MACRO REPORT US Economy Update 2015 Outlook Edition Key Insights Monica Defend Head of Global Asset Allocation Research Elina Ribakova Senior Economist Global Asset Allocation Research Annalisa Usardi Economist Global Asset Allocation Research Also contributing Riccardo Soggiu Senior Economist, Central Banks Global Asset Allocation Research 2015 Outlook: We expect the US Economy to grow strongly at above 3% in the next couple of years, with a forecast of 3.4% for 2015. We have also lowered further our baseline scenario for oil prices, and therefore lowered the CPI forecast for 2015 to 1.5%, and expect CPI to trend higher from 2016 onwards. Economic Conditions: The Bureau of Economic Analysis released the third estimate of 3Q14 GDP, lifting it to 5% annualized (quarter-over-quarter, seasonally adjusted). Based on incoming data, we have revised up our forecasts for GDP growth across 2014-2016. During its last meeting on December 17, the US Federal Reserve emphasized the solid progress in the economy so far and saw the slowdown in inflation as transitory. We expect the Fed to start slowly increasing rates during 2015. Stability Conditions: Republicans gained control of the Senate in mid-term elections; the election result, in our view, limits what President Obama can achieve during his final two years. In the US political establishment, the focus has now shifted to the next presidential election and little is likely to be achieved in terms of structural reforms in the near-term. We therefore are somewhat concerned about the challenging fiscal outlook, even if fiscal policy will be less of a drag on growth in 2015. Macro Pulse Source: Pioneer Investments, as of January 7, 2015. 1
Economic Conditions Growth & Economic Trends On December 23, the Bureau of Economic Analysis released its third estimate for 3Q14 GDP, which at 5% was well above our and consensus estimates. The GDP release highlighted strong contribution from personal spending, investments and government spending. We now expect the US economy to grow above 3% in the next couple of years. We expect US growth closer to 3% in the next couple of years, with 2015 at 3.4%. Figure 1. US GDP 5 4 3 2 1 0 % -1-2 -3-4 -5-6 1,0 1,8 2,8 3,8 3,3 2,7 1,8-0,3 2,5-2,8 2,3 2,2 2,4 1,6 3,4 3,7 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 E2015 E2016 E2017 E Pers. Cons. Exp. Investments Gov. Cons. Exp. Net Trade Inv. Changes GDP 3,0 Source:U.S. Bureau of Economic Analysis, Datastream, Pioneer Investments, as of 7 January, 2015. Real Personal Consumption Expenditure (PCE) for Q3 was revised upwards in the third release to 3.2%, above our earlier forecast which was based on disposable income and consumption expenditure data from the Personal Income and Outlays report. Consumption remained the most important driver of growth. Going forward, given the progressive improvement in the dynamics of the labour market (in particular a decrease in underutilisation of labour and in labour market slack), wages and disposable income, as well as a lower baseline oil price, we expect PCE to get a significant boost towards 4% in 2015. After this, the likely outlook would be for a gentle reversion towards a long-term average of about 2.5-3%. We expect inflation at about 1.8% in 2015 based on lower oil and commodity prices and USD strength. Positive developments in Q3 and Q2 are likely to carry over into Q4, given the data releases so far. Lower oil prices have given a strong boost to consumption growth already, particularly in retail and auto sales. Lower oil prices and significant job market improvements in November have driven improvements in consumer sentiment as reflected in surveys by the Conference Board and the University of Michigan. November s reading of 321,000 new non-farm jobs surprised all the forecasters on the upside. Roughly one-third of the new jobs came from the highwage sectors such as business and professional services and the financial industry. However, overall wage growth has remained moderate and broad-based indicators suggest that slack remains in the labour market despite healthy progress. We expect inflation somewhat below the Fed s objective of 2% in 2015, staying near 1.8% on average owing to the lower oil and commodity prices and US dollar strength. We see the inflation dip as temporary and expect inflation to revert to 2
