The State of the U.S. economy Florence Pisani December 6, 2013.

Présentation au sujet: "The State of the U.S. economy Florence Pisani December 6, 2013."— Transcription de la présentation:

1 The State of the U.S. economy Florence Pisani December 6, 2013

2 22 The contrast with the euro area is striking: in the US, the recovery did not stopped in mid-2011… Sources: Thomson Datastream, IMF, Dexia-AM GDP (2007 = 100) 07080910111213 96 98 100 102 104 106 108 United States Euro area 8% gap Cumulative fiscal tightening since 2010 (% of regions potential GDP) 0 1 2 3 4 5 2010201120122013 United States Euro area

3 33 … as the government has adjusted the pace of fiscal consolidation to the private sector spending behavior Sources: Thomson Datastream, Dexia-AM Financial surplus (+) or deficit (-) by sector (% of GDP) Private sector Government -15 -10 -5 0 5 10 808386899295980104071013 8 10 12 14 16 00020406081012 Business sectors saving and investment (% of GDP) Saving Investment Financial surplus (+) or deficit (-) (2 quarters moving average, % of GDP) -6 -4 -2 0 2 4 6 8 00020406081012 Households Business sector Rest of the World (-)

4 44 US private balance sheets healing process is almost over

5 55 Households have deleveraged and non financial corporations financial health is good Sources: Thomson Datastream, Dexia-AM 808488929600040812 15 16 17 18 19 19.5 Household financial obligation ratio (% of disposable income) Non financial corporations interest paid / cash-flows (%) 556065707580859095000510 0 5 15 20 25 30 35 Household debt (% of GDP) 808488929600040812 40 50 60 70 80 90 100

6 66 Despite the recent rise in mortgage rates, residential investment should continue to increase… Sources: Thomson Datastream, Dexia-AM Share of young adults (18-31) living with their parents (%) 28 30 32 34 36 38 1968198120072013 2.4 millions adults Inventory of homes available for sale (thousands) 8286909498020610 100 200 300 400 500 600 1400 1800 2200 2600 3000 3400 Existing homes [R.H.S.] New homes 0 1 2 3 4 4.5 00020406081012 90+ days delinquent Foreclosure inventory Stock of seriously delinquent loans (millions of homes) Home sales (thousands, annual rate) 00020406081012 200 400 600 800 1000 1200 1400 1600 3000 3500 4000 4500 5000 5500 6000 6500 Existing homes [R.H.S.] New homes

7 77 … and home prices to recover (although at a more reasonable pace) Sources: Thomson Datastream, Dexia-AM -20 -15 -10 -5 0 5 10 15 20 25 9294969800020406081012 Home prices (Case Shiller, existing homes, % year on year) Case Shiller home prices by metropolitan area (% year on year) -15 -10 -5 0 5 10 15 20 25 30 Dec. 2011 Dec. 2012Sep. 2013

8 88 Further rises in home prices will help reduce the number of mortgages with negative or near negative equity Source: CoreLogic Residential properties with negative or near negative owner equity 2009Q1 0 5 10 15 20 17.7 15.2 2.5 2013Q2 8.7 1.6 7.1 Near negative equity Negative equity Millions % of total mortgage property count 0 5 10 15 20 25 30 Jun-10Jun-11Jun-12Jun-13 14.6% 3.4% Negative equity Near negative equity

9 99 Less tightening… more growth!

