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The Lodging Conference 2013
September 18, 2013
What’s Ahead For The Economy?
Bernard Baumohl
Chief Global Economist
The Economic Outlook Group, LLC
475 Wall Street
Princeton, New Jersey
(609) 529-1300
www.EconomicOutlookGroup.com
What’s next for the economy? Three possible paths in 2014.
Scenario C
GDP growth exceeding 3%
Lodging Conference
Economic cycle peaked
Dec. 2007
2013
Scenario B
Growth less than 2.5%
2012
Recession ends
June 2009
2008 - 2009
recession
Scenario A
Economy slips into recession
The Economic Outlook Group
Scenario A: Recession
Average life span of recovery is just 4.8 years.
Sequester will do more damage.
Market interest rates keep climbing.
Consumers & businesses pull back;
The comeback of Europe, China and emerging markets is just wishful thinking.
>> Federal Reserve: Ramps up quantitative easing.
Scenario B: Dull Growth: Less than 2.5%.
US economy stuck in low gear. Higher market rates to restrain growth.
Europe “staggers” out of recession.
China avoids hard landing, but is beset with debt problems.
U.S. confidence vacillates; Spending remains lackluster
Employment: a miserly 100K/month
>> Federal Reserve: No increase in QE, but may postpone tapering.
Scenario C: Stronger Recovery: 3% or better
US economy gains more traction.
Higher confidence fuels both consumer & business spending
Europe emerges from recession. “Worst is over.” Private capital returns to EZ
Chinese leaders succeed in achieving growth target, even as it seeks reforms
U.S. employment enters in 200K - 300K/month range
>> Fed: On track to end QE mid-2014; Higher rates will NOT imperil the recovery.
The Economic Outlook Group
Scenario A: Recession
15%
Average life span of recovery is just 4.8 years.
Sequester will do more damage.
Market interest rates keep climbing.
Consumers & businesses pull back;
The comeback of Europe, China and emerging markets is just wishful thinking.
>> Federal Reserve: Ramps up quantitative easing.
Scenario B: Dull Growth: Less than 2.5%.
35%
US economy stuck in low gear. Higher market rates to restrain growth.
Europe “staggers” out of recession.
China avoids hard landing, but is beset with debt problems.
U.S. confidence vacillates; Spending remains lackluster
Employment: a miserly 100K/month
>> Federal Reserve: No increase in QE, but may postpone tapering.
Scenario C: Stronger Recovery: 3% or better
50%
US economy gains more traction.
Higher confidence fuels both consumer & business spending
Europe emerges from recession. “Worst is over.” Private capital returns to EZ
Chinese leaders succeed in achieving growth target, even as it seeks reforms
U.S. employment enters in 200K - 300K/month range
>> Fed: On track to end QE mid-2014; Higher rates will NOT imperil the recovery.
The Economic Outlook Group
The consumer is key
to the economic outlook!
Three main drivers of household spending:
1. Labor market conditions. Is the job market improving? Yes…slowly.
2. Household balance sheets. Have family debt burdens eased? Yes!
3. Household wealth. Have Americans seen their wealth increase? Yes!
The Economic Outlook Group
Unemployment rate has been dropping
(….but at an agonizingly slow pace)
Monthly change in non-farm payrolls
Peaked at 10%
Oct. 2009
7.3%
August 2013
Biggest employers
Leisure and hospitality
Retail
Temporary work
Construction
Energy
Source: BLS
Forecast:
6.5% by 2015
The Economic Outlook Group
New applications for unemployment benefits keep falling
4-week moving average
2013
Source: Federal Reserve
The Economic Outlook Group
Source: Federal Reserve
The Economic Outlook Group
Motor vehicle sales
New single-family home “lots” sold
Retail sales, ex-vehicles
Are Consumers Upbeat and Spending?
• Conference Board:
Latest consumer confidence near 5½yr high.
• University of Michigan:
Consumer sentiment is just below a 6 yr. peak.
• Are households spending more on big-ticket
items? Yes! Purchases of consumer durable
goods accelerated in the last quarter. (IIQ)
Sources: Federal Reserve, University of Michigan, Conference Board, Bloomberg PLC
New orders are accelerating to manufacturers and service firms;
It portends greater output and faster hiring in coming months.
August new orders to
manufacturers were the
highest in more than 2 yrs!
Orders expanding
Orders shrinking
Source: Institute for Supply Management (ISM)
August new orders to service firms
are the highest in more than two years!
The Economic Outlook Group
Bank credit is becoming more easily available;
Assets of U.S. commercial banks, in billions
Residential real estate loans
Business loans
Consumer loans
Source: Federal Reserve
The Economic Outlook Group
Real (inflation-adjusted) U.S. exports of goods and services
Homebuilders are struggling to keep up with permits filed for SFH
STARTS of single-family home construction
PERMITS filed for single-family home
construction
Business Confidence
Private non-residential construction spending improving.
Public non-residential construction spending is shrinking!
• Homebuilder sentiment (NAHB) in August:
Confidence surged to an 8-year high!
Debt ceiling crisis / fiscal cliff fears
• Small business confidence (NFIB):
Optimism rose in July to 2nd highest in a year.
• Quarterly CEO confidence survey by
Conference Board (conducted in July):
Sentiment highest in more than a year!
Sources: Federal Reserve, Institute for Supply Management
The Economic Outlook Group
The Economic Outlook Group
• Democrats & Republicans still butt heads over the budget.
Q: Will the lack of an agreement imperil growth?
A: No! The deficit is shrinking at the fastest pace since WW II.
• Deficit in 2014 to drop to 3.4% of GDP, avg. of the last 30 yrs.
Debt ceiling: No chance House will allow U.S. to default.
4
U.S. budget deficit as % of GDP
2
0
-2
-4
-6
-8
Forecast
-10
-12
2000
2
4
6
8
2010
12
14
16
18
2020
• WHO SUCCEEDS BEN BERNANKE?
Janet Yellen? Donald Kohn? Larry Summers? George Clooney?
Makes little difference. Tapering to commence soon regardless.
10-yr. Treasury yields will hover 3.2% - 4.2% in 2014.
Fed funds rate to remain 0% - ¼% until late 2015.
The normalization of interest rates is a good sign!
Source: CBO, The Economic Outlook Group
The Economic Outlook Group
The most important forces that will shape the global economy
• GLOBAL MONETARY EASING IS DRAWING TO A CLOSE:
More than 500 interest rate cuts have occurred worldwide since June 2007.
The payoff: Faster growth in 2014 - 2015
• WHO IS THE NEWEST EMERGING COUNTRY? IT IS THE UNITED STATES!
> Energy revolution = It will have a profound impact on aviation, travel, tourism,
manufacturing and the dollar. OPEC and Russia to be losers.
> U.S. to regain competitive advantage. Outsourcing becomes much less attractive.
> Capital of innovation = iPhone, Google Glass, Tesla, 3-D printing, Robotics, Genomics.
• EMERGING COUNTRIES NOW DEALING WITH “GROWTH PAINS”:
> 3.5 BILLION PEOPLE will move from rural areas to cities in the next 5 to 10 years;
$20 TRILLION to be spent on infrastructure to support this massive migration.
> MORE THAN 50% of global GDP growth in the next 10 years will STILL come from
emerging economies.
• BRACE FOR MORE SERIOUS EXOGENOUS SHOCKS: Middle East, Asia, global
terrorism, cyberwar ––– all pose great threats to business.
Yet few firms perform stress tests to evaluate their vulnerabilities!!
The Economic Outlook Group
The Economic Outlook Group