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The State of the U.S. economy Florence Pisani December 6, 2013 The contrast with the euro area is striking: in the US, the recovery did not stopped in mid-2011… GDP Cumulative fiscal tightening since 2010 (2007 = 100) 5 108 (% of region’s potential GDP) United States United States 106 4 104 3 Euro area 8% gap 102 2 100 1 98 0 Euro area -1 96 07 2 08 09 10 Sources: Thomson Datastream, IMF, Dexia-AM 11 12 13 2010 2011 2012 2013 … as the government has adjusted the pace of fiscal consolidation to the private sector spending behavior Financial surplus (+) or deficit (-) (2 quarters moving average, % of GDP) 8 Business sector 6 4 Financial surplus (+) or deficit (-) by sector 2 (% of GDP) 0 10 -2 Private sector -4 5 -6 0 Rest of the World (-) -5 Households 00 02 04 06 08 10 12 Business sector’s saving and investment (% of GDP) 16 Saving -10 Government 14 12 -15 80 83 86 89 92 95 98 01 04 07 10 13 10 Investment 8 3 Sources: Thomson Datastream, Dexia-AM 00 02 04 06 08 10 12 US private balance sheet’s healing process is almost over 4 Households have deleveraged and non financial corporations’ financial health is good Household debt (% of GDP) 100 90 80 70 Non financial corporations interest paid / cash-flows 60 35 50 40 (%) 30 80 84 88 92 96 00 04 08 12 25 20 Household financial obligation ratio (% of disposable income) 15 19.5 10 19 5 0 18 17 16 15 80 84 88 92 96 5 Sources: Thomson Datastream, Dexia-AM 00 04 08 12 55 60 65 70 75 80 85 90 95 00 05 10 Despite the recent rise in mortgage rates, residential investment should continue to increase… Share of young adults (18-31) living with their parents (%) 38 36 2.4 millions adults 34 Stock of seriously delinquent loans Home sales 32 (millions of homes) 4.5 1600 30 4 28 3 90+ days delinquent 2 Foreclosure inventory 0 00 02 04 06 08 10 12 1968 1981 2007 600 3400 500 3000 New homes 400 2600 300 2200 200 1800 6 Sources: Thomson Datastream, Dexia-AM Existing homes [R.H.S.] 86 90 94 98 02 06 10 Existing homes [R.H.S.] 1200 2013 Inventory of homes available for sale 100 82 6500 1400 (thousands) 1 (thousands, annual rate) 1400 6000 5500 1000 5000 800 4500 600 4000 400 200 00 3500 New homes 02 04 06 08 10 12 3000 … and home prices to recover (although at a more “reasonable” pace) CS home prices by metropolitan area (January 2000 = 100) “Bubble” areas 300 250 Case Shiller home prices by metropolitan area Home prices (Case Shiller, existing homes, % year on year) (% year on year) 200 150 25 30 20 25 15 20 50 10 15 0 5 10 0 5 -5 0 -10 -5 -15 -10 -20 92 94 96 98 00 02 04 06 08 10 12 -15 100 Washington New York Phoenix Las Vegas Los Angeles San Diego San Francisco Miami Tampa National trend 87 90 93 96 99 02 05 08 11 “No bubble” areas 300 Dec. 2012 Dec. 2011 Sep. 2013 250 Seattle Boston Chicago Minneapolis 200 150 100 Charlotte 50 Portland 0 7 Sources: Thomson Datastream, Dexia-AM 87 90 93 96 99 02 05 08 11 National trend Denver Cleveland Atlanta Detroit Less tightening… more growth! 