BBVA Research USA 19 Economic Outlook
Economic Outlook Global growth slowing as headwinds strengthen in both developed and emerging markets In U.S., growth moderation to continue in 19- Probability of recession increasing, as handful of indicators suggests growing risks FOMC tasked with engineering a soft-landing, as financial and macroeconomic conditions diverge Downward pressure on Oil prices should ease in 1Q19, but prices to remain below long-term levels in medium term Texas and Houston poised for another strong year
Slowing global growth, while risks intensify 1 More moderate and less synchronized global growth Moderation in performance in the US, EZ (policies on hold) and CHN (policies stimulating) 2 Ongoing monetary policy normalization Fed and ECB at very different stages: Fed at the end of tightening cycle while the ECB just ended QE with rates on hold until Sept19 3 Global financial tensions on the rise Risk-off mood prevails in financial markets: while pressure in EMs recedes, tensions arise in equity, credit and European debt. 4 5 US-CHN trade war ongoing US ready for more action, pending a 3 months truce, while tensions with other countries have eased for now. Global risks intensify Protectionism and Fed policy mistakes, EM sell-off acting as potential amplifier; greater political uncertainty in Europe
Global economic growth tilting to the downside US 18 2.8 19 2.8 Mexico Eurozone 18 19 2. 1.7 China 18 19 6.5 6. 18 19 1.9 2. Fuente: BBVA Research Latam 18 19.9 1.8 Up Stable Down Turkey 18 19 3. 1. World 18 19 3.7 3.6
2 4 6 8 12 14 16 18 22 U.S. Economy: Growth to moderate in 19 Government and consumption offsetting weak private investment. Growth to moderate, but remain above potential Real GDP Year-over-year % GDP- Contribution to 3Q Growth Annualized % 6.% 5.% 4.% 3.% 2.% 1.%.% -1.% -2.% -3.% -4.% Real GDP Average: '-Current 3. 2.5 2. 1.5 1..5. -.5-1. -1.5-2. -2.5 3Q18 Avg. 14-Current PCE Nonres Res Inv Net Federal State Exports Source: BBVA Research & BEA 5
2 4 6 8 12 14 16 18 22 Labor Market: Unemployment rate at 5 year lows As labor market continues to tighten, potential for further declines in the UR becoming more difficult Beveridge Curve UR & Job Openings % Unemployment Rate % 5 4.5 Current 11 9 4 8 3.5 7 3 6 2.5 5 2 4 1.5 3 5 7 9 11 Pre-Crisis Implied Beveridge Curve 3 2 Post-Crisis Implied Beveridge Curve Source: BBVA Research & BLS 6
Labor Market: Improvement in broader indicators Improved economic outlook drawing more prime-age participants back into the labor force Participation Rate % 68 67 66 65 64 63 62 Total Prime-Age Males (rhs) 8899294969846812141618 85. 84.5 84. 83.5 83. 82.5 82. 81.5 81. 8.5 8. Prime-Age Employment-to-Population % 81. 8. 79. 78. 77. 76. 75. 74. 73. 72. Pre-Crisis Avg. 8 9 11 12 13 14 15 16 17 18 Source: BBVA Research and Haver 7
Inflation: Upward momentum fading Inflation momentum slowing, pushing inflation expectations below 2% Consumer Price Index 12-month change % 3. 2.5 Market-Based Inflation Expectations % 3.5% 3.% 2.5% 2.% 1.5% 1.%.5%.% 11 12 13 14 15 16 17 18 5Y Implicit 5Y Forward Source: BBVA Research, Haver and Bloomberg 2. 1.5 1..5. 11 12 13 14 15 15 16 17 18 Core Inflation 12m % Change Core Sticky Median CPI Core Sticky ex Shltr Trimmed Mean 5. Core Srvs ex Shelter Core Goods Shelter 4. 3. 2. 1.. -1. -2. -3. 2 4 6 8 12 14 16 18 8
Mar-5 Mar-6 Mar-7 Mar-8 Mar-9 Mar- Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar- Mar-21 Mar-22 Inflation: Probability of high inflation scenario declining Inflation Regime Probability Regime change high / low % 9% 8% 7% 6% 5% 4% 3% % % Consumer Price Index Year-over-year change 6.% 5.% 4.% 3.% 2.% 1.%.% -1.% -2.% -3.% -4.% % 62 66 7 74 78 82 86 9 94 98 2 6 14 18 Baseline Downside Upside Source: BBVA Research 9