about 2.3% over the medium-term. We expect inflation to remain well behaved and expectations anchored with PCE inflation remaining below 2% given our current scenario on unit labor costs, wages and dollar strength. Monetary Policy In October, the Fed carried out the final 15B taper of its quantitative easing, ending bond purchases. The Fed in the December statement noted that economic activity is expanding at a moderate pace and forecast that economic activity will expand at a moderate pace, with labor markets indicators and inflation moving towards levels the Committee judges consistent with its dual mandate (Unemployment 5.8% in November). On inflation, the Fed expects it to rise gradually toward 2% as the labor market improves further (November Headline CPI 1.3% YoY, October Core PCE 1.6% YoY) and vowed to monitor inflation developments closely. The Fed statement sounded relatively upbeat on the labor market, noting that conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. The committee indicated that it can be patient in beginning to normalize the stance of monetary policy, this being defined as two meetings in the press conference (rate hikes now possible from April 2015); future changes will be employment and inflation data dependent. There were three dissenters out of 10 voters, with Fisher seeing the need for earlier rate hikes, Kocherlakota worried that the statement reduced the credibility of the 2% inflation target in the context of the current low inflation scenario, and Plosser who opposed the importance of the passage of time as a key element of forward guidance. The next scheduled Fed meeting is on January 28. Interest rates now look set to start to slowly increase during 2015 (fed fund futures currently expect rates to start to rise above 0.25% in the summer of 2015). Fiscal Policy Important consolidation has been achieved in the last couple of years, and in 2015 we expect fiscal policy to be less of a drag on economic growth. We remain concerned, however, about the challenging fiscal outlook over the medium term. The Congressional Budget Office (CBO) estimates that in order to stabilize the debt-to-gdp ratio for the Federal government, fiscal adjustment equivalent to 1¼ percent of GDP per annum is needed over the next 25 years. A legacy of high mandatory spending on health care and retirement, along with demographic trends, will likely continue to put pressure on the country s fiscal position. In the near term, we see a gridlock in politics akin to the government shutdown in 2013 as unlikely, but cannot rule it out. Financial Conditions The 2008 crisis was the first post-war recession where deleveraging played a key role. States with the largest declines in home values have seen the slowest recovery to date. It is therefore not surprising that the current recovery took longer to emerge and is more tepid than in the past. Despite the large expansion of the Fed s balance sheet, it is likely that monetary policy by itself cannot reach all corners of the economy. The Great Recession had a significant impact on household net worth and income. The decline in home values resulted in negative equity for many homeowners and played an important role in driving defaults. 3
% U.S. Macro Report 2015 Outlook Edition At the end of 2013 a large proportion of homeowners continued to have negative equity. According to the Federal Reserve Board of Governors Survey of Consumer Finances collected every three years, the percent of households with negative equity as a percent of all households with a mortgage decreased only marginally in 2013 compared to 2010. At 20.5%, the share of households with negative equity remains highly elevated compared to the pre-crisis period. Figure 2. Percentage of Households with Negative Equity 25 20 15 10 5 0 2004 2007 2010 2013 Less than 10% of equity Negative equity Source:U.S. Federal Reserve Board s Survey of Consumer Finances. Pioneer Investments, as of December 31, 