Download AFTER THE BOOM

AFTER THE STORM (s):
Average sustained growth, with risks
Ken Goldstein
WWW.CONFERENCE-BOARD.ORG
Overview:
 Global economy edging lower (3.7% in ’06 after 4.4% in ’05 and
5.1% in ’04).
 Longer-term prospect is closer to 3%, only partly related to oil
shock.
 US economy remains the linchpin.
 Euro strength could be recovering; Japan finally on board; China
cooling off
 Higher energy costs plus storms weaken domestic growth.
Recovery by mid ‘06.
 Back to trend by 2nd half of ‘06.
Page:2
A HEALTHY GLOBAL ECONOMY CONTINUES
Page:3
2004
2005
2006
US
Euro Zone
Japan
Other*
4.2
2.0
2.6
3.8
3.3
2.3
1.6
3.1
2.6
1.5
1.0
3.0
Developing Asia (ex. India and China)
India
China
Latin America
Middle East
Africa
5.9
7.3
9.5
5.7
5.5
5.1
5.6
6.7
9.0
4.1
5.0
5.0
4.0
6.4
7.0
3.7
4.9
5.4
Central and Eastern Europe
Other**
6.1
8.2
4.5
6.5
4.5
6.0
World total
5.1
4.4
3.7
TREND PRODUCTIVITY GROWTH IS SLOWER NOW
GDP PER EMPLOYEE
90-00
90-95
95-00
00-04
WORLD PRODUCTIVITY
1.6%
1.1%
2.2%
1.8%
USA
1.8%
1.3%
2.3%
2.1%
EURO ZONE
1.7%
2.0%
1.3%
0.8%
JAPAN
1.1%
0.9%
1.4%
1.5%
OECD (Other)
1.8%
1.0%
2.5%
1.6%
NON-OECD
2.1%
1.5%
2.7%
3.7%
Source: The Conference Board
Page:4
HOURS WORKED SLOWER NOW, BUT?
HOURS WORKED
90-00
90-95
95-00
00-04
WORLD
1.4%
1.3%
1.5%
1.4%
USA
1.6%
1.3%
1.9%
-0.4%
EUROPE
0.1%
-0.8%
1.1%
0.4%
JAPAN
-0.6%
-0.4%
-0.9%
-0.9%
OECD OTHERS
1.9%
2.1%
1.8%
0.8%
NON – OECD (workers)
1.5%
1.5%
1.6%
1.6%
Source: The Conference Board
Page:5
It’s not just the domestic trend
Global growth is slowing
Percent change year to year
8
Global LEI including U.S. (Sept '05 e)
Global LEI excluding U.S. (Aug '05)
6
4
2
0
-2
-4
-6
90
91
92
93
94
95
96
Note: Shaded areas represent U.S. recessions
Source: The Conference Board
Page:6
97
98
99
00
01
02
03
04
05
06
All regions are weakening simultaneously
Percent change year to year
12
North America (Sep '05)
Europe (Aug '05)
Asia (Aug '05)
10
8
6
4
2
0
-2
-4
-6
-8
-10
90
91
92
93
94
95
96
Note: Shaded areas represent U.S. recessions
Source: The Conference Board
Page:7
97
98
99
00
01
02
03
04
05
06
Moderate Growth Even in Germany
THE CONFERENCE BOARD’S LEADING ECONOMIC INDEXES
Sep
Oct
Nov Dec
2004
Page:8
Jan
Feb
Mar
Apr
May Jun
Jul
Aug
Sep
Oct
2005
U.S.A
0.1
0.0
0.6
0.7
-0.1
0.2
-0.7
0.1
0.1
1.1
-0.1
0.0
-0.8
MEXICO
0.3
1.2
-0.3
-0.5
0.7
-0.2
-0.3
1.7
-0.5
2.6
0.8
1.4
0.4
UK
0.2
0.1
-0.1
0.1
0.1
0.4
0.1
-0.4
-0.4
-0.4
0.5
0.3
0.3
GERMANY
0.3
-0.3
-0.1
0.2
0.0
0.0
-0.2
0.2
0.1
0.6
0.5
0.2
0.4
FRANCE
0.2
0.2
-0.1
0.1
0.0
0.1
0.0
0.1
-0.4
0.2
0.5
0.1
-0.1
SPAIN
0.7
-0.1
0.2
0.1
0.7
0.0
-0.4
0.8
0.5
0.7
0.1
-0.3
0.4
JAPAN
-0.3
0.0
-0.3
-0.1
0.5
0.0
0.2
-0.1
0.0
0.6
0.2
0.2
0.4
KOREA
0.4
0.3
0.4
1.0
1.9
-0.8
0.8
0.0
0.6
0.5
0.1
-0.4
-0.1
AUSTRALIA
0.0
0.0
0.5
0.1
-0.1
0.1
0.3
1.0
0.8
0.7
0.4
0.1
0.3
0.9
The industrial core takes the hit
6-month percent change
12
LEI (Sep '05)
IP (Oct '05 e)
10
8
6
4
2
0
-2
-4
-6
-8
-10
90
91
92
93
94
95
96
Note: Shaded areas represent U.S. recessions
Sources: FRB, The Conference Board
Page:9
97
98
99
00
01
02
03
04
05
06
Slower Growth and Inflation (not oil or Katrina) Make Consumers
Worry About Jobs
Index, 1985=100
160
Unemployment Rate
3
140
120
4
Unemployment Rate
5
100
6
80
7
Consumer Confidence
60
8
40
9
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Sources: The Conference Board, TNS NFO, BLS
Page:10
Environment Weakened And Expectations Eroded
Index, 1985=100
200
180
160
Present Situation
140
120
100
80
60
Expectation
40
20
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Sources: The Conference Board, TNS NFO
Page:11
Home Values Still Rising
6.0
Rising Home Values
5.8
Pacific
5.6
5.4
United States
5.2
5.0
4.8
4.6
4.4
New England
4.2
[Source] Freddie Mac, Conventional Mortgage Home Price Index
Page:12
200501
200401
200301
200201
200101
200001
199901
199801
199701
199601
199501
199401
199301
199201
199101
199001
198901
198801
198701
198601
4.0
West South Central
Whacky Oil Will Come Back to Balance
Million barrels (inverted)
$/BBL
200
70
220
West Texas int.
