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A Case for Optimism,
The Economic Outlook
Wednesday, March 7, 2007
Richard Yamarone,
SVP & Director of Economic Research
Argus Research Corp.
1
“60” and Counting – That’s Resilience
Consumer Spending
%
8
Source: Bureau of Economic Analysis
7
6
5
4
3
2
1
0
'92
'95
'98
'01
'04
Source: Bureau of Economic Analysis
2
Consumers Are Quite Confident
Conference Board Consumer Confidence
140
120
100
80
60
Source: The Conference Board
40
'78
'82
'86
'90
'94
'98
'02
'06
Source: The Conference Board
3
Jobless Claims Still Quite Low
Real GDP vs. Initial Jobless Claims
GDP%
Claims
6
250,000
5
300,000
4
350,000
3
2
400,000
GDP
1
Claims
450,000
0
500,000
-1
Source: Bureau of Economic Analysis, Dept. of Labor, Argus Research
-2
550,000
'87
'89
'91
'93
'95
'97
'99
'01
'03
'05
Source: U.S. Department of Labor; U.S. Bureau of Economic Analysis, Argus Research
4
Jobs Still Easy to Get
'Jobs Hard-to-Get' &
Unemployment Rate
U Rate
Job Openings Rate
Jobs Index
9
50
%
3.6
3.4
8
40
Jobs Index
7
3.2
3.0
30
2.8
6
20
5
2.6
2.4
Unemployment Rate
10
4
2.2
2.0
3
0
'90
'92
'94
'96
'98
00
'02
'04
'06
Source: Bureau of Labor Statistics
1.8
'01
'02
'03
'04
'05
'06
Source: The Conference Board; Bureau of Labor Statistics
5
Discretionary Spending Still Strong
Spending: Jewelry & Watches
Spending: Cosmetics & Perfumes
Y/Y%
Y/Y%
8
12
4
8
4
0
0
-4
-4
-8
-8
-12
-12
'91
'94
'97
'00
'03
'06
'91
'94
'97
'00
'03
'06
Source: Bureau of Economic Analysis, Argus Research Corp.
6
Low Interest Rate Environment
Benchmark
30-YR Mortgage Rate
10-Year Treasury Note
%
%
10
20
9
18
8
16
7
14
6
12
5
10
4
8
3
6
2
'90
'92
'94
'96
'98
'00
'02
'04
'06
4
'72
'76
'80
'84
'88
'92
'96
'00
'04
Source: Board of Governors of the Federal Reserve
7
Incomes, Wages & Salaries are on the Rise
Real Disposable Personal Income
%
8
6
4
2
0
-2
'92
'94
'96
'98
'00
'02
'04
'06
Source: Bureau of Economic Analysis, Argus Research Corp.
8
Inflation Well-Behaved
Consumer Prices
YOY%
7
6
5
4
3
2
1
0
'90
'95
'00
'05
Source: Bureau of Labor Statistics, Argus Research Corp.
9
This Isn’t the 1950s
Source: Lewis Wickes Hine,
“Power House Mechanic”
10
The Labor Market Has Changed Dramatically Over the Last 55 Years
Composition of Employment
1950
2007
Manufacturing
30.2%
10.3%
Education &
Health
4.8%
13.2%
Retail
10.3%
11.1%
Professional
6.5%
13.0%
Construction
5.0%
5.6%
Information
3.6%
2.2%
Financial
4.1%
6.1%
Leisure &
Hospitality
6.2%
9.7%
Government
13.6%
16.1%
Other Services
1.8%
4.0%
Wholesale
5.0%
4.3%
%
35
Source: U.S. Department of Labor, Bureau of Labor Statistics
30
25
20
15
10
5
0
1950
1961
1972
1983
1994
Manufacturing
Health Care
Retail
Professional
Resources
Construction
Information
Financial
Leisure
Government
Other
Wholesale
Source: Bureau of Labor Statistics, Argus Research Corp.
2005
11
We Don’t Do Unions
Union Enrollment
Members, Mlns
22
18.0
Member, Mlns
20
% of Employed
17.5
18
17.0
16
16.5
14
16.0
12
15.5
10
15.0
'83
'86
'89
'92
'95
'98
'01
'04
Source: Bureau of Labor Statistics
12
We Don’t Do Pensions
‘Old Time’ Labor Practices…Pension Suspension
13
Employers Don’t Even Pay Benefits
Employment Costs: Private Industry
YOY%
8
Compensation
7
Wages & Salaries
6
Benefits
5
4
3
2
1
0
2002
2003
2004
2005
2006
Source: Bureau of Labor Statistics
14
Different Type of Job Creation After 9/11
Post Recession, 9/11 Job Creation
December 2001=100
125
Nonfarm
120
23.6%
Household
"Temp"
115
Self-Employed
10.5%
110
7.3%
105
4.9%
100
Source: Bureau of Labor Statistics, Argus Research Corp.
95
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Source: Bureau of Labor Statistics, Argus Research Corp.
