Presentation to:
Paris GIC Conference Club Horizon Stratégie
2004 Outlook
John Silvia – Chief Economist February 2, 2004
Economics as Information Getting Beyond the Bloomberg Headline
Where are we now?
REAL GDP GROWTH
Quarter/Quarter Percent Change, Seasonally Adusted Annual Rate
10%
10% 4th Quarter 2003 @ 4.0%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
1999
2000
2001
2002
2003
FINAL DOMESTIC DEMAND COMPONENTS 15%
(Year-on-Year Growth)
15%
Green Line = Business Fixed Investment
10%
10%
5%
5%
0%
0%
-5%
-5%
-10%
Red Line = Government Spending Blue Line = Consumer Spending
97
98
99
00
01
02
03
-10%
NON-FARM PRODUCTIVITY and REAL GDP 7% 6%
Year-over-Year Percent Change
Line = Real GDP, 4Q @ 4.3%
7% 6%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
-1%
Bars = Non-Farm Productivity, 3Q @ 5.0%
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2001 2002 2003
-1%
Non-Farm Employment Net Quarterly Change, in Thousands
200 0
200 0
-200
-200 4Q @ 144K
-400
-400
-600
-600
-800
-800
-1000
-1000
2001
2002
2003
Where are we going? •
Outlook – Is the Recovery Picking Up Momentum?
• Not Your Father’ s Economic Recovery.
INITIAL JOBLESS CLAIMS 500
In Thousands
Blue Line = 4-Week Moving Average @ 346.00 Green Line = Weekly Figure @ 342.00
January 24
450
500
450
400
400
350
350
300
300
2002
2003
2004
Employment - Payroll vs. Household Thousands of Persons
140000
140000
130000
130000
120000
120000
110000
110000
100000
100000 Household (left)
90000
83
85
87
89
91
93
Payrolls (right)
95
97
99
01
03
90000
Employment - Payroll vs. Household Thousands of Persons
139000
Household (left)
133000
Payrolls (right)
138500
132500
138000
132000
137500
131500
137000
131000
136500
130500
136000
130000
135500
129500
2000
2001
2002
2003
ISM COMPOSITE INDEX Diffusion Index
70
70
December @ 66.2 65
65
60
60
55
55
50
50
45
45
40
40
35
35
97
98
99
00
01
02
03
70
ISM NON-MANUFACTURING INDEX BUSINESS ACTIVITY INDEX December @ 58.6
65
70 65
60
60
55
55
50
50
45
45
40
40
35
Seasonally Adjusted 97
98
99
00
01
02
03
35
Consumer Fundamentals: • Income
• Sentiment • Credit • Outlook – Better
INCOME & SPENDING GROWTH
Year to Year Percent Change, 12 Month Moving Average
6%
6%
November 5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0% 92
Real Spending (Green Line) @ 3.1% Real, Disposable Income (Blue Line) @ 2.5%
94
96
98
00
02
0%
Personal Consumption Expenditures 6% 14%
2002
7% 3%
Motor Vehicles and Parts
4%
Furniture and Household Equipment Other Durable Goods Food Clothing and Shoes
13%
Other Nondurable Goods Housing
14%
Energy Goods and Services Other Household Operation Transportation Medical Care
5%
Recreation Other Services
4% 8%
4% 5% 13%
Investment Spending: • Orders
• Capacity Utilization • Financial Depth • Outlook - Improving
MANUFACTURERS' NEW CAPITAL GOODS ORDERS 20%
NON-DEFENSE, EXCLUDING AIRCRAFT
20%
December 10%
10%
0%
0%
-10%
-10% Year-to-Year Percent Change @ 9.9%
-20%
-20% Series is a 3-Month Moving Average
-30% 93 94 95 96 97 98 99 00 01 02 03
-30%
REAL BUSINESS EQUIPMENT & SOFTWARE SPENDING 20%
Seasonally Adusted Annual Rate
20%
4th Quarter 2003 @ 10.0% 10%
10%
0%
0%
-10%
-10%
-20%
-20%
2001
2002
2003
Inventories Under Control
TOTAL INVENTORY TO SALES RATIO
1.60
1.60
