Presentation to: Global Interdependence Center 22nd Annual International Monetary & TradeConference
TheEconomicOutlook in the Post 9/11 World
John Silvia – Chief Economist October 2, 2003
Post 9/11 • Containment to Pre-emption
Pre9/11 Breakdown Valueof Washington Consensus • Open Capital Account • 1997 Thailand • 1999 Brazil, Ecuador • 2001 Argentina
Containment to Pre-Emption
More Insular World
Exports + Imports as a Percent of Real GDP 30%
30%
25%
25%
20%
20%
15%
15%
10%
10%
5% 60
64
68
72 76
80
84
88
92
96 00
5%
U.S. Recession
REAL GDP GROWTH
Quarter/Quarter Percent Change, Seasonally Adusted Annual Rate
8%
2nd Quarter 2003 @ 3.3%
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%
Red Line = Government Spending @ 4.1%
2Q 2003
10%
10%
5%
5%
0%
0%
-5%
-5%
-10%
Blue Line = Consumer Spending @ 2.9% Green Line = Business Fixed Investment @ 2.7%
97
98
99
00
01
02
03
-10%
INCOME & SPENDING GROWTH
Year to Year Percent Change, 12 Month Moving Average
6% 5%
Real, Disposable Income (Blue Line) @ 3.1% Real Spending (Green Line) @ 2.9%
6%
August 5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
-1% 87
89
91
93
95
97
99
01
03 -1%
MANUFACTURERS' NEW CAPITAL GOODS ORDERS 20%
NON-DEFENSE, EXCLUDING AIRCRAFT
20%
August 10%
10%
0%
0%
-10%
-10% Year-to-Year Percent Change @ 5.6%
-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 10% 5%
Seasonally Adusted Annual Rate
2nd Quarter 2003 @ 8.3%
10% 5%
0%
0%
-5%
-5%
-10%
-10%
-15%
-15%
-20%
-20%
2001
2002
2003
Drop in Productivity?
6% 4%
PRODUCTIVITY AND UNIT LABOR COSTS (TOTAL NON-FARM) Yr-to-Yr Percent Change (4 Qtr. Moving Average) Productivity @ 4.3% (Blue Line)
6% 4%
2nd Qtr. 2%
2%
0%
0%
-2% -4%
Unit Labor Cost @ -1.4% (Green Line)
98
99
00
-2%
01
02
03
-4%
NON-FARM PRODUCTIVITY and REAL GDP 7%
Year-over-Year Percent Change
Line = Real GDP, 2Q @ 2.5%
7%
6%
6%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
-1%
Bars = Non-Farm Productivity, 2Q @ 4.1%
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2001 2002 2003
-1%
Higher Interest Rates, Risk Taking.
Less
1.80
AA CORPORATE BOND YIELD /10-YEAR TREASURY
1.80
1.70
1.70
1.60
1.60
1.50
1.50
1.40
1.40
1.30
1.30
1.20
1.20
1.10
1.10
97
98
99
00
01
02
03
2.00
BAA CORPORATE BOND YIELD/ 10-YEAR TREASURY YIELD
2.00
1.80
1.80
1.60
1.60
1.40
1.40
1.20
1.20
2000
2001
2002
2003
BB Corporate Bond Yield Spread (O ve r 10-Ye ar Tre asury)
7%
7%
6%
6%
5%
5%
4%
4%
3%
3%
2%
2% Lines = Russia and Worldcom
1% 1997
1998
1999
2000
2001
2002
2003
1%
Weaker Dollar
Easy Strong Dollar Rhetoric1990s • Economy Strong • Relative Return on Assets Large • Was There Deliberate Policy?
Today?