10 10 From now on, fiscal policy should weigh less on growth Sources: CBO, Thomson Datastream, Dexia-AM -3.0 -2.5 -2.0 -1.5 -0.5 -0.6 -0.4 -0.2 0.0 0.2 0.4 07091113 Contribution to GDP growth (%) Budget balance of States and Local entities (% of GDP) Stable deficit Lower deficit 0.0 0.5 80859095000510 stimulation restriction -4 -3 -2 0 1 2 3 07091113 Fiscal restriction (change in structural balance, general government, % of GDP) 08101214

11 11 Disposable income will cease being affected by tax increases and help consumption grow faster Sources: Thomson Datastream, Dexia-AM Household disposable income (contribution, %) -2 0 1 2 3 4 5 Wages and supplements Income on assets Social benefits less contribution Taxes Disposable income 2012 2013 2014 Private employment (3mo3m change, monthly rate, thousands) -800 -600 -400 -200 0 200 400 02040608101214 Average weekly hours worked 33.5 34.0 34.5 35.0 02040608101214 Hourly earnings (% 3mo3m, annual rate) 0 1 2 3 4 5 02040608101214 34.5 170 2.0%

12 12 Wealth effects should push the saving rate lower Sources: Thomson Datastream, Dexia-AM 150 200 250 300 350 400 450 606570758085909500051015 Tangible wealth Net financial wealth Household wealth (% of disposable income) 14Q4 With the S&P 500 at 1900 by 2014Q4 With an increase in home prices of 7% in 2014 Change in the saving rate: -1%

13 13 Wealth effects should push the saving rate lower, but for this to happen, favorable financial conditions are necessary Source: Thomson Datastream ? Net borrowing rate Net financial saving rate [R.H.S.] -6 -4 -2 0 2 4 6 8 10 12 14 94970003060912 Other Consumer credit Home mortgages Credit market borrowing Household borrowing (% of disposable income)

14 14 This may call for the Fed to remain accommodative for a while Sources: Thomson Datastream, Federal Reserve, Dexia-AM Plans to buy a home and total home sales 1.0 1.5 2.0 2.5 3.0 3.5 808488929600040812 1 2 3 4 5 6 Plans to buy home in 6 months (% households) [R.H.S.] Home sales per capita (%) easy credit area tight credit area FHA purchase loans credit scores Average borrower credit scoreDistribution of FICO scores 0 10 20 30 40 50 60 70 80 040506070809101112 < 620 >660 >720 600 620 640 660 680 700 720 07080910111213 Mortgage interest rate (as given by Bankrate, %) 1 2 3 4 5 JanAprJulOct 30-year fixed mortgage rate US 10-year Treasury rate 2013

15 15 With tapering getting closer, Fed communication is more than ever key to prevent an excessive rise in 10-year interest rates Sources: Thomson Datastream, Federal Reserve, Dexia-AM 10-year interest rate (%) 2013 FOMC May 1 Press Conference, June 19 JanMarMayJulSepNov 1.6 2.0 2.4 2.8 3.0 No tapering Short term expected interest rates (%, Fed funds contracts) December 2014 December 2016 December 2015 0 0.5 1.0 1.5 2.0 2.5 3.0 2013 JanMarMayJulSepNov 1.6 2.0 2.4 2.8 3.0 0.8 1.2 1.6 2.0 2.4 2.8 Expected Fed funds rates in December 2016 [R.H.S.] 10-year Treasury rate 2013 JanMarMayJulSepNov 10-year interest rate and short term expectations (%)

16 16 After a slowdown in 2013, growth should accelerate towards 2.5% in 2014 Sources: Thomson Datastream, Dexia-AM 2 4 6 8 10 12 95979901030507091113 GDP growth in the United States Unemployment rate (%) GDP growth (%, year on year) 2009201020112012 -1.62.02.52.2 -16.77.06.38.3 -21.2-2.50.512.9 -14.39.49.25.9 -18.9-16.42.112.7 -0.81.4-0.20.2 3.10.1-3.2 1.0-0.50.1 -9.111.57.13.5 -13.712.84.92.2 13 Q3 1.5 4.0 14.6 -1.4 12.3 0.8 0.0 0.3 4.6 1.8 2.8 12 Q413 Q113 Q2 1.72.31.8 11.5-1.47.7 19.812.514.2 7.62.54.0 17.5-25.717.6 -1.80.90.4 -6.5-4.20.0 0.6-0.3-0.1 1.1-1.38.0 -3.10.66.9 0.11.12.5-2.82.51.8 2.8 20132014 1.92.7 4.57.4 14.113.5 2.44.8 1.89.9 0.0-0.1 -2.0-0.9 0.1-0.2 2.66.1 1.76.1 1.72.6 Q/Q annual rate (%) Consumption Investment - Residential -Equipment & artistic originals - Structures Inventory changes (contribution) Government External balance (contribution) - Exports - Imports GDP -6 -4 -2 0 2 4 6 95979901030507091113