9 From now on, fiscal policy should weigh less on growth Budget balance of States and Local entities (% of GDP) 0.5 Fiscal restriction 0.0 (change in structural balance, general government, % of GDP) -0.5 3 2 Contribution to GDP growth 0.4 0.2 -1.0 0.0 -1.5 -0.2 (%) Lower deficit Stable deficit -2.0 restriction 1 -2.5 0 -3.0 80 -0.4 85 90 95 00 05 -0.6 10 07 09 11 13 -1 -2 Government employment stimulation (annual change, thousands) 400 -3 Local entities States Federal* Total 300 -4 07 08 09 10 11 12 13 14 200 100 0 -100 -200 -300 -400 10 Sources: CBO, Thomson Datastream, Dexia-AM 07 08 09 10 11 12 13 (*) Corrected for the 2010 Census Disposable income will cease being affected by tax increases and help consumption grow faster Private employment 400 (3mo3m change, monthly rate, thousands) 200 170 0 -200 -400 14 8 5 6 4 4 35.0 3 2 34.5 34.5 2 0 1 -2 34.0 Calculated wages -4 Hours worked -6 02 04 06 08 10 12 -8 14 -10 Hourly earnings (% 3mo3m, annual rate) 5 06 07 08 09 10 11 Employment -1 Hourly earnings -2 12 13 14 4 3 2 2.0% 1 11 0 02 Sources: Thomson Datastream, Dexia-AM 04 06 08 10 12 14 0 Disposable income 12 Taxes 10 Social benefits less contribution 08 Income on assets 06 2012 2013 2014 04 Average weekly hours worked 33.5 (contribution, %) (% year on year) Wages and supplements -800 02 Household disposable income Contribution to private wages growth -600 Wealth effects should push the saving rate lower, but for this to happen, favorable financial conditions are necessary Household borrowing Household borrowing and saving rates (% of disposable income) 14 7 14 12 6 12 10 5 10 8 4 8 6 3 6 4 2 4 1 2 0 0 -1 -2 -2 -4 Net borrowing rate -3 -6 2 ? 0 -2 -4 -6 94 13 (% of disposable income) Net financial saving rate [R.H.S.] 97 Source: Thomson Datastream 00 03 06 09 12 Credit market borrowing Other Home mortgages Consumer credit 94 97 00 03 06 09 12 After a slowdown in 2013, growth should accelerate towards 2.5% in 2014 GDP growth GDP growth in the United States (%, year on year) 6 12 Q4 13 Q1 13 Q2 13 Q3 2009 2010 2011 2012 2013 2014 Consumption 1.7 2.3 1.8 1.5 -1.6 2.0 2.5 2.2 1.9 2.7 Investment 11.5 -1.4 7.7 4.0 -16.7 7.0 6.3 8.3 4.5 7.4 - Residential 19.8 12.5 14.2 14.6 -21.2 -2.5 0.5 12.9 14.1 13.5 -Equipment & artistic originals 7.6 2.5 4.0 -1.4 -14.3 9.4 9.2 5.9 2.4 4.8 - Structures 17.5 -25.7 17.6 12.3 -18.9 -16.4 2.1 12.7 1.8 9.9 Inventory changes (contribution) -1.8 0.9 0.4 0.8 -0.8 1.4 -0.2 0.2 0.0 -0.1 Government -6.5 -4.2 0.0 0.0 3.1 0.1 -3.2 -1.0 -2.0 -0.9 Q/Q annual rate (%) External balance (contribution) 2 0 -2 -4 -6 95 97 99 01 03 05 07 09 11 13 Unemployment rate (%) 12 10 0.6 -0.3 -0.1 0.3 1.0 -0.5 0.1 0.1 0.1 -0.2 - Exports 1.1 -1.3 8.0 4.6 -9.1 11.5 7.1 3.5 2.6 6.1 - Imports -3.1 0.6 6.9 1.8 -13.7 12.8 4.9 2.2 1.7 6.1 0.1 1.1 2.5 2.8 -2.8 2.5 1.8 2.8 1.7 2.6 GDP 4 8 6 4 2 95 97 99 01 03 05 07 09 11 13 16 Sources: Thomson Datastream, Dexia-AM Some issues still unsolved 17 The return to a more “normal” labor market will take more time (I) Employment rate (%) 65 64 63 Unemployment rate (%) 62 11 61 10 60 Employment to 59 population aged 16 & over 9 58 90 8 93 96 99 02 05 08 11 7 Involuntary part-time employment 6 (% of labor force) 5 7 4 3 90 6 93 96 99 02 05 08 11 5 4 3 2 18 Sources: