IHS National Outlook

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© 2016 IHS

US Economic OutlookIHS

The US Economic Outlook27 September 2016

Patrick Newport, Director+1 781 301 9125, [email protected]

ECONOMICS

© 2016 IHS. ALL RIGHTS RESERVED.

After disappointing growth in the first half of 2016, real GDP will accelerate• Real GDP increased at a 1.1% annual rate in the second quarter, as

2.4% growth in final sales was offset by an inventory correction.

• Economic growth will pick up to a 2.5-3.0% annual rate in the third quarter, as business fixed investment revives.

• Consumer spending will drive the expansion forward, supported by growth in employment, real incomes, and household net worth.

• Housing construction will continue to recover in response to pent-up demand from young adults and improved credit availability.

• Net exports will be a drag on economic growth through 2018, as a strong dollar impairs US competitiveness.

• The Federal Reserve will be cautious in raising interest rates; the next increase is expected in December.

2

US Economic Outlook / September 2016


Real GDP growth will pick up, but job growth will slow

3


Real GDP and payroll employment

-9

-6

-3

0

3

6

2007 2009 2011 2013 2015 2017

Perc

ent c

hang

e, a

nnua

l rat

e

Real GDP Employment

Source: IHS © 2016 IHS


US economic growth by sector

4


Real GDP and its components

Percent change, annual rate 16Q1 16Q2 16Q3 16Q4 17Q1

Real GDP 0.8 1.1 3.0 2.4 2.7

Consumption 1.6 4.4 3.4 2.6 2.1

Residential investment 7.8 -7.7 -2.9 6.6 9.6

Business fixed investment -3.4 -0.9 5.0 4.1 4.5

Federal government -1.5 -0.3 2.9 2.0 0.8

State & local government 3.5 -2.2 1.1 1.9 1.6

Exports -0.7 1.2 1.2 1.8 3.2

Imports -0.6 0.3 1.7 5.4 4.9


US economic growth by sector

5


Real GDP and its components

Percent change 2015 2016 2017 2018

Real GDP 2.6 1.5 2.4 2.4

Consumption 3.2 2.8 2.6 2.5

Residential investment 11.7 4.9 6.7 6.3

Business fixed investment 2.1 -0.2 4.0 4.4

Federal government 0.0 0.9 0.9 -1.3

State & local government 2.9 1.2 0.9 0.9

Exports 0.1 -0.4 2.8 4.2

Imports 4.6 0.9 4.7 5.4


Other key US indicators

6


Key indicators

Percent change, annual rate 16Q1 16Q2 16Q3 16Q4 17Q1

Industrial production -1.7 -0.8 2.6 -0.6 0.3

Payroll employment 1.9 1.3 1.7 1.4 1.3

Light-vehicle sales (Millions) 17.2 17.1 17.5 17.6 17.5

Housing starts (Millions) 1.15 1.16 1.19 1.21 1.26

Consumer Price Index -0.3 2.5 1.5 3.4 1.9

Core CPI 2.7 2.1 1.8 2.4 2.2

Brent crude oil price (USD/barrel) 34 46 46 48 48

Federal funds rate (%) 0.4 0.4 0.4 0.5 0.7

10-year Treasury yield (%) 1.9 1.8 1.6 1.7 2.0


Other key US indicators

7


Key indicators

Percent change 2015 2016 2017 2018

Industrial production 0.3 -0.9 1.4 3.1

Payroll employment 2.1 1.7 1.2 0.9

Light-vehicle sales (Millions) 17.4 17.4 17.7 17.7

Housing starts (Millions) 1.11 1.18 1.34 1.48

Consumer Price Index 0.1 1.3 2.3 2.1

Core CPI 1.8 2.2 2.1 2.0

Brent crude oil price (USD/barrel) 53 43 52 57

Federal funds rate (%) 0.1 0.4 1.0 1.7

10-year Treasury yield (%) 2.1 1.7 2.3 2.9


Interest rates will rise gradually as the Federal Reserve normalizes monetary policy

8


Interest rates

0

2

4

6

8

10

12

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

Perc

ent

Federal funds 10-year Treasury 30-year mortgage BAA corporate



Slower job growth is expected now that the unemployment rate is below 5%

9


Payroll employment

-8

-6

-4

-2

0

2

4

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Perc

ent c

hang

e, a

nnua

l rat

e



-200 -100 0 100 200 300 400 500 600

Mining & loggingManufacturing

UtilitiesState government

InformationFederal government

Wholesale tradeTransport & warehousing

EducationOther services

Local governmentFinancial services

ConstructionRetail trade

Leisure & hospitalityProf. & business services

Health & social services

Services recorded the largest employment increases during the 12 months ended August 2016

10


Change in payroll employment, thousands

Total change = 2.45 million



-200

-150

-100

-50

0

50

100

150

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Bill

ions

, ann

ual r

ate

After excess accumulation from mid-2013 through 2015, an inventory correction is under way