-36-33 -3-27 -24-2 -18-15 -1-9 -6-3 3 6 9 1 15 18 2 24 27 3 33 36-36 -33-3 -27-24 -2-18 -15-1 -9-6 -3 3 6 9 1 15 18 2 24 27 3 33 36 Recession: Equity prices & business cycles Since 196 there have been 7 major equity price corrections with no corresponding recession Equity Price Correction w/ Recession Trough=, t=days Equity Price Correction w/ No Recession Trough=, t=days 24 2 18 16 14 1 8 6 9 1 1982 1975 197 1991 198 196 Current (t@-25=13) Source: BBVA Research & Haver Analytics 16 15 14 13 1 1 9 8 1962 1966 1978 1984 1988 1994 16 Current (t@-25=115)
Feb-1961 Sep-1963 Apr-1966 Nov-1968 Jun-1971 Jan-1974 Aug-1976 Mar-1979 Oct-1981 May-1984 Dec-1986 Jul-1989 Feb-1992 Sep-1994 Apr-1997 Nov-1999 Jun-2 Jan-5 Aug-7 Mar- Oct-12 May-15 Dec-17 Recession: Consumer indicators suggests risks contained Personal Interest Expense Year-over-year % 3. 25.. 15.. 5.. -5. -. -15. -. 1961 1966 1971 1976 1981 1986 1991 1996 1 6 11 16 New 3+ Day Consumer Delinquency Rates % 8 6 4 2 Mortgage Auto Student Total HELOC CC Other 99 1 3 5 7 9 11 13 15 17 Source: BBVA Research, FRB, NY Fed & BEA Personal Interest Expense to Disp. Income Ratio, % 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 Senior Loan Officers Lending Standards + tightening / - loosening 15.. 5.. -5. -. -15. -. 12 13 Credit card 14 Autos 15 16 17 18 Consumer excl. credit cards 11
Recession: Corporate indicators imply elevated risk Nonfinancial Corporate Profits % of GDP 8 7 6 5 4 3 2 1 7 73 76 79 82 85 88 91 94 97 3 6 9 12 15 18 Nonfinancial Corporate Short-term Liabilities YoY % Change - Nonfinancial Business Debt % of GDP 5 4 3 Corporate NonCorporate 7 73 76 79 82 85 88 91 94 97 3 6 9 12 15 18 C&I Loan Charge-Off Rate & Fed Funds % 3. 2.5 2. 1.5 1..5 C&I Fed funds (rhs) 8 6 4 2-82 84 86 88 9 92 94 96 98 2 4 6 8 12 14 16 18. 88 9 92 94 96 98 2 4 6 8 12 14 16 18 Source: BBVA Research, Federal Reserve, BEA and Haver 12
Recession: Probability of downturn rising Near term risks modest, but probability of recession within 2 years above 5% 12-Month Ahead Recession Probability % 9 8 7 6 5 4 3 81 83 85 86 88 9 92 93 95 97 99 2 4 6 7 9 11 13 14 16 18 Term Structure Only (yr-6-month) 5-Factor Model Source: BBVA Research Future Recession Probability % 8 6 4 Risk Factors Percentile Rank 9 8 7 6 5 4 3 81 85 89 92 96 99 3 7 14 18 12-months ahead 24-months ahead Wages Shadow Banking Tipping Point Slope Personal Int Expense CAPE 13
5 6 7 8 9 11 12 13 14 15 16 17 18 19 21 22 Recession: A case for a soft landing Increased capital buffers and importance of intangibles implies more moderate business cycles. Lack of fiscal and monetary capacity a risk. Real GDP YoY % Change 5.% 4.% 3.% 2.% 1.%.% -1.% -2.% -3.% -4.% Baseline Downside Upside Source: BBVA Research, FDIC & OECD Tier 1 Risk-Based Capital Ratio Tier 1 Core Capital/risk-weighted assets, % Intangibles Investment share of total investment, % 3 25 15 16. 14. 12.. 8. 6. 1996 1998 2 5 7 9 11 13 15 17 All Insured Institutions Assets > $25 Billion 197 1975 198 1985 199 1995 5 15 14
Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan- Apr- Jul- Oct- Monetary Policy A sharp adjustment in market expectations Fed Funds Expectations EOY, % Fed Funds Implied Probability Number of rate increases through 19, % 3.5 3.25 3. 2.75 2.5 2.25 2. 1.75 1.5 1.25 1..75.5 FFR + BBVA Forecast 6/21/18 8/16/18 11/8/18 1/3/19 7 6 5 4 3 Last 1M Ago <2.25% 2.25-2.5 2.5-2.75 2.75-3. 3.+ Cut Zero One Two Three Source: BBVA Research, Bloomberg, FRB & Haver 15
Monetary Policy FOMC tasked with engineering the soft landing FOMC Projections of Fed Funds Year-over-year %, median 4 3.5 3 2.5 2 1.5 Change in FOMC Tone Post-meeting Press Conference December If you look at 18, as I mentioned, is the best year since the financial crisis And we also have a positive forecast, as I mentioned, and, in that context, we think this move was appropriate for what is a very healthy economy. Runoff of the balance sheet has been smooth and has served its purpose. And I don t see us changing that Powell Remarks at 19 AEA With the muted inflation readings that have been coming in, we will be patient and see how the economy evolves 1 18 19 21 L- Term Sep-18 Source: BBVA Research, FRB Current If we came to the view that the balance sheet normalization plan or any other aspect of normalization was part of the problem, we wouldn't hesitate to make a change 16
