation remains muted but deflation unlikely Inflation has been running below % for nearly two years. y/y % chng. Falling oil prices and lofty dollar will pressure headline inflation. Core inflation will also remain lukewarm as decline in oil works through the economy.. Deflation or "lowflation" does not appear likely in U.S. given economic momentum.. CPI Core CPI PCE Deflator Source: Bureau of Labor Statistics, Bureau of Economic Analysis, TD Economics 9 Fed looks likely to move this year After nearly seven years at zero, the Fed likely to begin to raise rates later this year. 7 6 Official policy rates (%) Fed BoE ECB BoC Inflation expected to track back to % range, with economy closer to full employment. 5 3 Rate hikes will be gradual. Neutral rate lower than before. 1 Other developed central banks will lag the Fed. Source: Federal Reserve Board, Bank of Canada, Bank of England, European Central Bank 1
Dollar strength to persist Prospects for diverging monetary policy has lifted the dollar. Trade weighted dollar at highest level since 5. Value rising against both major trading partners as well as other important trading partners (OITP). Exchange rate may begin to weigh on exporters and corporate profits. 11 6 7 8 9 1 11 1 13 1 15 Jan Jan 1 Jan Jan 3 Jan Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 1 Trade Weighted OITP Majors Source: Federal Reserve Board, TD Economics Index (=1 in 1997) FCAST Manufacturing sector holding up in the face of higher dollar and lukewarm global growth Manufacturing payrolls rising robustly nationally and in Maine. Offshoring has slowed with U.S. manufacturing increasing competitive. Largest gains in industries exposed to domestic demand or inexpensive natural gas. In Maine, wood products and shipbuilding remain strong. Paper continues to decline, while electronics very capital intensive. 1 1 1 1 Jan Jan 1 Jan Jan 3 Jan Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 1 Industrial production Mfg. emp. (U.S.) Mfg. emp. (Maine) Source: Bureau of Labor Statistics, TD Economics y/y % chng. FCAST
Long term and mortgage rates to remain low The Fed continues to reinvest proceeds but stopped adding to its balance sheet. Fed getting ready to hike, but long rates have declined. 9 8 7 6 % U.S. 1 year 3 year mortgage Germany 1 year Japan 1 year Plummeting rates elsewhere and falling inflation expectations are making U.S. notes/bonds more attractive. 5 3 Low rates will aid consumers, businesses, and housing. 1 Jan Jan Jan Jan 6 Jan 8 Jan 1 Source: Federal Reserve Board, Bundesbank, Japan Ministry of Finance, TD Economics 13 Home prices will continue to rise, but at a more moderate pace Home prices in Maine held up well during downturn relative to national home prices. 15 Home price index (y/y % chng.) Recovery has been slower to take hold. 1 5 Future gains will be more muted as more inventory comes on the market. Gains in Maine likely softer as shadow inventory still elevated. Improving incomes should keep affordability at good levels. 5 1 15 U.S. Maine Portland Lewiston Bangor Jan Jan 1 Jan Jan 3 Jan Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 1 Jan 17 Source: CoreLogic, TD Economics 1
Homebuilding set to grind higher Homebuilding is in its fourth year of recovery but remains at half of mid pace. Unlikely to rebound to peak, but demographics suggest a pace of 1.5 to 1.6 million sustainable. Building permits ('),5, 1,5 Building permits (') 1 1 8 6 Debt, weak income gains, and preferences leading more into multifamily housing. Maine homebuilding will improve but constrained by demographics. 1, 5 U.S. (LHS) Maine (RHS) Jan Jan 1 Jan Jan 3 Jan Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 1 Jan 17 Source: Census Bureau, TD Economics 15 15 looks to be the best year of the recovery Growth supported by: Improving labor market Real GDP (y/y % chng.) Low gasoline prices Low interest rates Recovery in housing. Risks include: Negative impact on energy producers Exports under pressure Maine will have the best year in a decade but underperform: Weaker demographics Less boost from housing Smaller share of high growth industry. 3 5 6 7 8 9 1 11 1 Source: Bureau of Economic Analysis, TD Economics 13 1 U.S. Maine Portland Lewiston Bangor Boston 15 16 17 16
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