15
“You Can Observe A Lot by Watching”…
Employment: Iron & Steel Mill
Employment: Motor Vehicles, Parts
Employment: Apparel, Footwear
Vehicles, '000
Footwear, '000
,000
200
Apparel, '000
90
1000
70
60
800
600
40
Iron & Steel Mill
Employment
110
30
Footwear
20
Apparel
400
'93
'96
'99
'02
'05
280
260
600
240
Vehicles
Parts
220
0
'90
800
200
10
80
300
700
50
140
900
1200
80
170
'92
'94
'96
'98
'00
'02
'04
200
'06
400
Employment: Custom Computer Programming Services
33
620
600
30
540
500
27
460
400
24
300
21
200
18
'90
'92
'94
'96
'98
'00
'02
'04
'06
100
'90
'01
'02
'03
'04
'05
'06
'000
'000
700
300
'00
Employment: Nail Salons
700
380
500
0
'90
'99
Employment: Community Care Services for
'000
the Elderly
Parts, '000
320
'92
'94
'96
'98
'00
'02
'04
'06
15
1990
Jan-94
Jan-98
Jan-02
Jan-06
Source: Bureau of Labor Statistics, Board of Governors Federal Reserve,
Argus Research Corp.
16
‘Household-type’ Jobs
Real GDP vs 'Household Job' Growth
%
5
4
3
2
1
0
Real GDP
-1
Household Employment
-2
'85
'87
'89
'91
'93
'95
'97
'99
'01
'03
'05
'07
Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Argus Research Corp.
17
Ethanol Boom is Much Bigger than Corn
High Fructose Corn Syrup
YOY
%
40
30
20
10
0
-10
Source: USDA
-20
-30
1995
1997
1999
2001
2003
2005
2007
Source: U.S. Department of Agriculture, Argus Research Corp.
18
Ag Prices on the Rise
Prices Received by Farmers
150
140
All
Crop
130
Livestock
120
110
100
90
80
'95
'96
'97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
Source: U.S. Department of Agriculture, Argus Research Corp.
19
Initial Stages of Higher Food Prices?
January
YOY%
PPI…
Prepared animal feeds
Eggs
Soft drink beverage bases
Processed young chickens
Milled rice
Confectionary materials
1.2%
3.2%
2.0%
4.6%
3.1%
12.5%
12.3%
20.0%
3.3%
11.8%
17.2%
17.2%
CPI…
Nonalcoholic beverages
Alcoholic beverage
Frankfurters
Flour & prepared flour mixes
Full service meals & snacks
Other food away from home
Crackers, bread, and cracker products
0.8%
0.9%
6.3%
0.9%
0.5%
1.3%
3.2%
2.7%
2.5%
8.5%
4.5%
3.7%
5.1%
3.6%
Source: Bureau of Labor Statistics, Argus Research Corp.
20
Reasons for the Federal Reserve to Pause
 Unknown Magnitude of Housing Downturn
(macroeconomic consequences)
 Cumulative Effect of Previous Actions
(17, 25 basis point rate hikes)
Argus Research Corp.
21
Reasons for the Federal Reserve to Hike
 All Inflation Measures Exceeding Purported ‘Comfort Zone’
 Commodity (Food) Inflation
(price pass alongs announced during the quarterly earning season)
 Unemployment Rate at Cyclical Low
 Wages, Incomes, & Salaries Rising
 Import Inflation from Weaker U.S. Dollar
Argus Research Corp.
22
Reasons for the Federal Reserve to Cut
 Stimulate Economy?
 Send Unemployment Rate Lower?
 Lower Mortgage Rates from 5.8%?
 Boost Consumer Spending from 4.2%?
 No Legitimate Reason to Reduce Overnight Target Rate…
Argus Research Corp.
23
Core Inflation Above ‘Comfort Zone’
Core Personal Consumption Expenditure Deflator
%
4.5
4.0
3.5
3.0
2.5
2.0
Federal Reserve's 'Comfort Zone'
1.5
1.0
0.5
0.0
'90
'92
'94
'96
'98
'00
'02
'04
'06
Source: Bureau of Economic Analysis, Argus Research Corp.
24
Respected Inflation Barometer Still Elevated
Dallas Fed Trimmed-Mean PCE Inflation Rate
%
2.9
2.7
2.5
2.3
2.1
1.9
1.7
Source: Federal Reserve Bank of Dallas
1.5
'95
'97
'99
'01
'03
'05
'07
Source: Federal Reserve Bank of Dallas, Argus Research Corp.
25
Pricing Power Index
Philadelphia Fed Current Prices Paid less
Difference Current & Future Prices Received
vs. ISM Prices
ISM Prices
CPP-(FPR-PR)
100
70
CPP-(FPR-CPR)
90
ISM Prices
50
80
30
70
10
60
-10
50
-30
40
-50
30
'87
'90
'93
'96
'99
'02
'05
Source: Federal Reserve Bank of Philadelphia, Institute for Supply Management,
Argus Research Corp.
26