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The US economic outlook: Surprising pessimists, disappointing optimists Click to edit Master title style Michael Feroli Chief US Economist JPMorgan March 2011 1 Economic outlook Look for growth to be somewhat better in 2011 than in 2010 Fiscal policy remains supportive Low inflation allows monetary policy to remain friendly Financial, credit conditions turning more supportive Spending still coming off depressed levels Negatives: fiscal drag coming, falling house prices For inflation, high unemployment will swamp high commodity prices Low inflation to keep Fed on the sidelines 2 The recovery in pictures: firming growth to contribute to slow improvement in jobs picture Real GDP Unemployment rate %ch at annual rate over 1 quarter Forecast 10 percent, sa Forecast 12 10 5 8 0 6 -5 4 -10 2 80 85 90 95 00 05 10 80 85 90 95 00 05 10 3 Bank credit turning slightly less restrictive Lending standards, C&I loans net % tightening 100 75 Large firm 50 25 0 Small firm -25 -50 90 95 00 05 10 4 Household balance sheets under repair Household debt service ratio Household debt to income ratio percent of disposable personal income, sa % 14 140 Forecast 120 13 100 12 80 60 11 40 10 80 85 90 95 00 05 10 20 70 75 80 85 90 95 00 05 10 5 QE2 is having beneficial effects Inflation breakeven (Fed measure 5yr5yr forward) %, both scales 1.8 1.6 Jackson Hole 1.4 0.8 3.2 3.0 92 nominal broad effective exchange rate 90 1350 1300 Jackson Hole 1250 88 1.2 1.0 index, both scales 2.8 S&P 500 index 86 Real yield (10-year) 2.6 84 0.4 0.2 Jan 1 Apr 1 2.2 Jun Sep 28 Dec 30 27 Mar 27 82 1050 80 Jan 1 Apr 1 1150 1100 0.6 2.4 1200 1000 Jun 30 Sep 28 Dec 27 Mar 27 6 Fiscal lift bought at a steep price Fiscal impact Federal deficit Percentage point contribution to annualized GDP growth % of GDP 5 3 2 0 1 0 -5 -1 -10 -2 -3 2009 2010 2011 2012 -15 60 65 70 75 80 85 90 95 00 05 10 7 Consumers: near-term hit from higher gas prices Consumer sentiment by income Index 120 Family income more than 75k/yr 110 100 90 80 70 Family income less than 75k/yr 60 50 05 07 09 11 8 Adjustment to higher saving probably behind us Household wealth to annual income Saving rate ratio percent, sa 6.5 14 12 6.0 10 5.5 8 6 5.0 4 4.5 2 4.0 60 65 70 75 80 85 90 95 00 05 10 0 60 65 70 75 80 85 90 95 00 05 10 9 Consumers have benefited from removal of fear factor Employment expectations and real consumer spending Index, %less-%more 140 % ch, oya 30 U Mich survey, expected unemployment over next year 120 20 100 10 80 0 60 20 -10 Real durables spending 40 78 83 88 93 98 03 08 -20 10 …and from support from D.C. Household sector: taxes paid - gov't payments received as % of income 12 10 8 6 4 2 0 -2 59 64 69 74 79 84 89 94 99 04 09 11 Consumers’ pent-up demands should continue giving some lift Vehicle sales and scrappage Millions of vehicles, annual rate 20 18 Light vehicle sales 16 14 12 10 Light vehicles scrapped 8 6 76 81 86 91 96 01 06 11 12 Businesses: capital spending has been solid Real spending on equipment and software during