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This Recovery is for Real: Solid, Sustainable, but Sub Par October 2009 Chris Varvares President, Macroeconomic Advisers, LLC www.macroadvisers.com © Macroeconomic.

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Presentation on theme: "This Recovery is for Real: Solid, Sustainable, but Sub Par October 2009 Chris Varvares President, Macroeconomic Advisers, LLC www.macroadvisers.com © Macroeconomic."— Presentation transcript:

1 This Recovery is for Real: Solid, Sustainable, but Sub Par October 2009 Chris Varvares President, Macroeconomic Advisers, LLC © Macroeconomic Advisers

2 2 October 2009 The US Economic Outlook: Bottom Line The recession is over (growth returns) & downside risks dwindle Above-trend growth in 2 nd half of 2009: 3.5% a.r. Robust (but sub par) growth in 2010 (4.1%  ) & 2011 (4.2%  ) Unemployment rate peaks at 10% (or a bit higher) in 2009:q4 Unemployment rate declines to 9.1% in ’10:q4 and to 7.7%  in ’11:q4 Core inflation very low: =1.4% in 2009,  0.8 in 2010 &  0.8 in 2011 Revised higher versus recent forecasts --- but still below FOMC Fed: Still expecting a late exit; but will “end easing” long before Fiscal: Stimulus working for now; getting control of the deficit later

3 © Macroeconomic Advisers3 October 2009 Percent History Forecast Unemployment rate Real GDP growth Deep U.S. Recession Followed by a Sub Par Recovery Back from the Abyss and Gaining Momentum 09:2H GDP Growth:3.5% 4.1%4.2% Un. Rate (Q4):10.0%9.1%7.7%

4 © Macroeconomic Advisers4 October 2009 Slack Keeps Downward Pressure on Inflation Unit Labor Cost and Core PCE Inflation 4-quarter percent change Unit labor cost Core PCE inflation H F

5 © Macroeconomic Advisers5 October 2009 Long-Rates are on the Rise, but the Fed Stands Pat Percent H F Conventional mortgage rate Fed funds rate 10-year Treasury yield Below-Target Inflation & Lingering Slack Imply Late Exit

6 © Macroeconomic Advisers6 October 2009 Forecast Comparison 09Q209Q309Q410Q GDP Growth MacroAdvisers (Oct 7) Blue Chip (Oct 10) PCE Growth MacroAdvisers Blue Chip Unemployment Rate MacroAdvisers Blue Chip GDP Price Inflation MacroAdvisers Blue Chip Fed Funds Rate MacroAdvisers Blue Chip* yr Note Yield MacroAdvisers Blue Chip * Inferred from t-bill yield Q4/Q4 Q4 Average FOMC CT (Jul) −1.5-− FOMC CT (Jul) Q4 Average

7 © Macroeconomic Advisers7 October 2009 Factors Contributing to Above-Trend GDP Growth Motor-vehicle production to rebound (with or without CARS) Inventory liquidation to slow sharply; X-auto: Q3=+$37b, Q4=+$56b Housing bounces off the bottom, will begin strong recovery Home prices are stabilizing, to remain flat (emergence of upside risk?) Broad financial conditions improving: –Especially equities –But spreads are narrowing too Implies improving balance sheets for households Helps stabilize & then boost consumer spending (pent-up demand!) ARRA actually is providing stimulus Global nature of the recovery Despite “Minsky Moment,” recession/recovery dynamics at work!

8 © Macroeconomic Advisers8 October 2009 Recession Dynamics Hint at Upside Risk Peak-to-trough decline in real GDP (%) quarter percent change y = 2.1x R 2 = Strength of Early Recovery Depends on Depth of Recession MA forecast NABE Consensus * All other includes interest, dividend and transfer income. Forecast prepared on October 7, 2009.

9 © Macroeconomic Advisers9 October 2009 Significant Downside Risks Remain Securitization markets in key segments still “dependent” or broken CMBS market still facing a potential refi squeeze, with spillovers RMBS spreads may widen sharply as Fed unwinds balance sheet Bank lending to consumer remains stingy; More HH de-leveraging? Home price stabilization could prove temporary, drag housing lower Recovery in equities could falter; further erode HH balance sheets Energy price increases still are a drag on growth Foreign demand for $ assets could fall short, pressure $  and rates  Expiring Bush tax cuts could add drag Back side of ARRA stimulus implies drag; will recovery have legs? What about health care reform? Cap and Trade?

