Macroeconomic Advisers, LLC Challenging Transitions: The US Economic Outlook Dr. Joel L. Prakken, Chairman Macroeconomic Advisers, LLC Presentation for The Global Interdependence Center: Global Issues and the US Outlook April 14, 2004 For more information about Macroeconomic Advisers write or call us at: 231 South Bemiston Ave, #900, Saint Louis, MO 63105 (314-721-4747) or visit us on the web at www.macroadvisers.com
April 2004
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Themes in the Outlook • Above-trend (> 3.5%) GDP growth in ’04 and ’05 – Healthy (monthly) profile heading into ’04 – Still positive (but waning) fiscal/financial stimulus – Synchronized global recovery, weakened dollar – Capital excesses of the 1990s turned to shortfalls – Lean inventories (outside of vehicle sector) • Still, only gradual improvement in labor markets • Further, but temporary, disinflation thru mid-’04 • First monetary tightening in early ’05 • Key transitions: withdrawal of policy stimulus; rotation to cap ex, net exports; inventory rebound • Biggest imponderables: productivity, terrorism April 2004
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Monthly Real GDP through January 2004 10800 Did you know that MA’s monthly GDP is now used by the NBER to date business cycles?!
Billions of Chained (2000) Dollars
10600
Jan
Jan/Q4 = 3.0% a.r. Q4
10400
10200
10000
9800
9600 2000
April 2004
2001
2002
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2004
First-Half Growth: MA vs. Our Own Consensus Panel
Survey results reported regularly in MA’s Weekly Economic Commentary.
April 2004
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The Forecast in Summary GDP
GDP Price
Unem Rate
Fed Funds Rate
T-Note Yield
9 Growth of: '04:H1 '04:H2 '04 '05 Real GDP 4.4 4.2 4.3 4.0 GDP Price 1.4 1.1 1.2 1.2
Annual Percent / Percent Change
8 7 6 5 4 3 2 1 0 -1
H
F
-2 2000
2001
April 2004
2002
2003
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2004
2005
5
Growth of Real GDP in 2004: MA vs Blue Chip 5.0
Percent Change, Year / Year
MA 4.5 Blue Chip
4.0
3.5
3.0 Aug 03
Sep 03
April 2004
Oct 03
Nov 03
Dec 03
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Jan 04
Feb 04
6
Mar 04
Apr 04
The Forecast in Summary 2003 Q4
Q1
Real GDP, PCAR CIPI (Contribution) Final Sales, PCAR Consumption Nonres Fixed Inv Residential Inv Exports Imports ( - ) Govt C&GI Dom Demand, PCAR
4.1 0.9 3.4 3.2 10.9 7.9 20.5 16.4 -0.1 3.6
4.4 1.1 3.3 3.6 7.4 -0.6 0.7 3.2 2.2 3.5
Unem Rate (%) Core CPI, PCAR Fed Funds Rate (%) 10-Yr T-Note Yld (%)
5.9 1.0 1.0 4.3
Foreign GDP, PCAR Exchange Rate Equity Wealth, % Chg Corp Profits, PCAR
April 2004
2004 Q2
4/4 or Yr Avg 03 04
Q3
Q4
4.3 0.5 3.8 4.0 11.9 -4.2 11.8 12.3 3.5 4.2
4.2 0.0 4.2 3.6 13.4 -4.8 12.0 6.4 1.9 3.8
4.1 0.1 4.0 3.3 13.1 -9.5 12.1 4.9 1.8 3.3
4.3 -0.1 4.4 4.0 7.4 9.5 6.4 4.5 2.1 4.2
4.3 0.5 3.8 3.6 11.4 -4.8 9.0 6.6 2.3 3.7
4.0 0.0 4.0 3.7 9.2 -8.9 11.8 4.0 1.1 3.2
5.6 1.4 1.0 4.0
5.6 1.3 1.0 4.0
5.5 1.3 1.0 4.3
5.4 1.4 1.0 4.5
6.0 1.1 1.0 4.0
5.5 1.3 1.1 4.2
5.2 1.7 2.0 5.3
4.9 115.6
3.0 113.3
3.3 113.8
3.4 113.7
3.1 113.5
2.6 119.3
3.2 113.6
3.3 112.3
12.2 32.3
0.4 10.2
2.4 10.2
1.7 9.5
2.0 8.2
30.1 29.1
6.7 9.5
10.3 6.0
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05
Qualitative Features of the Forecast • Steady growth in final sales (~ 4% ) punctuated by a sharp increase ($49 bil) in inventory inv during ’04 • Gradual deceleration of domestic final demand offset by robust recovery of net exports, especially in ’05 • Household expenditures, government C&GI undermined by the withdrawal of policy stimulus – PCE, govt C&GI grow slower than GDP – Residential construction declines in ’04 and ’05
• Partial offset from a sharp acceleration of capital expenditures, especially E&S • Trade benefits from recovery of global growth, deceleration of domestic demand, weaker dollar April 2004
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Qualitative Features of the Forecast • Gradual improvement in labor markets – Trailing edge of recent productivity surge – Modest cyclical rebound in labor force participation rate, average workweek – Lethargic employment not a threat to recovery… – …or even very mysterious! • Despite high oil prices, lower dollar, little inflation risk – Labor market slack: modest growth in wages – Productivity surge: falling unit labor costs • Fed is patient, but long rates eventually edge up in anticipation of first tightening. April 2004
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Fiscal Policy Assumptions • Provisions assumed to expire on schedule – Emergency unem benefits (“soft” expiration Dec 03) – 50% expensing “bonus” (Dec 04): impact on BFI?