expansions Sa, level at trough of recession=100 130 Business spending on information processing equipment, software $ bn, saar $2005 bn, saar 700 1982 Real spending 610 585 650 560 600 120 Nominal spending 550 510 2009 500 1991 2006 2007 2008 2009 2010 485 Real business spending on business equipment ex high tech 110 1975 1.25 1.00 2001 0.75 0.50 -2 qtrs 0 +2 qtrs +4 qtrs +6 qtrs Industrial equipment Index, 1Q05=1.00 100 90 535 0.25 Other equipment Transportation equipment 2005 2006 2007 2008 2009 2010 13 Investment spending coming off low levels Business capital spending, net of depreciation % of GDP 8 6 4 2 0 -2 60 65 70 75 80 85 90 95 00 05 10 14 Housing: pent-up demand but still oversupply Construction and demographics Vacant, for-sale housing units thousands, saar thousands, sa 2500 3500 3000 New housing units started 2000 2500 1500 2000 1500 1000 1000 Household growth (10-yr average) 500 69 74 79 84 89 94 99 04 09 500 95 97 99 01 03 05 07 09 15 Home prices are cheap by some metrics, but downside momentum continues Average monthly home payment as a percent of median income Real house prices index, 1976=1 percent, nsa 40 2.5 35 2.0 30 25 1.5 20 1.0 15 10 81 86 91 96 01 06 11 0.5 76 81 86 91 96 01 06 16 State and local: improvement in finances partly dependent on federal support Combined state and local deficits State and local tax receipts % of GDP % ch, saar 20 1.0 10 0.5 0 -10 -20 0.0 97 99 01 03 05 07 09 Fedeeral aid to state and local gov'ts % of GDP -0.5 4.0 -1.0 3.5 3.0 2.5 -1.5 2.0 1.5 80 85 90 95 00 05 10 -2.0 60 65 70 75 80 85 90 95 00 05 10 17 Labor market: Business caution toward hiring is a hallmark of modern recoveries Hires and separation rates Private payrolls around recessions Trough employment = 100 Percent of workforce, sa 108 Quits + layoffs 4.4 1982 107 4.2 106 1975 105 4.0 3.8 104 3.6 103 2009 102 3.4 1991 101 100 3.2 Hires rate 3.0 99 2.8 2001 98 -8 -4 0 4 8 Months from trough 12 16 20 2.6 01 03 05 07 09 11 18 Increases in workweek, productivity should give way to more full-time hiring Average workweek Productivity hours %ch at annual rate over 8 quarters 35.0 5 4 34.5 3 34.0 2 33.5 1 33.0 90 95 00 05 10 0 90 95 00 05 10 19 Participation rate has undershot trend Labor force participation rates, age 25-54 Labor force participation rate %, both scales 94 Male 78 Female 93 CBO 67.5 77 92 76 91 67.0 75 90 89 74 88 73 90 95 00 05 Labor force participation rates %, both scales 70 16-24 10 55 and over 66.5 Social Security Admin. 66.0 42 65.5 Actual 40 65 38 65.0 J.P. Morgan 36 60 34 32 55 50 %, annual average 64.5 February 30 90 95 00 05 10 28 64.0 00 02 04 06 08 10 * 12 14 20 Unemployment mostly cyclical, not structural Long-term unemployed Job-related moving 000s, sa, unemployed 27 weeks or more 000s 1200 8500 Manufacturing 8000 Nonfarm employment %ch, oya 6 4 2 7500 Construction 1000 Job-related internal migration 0 7000 -2 6500 800 6000 Trade -4 98 00 02 04 06 08 -6 Ratio: unskilled/skilled unemp. rate 600 4.5 4.0 400 Health and education 200 3.5 3.0 2.5 0 05 07 09 u-rate, less than high