cushing
240
60
260
50
280
U.S. crude oil ending
stocks excluding SPR
300
40
320
30
340
360
20
380
400
10
80
82
84
86
88
90
92
Note; Shaded areas represent U.S. recessions
Sources; EAI, The Conference Board
Page:13
94
96
98
00
02
04
06
Risk: Financial Imbalances
P/E ratio
Forecast
50
Actual S&P 500, PE ratio
45
40
35
30
25
20
15
PE implied by 10-year Treasury bonds
10
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Page:14
Dollar on strengthening trend…
0.7
US$/Euro(inverted)
06/2001
12/2004
Forecast
0.8
0.9
-Stdev
1.0
1.1
Trend 1999-forward
1.2
1.3
+Stdev
1.4
99
00
01
02
03
Note: Shaded areas represent U.S. recessions
Sources: Datastream, The Conference Board
Page:15
04
05
06
…as well as against the yen
136
Yen/US$ 12/1999
02/2002
01/2005
Forecast
132
128
Trend 1999-forward
124
-Stdev
120
116
112
108
+Stde
v
104
100
99
00
01
02
03
Note: Shaded areas represent U.S. recessions
Sources: Datastream, The Conference Board
Page:16
04
05
06
Katrina and Energy prices shocks weaken consumer spending
Annualized percent change
Forecast
4.4
Real GDP
4.0
Old forecast
3.6
3.2
2.8
2.4
2.0
New forecast
1.6
1.2
0.8
2004
2005
Sources: BEA, The Conference Board
Page:17
2006
2007
Shocks weaken consumer spending, Investment ?
Forecast
Percent change year to year
4.8
Real GDP
4.4
4.0
3.6
Pre-storm forecast
3.2
2.8
Good case
2.4
2.0
Less good case
1.6
2004
2005
Sources: BEA, The Conference Board
Page:18
2006
2007
After the storm(s)
2005
2006
2005
2006
2007
III Q*
IV Q
I Q
II Q
ANNUAL ANNUAL ANNUAL
--------------------------------------------------------------------------------------------------------------------------------------------Real GDP
4.3
1.4
2.2
3.2
3.5
2.6
2.8
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------CPI Inflation
5.1
3.2
2.9
2.9
3.4
3.4
3.1
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Real Consumer Spending
4.2
0.4
2.2
3.2
3.5
2.6
3.2
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Real Capital Spending
8.7
5.1
8.4
8.7
8.7
7.1
4.7
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Net Exports Bil. '92$
-621.3
-647.5
-656.7
-650.6
-632.1
-651.8
-645.6
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Industrial Production
2.3
1.6
0.3
2.7
3.3
1.7
3.5
Unemployment Rate (%)
5.0
5.1
5.2
5.2
5.1
5.2
5.3
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------90 Day T-Bills (%)
3.35
3.37
4.18
4.53
3.02
4.44
4.64
10 Yr Treas Bonds (%)
4.21
4.46
4.40
4.55
4.28
4.57
4.80
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------$/EURO
1.22
1.20
1.17
1.15
1.25
1.16
1.15
Yen/$
111
118
120
121
110
119
105
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Page:19
WHAT IF WAGES RISE AS PRODUCTIVITY SLOWS
6
Actual
Forecast
5
Productivity Growth
4
3
2
year over year %
growth
Page:20
IV
III
II
2005 I
II
2004 I
IV
III
II
2003 I
IV
III
II
2002 I
0
IV
Wage
III
1
COSTS WOULD RISE BUT STILL NOT MUCH PRICING POWER
4
Actual
Forecast
3
2
1
Inflation
0
-1
-2
year over year %
Unit Labor Cost
Page:21
IV
III
II
2005 I
IV
III
II
2004 I
IV
III
II
2003 I
IV
III
II
2002 I
-3
RECIPE FOR LESS PROFIT (AND LESS GROWTH?)
30
Forecast
Actual
25
20
15
Profit
10
5
Page:22
IV
III
II
2005 I
IV
III
II
2004 I
IV
III
II
2003 I
IV
III
II
year over year %
2002 I
0
LABOR FORCE GROWTH HUGE IN EMERGING WORLD
1980-2000
947.5 Million
93.2 Million
High Income
1.1%/year
428.1 Million
Low Income
2.3%/year
426.2 Million
Middle Income
1.8%/year
Page:23
AND IT WILL CONTINUE TO DO SO
2000-2010
393.3 Million
229.1 Million
Low Income
2.1%/year
Page:24
16.1 Million
High Income
0.4%/year
148.1 Million
Middle Income
1.1%/year