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2. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Executive Summary
Politics and Policy To Be Major Determinants of Growth
• Fiscal drag to be a major theme in 2013.
- Automatic sequestration could increase fiscal drag.
• Fed policy designed to address economy caught in liquidity trap.
- Fed will continue to purchase assets throughout 2013.
• Chances for major tax and fiscal reform are probably remote.
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3. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Executive Summary
Another Year of 2 Percent Growth Likely
• Job growth around 150,000 per month with a modest decline in the
unemployment rate by end of year.
• Growth drivers: energy, housing , manufacturing and improving financial conditions.
Risks to the outlook
• External Sector: Euro zone and Middle East tensions.
• Domestic fiscal policy disputes.
• Financial regulation.
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4. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Jobs and Growth
400 5
200
3
Quarterly Average (Percentage)
Quarterly Average (Thousands)
0
1
-200
-1
-400
-3
-600
-5
-800
Real GDP Y/Y (RHS) Total Change in Employment (LHS)
-1000 -7
1996 1998 2000 2002 2004 2006 2008 2010 2012
R2=.77
Source: Bloomberg
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5. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Executive Summary
US Economy: Liquidity Trap Prevails
• Slow growth and elevated unemployment continue.
• Investors have not priced in fiscal drag on growth in first half of 2013.
• 10-year rate likely hit high for until second half of year.
• Dollar weakness to persist against trade weighted basket of currencies.
• Policy debate around debt ceiling and sequestration to economy remains the primary
risk to the economic outlook.
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6. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Mind The Gap
US Retains Substantial Output Gap
15
Real GDP Real Potential Output
14
13
Trillions (2005 Chained $)
12
11
10
9
8
7
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Bloomberg
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7. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Labor Market Slack Persists
58 11
Employment to Population Ratio (LHS) Unemployment Rate (RHS, Inverted)
10
59
9
60
8
61
Percent
Percent
7
62
6
63
5
64
4
65 3
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Bloomberg USERTOT , USURTOT INDEX<GO>
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8. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Real Consumption on Lower Trend
11000
10500
Real PCE Trend Prior to Recession
Billions (Chained 2005 $)
10000
9500
9000
8500
8000
2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg US.HHSPNR BEA INDEX<GO>
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9. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Cyclical Growth Outlook
Core Scenario: Below Trend (2.5 percent) Growth
• Liquidity Trap Defines Business Cycle.
• Liquidity injections into banking system have failed to stimulate growth and
employment back to trend.
• Monetary policy targeting liquidity trap.
• Policy gridlock offers no fiscal relief.
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10. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Cyclical Growth Outlook
Structural adjustment to growth model and labor market continues.
• Moving away from overconsumption based on easy credit.
• Growth: 2.2 percent cyclical growth average.
• Consumption: 1.5 percent cyclical growth average.
• Diversification of growth drivers.
• Elevated unemployment likely to persist.
• Public and private deleveraging continues.
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11. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Cyclical Growth Outlook
Alternative Scenario: Cyclical Outperformance
• Long term tax and fiscal reform.
• Sustainable increase in corporate and consumer confidence.
• Domestic corporations deploy.
• Growth and hiring move back toward long term trends.
• Rising rates and inflation.
