Transcript The US Economy

The U.S. Economy:
Taking Measure of 2012
Presented by:
Jeff Korzenik
SVP, Chief Investment Strategist
Fifth Third Bank
1
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Beginning at the End

In 2011 the Economy
was:

In 2012 the economy
will be:
“A Glass Half-Empty”
2
“A Glass Half-Full”
—
Weak GDP growth, particularly for this
stage of the business cycle
—
Weak GDP growth, particularly for this
stage of the business cycle
—
Weak but noticeable employment growth
—
Weak but noticeable employment growth
—
Deleveraging of the household balance
sheet
—
Deleveraging of the household balance
sheet
—
A new age of limits for state and local
governments
—
A new age of limits for state and local
governments
—
Federal government unable to make
substantive progress in addressing
imbalances
—
Federal government unable to make
substantive progress in addressing
imbalances
—
Economic “headwinds” from events
overseas
—
Economic “headwinds from events
overseas
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2011 in Review
“A Glass Half-Empty”
3
—
Estimated real GDP Growth of 1.8%
—
CPI: 3.0%
—
Core CPI: 2.2%
—
10-year Treasury yield fell from 3.37% to 1.87%
—
The total return of the S&P500 was 2.11%, almost all of which was attributable to
dividends
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The Historical Case for
Robust Recoveries
Monthly Data 7/31/1986 - 11/30/2011
Resource Utilization
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
Unemployment Rate(Labor)
Shaded area represents NDR-defined band around
CBO estimates of the Nonaccelerating Inflation Rate of Unemployment (NAIRU)
84
CapacityTightening
11/30/2011= 8.6%
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
11/30/2011= 77.8%
84
82
82
80
80
78
78
SlackCapacity
76
76
74
74
CapacityUtilization(Capital)
72
72
70
70
68
68
OfficeVacancyRate(Capital)
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
Source: Cushman and Wakefield
1993
1992
1991
1990
1989
Average of downtown and suburban office rates
1988
(E576)
20
19
18
17
16
15
14
13
12
11
10
9
3/31/2011= 16.9%
1987
20
19
18
17
16
15
14
13
12
11
10
9
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.
Source: Ned Davis Research charts are used with permission
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Corporate Earnings
Follow the Playbook
Monthly Data 12/31/1953 - 2/29/2012 (Log Scale)
S&P 500 GAAP Earnings Per Share
78.6
64.5
52.9
43.4
35.6
29.2
24.0
19.7
16.1
13.2
10.8
8.9
7.3
6.0
4.9
4.0
3.3
2.7
2.2
S&P 500 (GAAP)
S&P 500 Earnings
Model:
40% and Below
%
of Time
20. 4
40. 4
14. 8
35. 0
-22. 3
24. 6
40% and 80%
Latest Reported 4Q EPS (9/30/2011) = $86.98
Source: Standard & Poor's
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
Strong Earnings Growth
WeakEarnings Growth
2/29/2012 = 79%
Source: Ned Davis Research, Inc.
(S686)
78.6
64.5
52.9
43.4
35.6
29.2
24.0
19.7
16.1
13.2
10.8
8.9
7.3
6.0
4.9
4.0
3.3
2.7
2.2
Per Share:
Gain/
Annum
Above 80%
* Between
1955
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
Earnings
S&P 500 Earnings Model