10 © Macroeconomic Advisers10 October 2009 Trillions of chained (2005) dollars MA’s Monthly GDP Index Q1 was not as Bad as it Appeared; Set up Q2 “Firming” Jan.2001Jan.2003Jan.2005Jan.2007Jan

11 © Macroeconomic Advisers11 October 2009 Q3 Has the Makings of a Real Recovery

12 © Macroeconomic Advisers12 October 2009 Q4 Too!

13 © Macroeconomic Advisers13 October 2009 Q3: Even Without CARS MVO Was Set to Jump Motor Vehicle Output Swings to the Plus Column Millions of units, annual rate Contributions to GDP growth (left) Change (right)

14 © Macroeconomic Advisers14 October nd Half and Beyond – Lift from Inventories Nonfarm Inventory Investment excl. Motor Vehicles & Parts Billions of chain-type (2005) dollars H F

15 © Macroeconomic Advisers15 October nd Half and Beyond – Lift from Housing! New and Existing Home Sales Turn Up SAAR, thousands Existing (left) New (right) SAAR, thousands

16 © Macroeconomic Advisers16 October nd Half and Beyond – Lift from Housing! Housing Starts and Residential Investment Turn Up SAAR, thous. units Residential investment (right) Private housing starts (left) 4-quarter percent change H F 09:2H Cont. to GDP Growth:0.5pp 0.8pp0.7pp

17 © Macroeconomic Advisers17 October 2009 Are House Prices About to Turn Up? …An Upward Revision to the Forecast of House Prices 2005:Q1 = Model predicted value Base 909 Base 907 A firming in home prices lowers the current user cost of housing and boosts demand for housing in a model that well understands the boom and bust…when fed the actual path of house prices! LoanPerformance House Price Index

18 © Macroeconomic Advisers18 October 2009 Single-Family Housing Starts 2nd Half and Beyond – Lift from Housing! SAAR, thous. units Current forecast Counterfactual assuming further 7½% decline in house prices

19 © Macroeconomic Advisers19 October 2009 Contributions to Real GDP Growth Percentage points Residential investment GDP excluding residential investment H F 2nd Half and Beyond – Lift from Housing!

20 © Macroeconomic Advisers20 October 2009 Financial Conditions: Healing Apace Credit Conditions Still Improving Percent H F Conventional mortgage rate – 10-yr treasury spread AAA – 10-yr treasury spread

21 © Macroeconomic Advisers21 October 2009 Senior Bank Loan Officer Survey Diffusion Indexes Index Net percentage “loosening” terms on C&I loans Net percentage “loosening” Terms on real estate loans Willingness to make consumer installment loans Financial Conditions: Healing Apace

22 © Macroeconomic Advisers22 October 2009 Interest Rates & Equity Values Billions of dollars Percent Financial Conditions: Healing Apace Equity wealth (left) Conventional mortgage rate (right) 10-year Treasury yield (right) H F

23 © Macroeconomic Advisers23 October 2009 Household Net Worth Trillions H F Other Equities Total Household Net Worth: Stop the Pain! -$14 tril. (-1.2) -$5 tril. (-0.5) -$9 tril. -$11 tril.

24 © Macroeconomic Advisers24 October 2009 PCE Aided by Improving Financial Conditions PCE Growth & Contributions from Wealth 4-quarter percent change Percentage points H F

25 © Macroeconomic Advisers25 October 2009 Personal Saving Rate Percent H F PCE Reset Lower; Saving Rate Reset Higher

26 © Macroeconomic Advisers26 October 2009 Comparative Consumption/Income Ratios Percent Consumption Ratios Reset Lower EC$/YPD$ (left) CON$/YPD$ (left) ECD$/YPD$ (right) EC$ - Consumer expenditures ECD$ - Consumer expenditures durables CON$ - Service concept consumption YPD$ - Pers. Disposable Income H F

27 © Macroeconomic Advisers27 October 2009 Diminishing Drag as HH Balance Sheets Stabilize Contributions of Error-Correction Term to Growth of CON Percent change, annual rate H F

28 © Macroeconomic Advisers28 October 2009 Durables Bear Much of the Burden Light Vehicle Sales Millions of units, annual rate Monthly sales Quarterly sales and MA forecast