2014. From 2007 to 2013 American families saw a 12% decline in income and 40% in net worth. Compared to the last survey in 2010, both income and net worth remained lower in 2013. Median inflation-adjusted family income now stands at $46,668 (down from $49,022 in 2010) and net worth at $81,400 (from $82,521 in 2010). Real household income and wealth are now still somewhat below 1989 levels. The most vulnerable groups were the hardest-hit. According to research by the St. Louis Fed, age, race and education are among the most significant predictors of gains or losses in income and net wealth during the Great Recession. Key Points on Economic Conditions Healthy, broad-based composition of growth. Watch for slowing investments in shale oil and gas, however. GROWTH Fed can start normalizing monetary policy with patience. Fiscal policy is no longer a drag on growth. ECONOMIC TREND ECONOMIC CONDITIONS ECONOMIC POLICIES Improved momentum, 3q2014 GDP growth at 5%. Low inflation. FINANCIAL CONDITIONS Household financial conditions set to improve further. Source: Pioneer Investments, as of January 7, 2015. 4
Stability Factors Demographics Participation rates should not pose a risk to the decline in unemployment. We expect the participation rate to remain broadly stable in the near term. We might see some improvements in the flows into the labour force, but the downward trend is a longterm issue and is mostly related to a change in demographics. Furthermore, we see declines in unemployment as being driven by news, where more people are becoming employed rather than detached from the labour force. Economic & Social Health Politics: The policy Agenda for 2015 will remain challenging. Compromises are likely to be reached in the following areas: Approval of Keystone XL Pipeline: opposed by Democratic Senate leadership and put on hold President Obama Corporate Tax Reform: cut the corporate tax rate from 35% to between 20-27%, tax profits earned overseas at between 5 and 20% and finally eliminate loopholes and depreciation allowances that favor capital intensive firms/industries. Trade Promotion Authority (TPA): TPA allows fast track consideration of trade agreements, which is critical to approval prospects for the Trans-Pacific Partnership (TPP). Energy Exports: there has been bi-partisan talk of liberalizing regulation in a way that would lead to increased of exportation of domestically produced US oil. Other areas might be particularly difficult, such as immigration reform, Obamacare, and fiscal policy. On fiscal policy, there could be room for an agreement with the Republicans negotiating higher defense spending and the Democrats increasing spending on infrastructure and raising the minimum wage. However, neither party is likely to be ready to put forward a comprehensive fiscal adjustment package that would put medium-term finances on a sustainable track. In the area of foreign policy, we might see fewer compromises. Key Points on Stability Conditions Source: Pioneer Investments, as of January 7, 2015 5
2015 Triggers and Risks Triggers Stronger-than-expected global growth and trade, resulting in higher demand for U.S. exports, could lift confidence and add to internal demand drivers to improve the growth profile. Improvements in consumer balance sheets, coupled with stable income growth and anchored inflation expectations, could trigger higher confidence and support more sustained patterns of consumption than we currently envisage. Upside for consumption could come from lower oil prices and lower inflation that we currently embed in our scenario. Improving business sentiment underpinned by accelerating and external sales, coupled with capacity utilization levels higher than we currently estimate, could support further acceleration in capital expenditures. A new Corporate Tax regime could be a key discussion topic for the new Congress, which could gain bipartisan support and revive animal spirits. Risks A significantly stronger dollar might adversely influence the export sector by making U.S.-produced s and services more expensive in foreign markets. Lower oil prices could have a sharper-than-expected effect on investments in the oil and gas sector. Despite adjustments in fiscal policy so far, we remain concerned that over the medium term healthcare and social spending could be a significant drag on fiscal balances. Renewed geopolitical tensions, involving directly or indirectly the United States, could be highly disruptive for the flow of oil and for financial markets in general. 6
