Bloomberg Brief Q3 Economic Outlook

Bloomberg Brief: EconomicsU.S. Q3’ 2013 Economic Overview and Outlook

Joseph Brusuelas | July 2013

U.S. Q3’ 2013 Economic Overview and Outlook Email [email protected] or call 212-617-7664

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Executive SummaryGrowth likely to modestly accelerate following sub 2% 1H’13• Growth

• Q3’13 growth in line with 2.2 percent cyclical trend• Keys to growth in second half of 2013 and 2014:

• Is household deleveraging cycle finished?• Will policy decisions result in reduced drag from sequestration?• Will domestic manufacturing rebound?• Will investors change expectations of Fed policy?• Will rising rates impact residential investment?

• Monthly job creation likely to hold near 175,000 per month.• Unemployment rate likely to move toward 7 percent.



Executive Summary• Monetary Policy

• Pace of asset purchases likely to slow following September FOMC meeting. • Any tapering likely to be asymmetrical.

• Tapering of treasuries likely to outweigh mortgage backed securities.• Fed to remain cautions on tapering purchases due to:

• Prodigious labor slack, output and consumption gaps• External headwinds.• Tapering is not tightening.

• Fed will hold off tightening rates until 2015.



Executive Summary• Fiscal Policy

• Fiscal year ends September 30.• FY 2014 needs to be put in place.• Debt ceiling debate to influence FY 2014 policy.

• Likely to determine the pace of sequestration.• Sequestration set to slow in FY 2014

• External Risks• Slower demand for durable and finished goods from Europe and China.• Chinese liquidity crunch.• German election and its aftermath.



Executive Summary• Long Term Future of U.S. Economy Improving

• Natural resource revolution.• U.S. supplying 85% of own energy needs.• U.S. production starting to influence global oil prices.

• Nascent manufacturing renaissance.• 3D printing

• Policy needs to be put in place to support energy and manufacturing revolutions.

• Major Challenges in Near Term• Underutilization of resources

• Output gap of roughly 4%.• 25 million unemployed and underemployed.• Fiscal restraint likely to remain in place.



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Bloomberg Consensus: Survey of Forecasters

Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14

Real GDP 1.8% 1.7% 2.3% 2.60% 2.8% 2.9%

CPI 1.70% 1.4% 1.5% 1.5% 1.7% 2.0%

Core PCE 1.28% 1.1% 1.3% 1.45% 1.6% 1.70%

Unemployment 7.7% 7.57% 7.40% 7.35% 7.2% 7.10%

Central Bank Rate 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%

2-Year Rate 0.24% 0.36% 0.36% 0.45% 0.55% 0.65%

10-Year Rate 1.85.% 2.49% 2.27% 2.41% 2.59% 2.70%

EUR/USD $1.28 $1.30 $1.28 $1.27 $1.26 $1.25



Current Recovery Continues to Lag

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 210

5

10

15

20

25

30Quarters After Start of RecoveryQuarters After 1981Quarters After 1990Quarters After 2001Quarters After 2007*

Perc

ent

Chan

ge F

rom

Sta

rt o

f Rec

over

y

file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desktop/BloombergBriefs-com.eps

Source: Minneapolis Fed, Bloomberg



US Hiring Settles in Near 200,000 Per Month

2007 2008 2009 2010 2011 2012 2013 -975

-875

-775

-675

-575

-475

-375

-275

-175

-75

25

125

225

325

Private Payrolls 12 Month Moving Average 6 Month Moving Average3 Month Moving Average


Source: Bloomberg



Growth Drivers• Consumer

• Upper two quintiles of households account for 63% of overall spending.• Falling oil and gasoline prices provide relief to households down the income

ladder. resulting in modestly improved personal disposable income.

• Interest rate sensitive sectors• Housing

• Reduced supply supporting price appreciation.• Lack of supply hindering purchases in some areas.• Shift in buyer preference toward new construction.