29 © Macroeconomic Advisers29 October 2009 Global Recovery, Dollar Decline “Help” Foreign Growth and the Dollar 4-quarter percent change Real trade-weighted exchange rate (right) H F Index Real foreign GDP (left)

30 © Macroeconomic Advisers30 October 2009 Sharply Rising Imports Depress Net Exports Exports, Imports, and Net Exports Billions of chain-type (2005) dollars 4-quarter percent change Exports (right) Imports (right) Net exports (left) H F

31 © Macroeconomic Advisers31 October 2009 Pent-up Demand Helps CapEx Tepid Recovery Growth of Nonresidential Fixed Investment 4-quarter percent change Computers and software “Other” equipment H F Structures

32 © Macroeconomic Advisers32 October 2009 Not Quite a Jobless Recovery! Employment, Labor Force, and Unemployment 4-quarter percent change Unemployment rate (right) Employment growth (left) H F Labor force growth (left) Percent

33 © Macroeconomic Advisers33 October 2009 Output per Hour in the Nonfarm Business Sector 4-quarter percent change Not Quite a Jobless Recovery! Overshoot on productivity in recession (cyclical anomaly) as firms shed workers quicker than typically (fearing deeper slump) argues for quicker re-hiring with recovery…somewhat slower productivity H F

34 © Macroeconomic Advisers34 October 2009 MA’s Unemployment Path versus Okun’s Law Simulation Results and MA Forecast Percent Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q Base 909 Predicted value +2 standard error -2 standard error H F

35 © Macroeconomic Advisers35 October 2009 Blue Chip Forecast Compared to Okun’s Law Predicted Values Percent Not Quite a Jobless Recovery! Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q Blue Chip forecast Predicted value from Okun’s Law model using Blue Chip GDP forecast H F

36 © Macroeconomic Advisers36 October 2009 Rising Energy Prices Marginally Boost Inflation Refiners’ Acquisition Cost of Imported Oil $/Barrel 2005 $ Current $ H F

37 © Macroeconomic Advisers37 October 2009 Inflation Revisions Reveal More Disinflation Pre-revised vs. Revised: 12-month Core PCE Inflation 12-month percent change Source: Bureau of Economic Analysis Revised Pre-revised 1.3% - lowest since September 2001

38 © Macroeconomic Advisers38 October 2009 Model Uncertainty and the Inflation Forecast Simulated Core PCE Inflation From Models Estimated over Alternative Samples 12-month percent change Source: Bureau of Economic Analysis; Macroeconomic Advisers, LLC

39 © Macroeconomic Advisers39 October 2009 Unit Labor Cost and Core PCE Inflation 4-quarter percent change Unit labor cost Core PCE inflation H F Split the Difference…Lean Toward Intermediate Result

40 © Macroeconomic Advisers40 October 2009 Long-Rates are on the Rise, but the Fed Stands Pat Percent H F Conventional mortgage rate Fed funds rate 10-year Treasury yield Below-Target Inflation & Lingering Slack Imply Late Exit

41 © Macroeconomic Advisers41 October 2009 The US Economic Outlook: Bottom Line The recession is over (growth returns) & downside risks dwindle Above-trend growth in 2 nd half of 2009: 3.5% a.r. Robust (but sub par) growth in 2010 (4.1%  ) & 2011 (4.2%  ) Unemployment rate peaks at 10% (or a bit higher) in 2009:q4 Unemployment rate declines to 9.1% in ’10:q4 and to 7.7%  in ’11:q4 Core inflation very low: =1.4% in 2009,  0.8 in 2010 &  0.8 in 2011 Revised higher versus recent forecasts --- but still below FOMC Fed: Still expecting a late exit; but will “end easing” long before Fiscal: Stimulus working for now; getting control of the deficit later

42 Back-up Slides

43 © Macroeconomic Advisers43 October 2009 MA Forecast Details

44 © Macroeconomic Advisers44 October 2009 Real Fed Funds Rate and Real 10-year T-note Yield* Percent Below-Target Inflation & Lingering Slack Imply Late Exit H F Real 10-year T-note yield Real fed funds rate

45 © Macroeconomic Advisers45 October 2009 Contributions to Real Disposable Personal Income 4-quarter percent change Wage & Salary Income Poised to Turn Up Taxes Real disposable personal income Wage, salary & proprietors’ income H F


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