11


Change in nonfarm inventories, 2009 dollars



An inventory correction is holding back near-term industrial production growth

12


Industrial production and real GDP

-2

-1

0

1

2

3

4

2012 2013 2014 2015 2016 2017 2018

Year

-ove

r-ye

ar p

erce

nt c

hang

e

Industrial production Manufacturing production Real GDP



US manufacturing production growth

13


Industrial production

Percent change 2015 2016 2017 2018

All manufacturing 1.1 0.5 1.7 2.9

Motor vehicles & parts 6.1 4.1 -3.2 -0.7

Computers & electronics 2.8 2.3 2.8 4.9

Electrical equip. & appliances 0.8 0.9 1.7 2.7

Machinery -1.6 -2.9 0.9 3.9

Textiles -0.2 4.2 -1.5 -2.0

Furniture 3.5 0.4 1.4 2.5

Chemicals 2.3 1.0 2.3 3.9


Consumer price inflation will pick up in response to a recovery in commodity prices

14


Personal consumption deflators

-1

0

1

2

3

4

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Year

-ove

r-ye

ar p

erce

nt c

hang

e

Personal consumption deflator Excluding food and energy



Both labor compensation and productivity growth will pick up as labor markets tighten

15


Private nonfarm sector

-4

-2

0

2

4

6

8

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

Perc

ent c

hang

e

Hourly compensation Productivity Unit labor costs



The global crude oil market returns to balance

• After significant surpluses in 2015 and the first half of 2016, the global oil market is returning to balance.

• Yet, no significant drawdown of stocks is expected in 2017-18.

• Our oil price forecast has been revised downward, reflecting higher projections of crude oil production in Russia, Kazakhstan, North Sea, and Gulf-5 (Saudi Arabia, Iran, Iraq, UAE, and Kuwait).

• The price of Dated Brent is projected to average USD43 per barrel in 2016, USD52 in 2017, and USD57 in 2018.

• The US onshore oil industry is proving skillful at adapting to lower prices—cutting costs and achieving efficiencies.

• While US crude oil output is now declining, it remains on track to begin rising again in early 2017.

16



US crude oil prices and natural gas prices

17


Crude oil and natural gas prices

0

2

4

6

8

10

12

14

0

20

40

60

80

100

120

140

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Dol

lars

/mill

ion

Btu

Dol

lars

/bar

rel

Crude oil, WTI (Left scale) Natural gas, Henry Hub (Right scale)

Source: IHS Energy © 2016 IHS


Lower gasoline prices have brought substantial savings for US households over the past two years

18


Retail gasoline price and annualized spending on motor fuels

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Thou

sand

dol

lars

/hou

seho

ld

Dol

lars

/gal

lon

Retail gasoline price Spending on motor fuels per household (right scale)



Forces affecting consumer spending

19


Positive forces

• Mild inflation

• Employment growth

• Rising disposable income

• Rising asset values

• Low interest rates

Negative forces

• Sluggish wage gains

• High student debt burdens

• Precautionary saving


The consumer market environment remains favorable

20


Consumer market indicators

Percent change 2015 2016 2017 2018

Real consumption 3.2 2.8 2.6 2.5

Real disposable income 3.5 2.7 2.6 3.0

Real household net worth 3.2 5.4 2.8 2.6

Payroll employment 2.1 1.7 1.2 0.9

Real wage rate 1.9 1.4 1.1 1.2

Consumption price deflator 0.3 1.1 1.7 1.7

Light-vehicle sales (Millions) 17.4 17.4 17.7 17.7

Single-family home sales (Millions) 4.78 5.13 5.44 5.62


Consumer spending will be supported by solid growth in real disposable income

21


Real consumer spending and disposable income

-2

0

2

4

6

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Perc

ent c

hang

e

Real consumer spending Real disposable income

Tax increases under-mined growth in 2013



Real household net worth has reached a new high

22


Household assets and liabilities

0

20

40

60

80

100

120

1980 1985 1990 1995 2000 2005 2010 2015 2020

Trill

ions

of 2

015

dolla

rs

Assets Liabilities Net worth



US light-vehicle sales are near their peak

23


Light-vehicle sales

0

4

8

12

16

20

1980 1985 1990 1995 2000 2005 2010 2015 2020

Mill

ions

of u

nits

, ann

ual r

ates

Total Cars Light trucksSource: IHS © 2016 IHS


Housing markets will continue to recover

• Sustained growth in jobs and incomes is boosting housing demand.

• Credit availability is improving for homebuyers.

• As demand outpaces supply, home prices and rents are rising.

• With new households choosing to rent rather than own, the US homeownership rate has fallen to a 51-year low.

• Lean inventories of unsold homes, low rental vacancy rates, and rising prices will encourage builders to step up construction activity.

• Multifamily units will account for 30% of housing starts.

