October 2014 Solid U.S. Economic Data Belie Market Turmoil Executive Summary September payroll job growth was above consensus with 248,000 jobs added over the month. September private-sector employment was up by 236,000, while government jobs were up by 12,000, with state and local government jobs up by 14,000 and Federal government jobs down by 2,000. As expected based on the past three years, August payroll job growth was revised up to 180,000 (from 142,000), and July job gains were revised up to 243,000 (from 212,000), for a total upward revision of 69,000, in addition to the 248,000 jobs added in September. So far in 2014 the U.S. has added an average of 227,000 jobs per month. The unemployment rate fell to 5.9 percent in September, to its lowest level since July 2008, just before the Financial Crisis. Inflation-adjusted (real) GDP growth in the second quarter was 4.6 percent at an annual rate, according to the third estimate from the Bureau of Labor Statistics. This was the second upward revision to second quarter growth; it was 4.0 percent in the advance estimate and 4.2 percent in the second estimate. The 4.6 percent second quarter gain was the biggest since the fourth quarter of 2011. In the first quarter of 2014 the economy contracted 2.1 percent. On a year-ago basis real GDP was up 2.6 percent in the second quarter. Real gross domestic income, an alternative measure of the size of the economy that looks at income going to households and firms, rose even more strongly in the second quarter. It increased an annualized 5.2 percent, an upward revision from 4.7 percent in the second estimate. GDI fell 0.8 percent in the first quarter. On a year-ago basis GDI was up 2.0 percent in the second quarter. U.S. stock prices fell sharply in mid-october, but have recovered somewhat. In addition to worries about the global economy, particularly weaker numbers from Europe, there have also been geopolitical concerns, including conflict in the Middle East and the potential spread of the Ebola virus. Falling oil prices and the potential for slower inflation have also weighed on long-term interest rates, with the yield on the 10-year Treasury briefly falling below 2.0 percent earlier this week, before recovering somewhat, to around 2.2 percent, still very low on an historical basis. But the fundamentals of the U.S. economy remain solid, with no indications of a significant slowdown in growth. The labor market continues its improvement, which will support gains in consumer spending. Businesses are boosting hiring and investment to keep up with improving demand. The housing market continues its slow recovery. And lower energy prices are a net positive for the U.S. economy. Baseline U.S. Economic Outlook, Summary Table* 1Q'14a 2Q'14a 3Q'14f 4Q'14f 1Q'15f 2Q'15f 3Q'15f 4Q'15f 2013a 2014f 2015f 2016f Output & Prices Real GDP (Chained 2009 Billions $ ) 15832 16010 16148 16269 16377 16485 16591 16699 15710 16065 16538 16970 Percent Change Annualized -2.1 4.6 3.5 3.0 2.7 2.7 2.6 2.6 2.2 2.3 2.9 2.6 CPI (1982-84 = 100 ) 235.2 237.0 237.7 238.7 240.0 241.3 242.7 244.1 233.0 237.2 242.0 247.6 Percent Change Annualized 1.9 3.0 1.2 1.7 2.2 2.2 2.3 2.3 1.5 1.8 2.0 2.3 Labor Markets Payroll Jobs (Millions ) 137.8 138.5 139.2 139.8 140.4 141.0 141.5 142.1 136.4 138.8 141.2 143.2 Percent Change Annualized 1.5 2.2 2.0 1.7 1.8 1.6 1.6 1.5 1.7 1.8 1.7 1.4 Unemployment Rate (Percent ) 6.7 6.2 6.1 5.8 5.7 5.6 5.5 5.4 7.4 6.2 5.5 5.1 Interest Rates (Percent) Federal Funds 0.07 0.09 0.09 0.13 0.13 0.13 0.42 0.83 0.11 0.10 0.38 1.60 Treasury Note, 10-year 2.77 2.62 2.50 2.57 2.71 2.82 2.92 3.02 2.35 2.61 2.87 3.33 a = actual f = forecast p = preliminary * Please see the Expanded Table for more forecast series.