• Transportation• Historically low rates and aggressive discounting by auto dealers.• Age of auto fleet supports improved total vehicle sales.• Auto sales settles in above 15 million on annualized pace• Civilian aircraft orders on pace double that of 1H’12 2012



U.S. Home Price Appreciation

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-25

-20

-15

-10

-5

0

5

10

15

20

Case-Shiller Home Price Index FHFA Home Price Index

Inde

x

Source: Bloomberg SPCS20Y%, HPIMYOY% INDEX<GO>



Falling Supply Supports Home Price Appreciation

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 20131

1.25

1.5

1.75

2

2.25

2.5

2.75

3

3.25

3.5

Hom

es F

or S

ale:

Mill

ions

Source: Bloomberg EHSLMP, EHSLHAFS INDEX<GO>



Improving Employment Picture Supports Rising Auto Purchases

3765237680377113774137772378023783337864378943792537955379863801738046380773810738138381683819938230382603829138321383523838338411384423847238503385333856438595386253865638686387173874838776388073883738868388983892938960389903902139051390823911339141391723920239233392633929439325393553938639416394473947839507395383956839599396293966039691397213975239782398133984439872399033993339964399944002540056400864011740147401784020940237402684029840329403594039040421404514048240512405434057440602406334066340694407244075540786408164084740877409084093940968409994102941060410904112141152411824121341243412744130541333413644139441425

4

5

6

7

8

9

10

11 8

10

12

14

16

18

20

22

U.S. Unemployment Rate Total Vehicle Sales


Source: Bloomberg SAARTOTL, USURTOT INDEX<GO>



Global Oil Pricing Starting to Reflect U.S. Production

2010 2011 2012 2012 -5

0

5

10

15

20

25

30Brent/WTI Spread

Spre

ad P

er B

arre

l


Source: Bloomberg



Condition of the Consumer• Are Households Ready to Drive Growth• Cash flow following tax hike still an issue for lower income groups.• Modest wage growth.

• Inflation adjusted 1.1% on a year ago basis.• June 0.4% M/M increase in average hourly and average weekly earnings very

encouraging. • Inflation adjusted spending 1.8% on a year ago basis.

• Income gains still asymmetrically tilted toward wealthy.• Household deleveraging.

• Household debt as a percentage of GDP still near danger level of 85%.• Financial obligations ratio to 15.5%.• Debt service ratio 10.3%.



Upper Income Earners Driving Spending8.9

12.9

17.1

23.1

38.0

Lowest 20% Second 20%

Third 20% Fourth 20%

Highest 20%

Source: BLS Consumer Expenditure Survey



US Household Deleveraging

03:Q1

03:Q3

04:Q1

04:Q3

05:Q1

05:Q3

06:Q1

06:Q3

07:Q1

07:Q3

08:Q1

08:Q3

09:Q1

09:Q3

10:Q1

10:Q3

11:Q1

11:Q3

12:Q1

12:Q3

13:Q1

4

5

6

7

8

9

10

11

12

13

85

90

95

100

105

110

115

Other Student Loan Credit Card Auto Loan HE Revolving

Mortgage Household Debt % of PI

Trill

ions

Percentage

Source: New York Fed, Bloomberg



Inflation Adjusted Spending Remains Muted

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -4

-3

-2

-1

0

1

2

3

4

5

Real Personal Consumption Expenditures


Source: Bloomberg PCE CHY& INDEX<GO>



US Household Deleveraging

Q1'09 Q2'09 Q3'09 Q4'09 Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'1275

80

85

90

95

100

105US Household Debt to GDP Ratio


Source: St. Louis Fed



Financial Conditions Overview• Financial conditions narrowing in aftermath of June FOMC

• Remain supportive of U.S. growth.

• Financial easing via asset purchases appropriate and necessary in Europe.

• Conditions tightening in Asia.

• Tapering is not tightening.



Bloomberg Financial Conditions Indices

2010 2011 2012 2013-6

-5

-4

-3

-2

-1

0

1

2

3

BFCIAXJ Index US Financial Conditions Index BFCIAXJ Index EU Financial Conditions Index

BFCIAXJ Index Asian Financial Conditions Index

file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desk-top/BloombergBriefscom.eps

Source: Bloomberg BFCIUS, BFCIEU, BFCIAXJ INDEX<GO>



Private Credit Creation Improving

1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 -5%

-3%

-1%

1%

3%

5%

7%

9%

11%

13%

15%

Total Private Credit Creation & Nominal GDP

Nominal GDP Total Credit Creation Private Financial Instiutions

Year

Ove

r Ye

ar P

erce

ntag

e Ch

ange

Source: Federal Reserve, Bloomberg

Adjusted R2=.64




Image pageU.S. Rates OverviewBloomberg consensus forecast indicates higher 10- and 30-year rates.

