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Presented by:
Nigel Gault
Chief U.S. Economist
IHS Global Insight
The United States:Fiscal Facts and Fantasies
Subdued Recovery:
Tailwinds Battling Headwinds
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 3
The U.S. Recovery: Tailwinds
• More sectors contributing; not just an inventory-driven recovery
• Strong manufacturing growth
• Financial markets healing
• Large businesses are flush with cash
• Labor market is improving
• Stimulus from December’s tax package
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 4
The U.S. Recovery: Headwinds
• Consumers and businesses remain cautious
• No housing recovery
• Rising commodity prices are squeezing real incomes
• The oil price rise could turn into a major shock
• Japan shock will temporarily disrupt the automotive sector
• State and local budget cuts continue
• Federal fiscal tightening is coming
Growth Indicators Showing Signs
Of Weakening
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 6
Key Leading Indicators Show Growth,
But Are Slipping
30
35
40
45
50
55
60
65
2007 2008 2009 2010 2011
80
83
86
89
92
95
98
101
Manufacturing Index
Nonmanufacturing Index
NFIB Small-Business (RS, Optimism Index, 1986=100)
(ISM Diffusion Indexes, 50 = breakeven)
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 7
350
375
400
425
450
475
500
525
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11
4-Week Moving Average Actual
Cautionary Sign: Initial Unemployment
Insurance Claims Have Turned Higher
(Initial unemployment insurance claims, thousands)
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 8
1.5
2.0
2.5
3.0
3.5
4.0
2010 2011 2012 2013
(Annualized real rate of GDP growth, Q/Q, percent)
2011 Growth Expected to Be Backloaded
The Housing Cycle:
Still at the Bottom
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 10
150
200
250
300
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11
4-Week Moving Average Actual
Mortgage Applications for House
Purchase Sank After Tax Credit Expired
(Mortgage applications for purchase, index, Mar.16,1990 =100)
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 11
(Millions of households)
Demand Shortfall:
Household Formation Has Plunged
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
Mar 01-
Mar 02
Mar 02-
Mar 03
Mar 03-
Mar 04
Mar 04-
Mar 05
Mar 05-
Mar 06
Mar 06-
Mar 07
Mar 07-
Mar 08
Mar 08-
Mar 09
Mar 09-
Mar 10
357,000 households added in year to
March 2010 – a post-World War II low
Source: Census Bureau
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 12
0.5
1.0
1.5
2.0
2.5
3.0
1975 1980 1985 1990 1995 2000 2005 2010
(Proportion of homeowner inventory vacant and for sale, percent)
Supply Excess:
The Housing Overhang
Source: Census Bureau
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 13
0.0
0.4
0.8
1.2
1.6
2.0
2.4
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
165
175
185
195
205
215
225
Housing Starts (LS, millions of units)
FHFA House Price Index (RS, purchase-only index, 1991Q1 = 100)
Housing Starts Have Hit Bottom:
Prices Not Quite There Yet
The Consumer :
Signs of Life, But Now Threatened
By Another Oil Spike
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 15
-100
0
100
200
300
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11
Employment Is Turning
4
6
8
10
12
Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
*Thousands, monthly change, SA; **Percent; ***Hours, SA; ****Nominal, percent year-over-year
Private Payroll Employment* Unemployment Rate**
Length of Workweek*** Average Hourly Earnings Growth****
0
1
2
3
4
Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
33.6
33.8
34.0
34.2
34.4
34.6
Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 16
Energy and Food Prices Have Climbed...
20
40
60
80
100
120
140
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Oil Price (LS, WTI, $/barrel) PPI Farm Products (RS, index, 1982=1.0)
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 17
(Percent change unless otherwise noted)
...Driving the CPI Higher And Hurting The
Consumer’s Purchasing Power
2009 2010 2011
CPI -0.3 1.6 3.0
Components (rates of increase)
Core 1.7 1.0 1.5
Energy -18.1 9.6 15.3
Food 1.8 0.8 3.9
Components (contributions)
Core (77.7%) 1.3 0.7 1.1
Energy (8.6%) -1.7 0.8 1.3
Food (13.7%) 0.2 0.1 0.5
CPI weights as of Dec 2010 in parentheses
Note: The 2011 payroll tax cut is worth 1.0% of disposable income,
so it has been more than offset by higher inflation.
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 18
-4
-2
0
2
4
6
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
(Annualized rate of growth)
Consumer Spending Stabilizing,
But Not a Strong Driver of Recovery
Business Investment:
A Mixed Picture
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 20
Business Equipment Demand
Recovering
(Non-defense capital goods orders ex-aircraft, 3-mo moving average, $ billions)
45
50
55
60
65
70
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 21
Nonresidential Construction:
Architects’ Billings Just Above Neutral
(Diffusion Index)
30
35
40
45
50
55
60
65
1995 1997 1999 2001 2003 2005 2007 2009
* Source: American Institute of Architects
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 22
(Percent change annualized rate, real spending)
Business Capital Spending Cycle:
Construction Lags
-45
-30
-15
0
15
30
45
2007 2008 2009 2010 2011 2012 2013
Software & Equipment Buildings
Foreign Trade:
A Key Driver of Growth
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 24
(Percent growth in 12-month-moving average, merchandise exports, Feb 2011)
Export Growth By Destination
0
10
20
30
Total
(100%)
Latin
America
(23%)
Pac Rim
(25%)
Canada
(19%)
Other
(10%)
Europe
(22%)
Export shares are in parentheses. Latin America includes Mexico.