PNC Survey Finds More Small Business Owners Plan Pay Raises and Price Hikes An increasing number of U.S. small and mid-sized business owners plan to raise salaries and prices at rates higher than national trends and above the Federal Reserve s inflation trigger, according to the latest PNC Economic Outlook Survey findings. The Autumn findings of PNC s biannual survey, which began in 2003, reveal that two out of five (38 percent) business owners expect to increase employee compensation in the next six months, which is the most since 2008. This is a significant spike since Spring (32 percent) and one year ago (22 percent). Of those that plan raises, three in five (59 percent) plan wage hikes of three percent or more, which exceeds recent national wage trend growth of near two percent. Meanwhile, 38 percent plan to raise selling prices during the next year as they attempt to preserve profit margins and withstand rising supplier costs. Of those that plan hikes, 31 percent will increase prices 1-2 percent, while 40 percent intend to increase by 3-4 percent, in excess of the Federal Reserve s two percent inflation target. Business owners optimism about their own company s prospects is steady as 85 percent are optimistic, on par with 87 percent in the Spring. More than one-half (52 percent) expect sales to increase during the next six months and three of four expect growth of three percent or more. Of the 45 percent who expect profits to rise, three in five expect gains of three percent or more. Wage growth has been a missing piece of the labor market puzzle to date. With more business owners planning pay raises and higher prices for customers, these findings strongly support PNC s forecast for a faster economic and jobs expansion and also send important signals to Fed policy makers that the economic recovery is speeding up. The number of businesses that plan to hire is unchanged, but those that will aim to substantially grow their workforce. Twenty percent plan to add full-time employees compared to 22 percent six months ago and up from 16 percent one year ago. Of those hiring, the majority (61 percent) plan to add one to five employees, which is sizable, given that three-quarters of these businesses have fewer than 50 full-time employees. Of the 78 percent not hiring, over one-half (52 percent) need sales to increase at least three percent to add more employees. Two in 10 say the U.S. economy s lack of improvement is a key reason why they have not hired. Meanwhile, 28 percent of respondents said that finding qualified employees is harder than it was six months ago, up significantly from 20 percent in Autumn 2013. Nearly one in five small business owners surveyed (17 percent) will probably/definitely take out a new loan or line of credit in the next six months, up slightly from 15 percent in the Spring. One-fifth (21 percent) report that credit is easier to get relative to three months ago, compared to 17 percent who say it is more difficult. This is the first time since 2006 that the number saying easier is larger than the number saying more difficult. One factor that could hold small business back is confusion over the Affordable Care Act. Among owners with at least 50 employees, nearly two-thirds (64 percent) say they are not entirely sure how the ACA applies to their business. Nearly four in ten (42 percent) say it will impact their business in the next six months, with almost all (93 percent) saying the impact will be negative. The gradual recovery in small business sentiment is consistent with PNC s forecast for solid economic growth in the fourth quarter of 2014 and into 2015. Job growth and low interest rates will support consumer spending, the housing market recovery, and business investment. With exports benefitting from a gradually improving global economy, PNC forecasts real GDP growth of around 3 percent per annum in the fourth quarter of 2014 and throughout 2015. With growth above trend, but the labor force expanding, the unemployment rate will end this year at around 5.8 percent, and slowly decline to around 5.5 percent at the end of 2015. 2 Visit http://www.pnc.com/economicreports to view the full listing of economic reports published by PNC s economists.