school / urate, college degree 92 94 96 98 00 02 04 06 08 10 11 21 Inflation: underlying inflation has been low CPI % ch, oya 6 5 4 Median 3 2 Core 1 0 90 95 00 05 10 22 In the long run, wage and price inflation are linked together Business costs and prices % ch, oya Prices, business output 15 10 Unit labor costs 5 0 -5 48 53 58 63 68 73 78 83 88 93 98 03 08 23 Labor market slack keeping a lid on wage inflation Wages and unemployment % 11 Unemployment rate 9 7 5 3 Average hourly earnings, change over year-ago 1 85 90 95 00 05 10 24 Nobody is even hoping for a raise Median expected change in family income in the coming year Percent 7 6 5 4 3 2 1 0 80 85 90 95 00 05 10 25 A Fed on hold is not a Fed at ease Taylor rules Fed Treasury holdings as % of outstanding UST, with passive run-off % %, assuming QE2 completed Original Taylor rule 10 25 Forecas t Fed funds 5 20 0 15 -5 10 Rudebusch Taylor rule -10 5 88 93 98 03 08 13 52 57 62 67 72 77 82 87 92 97 02 07 12 26 The US economic outlook in brief First year and a half of recovery have been uneven 2011 should see somewhat better growth Inflation trends remain soft Monetary policy will be more growth-supportive than fiscal policy 27 The US economic forecast in detail % q/q, saar Gross domestic product Real GDP Final sales Domestic Consumer spending Business investment Equipment Structures Residential investment Government Net exports ($bn, chained $2005) Exports (goods and services) Imports (goods and services) Inventories (ch $bn, chained $2005) Contribution to real GDP growth (% pts): Domestic final sales Net exports Inventories Income and profits (NIPA basis) Adjusted corp profits Real disposable personal income Saving rate1 Prices and labor cost Consumer price index Core Producer price index Core GDP chain-type price index Core PCE deflator S&P/C-S house price index (% oya) Productivity Other indicators Housing starts (mn units, saar)1 Industrial production, mfg. Capacity utilization, mfg. (% )1 Light vehicle sales (mn units, saar)1 Unemployment rate1 Nominal GDP Current account balance ($bn)1 % of GDP Federal budget balance ($bn)1 % of GDP % q4/q4 % y/y 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2010 2011 2012 2010 2011 2012 2.6 0.9 2.6 2.4 10.0 15.4 -3.5 -27.3 3.9 -505 6.7 16.8 121.4 2.8 6.7 3.1 4.1 5.3 5.5 4.5 2.7 -1.5 -395 9.6 -12.4 7.1 2.5 1.0 2.2 2.1 6.7 8.0 2.0 10.0 -0.9 -437 15.0 21.0 57.8 3.5 3.6 3.6 3.5 10.5 12.0 5.0 15.0 -1.3 -440 8.0 7.0 55.8 3.5 3.6 4.0 4.0 11.4 12.0 9.0 15.0 -1.3 -459 8.0 10.0 53.9 3.0 2.9 3.3 3.0 10.1 10.0 10.0 10.0 -0.1 -479 8.0 10.0 59.2 2.0 1.9 2.3 1.5 10.1 10.0 10.0 10.0 -0.4 -494 8.0 9.0 62.2 2.7 2.4 2.8 2.6 10.0 16.3 -4.7 -4.7 1.2 9.2 11.0 - 3.1 2.7 3.3 3.1 9.7 10.5 6.5 12.5 -0.9 9.7 11.9 - 3.0 3.0 3.0 2.6 8.9 8.5 10.0 13.7 -0.5 8.7 7.7 - 2.8 1.4 1.8 1.8 5.6 15.1 -13.8 -3.0 1.0 11.8 12.7 - 2.9 2.9 3.1 3.1 9.0 10.8 3.5 5.5 -0.2 9.9 9.5 - 2.9 2.9 3.1 2.7 9.7 9.6 9.6 12.8 -0.6 8.4 8.6 - 2.7 -1.7 1.6 3.2 3.4 -3.7 2.2 -1.2 1.5 3.6 0.0 -0.1 4.0 -0.5 -0.1 3.3 -0.5 0.1 2.3 -0.4 0.1 2.9 -0.5 0.3 3.3 -0.5 0.4 3.0 0.0 0.0 