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 25
(2005=1.0, inflation-adjusted)
The U.S. Dollar: Secular Weakness
Against Emerging Market Currencies
0.6
0.8
1.0
1.2
1.4
1.6
1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Major Currency Index Other Important Trading Partners Index
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 26
(Percent change annualized rate, volumes)
Exports Expected to Outpace Imports
-40
-20
0
20
40
2008 2009 2010 2011 2012 2013
Real U.S. Exports Real U.S. Imports
Inflation and Interest Rates
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 28
(Percent change from a year earlier)
Core Inflation Is Bottoming Out: Oil and
Food Driving Headline Inflation Higher
-2
-1
0
1
2
3
4
5
6
2006 2007 2008 2009 2010 2011 2012 2013
All-Urban CPI Core PCE Price Index
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 29
(Percent)
Federal Funds Rate to Stay Near Zero Until 2012:
Long Rates Rise But Only Gradually at First
0
1
2
3
4
5
6
7
1999 2001 2003 2005 2007 2009 2011 2013
Federal Funds 10-Year Treasury Yield
Fiscal Facts and Fantasies
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 31
Will The U.S. Ever Stabilize the Public
Debt?
“You can always count on Americans to do
the right thing - after they've tried
everything else.”
Winston S. Churchill
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 32
Fiscal Facts
• The federal fiscal trajectory is wholly unsustainable
• Spending is high, revenues are low
• S&P has issued a downgrade warning, but markets have not panicked –
10-year Treasury yields are not far above 3%
• Politicians are now getting more serious; they know something must be
done
• There is a huge philosophical divide over how to cut the deficit
• There are elections in 2012 (isn’t that the place to argue things out?)
• There is a looming flashpoint before 2012:
―The debt ceiling must be raised. “Drop-dead” date currently August 2.
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 33
Fiscal Fantasies
• The deficit can be stabilized just by cutting spending
• Tax cuts can “pay for themselves”
• Only the “rich” need pay more taxes
• Spending can be cut just by getting rid of waste and inefficiency
• Medicare can continue as is
• Defense can’t be touched
• Austerity in current conditions is expansionary
Everybody must give a little ground on their fantasies to allow a
comprehensive deficit-reduction plan. Unlikely before the elections.
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 34
The Federal Budget Gap
(Percent of GDP)
14
16
18
20
22
24
26
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020
Revenues Expenditures
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 35
Federal Debt Projections
(Percent of GDP)
50
55
60
65
70
75
80
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
IHSGI (May) Ryan (Apr) Obama (Feb) Bowles-Simpson (Dec)
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 36
Federal Deficit Projections
(Percent of GDP)
0
2
4
6
8
10
12
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
IHSGI (May) Ryan (Apr) Obama (Feb) Bowles-Simpson (Dec)
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 37
Federal Spending Projections
(Percent of GDP)
19
20
21
22
23
24
25
26
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
IHSGI (May) Ryan (Apr) Obama (Feb) Bowles-Simpson (Dec)
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 38
Federal Revenue Projections
(Percent of GDP)
14
15
16
17
18
19
20
21
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
IHSGI (May) Ryan (Apr) Obama (Feb) Bowles-Simpson (Dec)
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 39
(IHSGI May Baseline, percent of GDP)
Entitlements and Interest Make It Hard to
Cut Federal Spending
0
5
10
15
20
25
2000 2003 2006 2009 2012 2015 2018 2021
Defense Medicare/Medicaid
Social Security Interest
Nondefense Goods & Services Other
Summary Tables and Implications
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 41
(Percent change unless otherwise noted)
U.S. Economic Growth by Sector
2010 2011 2012 2013
Real GDP 2.9 2.7 2.9 2.8
Final Sales 1.4 2.7 2.9 3.0
Consumption 1.7 2.8 2.4 1.9
Light Vehicle Sales (Millions) 11.5 12.7 14.6 15.8
Residential Investment -3.0 0.4 24.0 27.9
Housing Starts (Millions) 0.59 0.63 1.02 1.42
Business Fixed Investment 5.7 8.3 8.1 5.8
Federal Government 4.8 0.1 -3.2 -3.3
State and Local Government -1.4 -1.9 -1.4 0.3
Exports 11.7 7.5 9.5 8.3
Imports 12.6 4.8 6.4 4.0
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 42
(Percent unless otherwise noted)
Other Key Indicators
2010 2011 2012 2013
Industrial Production (% growth) 5.3 5.3 3.6 2.6
Employment (% growth) -0.7 1.2 1.8 1.8
Unemployment Rate 9.6 8.8 8.3 7.8
CPI Inflation 1.6 3.0 1.8 2.0
Oil Prices (WTI, $/bbl) 79 102 104 108
Core PCE Price Inflation 1.3 1.2 1.6 1.7
Federal Funds Rate 0.18 0.16 1.28 3.43
10-year Government Bond Yield 3.21 3.53 3.86 4.66
Dollar (Major Currencies, 2005=1) 0.90 0.83 0.86 0.88
Copyright © 2011 IHS Global Insight. All Rights Reserved.2011 World Economic Outlook Conference 43
Implications
• Recovery muted by historical standards; growth stays just below 3%
• Higher oil and food prices are offsetting the payroll tax cut stimulus
• Core inflation has bottomed but won’t rise rapidly
• Fed will stay the course on QE II; no QE III
• Fiscal tightening on the way, but the big issues (entitlements, taxes)
probably won’t be tackled soon
• Key Risks:
• Middle East turmoil / renewed commodity price spike
• Housing
• Federal Deficit — is it ok to wait till after 2012 for the “big fix”?
Presented by:
Nigel Gault
Chief U.S. Economist
IHS Global Insight
Thank You for Your Participation!
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