Visit http://www.pnc.com/economicreports to view the full listing of economic reports published by PNC s economists. 3
Visit http://www.pnc.com/economicreports to view the full listing of economic reports published by PNC s economists. Disclaimer: The material presented is of a general nature and does not constitute the provision of investment or economic advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions and forecasts expressed herein are subject to change without notice. Relevant information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. 2014 The PNC Financial Services Group, Inc. All rights reserved. 4
PNC Economics Group October, 2014 Baseline U.S. Economic Outlook, Expanded Table 1Q'14a 2Q'14a 3Q'14f 4Q'14f 1Q'15f 2Q'15f 3Q'15f 4Q'15f 2013a 2014f 2015f 2016f Output Nominal GDP (Billions $ ) 17044 17328 17519 17714 17918 18127 18338 18550 16768 17401 18233 19077 Percent Change Annualized -0.8 6.8 4.5 4.5 4.7 4.7 4.7 4.7 3.7 3.8 4.8 4.6 Real GDP (Chained 2009 Billions $ ) 15832 16010 16148 16269 16377 16485 16591 16699 15710 16065 16538 16970 Percent Change Annualized -2.1 4.6 3.5 3.0 2.7 2.7 2.6 2.6 2.2 2.3 2.9 2.6 Pers. Consumption Expenditures 10844 10913 10974 11051 11117 11183 11249 11315 10700 10945 11216 11481 Percent Change Annualized 1.2 2.5 2.3 2.8 2.4 2.4 2.4 2.4 2.4 2.3 2.5 2.4 Nonresidential Fixed Investment 2052 2100 2138 2160 2180 2196 2210 2226 1991 2112 2203 2262 Percent Change Annualized 1.6 9.7 7.6 4.2 3.6 3.1 2.5 2.9 3.0 6.1 4.3 2.7 Residential Investment 485 496 511 526 535 542 550 556 488 504 546 575 Percent Change Annualized -5.3 8.8 13.0 11.9 7.0 6.0 6.1 4.2 11.9 3.3 8.2 5.3 Change in Private Inventories 35 85 72 60 50 45 40 37 64 63 43 36 Net Exports -447-460 -442-439 -432-425 -418-412 -420-447 -422-399 Government Expenditures 2869 2881 2897 2913 2930 2946 2963 2979 2894 2890 2955 3017 Percent Change Annualized -0.8 1.7 2.3 2.3 2.3 2.3 2.3 2.3-2.0-0.2 2.2 2.1 Industrial Prod. Index (2007 = 100 ) 102.2 103.6 104.6 105.5 106.2 107.0 107.8 108.6 99.9 104.0 107.4 110.6 Percent Change Annualized 3.9 5.5 3.7 3.7 2.9 2.8 3.0 3.0 2.9 4.0 3.3 3.0 Capacity Utilization (Percent ) 78.6 79.1 79.2 79.5 79.6 79.7 79.9 80.0 77.9 79.1 79.8 80.5 Prices CPI (1982-84 = 100 ) 235.2 237.0 237.7 238.7 240.0 241.3 242.7 244.1 233.0 237.2 242.0 247.6 Percent Change Annualized 1.9 3.0 1.2 1.7 2.2 2.2 2.3 2.3 1.5 1.8 2.0 2.3 Core CPI Index (1982-84 = 100) 236.2 237.7 238.5 239.6 240.9 242.2 243.6 245.0 233.8 238.0 242.9 248.6 Percent Change Annualized 1.6 2.5 1.4 1.9 2.2 2.2 2.3 2.3 1.8 1.8 2.1 2.3 PCE Price Index (2009 = 100 ) 108.2 108.8 109.0 109.4 109.9 110.4 111.0 111.5 107.3 108.8 110.7 113.0 Percent Change Annualized 1.4 2.3 0.8 1.5 1.9 1.9 2.0 2.0 1.2 1.4 1.7 2.0 Core PCE Price Index (2009 = 100 ) 106.9 107.4 107.7 108.1 108.6 109.1 109.7 110.2 106.1 107.5 109.4 