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.
But Employment Doesn’t:
Source: Bureau of Labor Statistics
Source: FactSet Charts are use with permissions.
6
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Recessions vs. Panics
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Recessions vs. Panics
“The symptoms of an approaching
panic… are wonderful prosperity… by
a rise in the price of all
commodities, of land, of houses,
etc, etc….a lowering of interest, by
the gullibility of the public, by a
general taste for speculating in
order to grow rich at once, by a
growing luxury leading to excessive
expenditures, a very large amount of
discounts and loans and bank notes
and a very small reserve in specie
and legal-tender notes and poor and
decreasing deposits [leverage].
8
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Deleveraging the Private Sector
Quarterly Data 12/31/1951 - 12/31/2011
Private Domestic Nonfinancial Debt as a % of GDP
181.3
180
177
174
171
168
165
162
159
156
153
150
147
144
141
138
135
132
129
126
123
120
117
114
111
108
105
102
99
96
93
90
87
84
81
78
75
72
69
66
63
60
57
54
(E0503)
%
180
177
174
171
168
165
162
159
156
153
150
147
144
141
138
135
132
129
126
123
120
117
114
111
108
105
102
99
96
93
90
87
84
81
78
75
72
69
66
63
60
57
54
Shaded
areas represent
National Bureauof Economic
ResearchRecessions
12/31/2011
12/31/2011
Debt
GDP
=
=
$24. 9 Trillion
$15. 3 Trillion
= 162.2%
125.7
115.5
Mean = 108.0%
102.3
97.5
96.3
92.3
Data Subject To Revisions By
The Federal Reserve Board
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
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.
Deleveraging the Private Sector
Quarterly Data 3/31/1980 - 12/31/2011
Household Financial Obligations Ratios
22.8
22.6
22.4
22.2
22.0
21.8
21.6
21.4
21.2
21.0
20.8
20.6
20.4
20.2
20.0
19.8
19.6
19.4
19.2
19.0
18.8
18.6
18.4
18.2
18.0
17.8
17.6
17.4
17.2
17.0
16.8
16.6
16.4
16.2
16.0
15.8
15.6
(E0509A)
22.8
22.6
22.4
22.2
22.0
21.8
21.6
21.4
21.2
21.0
20.8
20.6
20.4
20.2
20.0
19.8
19.6
19.4
19.2
19.0
18.8
18.6
18.4
18.2
18.0
17.8
17.6
17.4
17.2
17.0
16.8
16.6
16.4
16.2
16.0
15.8
15.6
FORs include vehicle leases, rent, insurance, and propertytaxes
in addition to required mortgage and consumer debt payments
Correlation Coefficient = 0.93
Adjusted Financial Obligations Ratio
(excludes government transfer payments
fromDisposable Personal Income)
12/31/2011 = 19.88%
Mean = 20.35%
Mean = 17.17%
Financial Obligations Ratio
12/31/2011 = 15.93%
1980
1985
1990
1995
2000
2005
2010
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.
Deleveraging the Public Sector:
It’s Worse Than We Thought
Unfunded Pension
Liabilities
Unfunded Retiree
Health Benefits
Traditional Debt
Source: Federal Reserve, Pew Center for the States
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States Lead the Way
2001
2010
Source: Pew Center on the States
12
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Deleveraging the Public Sector:
Washington’s turn next?
Components of the 2013 Fiscal Drag, $BN
Affordable Care
Act Tax es, -26.0
Healthcare
Sequester, -1 2.0
Other, -1 4.8
Non-Defense Disc
Sequester, -31.0
2010 Tax Cut
Extension, -303.3
Defense
Sequester
-55.0
Payroll Tax, UI
-92.7
Source: Strategas Research, used with permission
13
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The Vicious Cycle
of Long-Term Unemployment