REAL FED DOLLAR INDEX VS. EURO
1.20
Blue Line = Real Fed Dollar Index, left scale Green Line = Euro, right scale
110
1.10
105
1.00
100
0.90
95
0.80
99
00
01
02
03
Euro/$
Index
115
U.S.-EU INTEREST RATE DIFFERENTIALS 250
Green Line = BBB Corporate Bond Blue Line = 10-Yr Government Bond
200
150
150
100
100
50
50
0
0
-50
-50
-100
-100
1999
2000
2001
2002
2003
Basis Points
Basis Points
200
250
REAL FED DOLLAR INDEX VS. CANADIAN DOLLAR 115
1.65
Blue Line = Real Fed Dollar Index, left scale Green Line = Canadian Dollar, right scale
1.60 1.55 1.50
105 1.45 1.40
100
1.35 95
99
00
01
02
03
1.30
C$/$
Index
110
REAL FED DOLLAR INDEX VS. MEXICAN PESO
115
11.5
Blue Line = Real Fed Dollar Index, left scale Green Line = Mexican Peso, right scale
11.0 110
105
10.0 9.5
100 9.0 95
99
00
01
02
03
8.5
MXN/$
Index
10.5
JAPANESE FOREIGN EXCHANGE RESERVES In Billions of Dollars
$500
$500
$450
$450
$400
$400
$350
$350
$300
$300
$250
$250
$200
$200
$150
$150
96
97
98
99
00
01
02
03
Weaker Dollar Policy Target? • Devaluation – But Not Too Much • Against When
Instruments? • Foreign Central Banks Undertake Dollar Devaluation Not the Fed.
Dollar Policy • Bush I
Brady 1989
• Bush II
Snow 2004?
Public Policy: • Monetary Policy
• Fiscal Policy
12% 10%
REAL FEDERAL FUNDS RATE VS. M2 MONEY GROWTH Blue Line = M2 Growth, Yr/Yr % Change, August @ 8.1% Green Line = Real Fed Funds Rate*, August @ - 0.3%
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%
August '03
22%
19%
22%
SPENDING (Blue Line)
21% 20%
23%
21%
19.5%
20%
Latest 12 months: Revenue $ 1,783 Trillion Spending $ 2,141 Trillion
19%
18%
18%
17% 16% 15% 87
17%
REVENUE (Green Line)
16%
16.3% 89
91
93
95
97
99
01
03 15%
Financial Face of Recovery
HOUSEHOLD DEBT SERVICE
Total Monthly Payments as Percent of Disposable Income
15%
15%
1st Qtr. '03 13.99% 14%
14%
13%
13%
12%
12%
11% 80 82 84 86 88 90 92 94 96 98 00 02
11%
DELINQUENCY RATES
8%
Percent of Average Loans, Seasonally Adjusted
8%
2Q 2003 6%
6%
4%
4%
2%
2%
0%
Green Line = Consumer Loans Blue Line = Real Estate Loans
87
89
91
93
95
97
99
Source: Federal Reserve Board
01
03
0%
NET CASH FLOW WITH INVENTORY & CAPITAL CONSUMPTION ADJUSTMENTS
$1100
$1100
2Q 2003 @ $ 1,035.5 B
$1000
$1000
$900
$900
$800
$800
$700
$700
$600
$600
$500
$500
$400
In Billions of Dollars
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
$400
PRIVATE CAPITAL INFLOWS INTO U.S. $400
In Billions of Dollars
$400
Blue Bar = FDI Green Bar = Portfolio
$300
$300
$200
$200
$100
$100
$0
97
98
99
00
01
02
$0
Capital Flows: European Tension • Ownership of Stocks • Pace of FDI Flows
Capital Sanctions Rather Than TradeSanctions? • Trade Liberalization – Agriculture & Service
PHYSICAL ASSETS OWNED BY FOREIGNERS Percent of Total
80%
80%
60%
60%
40%
40%
20%
20%
0%
Europe
Asia
Western Hemisphere
Other
0%
INFLOWS OF FOREIGN DIRECT INVESTMENT Percent of Total, 1997-2001
30%
30%
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
U.K.
Germany
France
Netherlands
Other
0%
EXTERNAL INDICATORS $100
In Billions of Dollars
$0
$100 $0
$-100
$-100
$-200
$-200
$-300
$-300
$-400
$-400
$-500
Blue Line = Current Account Deficit Green Line = National Savings Less Domestic Investment
$-500
$-600 90 91 92 93 94 95 96 97 98 99 00 01 02 $-600
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