• JGTRRA provisions assumed not to expire in Dec 04 – – – –
Expanded 10% bracket (JCT: $4.3 bil in FY05) Child credit at $1000 ($2.6 bil) Relief from “marriage penalty” ($5.4 bil) Increased AMT exemption amount ($6.9 bil)
• $48 bil decline in net nonwithheld taxes in 2004 – $30 bil as refunds (BEA: $26 bil; OTA: $36 bil) – $18 bil as reduced final settlements (OTA)
• Late-year Iraq supplemental, smaller than last two April 2004
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Other Key Forecast Assumptions • Monetary policy (more from Larry, next) – First tightening in Jan ’05 – Fed funds rate hits 3% by Dec ’05
• Oil prices remain high in ’04, decline modestly in ’05 • Uncertainty that has restrained both businesses and investors gradually lifts – Further rise in stock prices – Businesses willing to rebuild inventories, re-hire labor – And resume accumulating fixed capital
• Recent, rapid productivity growth is unsustainable • US leads, but global recovery in phase • No significant terrorist acts in the US April 2004
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Notes on the Implementation of Fiscal Stimulus • There is a lot a tax money hitting the economy in the first half of 2004, but overall stimulus is modest • Refunds of over-withholdings from first half of 2003 are a one-time event with a “temporary” MPC • The decline in final settlements is mostly against estimated taxes on dividends and capital gains – We do assume this is permanent (not sunset in ’08) – But expectation of tax cut already working via wealth effect – With little extra kick when lower settlements realized
• Tax stimulus partly offset by impact of the expiration of emergency unemployment benefits in Dec • Discretionary outlays will slow (relative to trend) April 2004
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MA's Fiscal Conditions Index 4
Percentage Points of GDP Growth
3
Transition from fiscal stimulus to restraint
2 1 0 -1 -2 H F -3 1999
2000
April 2004
2001
2002
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2004
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2005
MA's Monetary & Financial Conditions Index 4 Transition from monetary / financial acceleration to deceleration
Percentage Points of GDP Growth
3 2
From Rates/Yields 1 0 -1 -2 Total
H F
-3 1999
2000
April 2004
2001
2002
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2004
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2005
MA's Combined Fiscal/Financial Conditions Index 4 The gradual withdrawal of combined stimulus.