17 17 Some issues still unsolved

18 18 The return to a more normal labor market will take more time (I) Sources: Thomson Datastream, BLS, Dexia-AM Unemployment rate (%) 90 9396990205 08 11 3 4 5 6 7 8 9 10 11 Involuntary part-time employment (% of labor force) 2 3 4 5 6 7 566370778491980512 Employment rate (%) Employment to population aged 16 & over 9093969902050811 58 59 60 61 62 63 64 65

19 19 The return to a more normal labor market will take more time (II) Sources: Thomson Datastream, BLS, Dexia-AM 0 10 20 30 40 50 60 80859095000510 20 30 40 50 60 70 80 90 16-1920-2425-2930-3435-3940-4445-4950-5455-5960-64 >65 16-24 25-54 55-59 >60 Population age structure (%) Participation rate by age (%) cyclical effect ? 80 81 82 83 84 85 9194970003060912 -4 -3 -2 0 1 2 3 25-54 year old participation rate (%) Employment (% over 4 years, annual rate) [R.H.S.] 25-54 year old participation rate and employment growth The excess increase in disabilities explains 1 percentage point of the participation gap. This leaves a 1% unexplained fall in the participation rate of the 25-54 year old. Should this correct, the unemployment rate would increase by 0.5%. most of the fall in the unemployment rate is here to stay. 63 64 65 66 67 68 92949698000204060810 12 Participation rate (%) Ageing effect Disability insurance applications (number in thousands, annual rate, 12 mma) 0 1000 2000 3000 3500 868992959801040710 13 Total

20 20 Polarization of job market creations has increased… -6 -5 -4 -3 -2 0 1 Lower earnings Medium earnings Higher earnings Change in employment by earnings category and sector (2008-10, millions) Manufacturing Construction Retail trade Administrative and support and waste management and remediation services Educational services, health care and social assistance Other net jobs creating sectors Other net jobs losing sectors Employment by earnings category (millions) 35 37 39 41 43 45 47 0506070809101112 Medium Lower Higher Sources: Thomson Datastream, BLS, Dexia-AM

21 21 … inequalities have continued rising and poverty rates are elevated Source: Emmanuel Saezs website at University of California, Berkeley, Census Bureau Poverty rate (%) Poverty thresholds in 2012 : 1 adult : 11 945 $ 1 family with 2 children = 23 283$ 10 12 14 16 18 20 22 24 596979899909 Top 10% income share in the United State (%, including capital gains, 1917-2012) 30 35 40 45 50 55 1917192719371947195719671977198719972007 Top 0.1% income share (excluding capital gains, %, 1913-2012) United States France United Kingdom 0 2 4 6 8 10 12 1913192319331943195319631973198319932003 Poverty rate by age (%) 5 10 15 20 25 30 687378838893980308 > 65 years Under 18 years 18-65 years

22 22 The Budget debate is not over yet, but the ongoing political drama is distracting attention from longer term fiscal issues Sources: CBO, Dexia-AM US federal Budget: CBO forecasts (% of GDP) Budget balance -12 -10 -8 -6 -4 -2 0 2 4 80848892960004081216202428 Receipts and outlays Outlays Receipts 14 16 18 20 22 24 26 80848892960004081216202428 Debt held by the public 0 20 40 60 80 100 120 8088960412202836 +3% 0 1 2 3 4 5 6 7 808896041220 28 Social Security Medicare Medicaid & exchange subsidies Outlays 0 2 4 6 8 10 12 14 80889604122028 Other mandatory spending Discretionary Net interest Social Security + health

23 23 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.

