Transcript Maury Harris

US Economic and Financial Outlook
Maury Harris
Chief US Economist
212 713-2472
[email protected]
October 19, 2006
This report has been prepared by UBS Securities LLC
U.S. economic forecasts: What and why?
“Bottom line” on UBS U.S. economic forecasts
 Real GDP growth at a 2.0% pace in H2(06) and at 2.4% in 2007 (Q4/Q4) mainly
due to consumer slowdown. H2(07) growth above H1(07) growth in response to
lower rates and dollar. (2.2% for calendar average 2007 GDP growth.)
 5¼% Fed funds peak followed by 2007 easing to 4¼%
 4½% to 5% 10-yr Treasury yield range for most of 2006;
4 to 4½% for most of 2007.
 Core PCE price index inflation rises from 2.1% in 2005 to 2.4% in 2006 before
slowing to 2.0% in 2007.
2
“Soft landing” growth forecast fundamentals
 Terminated real estate boom had added 1% per year to growth,
but...
 Some 2007 assistance from eventual interest rate relief.
 Capex supported by high capacity utilization.
 Export assist from expected resumed dollar decline.
3
Major growth risks
 Housing-related uncertainty following unprecedented boom.
 Crude oil prices much above our $68/barrel 2007 forecast.
 Upside growth risk is hard-to-forecast household formation
4
Key growth signposts
 Jobless claims
 Capital goods orders
5
Inflation forecast crosscurrents
 Temporarily accelerating Owners’ Equivalent Rent (OER)
 Productivity slowing to trend
 Projected lower dollar
 Only moderate wage acceleration
 Slower output and demand growth
6
Inflation
Other than a pickup in rents, which is arguably a byproduct of
weakening in homebuying rather than “overheating,” core PCE
inflation has been stable.
Accel
Weight
in core
PCE*
Cont rib.
t o accel
in core
PCE
% ch, ar
2.5
4.6
3.9
2.0
pct pt
0.34
2.09
0.79
0.03
%
100.0
13.7
3.6
82.7
pct pt
0.34
0.29
0.03
0.03
1.8
2.2
0.44
100.0
0.44
2.5
3.2
1.6
4.6
3.9
1.6
2.09
0.79
0.06
16.8
4.4
78.7
0.35
0.03
0.05
2006 t o
dat e
(Jan-Aug)
% ch
2.1
2.5
3.2
2.0
2005
(Dec-Dec)
Core PCE prices
Ow ner-occ. rent
Tenant rent
Ex rent
M arket -based core
PCE prices
Ow ner-occ. rent
Tenant rent
Ex rent
* Weights based on Q4(05) nominal personal consumption expenditures.
Source: Bureau of Economic Analysis and UBS calculations
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Interest rate forecast drivers
 5 1/4% Fed funds rate peak “data dependent” on sustained slowing in growth.
 Fed and investors start to expect that OER-led core inflation acceleration in 2006 is
unsustainable as growth slows
 Foreign savings help keep bond yields somewhat below normal, although such
“help” now less than in 2005.
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US forecasts
GDP
Percent change, seasonally adjust ed at annual rat es, except w here not ed, as of 9/29/06
Annual change 4Q/4Q change
2007
2006
2QA
3QE
4QE
1QE
2QE
3QE
4QE
2006E
2007E
2006E
2007E
2.6
2.0
2.0
2.0
2.3
2.5
2.8
3.3
2.2
3.0
2.4
2.6
3.2
3.3
2.0
2.0
1.7
2.4
3.2
2.4
3.5
2.0
-1.6
-0.1
-1.0
0.8
4.1
6.7
7.5
3.5
1.9
1.3
4.8
Business f ixed invest ment
4.4
8.5
7.5
6.7
6.9
7.8
7.8
7.8
7.2
8.5
7.3
Equipment & sof t w are
-1.4
10.0
7.5
6.3
6.5
7.5
7.5
7.6
6.7
7.8
6.9
St ruct ures
20.3
5.0
7.5
7.5
8.0
8.5
8.5
8.1
8.2
10.3
8.1
-11.1
-14.0
-15.5
-10.0
-1.5
4.5
7.0
-3.3
-7.5
-10.4
-0.2
0.8
2.8
1.9
1.9
1.6
1.6
0.5
2.1
1.8
2.6
1.4
-624
-622
-621
-618
-619
-619
-621
-626
-619
-621
-621
Export s
6.2
7.0
7.0
6.0
6.0
7.0
7.0
8.7
6.5
8.5
6.5
Import s
1.4
4.2
4.5
3.6
4.2
4.8
5.4
6.1
4.1
4.7
4.5
Change in invent ories ($ bil.)