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12. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Bloomberg Consensus: Survey of Forecasters
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13
Real GDP 1.40% 1.60% 2.10% 2.50% 2.80%
CPI 2.0% 1.70% 2.0% 1.90% 2.10%
Core PCE 1.70% 1.60% 1.60% 1.70% 1.80%
Unemployment 7.83% 7.80% 7.80% 7.70% 7.50%
Central Bank Rate 0.25% 0.25% 0.25% 0.25% 0.25%
2-Year Rate 0.25% 0.26% 0.29% 0.34% 0.41%
10-Year Rate 1.76% 1.76% 1.86% 1.99% 2.14%
EUR/USD $1.32 $1.29 $1.28 $1.27 $1.27
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13. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Slow Growth Likely to Define 2013
65.0 6.0
5.0
60.0 4.0
3.0
GDP Y/Y Percentage Change
Index (Quarterly Average)
55.0 2.0
1.0
50.0 0.0
-1.0
45.0 -2.0
-3.0
40.0 -4.0
ISM Manufacturing Survey (LHS)
Weighted ISM Manufacturing & Non-Man (LHS) -5.0
GDP Y/Y (RHS)
35.0 -6.0
1998 2000 2002 2004 2006 2008 2010 2012
Source: Bloomberg NAPMPMI, GDP CYOY INDEX<GO>
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14. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Low Wage Bias in Hiring
150
125
100
75
Thousands
50
25
0
-25
Leisure and Hospitality Health Care and Social Assistance Temp Retail Trade
-50
2010 2011 2012
Source: Bloomberg USRTTOT, USESTEMP, USEETOTS, USEHTOTS INDEX<GO>
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15. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Real Consumption and Consumer Confidence
120 8
110
6
Year Over Year Percentage Change
100
4
90
Index
2
80
0
70
-2
60
University of Michigan Consumer Sentiment Real Personal Consumption
50 -4
1996 1998 2000 2002 2004 2006 2008 2010 2012
PCE CHY%, CONSSENT INDEX<GO>
Source: Bloomberg
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16. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Central Bank Policy Outlook and Overview
Fed will likely remain on hold throughout 2013
• Forward guidance to remain unchanged.
• Asset purchase to remain in place, then slow in 2014.
.
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17. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Central Bank Policy Outlook and Overview
• Aggressive action to unclog monetary transmission mechanism to remain in place
through 2013.
• Balance sheet likely to expand to $4 trillion by end of 2013.
• If policy does not gain traction, Fed will begin to create conditions for targeting of
nominal GDP.
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18. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Central Bank Policy Outlook and Overview
Five C’s of U.S. Monetary Policy
• Communications
• Commitment
• Conditionality
• Composition
• Credibility
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19. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
The Long Road Ahead
Slow Grind Back To Full Employment
Scenario 1: Structural Break Scenario 2: Cyclical Recovery
7% NAIRU 7% NAIRU 5.5% NAIRU 5.5% NAIRU
Monthly Job Gains 150,000 150,000 150,000 150,000
Labor Force Participation Rate 63.50% 63.50% 63.50% 63.50%
Average Annual Population Growth 0.92% 0.50% 0.92% 0.50%
Years to Full Employment 3 Years 1.5 Years 7 Years 4 Years
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21. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Monetary Policy at the Zero Bound
Taylor Rule & Evans Rule Estimates of the Fed Funds Rates
8
6
Taylor Rule Estinates
Fed Funds Rate
4
2
Percentage
0
Evans Rule
-2 Estimates
-4
-6
-8
-10
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Bloomberg USFEDL01, PCE CYOY, USURTOT INDEX<GO>
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22. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Rate Outlook
U.S. 10-Year likely posted highs for first half of 2013
• Forward looking rates indicated Fed policy to continue to suppress curve.
• Slower spending, followed by slow growth and modest deceleration in hiring mid year.
• Expect move back toward 1.50 on 10-year due to weak January data.
• Long term rates should trade in range between 1.50 and 2 percent.
• Risks to the outlook:
- Acceleration in demand from external sector bolsters growth prospects.
- Gains in labor market and housing offset fiscal drag.
- Premature exit by Fed from asset purchase program.
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23. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Image page
U.S. Rates Overview
Bloomberg consensus forecast indicates higher 10- and 30-year rates.
Fed Asset Purchases Likely to continue near $85 billion per month.
Current Rates:
• 2-Year: .41 percent
• 10-year: 2.14 percent
• 30-year: 3.26 percent
Fourth Quarter Consensus Survey Rate Forecast:
• 2-Year: .26 percent
• 10-year: 1.90 percent
• 30-year: 3.10 percent
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24. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Projected Path of Long- and Short-Term Rates
4.50
4.00
3.50
3.00
2.50
Percent
2.00
1.50
1.00
0.50
US 10-Year (LHS) 3-Month, 2-Year Forward (RHS)
0.00
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Source: Bloomberg
USGG10YR INDEX, G0025 2Y3M BLC2CURNCY<GO>
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25. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
FX Overview
Dollar appreciation versus euro- and-trade weighted basket of currencies eases:
• Global central bank policy will drive foreign exchange valuations.
• Competitive quantitative easing manage currency competition among highly indebted
industrialized states.
• USD depreciation against a broader trade weighted based of currencies.