Oil Price Outlook: 3% below their previous peak Crude oil prices July to December 18 ($ per barrel, 18) 9 85 8 75 August 6 First set of U.S. sanctions against Iran come back into full effect September 25 India may cut imports of Iranian oil to zero in November November 2 U.S. issue waivers to Iran s oil buyers November 12 OPEC lowers oil demand growth forecasts and anticipates oversupply December 6 OPEC hints a lower than expected cut 7 65 6 55 5 WTI Brent September 23 OPEC and allies agree not to further increase oil production October 8-12 Stock market chaos. Concerns on weaker demand emerge November 6 EIA expects U.S. crude oil production to surpass 12 million b/d by 19 December 7 OPEC+ decide to cut output by 1.2 Mb/d 45 4 Jul Aug Sep Oct Nov Dec Jan Source: BBVA Research and Haver Analytics 17
Oil Price Outlook: Market dynamics Current dynamics driven by market uncertainty, weaker demand expectations and supply considerations Ex-Post Forecasts and Actual West Texas Intermediate Prices Spot Price $/barrel 14 Oil Price Error Variance Decomposition % explained 1 8 6 4 4 6 8 12 14 16 18 Source: BBVA Research & Haver Analytics 9 8 7 6 5 4 3 16+ 14-16 1985- Market Volatility OECD Demamd Non-OECD Demamd OECD Supply Non-OECD Supply Exchange Rate 18
Oil Price Outlook: Short-term risks are now tilted to the downside >= $7/b* OPEC+ implements further cuts to production U.S. waivers expired and are not renewed OPEC+ is perceived incapable of offsetting the gap left by Iran and Venezuela Additional negative supply shocks (e.g. Libya, Nigeria) Stronger-than-expected global demand Takeaway issues prevent U.S. crude to reach global markets *Brent crude prices. Source: BBVA Research <= $6/b* Weaker global outlook after turbulence in emerging markets (e.g. Turkey, Argentina) Escalation of protectionism Dollar appreciation President Trump s pressure on OPEC Limited enforcement of Iranian sanctions Higher-than-expected crude oil production in the U.S. 19
United States of Energy Impact from changes in energy prices obfuscated by growth in domestic production and the spillovers to other sectors Primary Energy Trade Balance Quadrillion Btu Impact of Energy Prices on Real Growth Response to price increase in gasoline (PCE) & Oil (NRI/GDP) 8-8 -16 Coal Ngas Crude Petr Prod -24 7 74 78 82 86 9 94 98 2 6 14 18.6.4.2. -.2 -.4 -.6 -.8 -. 197-18 197-99 -18 PCE NRI GDP Source: BBVA Research, Haver, Census; 18 Capex YTD annualized, WTI baseline forecast
Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Texas Economic Outlook: O&G impact on economy evolving Mining sector s sensitivity to oil price changes has declined, as industry shifts to productivity driven model Oil Prices & State-Level Rig Activity Index=June-14, rig activity= 3-month lag Mining Employment & Rig Activity Elasticity %response to % increase in Rig Activity 14 1 8 6 4 8. 7. 6. 5. 4. 3. 2. 199-14 15-Current 1. WTI CO ND NM OK TX WY. CO ND NM OK TX WY Average Source: BBVA Research & OGJ 21
Texas Economic Outlook: State recession risks Recession risks in next 12-months remain low despite correction in oil prices and deceleration in U.S. growth Insured Unemployment Rate %, SA Texas Recession Risk Probability of recession within 12-months, % 3.5 3. 2.5 2. 1.5 1..5 95 97 99 1 3 5 7 9 11 13 15 17 9 8 7 6 5 4 3 81 82 84 86 88 9 92 94 96 98 2 4 5 7 9 11 13 15 17 Source: BBVA Research & BLS 22
Texas Economic Outlook: Low risk, high reward In 19, Texas and Houston present optimal risk-reward balance Growth and Recession Risk % GDP Growth Year-over-year % 5 4.5 TX WA 4 ND CA 3.5 SD FL DE NV CO OR TN 3 ID OK GA SC 2.5 MA MN IN IA MT NC NE LA AZ NH WI AL IL NY 2 MI HI PA ME MD VT 1.5 KS CT NM AR MO RI WV NJ 1 AK KY MS VA.5 5 15 25 3 Source: BBVA Research 8% 6% 4% 2% % -2% -4% 5.1% 3.5% Texas U.S. Houston 4.4% -.4% 2.6% 4.6% 13 14 15 16 17 18 (e) 4.5% 4.1% 3.7% 19 (f) (f) 21 (f) 23
BBVA Research USA 19 Economic Outlook