24



Housing starts will continue to recover in response to employment and income growth

25


Housing starts

0.0

0.4

0.8

1.2

1.6

2.0

2.4

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Mill

ions

of u

nits

Single-family Multifamily



Single-family home sales and construction are not expected to regain 2005 peaks

26


Single-family housing starts and sales

1

2

3

4

5

6

7

8

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Mill

ions

of u

nits

Mill

ions

of u

nits

Housing starts (Left scale) Home sales (Right scale)



Core capital goods orders and shipments remain weak

27


Nondefense capital goods excluding aircraft

45

50

55

60

65

70

2000 2002 2004 2006 2008 2010 2012 2014 2016

3-m

onth

mov

ing

avg.

, bil.

USD

New orders Shipments



Capital spending growth has been held back by the decline in energy-related investment

28


Real business fixed investment

-30

-20

-10

0

10

20

30

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Year

-ove

r-ye

ar p

erce

nt c

hang

e

Equipment Structures Intellectual products



Investment in manufacturing structures has peaked, while investment in mines and wells has bottomed out

29


Investment in structures

0

25

50

75

100

125

150

1990 1995 2000 2005 2010 2015 2020

Bill

ions

of 2

009

dolla

rs

Manufacturing Mines & wells Utilities



Federal expenditures will continue to exceed revenues

30


Federal revenues and expenditures*

14

16

18

20

22

24

26

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Perc

ent o

f GD

P

Federal revenues Federal expenditures* Fiscal years, unified budgetSource: IHS © 2016 IHS


Federal government debt remains high relative to GDP

31


Publicly held federal debt

0

10

20

30

40

50

60

70

80

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Perc

ent o

f GD

P



Global economic growth remains subdued

• Global growth will remain below 3% in 2017, as slowdowns in Europe and China offset accelerations in the US and emerging markets.

• Eurozone growth is projected to slow from 1.6% this year to 1.3% in 2017, reflecting increased political instability and banking problems.

• China’s economic growth will slow further in the year ahead because of imbalances in credit, housing, and industrial markets.

• If sustained, the rallies in global financial markets will ease pressures on emerging markets.

• After deep recessions, Russia and Brazil are stabilizing.

32



-2

0

2

4

6

NAFTA OtherAmericas

WesternEurope

EmergingEurope

Mideast-N. Africa

Sub-Saharan

Africa

Japan OtherAsia-

Pacific

Ann

ual p

erce

nt c

hang

e

2015 2016 2017 2018 2019–23

Asia-Pacific (excluding Japan) will achieve the fastest growth in real GDP

33


Real GDP



Surpluses in services trade partially offset US deficits in merchandise trade

34


US net exports, NIPA

-1000

-800

-600

-400

-200

0

200

400

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

Bill

ions

of d

olla

rs, a

nnua

l rat

es

Goods and services Goods Services



The US current account will remain in deficit

35


Current-account balance

-6

-5

-4

-3

-2

-1

0

1

-1,200

-1,000

-800

-600

-400

-200

0

200

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Current-account balance (Left scale, billion US dollars)Balance as percent of GDP (Right scale)



A widening US trade deficit will contribute to a retreat in the dollar’s real exchange value in 2017‒20

36


Real trade-weighted dollar index

0.6

0.8

1.0

1.2

1.4

1.6

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

Inde

x, 2

009

= 1.

0

Major trading partners Other important trading partners



Risks to the US forecast

37


Scenario Characteristics

Recession induced by US and global political risks(Probability = 20%)

• US and global political risks hurt business confidence, restraining investment and productivity growth.

• A stock market plunge and rising unemployment lead to downturns in consumer spending and housing markets.

• The US suffers a recession in the second half of 2017.

Productivity picks up(Probability = 15%)

• Productivity accelerates, raising potential GDP growth.• Stronger global growth and a weaker dollar help exports.• An improving business outlook and favorable financing environment boost capital spending and homebuilding.

Baseline forecast(Probability = 65%)

• The Fed gradually raises interest rates through 2019.• Consumer spending growth continues; capital spending rebounds from its recent setback.

• Housing starts rise, but do not regain their 2005 peak.• Global economic growth picks up moderately in 2017–18.


Real GDP growth in alternative scenarios

38


Real GDP

-3

-2

-1

0

1

2

3

4

5

2010 2011 2012 2013 2014 2015 2016 2017 2018

Perc

ent c

hang

e, a

nnua

l rat

e

Baseline (65%) Pessimistic (20%) Optimistic (15%)



Bottom line for the US economy

• After slowing from 2.6% in 2015 to 1.5% this year, real GDP growth is projected to pick up to 2.4% in both 2017 and 2018.

• Consumer spending will be supported by solid gains in employment, real disposable income, and household net worth.

• Pent-up demand will fuel further recovery in housing markets.

• Real business fixed investment will recover, led by gains in information technology and commercial structures.

• Foreign trade will remain a drag on real GDP growth, due to a strong dollar and weak expansions in major export markets.

• Core consumer price inflation will average close to 2%.

• The Federal Reserve will gradually raise the federal funds rate to an equilibrium level of 3.0% by the end of 2019.

39


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