54
32
18
19
19
19
19
36
19
18
19
Real domest ic purchases
2.0
1.8
1.9
1.8
2.2
2.4
2.8
3.2
2.1
2.7
2.3
Final sales
2.1
2.8
2.5
2.0
2.3
2.5
2.8
3.1
2.4
3.3
2.4
Domest ic f inal sales
1.6
2.6
2.3
1.8
2.2
2.4
2.8
3.0
2.2
3.0
2.3
Net export s cont ribut ion (pct pt s)
0.4
0.1
0.0
0.2
0.1
0.1
0.0
-0.1
0.0
0.1
0.0
Invent ory cont ribut ion (pct pt s)
0.4
-0.8
-0.5
0.0
0.0
0.0
0.0
0.2
-0.2
-0.2
0.0
Nominal GDP
5.9
4.5
4.4
4.1
4.4
4.7
5.0
6.4
4.5
5.9
4.6
Real GDP (Chain)
Personal consumpt ion expendit ures
Fixed invest ment
Resident ial
Government purchases
Net export s ($ bil.)
Source: Bureau of Economic Analysis and UBS estimates
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US forecasts
Key business indicators, income, and productivity
Percent change, seasonally adjust ed at annual rat es, except w here not ed, as of 9/29/06
2006
2007
Annual change 4Q/4Q change
2QA
3QE
4QE
1QE
2QE
3QE
4QE
2006E
2007E
2006E
2007E
6.6
82.0
2.6
82.0
3.0
82.1
3.1
82.2
2.8
82.3
2.8
82.4
3.2
82.5
4.3
81.8
3.1
82.4
4.3
82.1
3.0
82.5
4.6
4.8
4.9
5.0
5.1
5.2
5.2
4.8
5.1
4.9
5.2
Housing st art s (millions)
1.87
1.75
1.65
1.65
1.70
1.75
1.80
1.85
1.73
1.65
1.80
Current account balance (% of GDP)
-6.6
-6.7
-6.7
-6.6
-6.5
-6.5
-6.4
-6.6
-6.5
-6.7
-6.4
Average hourly earnings
4.4
3.4
3.4
3.4
3.4
3.4
3.4
3.7
3.5
3.8
3.4
Nonf arm business compensat ion
6.6
4.0
3.8
3.8
3.8
3.8
3.8
6.9
4.0
7.0
3.8
Employment cost index
3.6
3.2
3.2
3.2
3.2
3.2
3.2
3.0
3.2
3.1
3.2
Real disposable income
1.7
1.7
4.4
1.4
1.9
2.4
3.5
2.9
2.4
3.1
2.3
-0.6
-0.9
-0.7
-0.8
-0.8
-0.7
-0.4
-0.6
-0.7
-0.7
-0.4
1.6
1.2
1.4
1.4
1.6
1.8
2.0
2.3
1.5
2.1
1.7
Key business indicat ors
FRB indust rial product ion index
Capacit y ut ilizat ion rat e (% , level)
Civilian unemployment rat e (% , level)
Incom e indicat ors
Saving rat e (% , level)
M em o: Nonf arm business product ivit y
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve Board, and UBS estimates
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US forecasts
Inflation and interest rates
Percent change, seasonally adjust ed at annual rat es, except w here not ed, as of 9/29/06
2006
2007
Annual change 4Q/4Q change
2QA
3QE
4QE
1QE
2QE
3QE
4QE
2006E
2007E
2006E
2007E
GDP Chain Price Index
3.3
2.4
2.3
2.1
2.1
2.1
2.1
3.0
2.2
2.8
2.1
CPI-U
5.0
3.0
-1.0
3.6
3.2
2.5
0.9
3.3
2.4
2.3
2.6
3.5
2.9
2.5
2.4
2.3
2.2
2.3
2.5
2.5
2.8
2.3
4.0
2.9
0.3
3.0
2.7
2.2
1.2
2.9
2.3
2.3
2.3
2.7
2.6
2.2
2.1
2.0
1.9
2.0
2.3
2.2
2.4
2.0
2.7
2.3
1.9
1.8
1.7
1.6
1.7
1.9
1.9
2.1
1.7
4.4
2.7
-2.4
4.2
3.6
2.5
-0.1
3.3
2.2
1.0
2.5
Inf lat ion
Core CPI-U
PCE Chain Price Index
Core PCE Chain Price Index
M arket -based core PCE Price Index
PPI-f inished goods
Int erest rat es
Federal f unds rat e
Annual averages End of year
5.25
5.25
5.25
5.00
4.50
4.25