November @ 1.35 1.50
1.50
1.40
1.40
1.30 92 93 94 95 96 97 98 99 00 01 02 03 1.30
Housing: • Household Income
• Employment • Credit • Outlook - Positive
SINGLE FAMILY HOUSING STARTS 1.8
Seasonally Adjusted Annual Rate - in Millions
December Single-Family Starts @ 1.66 Blue Line (Left Scale)
1.6
12% 11% 10%
1.4
9% 1.2 8% 1.0
7% Mortgage Rate @ 5.88% Green Line (Right Scale)
0.8 0.6 87
89
91
93
95
97
99
6% 01
5% 03
SAN JOSE MSA HOME PRICES 50%
Quarterly Percent Change, Annual Rate
Third Quarter 2003
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0%
-10% -20% 87
-10%
Red Line = Yr/Yr Change + 1.0% Blue Bar = Qtrly Change @ 0.0%
89
91
93
95
97
99
FHLMC/FNMA House Price Index
01
03 -20%
Inflation: • Commodity Prices
• Dollar • Energy • Productivity • Outlook - Creeping Up
U.S. CPI - SERVICES VS "CORE" COMMODITIES 6%
Year to Year Percent Change
Line is Services @ 2.8%
6%
December
4%
4%
2%
2%
0%
0%
-2%
-2% Bars are Commodities, ex. Food & Energy @ - 2.5%
-4%
97
98
99
00
01
02
03
-4%
7%
CPI and Commodities Prices Green Line is CRB Price Index (right)
390
6%
360
5%
330
4%
300
3%
270
2%
240
1%
210
0% 83
Blue Line is Yr/Yr change in CPI (left)
87
91
95
99
03 180
CPI and ISM Prices
7%
90
6%
81
5%
72
4%
63
3%
54
2%
45
1%
36
Green Line is ISM Price Index (right) Blue Line is Yr/Yr change in CPI (left)
0% 83
85
87
89
91
93
95
97
99
01
03 27
CPI and Capacity Utilization
7%
90
Blue Line is Yr/Yr change in CPI (left)
6%
87
5%
84
4%
81
3%
78
2%
75
1%
72 Green Line is Capacity Utilization (right)
0% 83
85
87
89
91
93
95
97
99
01
03 69
7%
CPI and Unemployment Blue Line is Yr/Yr Change in CPI (left)
16%
6%
14%
5%
12%
4%
10%
3%
8%
2%
6%
1%
4%
0% 83
Green Line is Unemployment Rate (right)
85
87
89
91
93
95
97
99
01
03 2%
International • Outlook - Weak
Driven By Weakness Abroad
EUROZONE REAL GDP GROWTH Year-to-Year Percent Change
5%
5%
3Q 2003 @ 0.3%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
98
99
00
01
02
03
REAL GDP GROWTH Source: IMF
10%
10% 2002
8%
8%
6%
6%
4%
Blue Line = China @ 8.0% Red Line = Japan @ 0.3%
4%
2%
2%
0%
0%
-2%
98
99
00
01
02
-2%
FED'S "MAJOR CURRENCY" AND "OTHER IMPORTANT TRADING PARTNERS" CURRENCY INDICES
105
Green Line = OITP Index
105
100
100
95
95
90
90
85
85 Blue Line = Major Currency Index
80 Jan. Mar. May July Sept. Nov. Jan. 2003 2004
80
U.S. EXTERNAL INDICATORS In Billions of Dollars
$800
$800
$600
$600
$400
$400
$200
$200
$0
95
96
Green Line = Private Capital Inflows Blue Line = Current Account Deficit 97 98 99 00 01 02 03
$0
Public Policy: • Monetary Policy
• Fiscal Policy • Regulation • Trade
12% 10%
REAL FEDERAL FUNDS RATE VS. M2 MONEY GROWTH Blue Line = M2 Growth, Yr/Yr % Change, December @ 4.3% Green Line = Real Fed Funds Rate*, December @ - 0.2%
12% 10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0% * Fed Funds Rate minus "Core" Consumer Price Index
-2% 92 93 94 95 96 97 98 99 00 01 02 03 -2%
FEDERAL SPENDING vs. REVENUE As Percent of GDP
23%
December '03
22%
20% 19%
22%
SPENDING (Blue Line)
21%
21%
19.4%
20%
Latest 12 months: Revenue $ 1,796 Trillion Spending $ 2,190 Trillion
19%
18%
18%
17%
17%
REVENUE (Green Line)
16% 15% 87
23%
16%
15.9% 89
91
93
95
97
99
01
03 15%
Financial Markets Is The Bond Market Still Overbought?