4. Macroeconomic Forecast US 2013 2014E 2015E 2016E 2017E 2013 2014 E* 2015 E* 2016 E* Macroeconom i c Forecasts Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4E Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E GDP & Com ponents Y oy % % QoQ Annual i zed % QoQ Annual i zed % QoQ Annual i zed % QoQ Annual i zed GDP 2,2 2,4 3,4 3,7 3,0 2,7 1,8 4,5 3,5-2,1 4,6 5,0 1,7 2,5 4,4 4,0 4,0 3,2 3,8 3,2 3,3 Personal Consumption Expenditures 2,4 2,5 4,0 3,5 3,0 3,6 1,8 2,0 3,7 1,2 2,5 3,2 3,7 4,5 4,2 4,3 3,6 3,1 3,1 3,7 3,1 Government Consumption Expenditures -2,0 0,1 2,3 2,3 2,6-3,9 0,2 0,2-3,8-0,8 1,7 4,2 2,0 2,0 2,0 2,0 2,0 2,4 2,4 2,4 2,4 Fixed Investment 4,7 5,3 5,2 6,9 4,1 2,6 4,8 6,6 6,4 0,3 9,5 7,8 3,6 2,3 4,9 7,2 9,0 7,0 6,6 5,4 4,7 Nonresidential 3,1 6,3 5,1 7,1 4,7 1,5 1,6 5,5 10,4 1,6 9,7 8,9 4,3 2,0 3,8 6,8 9,0 7,8 7,2 6,2 5,1 Residential 12,0 1,4 5,4 5,6 1,7 7,8 19,0 11,2-8,5-5,3 8,8 3,3 0,4 3,3 10,1 9,1 8,9 3,8 4,2 2,2 3,1 Total Internal Dem and Total Consumption + Fixed Investment+Inventories 1,9 2,4 3,4 4,0 3,2 2,8 2,0 3,6 2,4-0,4 4,9 4,1 2,0 2,4 4,1 4,5 4,5 3,6 4,1 3,6 3,2 Fi nal Internal Dem and Total Consumption + Fixed Investment 1,9 2,5 3,9 3,8 3,1 2,0 2,0 2,4 2,8 0,8 3,6 4,1 3,2 3,6 4,1 4,5 4,1 3,6 3,6 3,6 3,2 Exports 3,1 3,1 4,8 7,3 5,5-0,8 6,3 5,1 10,0-9,2 11,0 4,6 2,7 1,8 6,9 6,1 8,7 7,5 8,4 4,7 6,5 Imports 1,2 3,6 4,3 8,8 6,4-0,2 8,5 0,6 1,3 2,2 11,3-0,9 3,9 2,6 4,1 7,5 10,8 9,4 9,7 7,9 6,9 GDP Contri buti ons Net trade 0,2-0, 1 0,0-0, 4-0, 3 - - - - - - - - - - - - - - - - Inventori es changes 0,0 0,0-0, 5 0,2 0,1 - - - - - - - - - - - - - - - - Econom i c Trend % Y oy % Y oy % Y oy % Y oy Industrial Production 2,9 4,1 5,0 5,5 3,4 3,0 2,5 2,7 3,3 3,3 4,2 4,6 4,4 4,4 4,5 5,2 5,9 6,3 6,0 5,2 4,4 Corporate Profits (with IVA and CCAdj) 4,1-0,4 7,1 3,6-0,5 3,1 3,9 4,9 4,7-4,8 0,1 1,4 1,7 13,1 6,3 4,6 4,4 4,4 4,2 3,3 2,4 Hourly Compensations 1,1 2,5 2,7 2,8 2,9 1,0 1,7 1,9-0,1 2,8 2,0 2,2 2,5 2,7 2,8 2,8 2,8 2,8 2,8 2,9 2,9 Unit Labour Cost 0,3 2,0 1,3 1,5 1,3 0,4 1,5 1,2-2,1 2,5 1,5 1,2 2,9 0,7 1,0 2,2 1,2 1,5 1,4 1,5 1,5 Productivity (H Compensation - ULC) 0,9 0,4 1,5 1,3 1,6 - - - - - - - - - - - - - - - - Import Prices Index -1,1-1,0-6,3 2,7-0,2-1,4-1,5 0,1-1,6-1,0 0,4-0,2-3,4-8,0-8,3-7,1-1,9 3,2 3,6 2,7 1,3 Disposable Income -0,2 2,5 3,2 3,0 2,9-0,1 0,3 0,9-1,9 2,4 2,2 2,2 3,1 3,2 3,3 3,3 3,0 2,8 2,9 3,1 3,1 Producer Prices Index 1,2 2,1-0,1 3,6 2,9 1,4 1,6 1,1 0,8 1,6 2,8 2,4 1,4-0,1-0,9-0,6 1,4 3,2 3,9 3,9 3,5 Consumer Prices Index 1,5 1,8 1,5 2,8 2,5 1,7 1,4 1,5 1,2 1,4 2,1 1,8 1,8 1,3 1,1 1,6 2,1 2,8 3,0 2,8 2,6 Export Prices Index -0,4-0,3-2,8 1,4 1,4 1,0-0,3-0,8-1,6-0,5 0,2 0,1-1,0-3,4-3,5-3,0-1,5 0,5 1,6 1,9 1,7 Capacity Utilization 77,9 79,1 78,4 76,8 74,9 77,7 77,8 77,9 78,4 78,6 79,1 79,2 79,3 78,9 78,6 78,2 77,9 77,5 77,1 76,5 76,0 Unemployment Rate 7,4 6,1 5,3 4,8 4,6 7,7 7,5 7,2 7,0 6,7 6,2 5,8 5,6 5,5 5,4 5,3 5,1 5,0 4,9 4,8 4,7 MZM Monetary Index 7,3 6,0 6,3 6,8 7,1 7,9 7,6 7,1 6,6 6,2 6,2 5,9 5,8 6,0 6,2 6,4 6,6 6,5 6,7 6,9 7,1 Source: Pioneer Investments Forecast. Update as of January 7, 2015; for time series with higher frequency (monthly or daily) than quarterly, we consider the quarterly average; in Italic exogenous variables; GDP components on quarterly frequency are %Q/Q annualized rates; all other figures, if not otherwise specified, are %Y/Y. Important Information Unless otherwise stated, all information contained in this document is from Pioneer Investments and is as of December 31, 2014. Unless otherwise stated, all views expressed are those of Pioneer Investments. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any services. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies. Date of First Use: 7 January, 2015. Follow us on: www.pioneerinvestments.com 7