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

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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) United States Euro area 8% gap Cumulative fiscal tightening since 2010 (% of regions potential GDP) 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 Business sectors saving and investment (% of GDP) Saving Investment Financial surplus (+) or deficit (-) (2 quarters moving average, % of GDP) 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 Household financial obligation ratio (% of disposable income) Non financial corporations interest paid / cash-flows (%) Household debt (% of GDP)

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 (%) millions adults Inventory of homes available for sale (thousands) Existing homes [R.H.S.] New homes days delinquent Foreclosure inventory Stock of seriously delinquent loans (millions of homes) Home sales (thousands, annual rate) 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 Home prices (Case Shiller, existing homes, % year on year) Case Shiller home prices by metropolitan area (% year on year) Dec 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 2009Q Q Near negative equity Negative equity Millions % of total mortgage property count Jun-10Jun-11Jun-12Jun % 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 Contribution to GDP growth (%) Budget balance of States and Local entities (% of GDP) Stable deficit Lower deficit stimulation restriction Fiscal restriction (change in structural balance, general government, % of GDP)

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, %) Wages and supplements Income on assets Social benefits less contribution Taxes Disposable income Private employment (3mo3m change, monthly rate, thousands) Average weekly hours worked Hourly earnings (% 3mo3m, annual rate) %

12 12 Wealth effects should push the saving rate lower Sources: Thomson Datastream, Dexia-AM 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.] 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 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 < 620 >660 > Mortgage interest rate (as given by Bankrate, %) 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 No tapering Short term expected interest rates (%, Fed funds contracts) December 2014 December 2016 December JanMarMayJulSepNov 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 GDP growth in the United States Unemployment rate (%) GDP growth (%, year on year) Q Q413 Q113 Q Q/Q annual rate (%) Consumption Investment - Residential -Equipment & artistic originals - Structures Inventory changes (contribution) Government External balance (contribution) - Exports - Imports GDP

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 (%) Involuntary part-time employment (% of labor force) Employment rate (%) Employment to population aged 16 & over

19 19 The return to a more normal labor market will take more time (II) Sources: Thomson Datastream, BLS, Dexia-AM > >60 Population age structure (%) Participation rate by age (%) cyclical effect ? year old participation rate (%) Employment (% over 4 years, annual rate) [R.H.S.] 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 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 Participation rate (%) Ageing effect Disability insurance applications (number in thousands, annual rate, 12 mma) Total

20 20 Polarization of job market creations has increased… Lower earnings Medium earnings Higher earnings Change in employment by earnings category and sector ( , 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) 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 : $ 1 family with 2 children = $ Top 10% income share in the United State (%, including capital gains, ) Top 0.1% income share (excluding capital gains, %, ) United States France United Kingdom Poverty rate by age (%) > 65 years Under 18 years 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 Receipts and outlays Outlays Receipts Debt held by the public % Social Security Medicare Medicaid & exchange subsidies Outlays 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) 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 Fuel Other Medical care (% year on year) Rent of primary residence Owners equivalent rent Housing (% year on year) Shares in total CPI (July 2013) Housing Sources: Thomson Datastream, Dexia-AM

26 The euro dollar exchange rate 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 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 % 8.1% 10.5% 5.5% 6.7%

28 28 India Indonesia Turkey Brazil Balance of payments (billions of dollars) Despite slower growth, some emerging economies are now confronted with rising external imbalances Sources: Thomson Datastream, Dexia-AM 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) 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 United States Euro area Private sector

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