FORWARD RATES
3.5% 3.0%
90-Day Euro-Dollar Futures
Green Line = 6-Months Ago Blue Line = Current Red Line = Two Weeks Ago
3.5% 3.0%
2.5%
2.5%
2.0%
2.0%
1.5%
1.5%
1.0% Feb. Mar. Apr. May June July Sept. Dec. Mar. June 1.0% 2004 2005
9%
10-YEAR TREASURY VS. BAA CORPORATE BOND YIELD
9%
January 8%
8%
7%
7%
6%
6%
5%
5%
4%
4%
3%
Green Line = BAA Yield @ 6.45% Blue Line = 10-Yr Treasury @ 4.15%
97
98
99
00
01
02
03
04
3%
A Profits Rebound? • Revenue
• Costs
CORPORATE PROFITS In Billions of Dollars, SAAR
$1200
$1200
3rd Quarter 2003 @ $1124.2 B
$1000
$1000
$800
$800
$600
$600
$400
$400
$200
Adjusted for Inventory Valuation & Capital Consumption
90
92
94
96
98
00
02
$200
6% 4%
PRODUCTIVITY AND UNIT LABOR COSTS (TOTAL NON-FARM) Yr-to-Yr Percent Change (4 Qtr. Moving Average)
Productivity @ 4.1% (Blue Line)
6% 4%
3rd Qtr. 2%
2%
0%
0%
-2% -4%
Unit Labor Cost @ -1.4% (Green Line)
98
99
00
-2%
01
02
03
-4%
Uncommon Wisdom Tyrannosaurus Rex Big One Day, Dead the Next
S&P 400 MIDCAP INDEX VS. NASDAQ 600
January
500 Blue Line = S&P 400 Midcap, left scale Green Line = Nasdaq, right scale
5000 4000
400 3000 300 2000 200 100
1000
0 78 80 82 84 86 88 90 92 94 96 98 00 02 04 0
Uncommon Wisdom “ Whether you get soaked depends on proper balance�
Total Return
40%
30%
(Year-to-Date, January-2003 thru December 2003)
40%
Wilshire
High Yield
30%
20%
20%
10%
10%
Corporate Gov't
0%
T-Bills
0%
CAPITAL MARKETS PERFORMANCE SUMMARY 15%
5-Year Returns as of December 2003
Stocks S&P 400 Midcap
10% 5%
Real Estate
Bonds LB Intermediate G/C
Russell 1000 Value
0%
MSCI EAFE
Russell 1000 Growth
10% 5%
NCREIF Property Index
-5% -10% S&P 500
15%
Russell 2000
ML 3-Mo T-Bills
LB Aggregate
0% -5% -10%
Economic Forecast *(Qtr/Qtr% Change, Annual Rate)
2001
2002
2003
2004
Real GDP*
0.5%
2.2%
3.1%
5.1%
Personal Consumption*
2.5%
3.4%
3.1%
3.8%
Equipment & Software*
-5.2%
-2.8%
5.4%
17.2%
2.8%
1.5%
2.3%
1.6%
Corporate Profits (YoY)
-5.8% 17.4%
16.9%
17.4%
10-Yr T-Note
4.98% 4.30%
3.89%
4.59%
CPI (YoY)
www.wachovia.com/economics