4.25
4.96
4.63
5.25
4.25
3-mont h T-bill rat e (bey)
5.0
4.9
4.8
4.8
4.3
4.3
4.3
4.8
4.5
4.8
4.3
2-year government not es
5.2
4.7
4.2
4.2
4.0
4.1
4.3
4.7
4.1
4.2
4.3
10-year government not es
5.2
4.6
4.4
4.3
4.1
4.3
4.5
4.8
4.3
4.4
4.5
Note: Quarterly interest rate forecasts are for end of period yields
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve Board, and UBS estimates
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Global forecast summary
Global forecasts
Global real GDP growth
Weig
ht *
1980s
**
1990s
2001
2002
2003
2004
2005
2006e
2007e
World
1.00
3.4
3.1
2.6
3.0
4.0
5.1
4.5
4.4
3.5
Developing
count ries
0.40
Asia* * *
0.25
7.3
6.6
6.3
7.1
8.7
8.8
8.3
7.7
7.0
China
0.11
10.0
9.7
9.5
10.5
12.0
11.7
10.9
10.0
8.7
Russia
0.03
2.7
-4.8
5.1
4.7
7.3
7.1
6.4
7.0
7.5
Lat in Am .
0.08
1.4
2.9
0.4
-0.4
2.0
5.7
4.1
4.2
3.8
% ch, y/y
Developed
count ries
0.60
US
0.25
3.4
3.1
0.8
1.6
2.5
3.9
3.2
3.3
2.2
Canada
0.02
3.1
2.4
1.8
3.1
1.8
3.3
2.9
2.8
2.3
Japan
0.08
3.8
1.7
0.2
-0.3
1.8
2.3
2.6
2.6
2.0
EU
0.25
2.2
2.1
1.8
1.1
1.1
2.0
1.6
2.7
2.1
*Based on purchasing power parity-adjusted GDP levels. **1981-1989 average
***includes Australia and New Zealand.
Source: UBS
13
Housing
When the new homes sales months’ supply is over 6
months, real new home prices tend to decline.
12
months
percent change from prev ious y ear
15
10
10
8
5
6
0
4
-5
2
-10
0
-15
69
71
73
75
77
79
81
83
85
New home sales months' supply (left)
87
89
91
93
95
97
99
01
03
05
Real new home prices (right)
Source: U.S. Census Department
15
The reported 6.6 months’ supply in August understates the inventory
overhang, because reported sales exclude surging cancellations.
Q2
average home sales cancellation rate, %
30
25
20
15
00
01
02
03
04
05
06
Source: UBS
16
Housing’s indirect effects…
…have been larger than usual in the current cycle, due to a surge in
wealth as home prices have risen. Wealth has been tapped through
home equity extraction (HEE). At least some of that extraction has
likely been used to finance extra household spending.
15
%y/y
% of disposable income, 4-quarter avg
10
5
5
Q2
0
-5
1992
8
2
-1
Aug* * *
-4
1997
2002
2007
Median existing home sales prices* (left)
OFHEO house price purchase only index (left)
Home equity extraction (right)* *
* Single-family only are available prior to 1999; ** UBS estimate of home equity extraction calculated as increase in residential
mortgage debt minus all new residential investment other than home improvements *** Quarterly except latest. Source:
Federal Reserve, Bureau of Economic Analysis, National Association of Realtors, OFHEO , and UBS
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18
Contact information
Maury N. Harris
Chief US Economist
[email protected]
+1-212-713 2472
www.ubs.com
19