111.6 Percent Change Annualized 1.2 2.0 0.9 1.5 1.9 1.9 2.0 2.0 1.3 1.4 1.7 2.0 GDP Price Index (2009 = 100 ) 107.7 108.2 108.5 108.9 109.4 110.0 110.6 111.2 106.7 108.3 110.3 112.5 Percent Change Annualized 1.3 2.1 1.0 1.5 2.0 2.1 2.1 2.1 1.5 1.5 1.8 2.0 Crude Oil, WTI ($/Barrel ) 98.7 103.3 98.0 94.0 96.0 98.0 100.0 101.0 97.9 98.5 98.7 103.0 Labor Markets Payroll Jobs (Millions ) 137.8 138.5 139.2 139.8 140.4 141.0 141.5 142.1 136.4 138.8 141.2 143.2 Percent Change Annualized 1.5 2.2 2.0 1.7 1.8 1.6 1.6 1.5 1.7 1.8 1.7 1.4 Unemployment Rate (Percent ) 6.7 6.2 6.1 5.8 5.7 5.6 5.5 5.4 7.4 6.2 5.5 5.1 Average Weekly Hours, Prod. Works. 33.6 33.7 33.7 33.8 33.8 33.8 33.8 33.8 33.7 33.7 33.8 33.9 Personal Income Average Hourly Earnings ($ ) 20.45 20.54 20.65 20.77 20.90 21.04 21.17 21.31 20.14 20.60 21.10 21.67 Percent Change Annualized 3.1 1.7 2.2 2.4 2.6 2.6 2.6 2.6 2.0 2.3 2.4 2.7 Real Disp. Income (2009 Billions $ ) 11810 11936 12027 12126 12198 12272 12344 12417 11651 11975 12308 12601 Percent Change Annualized 3.4 4.4 3.1 3.3 2.4 2.5 2.4 2.4-0.2 2.8 2.8 2.4 Housing Housing Starts (Ths., Ann. Rate ) 925 985 1002 1015 1027 1034 1042 1049 930 982 1038 1057 Ext. Home Sales (Ths., Ann Rate ) 4603 4867 4978 5042 5093 5119 5144 5169 5073 4873 5131 5284 New SF Home Sales (Ths., Ann Rate ) 431 430 460 470 473 480 485 487 430 448 481 496 Case/Shiller HPI (Jan. 2000 = 100 ) 163.7 163.7 164.9 166.3 168.8 169.1 170.2 171.3 154.6 164.7 169.8 174.2 Percent Change Year Ago 9.9 7.1 5.4 3.7 3.1 3.3 3.2 3.0 9.6 6.5 3.1 2.6 Consumer Household Economic Stress Index -1.8 1.2 2.4 4.0 4.5 4.0 4.4 4.6-0.8 1.4 4.4 4.8 Auto Sales (Millions ) 15.7 16.5 16.7 16.7 16.6 16.6 16.6 16.6 15.5 16.4 16.6 16.6 Consumer Credit (Billions $ ) 3148 3212 3273 3331 3395 3446 3489 3534 3033 3241 3466 3635 Percent Change Annualized 6.6 8.3 7.8 7.4 7.8 6.2 5.1 5.2 6.1 6.9 6.9 4.9 Interest Rates (Percent) Prime Rate 3.25 3.25 3.25 3.25 3.25 3.25 3.42 3.83 3.25 3.25 3.44 4.60 Federal Funds 0.07 0.09 0.09 0.13 0.13 0.13 0.42 0.83 0.11 0.10 0.38 1.60 3-Month Treasury Bill 0.05 0.03 0.03 0.15 0.29 0.36 0.54 0.93 0.06 0.06 0.53 1.72 10-Year Treasury Note 2.77 2.62 2.50 2.57 2.71 2.82 2.92 3.02 2.35 2.61 2.87 3.33 30-Year Fixed Mortgage 4.36 4.23 4.14 4.27 4.47 4.59 4.70 4.79 3.98 4.25 4.64 5.09 a = actual f = forecast p = preliminary Visit http://www.pnc.com/economicreports to view the full listing of economic reports published by PNC s economists. Disclaimer: The material presented is of a general nature and does not constitute the provision of investment or economic advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions and forecasts expressed herein are subject to change without notice. Relevant information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. 2014 The PNC Financial Services Group, Inc. All rights reserved.