US Economic Outlook Global Interdependence centre London conference 3 June 2016
Keith Wade | Chief Economist
June 2016 | For professional investors or advisers only
US economic outlook Overview Key issues
Near term outlook, the boost from oil, trade and the Fed
Permanent damage? impact of the GFC on the credit channel
President Trump?
Source: Schroders 1
The US: still leader of the pack GDP since the crisis
Source: Datastream, Schroders 31 May 2016 2
Another year of downgrades, despite record stimulus Evolution of consensus forecasts for global growth US GDP growth consensus forecast (by calendar year, y/y %)
Source: Thomson Reuters Datastream, Consensus Economics, Schroders, Updated 27 May 2016 3
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First quarter blues in the US Seasonality problems plague the data Average quarter on quarter US real GDP growth rate (saar) 3.5%
Official statistics struggle to fully account for seasonal fluctuations in economic activity
We think the bias is removing around 1.5% from first quarter growth
However, there is less bias in later quarters, implying a second quarter bounceback
3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Q1
Q2 Last 30 years
Q3 Last 5 years
Source: Thomson Reuters Datastream, Schroders Economics Group, 21 April 2016 4
Q4
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Near-term data firming ISM signals turn in the US cycle Balance 65
q/q (annualised rate) 10%
ď Ž
The IMF have confirmed the global slowdown with a comprehensive, if lagging, assessment
ď Ž
However, commodity prices, surveys and residual seasonality point to better growth ahead
8% 60
6% 4%
55
2% 0%
50
-2% 45
-4% -6%
40
-8% 35 2001
-10% 2003
2005
NBER recessions
2007
2009
US GDP, rhs
2011
2015
ISM manufacturing & services average
Source: Thomson Reuters Datastream, Schroders Economics Group, 6 April 2016 5
2013
Oil price winners and losers The energy tax cut in the US vs. the hit to oil and gas capex 6.5
5.0
6
4.5
140
1600
120
1400
4.0
5.5
1200
100
3.5 5 3.0
1000 80 800
4.5 2.5
60 600
4
2.0
3.5
1.5
3
1.0
40
400
20
01
03
05
07
09
11
13
15
Energy as a % of Disposable Income Gasoline Retail Regular U$/GL (rhs) Source: Thomson Datastream, Schroders Economics Group, 19 May 2016 6
200
0
0 96
98
00
02
04
06
Brent Crude U$/BBL
08
10
12
14
16
US Rotary Oil Rigs (rhs)
Oil boost has gone into services (food!), not goods Percent of savings from lower gas prices spent on non-gas categories 4% 5% 5% 6% 7% 10%
6%
1%
32%
7% 18%
Source: JPMorgan Chase Institute, Schroders Economics Group. 14 October 2015 7
33%
2%
6%
2%
73%
Global trade growth stalls EM exports not responding to DM recovery 20 15 10 5 0 -5 -10 -15 -20 1992
1994
1996
1998
2000
World export volumes y/y% Source: Thomson Datastream, Schroders, 19 May 2016 8
2002
2004
2006
Average trade growth
2008
2010
Recession
2012
2014
2016
Dovish Fed to move in 2016 External vs. domestic pressures
Source: Thomson Datastream, Schroders Economics Group. 19 May 2016 9
Fed tightening delayed, not dodged US unemployment cycles and real Fed funds rate %
%
5
-2
4
-1
3
0
2
1
1
2
0
3
-1
4
-2
5 92
93
94
Recessions
95
96
97
98
99
00
01
02
04
Unemployment gap (U/E rate minus NAIRU)
Source: Thomson Datastream, Schroders Economics Group. 19 May 2016 10
03
05
06
07
08
09
10
11
12
13
14
15
16
Real interest rates (fed funds rate minus core inflation), rhs inv
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Credit channel: Households unwilling, or unable to re-leverage Balance sheet repair persists despite de-leveraging US debt/ GDP by sector
Source: Schroders, Thomson Reuters Datastream, 31 May 2016 11
US home equity loans
Rising risk premia acts as a drag on growth Despite the risk free rate falling, risk premiums have risen post the financial crisis Global real interest rate vs cost of capital
Average spread on US household credit %
%
7
4
6
3
5
4
2 3
1
2
1
0 0 1982
1991-2000 1988
1994
2000
Average Spread on Household Credit
2006
Decade Averages
Note: Weighted interest rate spread over the Federal Reserves base rate whereby total household borrowing consists of mortgages, credit cards, auto’s and other consumer credit. Respective interest rates include 30 year fixed mortgages, credit cards (all accounts), 48 month new car loans and 24 month personal loans. Source: US Flow of Funds, IMF, Thomson Datastream, Schroders,13 May 2016. 12
2001-07
2008-2013
2012
Global real interest rate
Global cost of capital
Spread
Corporate sector has re-leveraged ‌but not to increase capex Capex vs. distributions % 5 yr ma 100
HY debt issuance
90 80 70 60 50 40 30 20 10 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Dividends and buybacks net, % internal funds Capex, % internal funds Source: Thomson Datastream, Schroders,13 May 2016. 13
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Demographics and Debt Older people have lower willingness to borrow – UK data Unsecured credit use, by age
Housing tenure and age 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 25 - 30 - 35 - 40 - 45 - 50 - 55 - 60 - 65 - 70 - 75 - 80+ 29 34 39 44 49 54 59 64 69 74 80 Owned Outright
Source: British Household Panel Survey, 1995, 2000, 2005 14
Owned with Mortgage
LA/HA rented
Other rented
US Political risk A Trump Presidency?
Joe Biden
1.6%
Bernie Sanders
2.5%
Donald Trump
25.8%
Hillary Clinton
69.2%
0%
10%
20%
30%
40%
50%
60%
Betting markets implied winner of US presidential election (2016)
Source: Oddschecker.com, Wikipedia, Schroders Economics Group. 19 May 2016 15
70%
80%
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Important information The views and opinions contained herein are those of the Schroders Economics Group, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This presentation is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested The forecasts included in this presentation should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors. Issued in June 2016 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 1893220 England. Authorised and regulated by the Financial Conduct Authority.
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