Thomson Datastream, BLS, Dexia-AM 56 63 70 77 84 91 98 05 12 Polarization of job market creations has increased… Change in employment by earnings category and sector (2008-10, millions) 1 Employment by earnings category 0 (millions) -1 47 -2 Higher 45 -3 Lower 43 -4 -5 41 -6 Lower earnings 39 Medium 37 35 05 06 07 08 09 10 11 12 Medium earnings Higher earnings Manufacturing Construction Retail trade Administrative and support and waste management and remediation services Educational services, health care and social assistance Other net jobs losing sectors Other net jobs creating sectors 20 Sources: Thomson Datastream, BLS, Dexia-AM … inequalities have continued rising and poverty rates are elevated 55 Top 10% income share in the United State 24 (%, including capital gains, 1917-2012) 22 Poverty rate (%) Poverty thresholds in 2012 : 1 adult : 11 945 $ 1 family with 2 children = 23 283$ 20 50 18 45 16 14 40 12 35 10 59 30 69 79 89 99 09 1917 1927 1937 1947 1957 1967 1977 1987 1997 2007 Poverty rate by age (%) Top 0.1% income share 30 (excluding capital gains, %, 1913-2012) 12 25 10 Under 18 years United States 8 20 6 United Kingdom 4 15 18-65 years 2 France 10 0 1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 21 Source: Emmanuel Saez’s website at University of California, Berkeley, Census Bureau > 65 years 5 68 73 78 83 88 93 98 03 08 The Budget debate is not over yet, but the ongoing political drama is distracting attention from longer term fiscal issues US federal Budget: CBO forecasts (% of GDP) Receipts and outlays 26 Outlays 24 +3% 22 Budget balance Debt held by the public 4 20 120 2 18 100 0 16 -2 80 Receipts 14 80 84 88 92 96 00 04 08 12 16 20 24 28 -4 -6 40 -8 20 Outlays -10 -12 60 14 80 84 88 92 96 00 04 08 12 16 20 24 28 12 10 Social Security + health Discretionary 4 Other mandatory spending 3 Medicare 2 1 Net interest 0 80 Sources: CBO, Dexia-AM Social Security 4 2 22 6 5 8 6 7 88 96 04 12 20 28 Medicaid & exchange subsidies 0 80 88 96 04 12 20 28 0 80 88 96 04 12 20 28 36 Conclusions □ Most of the fiscal restraint has now been absorbed by the US economy: from now on, the pace of growth should pick up. □ While a “grand fiscal bargain” seems out of reach, some compromise should be found that would fix the current budget issues (i.e. raise the debt ceiling and vote a budget for FY2014). But the weakening of both the Tea Party and President Obama is making the outcome more uncertain. □ Should growth surprise on the upside, bond rates would be under pressure, but monetary policy should still remain accommodative. 23 Adresses Luxembourg Dexia Asset Management Luxembourg S.A. 136, route d’Arlon 1150 Luxembourg Tel.: + 352 2797-1 Belgique Dexia Asset Management Belgium SA Avenue des Arts 58 1000 Brussels Tel.: + 32 2 222 11 11 France Dexia Asset Management S.A. 40, rue Washington 75408 Paris Cedex 08 Tel.: + 33 1 53 93 40 00 32 Allemagne Dexia Asset Management Luxembourg SA Zweigniederlassung Deutschland Grüneburgweg 58 - 62 60322 Frankfurt Tel.: + 49 69 2691 903 50 Émirats arabes unis Dexia Asset Management Luxembourg S.A. 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