• Winners
- AUD
- CAD
- BRL
- MXN
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26. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Dollar Depreciation Likely to Continue
115
QE 1 Begins QE 2 QE 3
110
105
Index
100
95
Real Trade Weighted Broad Dollar Index
90
2006 2007 2008 2009 2010 2011 2012 2013
Source: Bloomberg USTWBROA INDEX<GO>
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27. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Image page
U.S. Manufacturing Outlook
Manufacturing growth stabilizes
• Rise in capital expenditures following resolution of
- Automatic sequestration.
- Debt ceiling.
- Auto production leads modest growth in manufacturing.
o Rebuilding of auto stock following Hurricane Sandy.
o 250,000 autos destroyed by storm.
External Demand Rebounds
• Modest support for U.S. growth picture.
• European recession.
• China bounce in second half of 2013.
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28. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Industrial Production and Growth
6.0 10.0
5.0
Y/Y Percentage Change (Quarterly Average)
4.0
5.0
3.0
Y/Y Percentage Change
2.0
0.0
1.0
0.0
-5.0
-1.0
-2.0
-10.0
-3.0
-4.0
GDP CYOY (LHS) Industrial Production (RHS)
-5.0 -15.0
1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Bloomberg
IP YOY, GDP CYOY INDEX<GO> R2=.76
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29. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Excluding Europe Global Manufacturing Rebounds
65 60%
60
40%
Y/Y Percentage Change (Index)
55
20%
50
Index
0%
45
-20%
40
-40%
35
MSCI World Index (RHS) US ISM (LHS) China PMI (LHS)
Euro Zone PMI (LHS) JP Morgan Global PMI (LHS)
30 -60%
2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg
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30. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Financial Conditions Overview
• Global central banks asset purchase supportive of financial conditions.
• Improved financial conditions supportive of U.S. and global growth.
• Credit creation continues to improve.
• This has not resulted in an increase in monetary velocity.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 30 <<<<
31. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Bloomberg Financial Conditions Indices
2
1
0
-1
Index(Z-Score)
-2
-3
-4
-5
US Financial Conditions Index
EU Financial Conditions Index
-6
2010 2011 2012 2013
Source: Bloomberg BFCIUS, BFCIEU INDEX<GO>
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 31 <<<<
32. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Credit Markets Healing
Private Credit Creation & Nominal Growth
20%
Nominal GDP
Total Credit Creation Private Financial Instiutions
15%
Year Over Year Percentage Change
10%
5%
0%
-5%
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
Adjusted R2=.64
Source: Federal Reserve, Bloomberg
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33. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Credit Markets Healing, Not Translating to Rising Velocity
2.2
M2
2.1
2
1.9
1.8
1.7
1.6
1.5
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Source: Bloomberg VELOM2 INDEX<GO>
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34. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Housing Outlook and Overview
Modest cyclical recovery
• Recovery in starts driven by demand for multifamily dwellings.
• Prices stabilization.
• Some metro-areas experiencing price appreciation.
Overall housing recovery still years away
• Mortgages underwater still a concern.
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35. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Housing Starts Stabilize
2 90
1.8 80
1.6
70
1.4
Millions (Annualized Pace)
60
1.2
50
Index
1
40
0.8
30
0.6
20
0.4
0.2 10
Single Family Starts National Association of Homebuilders Index
0 0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Bloomberg USHBMIDX, NHSPS1 INDEX<GO>
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 35 <<<<
36. U.S. 2013 Economic Overview and Outlook Email jbrusuelas3@bloomberg.net or call 212-617-7664
Negative and Near Negative Equity Still A Policy Challenge
First Mortgages: Negative and Near Negative Equity
29
28
27
26
25 Near Negative
Percent
Equity, 4.7
24
23
22
21 Negative Equity, 22.3
20
Q4'09 Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12
Source: Bloomberg NESHNATI, NNSHNATI INDEX<GO>
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SUBSCRIBE @BRIEF<GO> | 36 <<<<
37. Bloomberg
Joseph Brusuelas,
Senior Economist
Bloomberg, LP
jbrusuelas3@bloomberg.net
Joseph Brusuelas is an economist who writes for the Bloomberg Economic Brief. The observations he makes
are his own. Bloomberg is a leading source of data, news, and analytics for financial and legal
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