Long-term
unemployment
leads to long-term
unemployment

Weak housing
lessens labor
mobility

Average Duration on Unemployment in the U.S.
(weeks, seasonally adjusted)
Hiring “intensity”
stays weak
Source: BLS
Source: FactSet Research System charts are use with permission.
14
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Deconstructing Inflation:
Wage Pressures
U.S. Unemployment Rate
YOY change: US Avg Hourly Earnings
Source: Bloomberg Charts are used with permission.
15
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Deconstructing Inflation:
Commodity Pricing
Source:http://climatechange.thinkaboutit.eu/think4/post/homo_ecologicus_end_of_greed
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Source:http://en.wikipedia.org/wiki/An_Essay_on_the_Principle_of_Population
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Deconstructing Inflation:
Commodity Pricing
CRB Index: 2 Year Moving Average
Crb Spot Index, 1967=100 - United States
(MOV 2Y) Crb Spot Index, 1967=100 - United States
600
500
400
300
200
100
'57
'59
'61
'63
'65
'67
'69
'71
'73
'75
'77
'79
'81
'83
'85
'87
'89
'91
'93
'95
'97
'99
'01
'03
'05
'07
'09
'11
©FactSet Research Systems
Source: FactSet Charts are use with permission.
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Deconstructing Inflation:
Expectations
Source: Cleveland Fed (Haubrich, Pennacchi, Ritchken)
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Deconstructing Inflation:
The Real Risk
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Global Impacts in 2012
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Anticipating the Impact
of Euro Zone Recession
Source: FactSet
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When a Half-Full Cup
Beats One Half-Empty
Monthly Data 1966-01-31 to 2011-08-31
S&P 500 Earnings Yield vs. 10-Year Treasury Yield
15
14
13
12
15
10-Year Treasury Yield -- Dashed Red Line
2011-08-31 = 2.30%
13
14
12
11
11
10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
6
6
Earnings Yield Minus Treasury Yield
2011-08-31 = 4.58%
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
-4
1966
S798
22
S&P 500 Earnings Yield (est.) -- Solid Blue Line
2011-08-31 = 6.88%
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
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The Potential For
Upside Surprises
percentage of the adult, nonbusiness-owner
population that starts a business each month
23
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Potential Upside in
Reshoring Manufacturing
$ Labor Costs in Manufacturing vs. U.S.
Source: BLS
24
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Will Manufacturing Return?
$/ Chinese Yuan
Source: Bloomberg Charts are use with permissions
25
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Looking At 2012 Consensus
26
Federal Reserve
Estimate
Wall Street
Consensus
Surprise Potential
Bias vs Street
Real GDP
2.45%
2.2%
Higher
Unemployment
8.35%
8.2%
Lower
CPI
1.60%
2.30%
Same
Fed Funds Rate
n/a
0.25%
Same
10-Year Tsy
n/a
2.56%
Lower
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Disclosures & Definitions
Opinions are provided by Fifth Third Private Bank.This information is intended for educational purposes only and does not constitute the
rendering of investment advice or a specific recommendation on investment activities and trading. The mention of any specific
security does not constitute a solicitation or an offer to buy or sell any security. This information is current as of the date of this
presentation and is subject to change at any time, based on market and other conditions.
The Standard & Poor's 500 Stock Index is a composite of the 500 largest companies in the United States and it often used as a
measure of the overall U.S. stock market.
The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market of goods and
services purchased by individuals. The weights of components are based on consumer spending patterns
U.S. Treasury notes are issued with maturities of one to 10 years in denominations beginning at $1,000. Investors purchase bills at a
discounted price from their face value. At maturity, the Treasury redeems the bills at full face value. The difference between the
discounted price paid and the face value of the bill when it is redeemed is its return.
U.S. GDP (Gross Domestic Product) is the total market value of all final goods and services produced in a country in a given year, equal
to total consumer, investment and government spending, plus the value of exports, minus the value of imports
CRB/Reuters Futures Price Index is an equal-weighted geometric average of commodity price levels relative to the base year average
price.
Indexes are unmanaged and do not incur investment management fees. You cannot invest directly in an index. Past performance is no
guarantee of future results.
Ned Davis Research Charts, Bloomberg Charts and FactSet Charts are used with permissions.
Fifth Third Bancorp provides access to investments and investment services through various subsidiaries. Investments and Investment Services:
Are Not FDIC Insured
Offer No Bank Guarantee
Are Not Insured By Any Federal Government Agency
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May Lose Value
Are Not A Deposit
The U.S. Economy:
A Difference of Kind
Q &A
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