24 24 Federal Reserves balance sheet Sources: Federal Reserve, Dexia-AM Federal Reserves balance sheet (trillions of dollars)

25 25 Addenda: inflation in the United States Inflation (%, annual average, CPI) 2.1 1.6 1.9 0 1 2 3 201220132014 980104071013 -3 -2 0 1 2 3 4 5 Core services Core goods Core CPI Core inflation by sector (% year on year) Apparel (3%) Transportation (17%) Recreation (6%) Education & communication (7%) Other (3%) Food & beverages (15%) Housing (42%) Medical care (7%) Rent of primary residence Owner equivalent 24 7 4 6 0 10 20 30 Fuel Other 0 1 2 3 4 5 6 980104071013 Medical care (% year on year) 0 1 2 3 4 5 980104071013 Rent of primary residence Owners equivalent rent Housing (% year on year) Shares in total CPI (July 2013) Housing Sources: Thomson Datastream, Dexia-AM

26 26 1.1 1.2 1.3 1.4 1.5 1.6 1.7 050607080910111213 0.0 0.5 1.0 1.5 2.0 2.5 3.0 10111213 The euro dollar exchange rate 1.1 1.2 1.3 1.4 1.5 1.6 1.7 050607080910111213 -3 -2 0 1 2 3 Sources: Thomson Datastream, Dexia-AM Error explanation and Spain CDS Interest rates differential and euro dollar exchange rate Short term interest rates differential (%, euro minus US) [R.H.S.] Euro dollar exchange rate 3-month interest rates anticipated at one year (%) United States Euro Interest rates differential Euro dollar exchange rate Error Estimated with the interest rates differential Euro dollar exchange rate Estimated by adding Spanish CDS and a dummy (since July 2011) reflecting the US budget uncertainty -0.25 -0.20 -0.15 -0.10 -0.05 0.00 0.05 10111213 -3.9 -3.4 -2.9 -2.4 -1.9 -1.4 -0.9 -0.4 Spain CDS (-) [R.H.S.] Dummy US [R.H.S.] Error

27 27 5% While world growth is expected to reaccelerate somewhat in the coming years, it should remain almost 1% below pre-crisis levels Sources: IMF, Dexia-AM IMF GDP growth forecasts (%, year on year) World 0 1 2 3 4 5 6 0204060810121416 4.1% 8.1% 10.5% 5.5% 6.7%

28 28 India -100 -80 -60 -40 -20 0 20 40 60 80 980104071013 Indonesia Turkey Brazil Balance of payments (billions of dollars) -100 -80 -60 -40 -20 0 20 40 60 020406081012 -50 -40 -30 -20 -10 0 10 20 980104071013 -100 -80 -60 -40 -20 0 20 40 60 80 100 020406081012 Despite slower growth, some emerging economies are now confronted with rising external imbalances Sources: Thomson Datastream, Dexia-AM 0607080910111213 -10 -8 -4 0 4 8 12 Brazil Turkey India South Africa Real GDP growth (%, year on year, smoothed over 1 year) Current account Current account Direct investment Direct investment Direct investment Direct investment Portfolio Other

29 29 Growing external deficits have made those Emerging economies – and their exchange rates – vulnerable to changes in global financial conditions Sources: IMF, Thomson Datastream, Dexia-AM

30 30 The oil market is driven by demand… and supply factors! OPEC and North American production capacities (Millions of barrel per day) 30 32 34 36 38 40 0608101214 10 12 14 16 18 20 OPEC Sources: EIA, Dexia-AM North America [R.H.S]

31 31 … as the government has adjusted the pace of fiscal consolidation to the private sector spending behavior Sources: Thomson Datastream, Dexia-AM Financial surplus (+) or deficit (-) by sector (% of GDP) Rest of the World (-) Private sector Government -15 -10 -5 0 5 10 808386899295980104071013 United States Euro area Private sector -8 -6 -4 -2 0 2 4 6 8 00020406081012

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