Current Rates:• 2-Year: .37 percent.• 10-year: 2.63percent.• 30-year: 3.64 percent.

End of Fourth Quarter Consensus Survey Rate Forecast • 2-Year: .45 percent.• 10-year: 2.51 percent.• 30-year: 3.49 percent.



Projected Path of Long- and Short-Term Rates

2007 2008 2009 2010 2011 2012 2013 2014 2015 1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.5US 10-Year (LHS) U.S. 3-Mo. 2-Years Forward

Perc

ent

Perc

ent

Source: Bloomberg

USGG10YR INDEX, G0025 2Y3M BLC2CURNCY<GO>

Forward Market Estimate of 10-Year Yields in 2-Years' Time


FOMC Implied Forecast of 3-Mo. Rates in 2-Years' Time



Long-Term Rates During Era of Quantitative Easing

2008 2009 2010 2011 2012 20131.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Long Run Asset Purchase Programs US 10-Year Yield

Perc

enta

ge

Source: Bloomberg

QE 1 QE 2 Op Twist 1 & 2

QE 3



U.S. Long Term Yields Likely to Decline In Near Term

2012 2013 40

50

60

70

80

90

100

110

120

1.40

1.60

1.80

2.00

2.20

2.40

2.60

Merrill Lynch Option Volatility Index US 10-Year Yield


Source: Bloomberg



U.S. Economic Surprise Index & 10-Year Treasury Yields

2010 2011 2012 2013-1.2

-0.8

-0.4

0.0

0.4

0.8

1.2

-2

-1.5

-1

-0.5

0

0.5

1

1.5

Bloomberg Economic Surprise Index(LHS)US 10-Year Yield(RHS, 6-Mo. Basis Point Change)

Z-Sc

ore

Percentage

Source: Bloomberg ECSURPUS, USGG10YR INDEX<GO>



U.S. Economic Surprise Index & U.S. Equity Markets

2010 2011 2012 2013-1.2

-0.8

-0.4

0.0

0.4

0.8

1.2

-20%

-10%

0%

10%

20%

30%

40%

Bloomberg Economic Surprise Index(LHS) S&P 500 (RHS,6-mo. % chg.)

Z-Sc

ore

Index (Percentage Change)

Source: Bloomberg ECSURPUS, SPX INDEX<GO>



Central Bank Policy Outlook and Overview• Reduction of asset purchases likely in September or December

• Why reduce pace of purchases?• Disruption to asset markets.• Costs outweigh marginal benefit of further purchases.• Improving economy.

• Risks• Economy remains stuck in liquidity trap producing 2 percent growth amidst

substantial labor and economic slack.• Asymmetry in Pace of Reduction

• Continue to purchase mortgage backed securities at a faster pace than treasuries.



Central Bank Policy Outlook and Overview• U.S. policy rate to remain effectively at zero until 2015.• 6.5 percent employment threshold likely to be achieved in 9-12 months.• Inflation expectations remain well behaved.

• ECB and Japan Likely to Become More Aggressive

• Japan: Debt-Deflation, growth and structural.

• Europe: Post German election, asymmetrical business cycle, labor crisis.

.



The Long Road Ahead

Slow Grind Back To Full Employment

Scenario 1: Structural Break Scenario 2: Cyclical Recovery

6.5% Full

Employment6.5% Full

Employment 5.5% Full

Employment5.5% Full

Employment

Monthly Job Gains 200,000 200,000 200,000 200,000

Labor Force Participation Rate 63.50% 63.50% 63.50% 63.50%

Average Annual Population Growth 0.92% 0.50% 0.92% 0.50%

Years to Full Employment 2 Years 1 Years 4 Years 2 Years



Long Term Inflation Expectations Remain Soft

2008 2009 2010 2011 2012 20131.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

Fed 5 Year Forward 200-2012 Average

Perc

ent

Source: Bloomberg FED5YEAR INDEX<GO>file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desktop/BloombergBriefs-com.eps



Mortgage Backed Primary Secondary Spread

2005 2006 2007 2008 2009 2010 2011 2012 2013-20

0

20

40

60

80

100

120

140

160

Basis

Poi

nts:

30

Day

Mov

ing

Aver

age

Start Dates of Fed MBSPurchase Programs

QE 1 QE 3

Source: Bloomberg



Global Money Supply Set to Rapidly Accelerate

Q1'04Q3'04

Q1'05Q3'05

Q1'06Q3'06

Q1'07Q3'07

Q1'08Q3'08

Q1'09Q3'09

Q1'10Q3'10

Q1'11Q3'11

Q1'12Q3'12

Q1'1320

30

40

50

60

70

80

Global Money Supply: Q1'13 $63 Trillion

M2

Trill

ions

Source: Bloomberg

Q2'07:Fed Begins Response to Finan-cial Crisis

ECB 3-Yr Term LTRO

BOJ Liquidity Operations to Support Abenomics



Europe: Monetary Policy at the Zero Bound

19981999

19992000

20002001

20012002

20022003

20032004

20042005

20052006

20062007

20072008

20082009

20092010

20102011

20112012

2012-6

-4

-2

0

2

4

6

8

10

ECB Rate Core Euro Area Non-Core Euro Area

Polic

y Ra

te (P

erce

nt)

Source: Bloomberg



Expansion of Monetary Base Carries Long Term Inflation Risk

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Ratio of Monetary Base to GDP (Euro Area)

Ratio of Monetary Base to GDP (U.S.)

Source: Bloomberg

file://corp.bloomberg.com/ny-dfs/Users/jbrusuelas3/Desk-top/BloombergBriefscom.eps



Economic Challenges Targeted by Policymakers• Substantial Output Gap.

• Labor Market Slack.

• Low Wage Bias in Hiring.

• Consumption Gap.



Significant Output Gap Remains

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20127

8

9

10

11

12

13

14

15US Retains Substantial Output Gap

Real GDP Real Potential Output

Trill

ions

(200

5 Ch

aine

d $)

Source: Bloomberg



Labor Slack and the American Economy

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

58

59

60

61

62

63

64

65 3

4

5

6

7

8

9

10

11Employment to Population Ratio (LHS, Inverted)Unemployment Rate (RHS)

Perc

ent Percent

Source: Bloomberg USERTOT , USURTOT INDEX<GO>

11.7 Million Unemployed12.7 Million Underemployed




Low Wage Bias in Hiring

2010 2011 2012 2013-50

-25

0

25

50

75

100

125

150

175Low Wage Bias Driving Hiring

Leisure and Hospitality Health Care and Social Assistance Temp Retail Trade


Source: Bloomberg

USRTTOT, USESTEMP, USEETOTS, USEHTOTS INDEX<GO>



Real Consumption on Lower Trend

2005 2006 2007 2008 2009 2010 2011 2012 20138000

8500

9000

9500

10000

10500

11000

Billi

ons

(Cha

ined

200

5 $)

Real PCE Trend Prior to Recession

Source: Bloomberg US.HHSPNR BEA INDEX<GO>



This is an exclusive presentation from Bloomberg Brief newsletters.

Bloomberg BRIEF Economics is an award winning, groundbreaking publication written by leading economists in US, Europe and Asia, published by Bloomberg, the premier source of data and analytics in the financial world.

Bloomberg BRIEF Economics is already read by thousands every morning and you’ll soon see why – the Economics Brief provides a clear, concise snapshot every morning of all the key information you need to know:

• Valuable insight and independent analysis from our renowned economists who've spent decades on Wall Street including Joseph Brusuelas, Michael McDonough, Tamara Henderson, Richard Yamarone, David Powell and Niraj Shah.

• Proprietary data and commentary that gets beneath the numbers with eye catching charts.• Guest columnists from top-tier firms.• Exclusive publications such as the Orange Book, Quarterly Economic Overviews, The Economist Notepad, Daily

Economic Outlook Videos and much more!

Your time is valuable. Maximize it by switching to Bloomberg BRIEF Economics today.

Take a free 30 day trial today!

www.bloombergbriefs.com for more information.


Joseph Brusuelas,Senior EconomistBloomberg, [email protected]

Bloomberg

Joseph Brusuelas is an economist who writes for the Bloomberg Economic Brief. The observations he makes are his own. Bloomberg is a leading source of data, news, and analytics for financial and legal professionals, corporations, media organizations and private individuals around the globe. The BLOOMBERG PROFESSIONAL® service and Bloomberg’s media services provide real-time and historical pricing, indicative data, reporting, research, estimates, analytics, portfolio management tools, electronic trading and order management systems, multimedia events and electronic communications to Bloomberg clients in more than 150 countries, 24 hours a day.

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