1.9 -0.4 1.4 3.1 -0.1 -0.1 3.1 -0.2 0.1 6.6 1.0 6.0 10.0 1.4 5.4 6.0 1.0 5.1 10.0 3.0 5.0 8.0 3.3 4.8 7.0 3.3 4.9 3.0 0.0 4.5 18.4 2.3 - 7.7 2.6 - 5.5 2.4 - 29.2 1.4 5.8 8.3 2.1 5.0 5.9 2.4 4.6 1.4 1.1 1.1 2.1 2.1 0.5 -1.4 2.3 2.6 0.6 7.2 -0.4 0.4 0.5 -4.1 2.6 4.0 1.4 6.0 0.6 1.0 0.9 -2.5 2.0 1.8 0.9 0.7 0.5 1.0 0.7 -1.0 2.5 1.5 0.7 0.8 0.5 1.0 0.7 0.0 2.0 1.1 0.8 1.3 1.0 1.1 0.8 0.5 2.0 1.1 0.9 1.3 1.0 1.2 0.9 1.5 1.0 1.2 0.6 3.9 1.4 1.4 0.8 -4.1 1.9 2.1 0.9 2.2 0.6 1.0 0.8 0.5 2.1 1.3 1.1 1.4 1.1 1.2 1.0 2.0 1.6 1.6 1.0 4.2 1.2 1.0 1.3 0.1 3.8 2.2 1.0 3.3 0.7 1.1 0.7 -0.8 2.0 1.3 0.9 1.3 1.0 1.2 0.9 1.9 1.7 0.588 4.3 72.4 11.6 9.6 4.6 -127.2 -3.5 - 0.534 4.0 73.0 12.3 9.6 3.2 -105.3 -2.8 - 0.600 4.5 73.7 13.0 8.9 3.5 -107.8 -2.9 - 0.650 5.0 74.4 13.1 8.8 4.5 -109.8 -2.9 - 0.675 4.5 75.0 13.3 8.7 4.5 -113.6 -3.0 - 0.700 3.5 75.5 13.5 8.6 4.1 -121.4 -3.1 - 0.725 3.5 75.8 13.1 8.5 3.2 -124.7 -3.2 - 6.0 4.1 - 4.4 4.2 - 3.5 4.3 - 0.585 6.0 71.8 11.5 9.6 3.8 -464.9 -3.2 -1294.2 -8.8 0.656 4.7 74.6 13.2 8.8 4.0 -452.7 -3.0 -1500.0 -9.8 0.781 3.7 76.2 13.3 8.4 4.1 -513.3 -3.2 -1100.0 -6.9 1. Entries are average level for the period. Federal balance figures are for fiscal years. Mar 11 2Q11 3Q11 4Q11 1Q12 Interest rate forecast (end of period) Fed funds target 3-mo LIBOR 3-month T-bill (bey) 0.13 0.31 0.08 0.13 0.30 0.18 0.13 0.30 0.20 0.13 0.30 0.21 0.13 0.30 0.21 2-yr Treasury 5-yr Treasury 10-yr Treasury 30-yr Treasury 0.63 2.04 3.39 4.54 0.75 2.30 3.60 4.70 0.83 2.40 3.65 4.70 0.90 2.50 3.70 4.70 1.20 2.85 3.90 4.70 28 Copyright 2005 J.P. Morgan Chase & Co. All rights reserved. JPMorgan is the marketing name for J.P. Morgan Chase & Co., and its subsidiaries and affiliates worldwide. J.P. Morgan Securities Inc. is a member of NYSE and SIPC. JPMorgan Chase Bank is a member of FDIC. J.P. Morgan Futures Inc., is a member of the NFA. J.P. Morgan Securities Ltd. (JPMSL), J.P. Morgan Europe Limited and J.P. Morgan plc are authorized by the FSA. J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. J.P. 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Over the next six to twelve months, we expect this bond to perform in line with the average total return of the bonds in the analyst’s (or analyst’s team’s) coverage universe. Underweight. Over the next six to twelve months, we expect this bond to underperform the average total return of the bonds in the analyst’s (or analyst’s team’s) coverage universe. JPMorgan uses the following rating system: Improving (I) The issuer’s long-term credit rating likely improves over the next six to twelve months. Stable (S) The issuer’s long-term credit rating likely remains the same over the next six to twelve months. Deteriorating (D) The issuer’s long-term credit rating likely falls over the next six to twelve months. Deteriorating+ (D+) The issuer’s long-term credit rating likely falls to junk over the next six to twelve months. Defaulting (F) There is some likelihood that the issuer defaults over the next six to twelve months. 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