Percentage Points of GDP Growth
3 2 1 0 -1
For more see “A Combined Monetary, Financial, and Fiscal Conditions Index”, Economic Outlook (Sept 2003) -2 H F -3 1999
2000
April 2004
2001
2002
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2005
Surprise! Refiners' Cost of Oil Imports 35 2003 $28
30
2004 $31
2005 $27
Dollars per Barrel
25 20 July 2003 Forecast
15 10 For more, see “Are High Oil Prices a Threat”, US Economic Outlook (March 20, 2004)
5 0 1989
1991
April 2004
1993
1995
1997
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H F 2001
16
2003
2005
Growth of Labor Productivity 6
4-Quarter Percent Change
5 Actual 4 3 Potential 2 1 0 H F -1 1989
1991
April 2004
1993
1995
1997
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1999
2001
17
2003
2005
Phased Global Slowdown…& Recovery 6 H F
4-Quarter Percent Change
5 4 3 Asian Crisis
2 1
Gulf War
36-country GDP excl US (OEF)
0 U.S. Real GDP -1 -2 1989
1991
April 2004
1993
1995
1997
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1999
2001
18
2003
2005
FRB Broad, Real, Trade-Weighted Dollar 130 H F
125
Index (March 1973 = 100)
120 Dollar reversal to help spur trade
115 110 105 100 95 90 85
80 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
April 2004
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Equity Wealth & S.E. Band Around "Fair" Value 20
0.50 Tech Bubble
Trillions of Dollars (End of Quarter)
18
0.45
16
0.40
14
0.35 Ruble Collapse
12 10
0.30 Ratio of NASDAQ to Wilshire (Right)
0.25
Irrational Exuberance
8
0.20
6
0.15 Geopolitical Uncertainties
4
0.10
Gulf War
2 0 1984
0.05 H
1987 Correction 1986
1988
April 2004
1990
1992
1994
1996
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1998
2000
2002
20
F
2004
0.00
Contribution of Equity Wealth to GDP Growth 2.0 H F
Annualized Percentage Points
1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 1980
1982
1984
April 2004
1986
1988
1990
1992
1994
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1996
1998
2000
21
2002
2004
Consumer Durables & Residential Investment: Contr to 4-Qtr % Chg in Real GDP
Percentage Points of Annualized Growth
4 3 This time it was positive
2 1 0 Usually negative in recessions
-1 -2
H F -3 1979
1982
April 2004
1985
1988
1991
1994
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1997
2000
22
2003
Nonfarm, Nonvehicle Inventories 21
120
Percent
20
80
19
40
18
0
17
-40
Inventory Investment (Right)
16
-80 Record Low I /S Ratio
15 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
April 2004
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-120
Billions of Chained (2000) Dollars
H F
I / S Ratio (Left)
Investment in Equipment & Software 50 For more, see “What Happens when the Expensing Bonus Expires”, Economic Outlook (February 19, 2004)
H F
40 4-Quarter Percent Change
Computers & Software 30 20 10 0 Other Equipment -10 -20 1985
1987
April 2004
1989
1991
1993
1995
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1999
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24
2003
2005
1000
20
900
16
800
Predicted (left)
Co-integrating Equation: log(K) = 2.95 + 1.00*log(Q) – 1.36*log(R)
12
700
8
600
4
500
0
400
-4 Error (right)
300
-8
200
-12 Actual (left)
100 0 1985
-16 -20 1987
April 2004
1989
1991
1993
1995
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1999
2001
25
2003
Percent of Capital Stock
Billions of Chained (2000) Dollars
Capital Excess/Shortfall: Computers & Software
Capital Excess/Shortfall: Other Equipment 4000
5
3800
4
3600
3
3400
2
Predicted
3200
1
3000
0
2800
-1
Actual
2600
-2
2400
-3 Co-integrating Equation: log(K) = 4.60 + .80*log(Q) – 1.17*log(R)
2200 2000 1985
-4 -5
1987
April 2004
1989
1991
1993
1995
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1999
2001
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2003
Percent of Capital Stock
Billions of Chained (2000) Dollars
Error (right)
Contributions to PNF Price Inflation 5 From "Unit Labor Costs"
H F
4-Quarter Percent Change
4 3 2 1 Actual Inflation 0 -1
From unemployment and exchange rates
-2 1991
1993
April 2004
1995
1997
1999
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2001
2003
27
2005
Interest Rates & the Term Spread 10 H F
9 8 10-Yr Note Yield
Percent per Annum
7 6 5
Fed Funds Rate
4 3 2
Term Spread
1 0 -1 -2 1989
1991
April 2004
1993
1995
1997
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1999
2001
28
2003
2005
Unemployment Rate & the NAIRU 12 H F Initial conditions matter! Historically small unemployment gap is consistent with slow employment growth.
10
8 Percent
Unemployment Rate 6 NAIRU 4 90% Confidence Interval: Full Employment 2
0 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
April 2004
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Elasticity of Pvt Nonfarm Estab Employment with Respect to MA's Index of Monthly GDP 1.20
0.10 0.09
1.00
0.08 Cumulative (Left)
0.80
0.07 0.06
0.60
0.05 0.04
0.40
0.03 Incremental (Right)
0.02
0.20
0.01 0.00
0.00 0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Months
April 2004
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15
16
17
Private Nonfarm Establishment Employment 0.3 For more see “Can Sluggish Employment Growth Scuttle the Expansion?”, Economic Outlook (March 10, 2004)
Monthly Percent Change
0.2 0.1 0.0 -0.1 -0.2 -0.3
+/- 1 Std. Err
H F
-0.4 2001
April 2004
2002
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