Transcript Growth Rotates by David Wyss, S&P`s Chief

The Economic Outlook:
Growth Rotates
David Wyss
Chief Economist
Standard & Poor’s
November 2006
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Copyright (c) 2006 Standard & Poor’s, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
The U.S. Recovery Is Slowing
• After a strong 2004 and 2005
• Growth has slowed to below trend.
• The economy is rotating from consumer- and housing-led growth to
investment-led growth.
• The Fed is through hiking interest rates, and will probably have to
reverse next year.
• The housing market peaked last summer, but is more stalling than
plunging. Starts are expected to drop 25%.
• Oil prices are coming down from record highs, restoring some
purchasing power.
• Katrina rebuilding has been slow.
• Stronger European growth and a weaker dollar should mean less drag
from the trade deficit.
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2.
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Oil Prices Hit New Highs
($/barrel, WTI and deflated by CPI;
household energy purchases as percent of disposable income)
90
80
70
60
50
40
30
20
10
0
1980
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1985
Oil price (WTI)
1990
1995
2005 dollars
2000
% of disp. income (right)
Source: BEA
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3.
2005
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The World Is More Energy Efficient
(Tonnes of oil equivalent per $1000 dollars (2000 dollars) of real GDP)
1
0.8
0.6
0.4
0.2
0
US
France Germany UK
1971
1980
Japan
China
1995
Source: OECD
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4.
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India
World
2004
The Fed Is Moving Toward Neutral
(Percent)
10
8
6
4
2
0
1995
1997
1999
2001
Federal Funds Rate
2003
2005
2007
10-Yr Bond Yield
Source: Federal Reserve
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7.
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2009
Mortgage rate
Interest Rates Had Converged
(Long-term government bonds)
6
5
4
3
2
1
0
US
Canada Japan
Oct-04
Euro
Dec-05
UK
Oct-06
Source: Bloomberg
CONFIDENTIAL AND PROPRIETARY.
8.
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Australia
Quality Spreads Grind Tighter
(Spread over Treasury yields, basis points)
900
800
700
600
500
400
300
200
100
0
2003
2004
Investment grade
2005
2006
Speculative grade
Source: S&P
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9.
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Financial Risk Is Greater
100%
80%
60%
40%
20%
0%
1980
1985
AAA
AA
1990
A
1995
BBB
2000
Junk
Source: S&P
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10.
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2004
World Growth Is Steady
(Real GDP, % change)
8
6
4
2
0
US
2003
Canada Eurozone
2004
2005
Japan
2006
Other
Asia
2007
Source: Global Insight and S&P
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11.
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Latin
America
2008
And Comes Mostly From Asia
(IMF purchasing power weights, 2005)
Other
19%
Other
19%
US
21%
US
15%
Eurozone
4%
East Eur
7%
Japan
4%
East Eur
9%
Other Adv
8%
Eurozone
15%
India
6%
India
10%
China
15%
Japan
6%
China
31%
Other Adv
11%
Percent of World GDP
Percent of World Growth
Source: IMF
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12.
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Fiscal Deficits Almost Everywhere
(Government balance as percent of GDP, 2004)
3
2
1
0
-1
-2
-3
-4
US
Canada France
Germ.
Italy
Source: IMF
CONFIDENTIAL AND PROPRIETARY.
14.
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UK
The Future Looks Bleak
(Government debt as % of GDP)
600
530
500
350
400
300
200
100
113
173
101
49
223
182
38 62
57
86
220
59 71
0
US
Japan
2005
UK
France
2025
Source: S&P
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15.
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Germany
2050
Aging Populations Will Boost Government Spending
(Ratio of over 65 population to labor force)
60
50
40
30
20
10
0
US
Canada France Germany Italy
UK
Japan AustraliaMexico OECD
2000
Source: OECD
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16.
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2020
US Trade Deficit Balances Surpluses Overseas
(Trade balance as percent of GDP, 2005)
6
4
2
0
-2
-4
-6
-8
US
Canada Germany France
Italy
UK
Japan
Source: Global Insight
CONFIDENTIAL AND PROPRIETARY.
17.
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China
India
US Borrows From Abroad to Offset Weak Savings
(Percent of GDP)
22%
20%
18%
16%
14%
12%
10%
8%
1970
1975
1980
Gross saving
1985
1990
1995
Private saving
2000
Private investment
Source: BEA
CONFIDENTIAL AND PROPRIETARY.
18.
2005
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European Productivity Growth Trails
(Output per hour, percent change, 1995-2005)
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Eurozone
UK
Japan
Source: BLS
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19.
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US
Other Countries Are Catching Up
(Percentage of tertiary degrees by age group, 2003)
45-54
25-34
60
50
40
30
20
10
0
C
ad
an
a
e
c
an
r
F
e
G
an
m
r
y
Ita
ly
pa
Ja
n
K
ea
r
o
i
ex
M
co
Source: OECD
CONFIDENTIAL AND PROPRIETARY.
20.
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U
K
U
S
Educated Workers Earn More
(Ratio of income of tertiary graduate to high school graduate, men
30-44)
Source: OECD
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21.
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U
.S
.
.
U
.K
or
ea
K
ly
It
a
an
y
G
er
m
ce
Fr
an
ad
a
C
an
A
us
tr
al
ia
190
180
170
160
150
140
130
120
110
100
Can the Consumer Keep Spending?
• Consumer spending has led the expansion
• The tax cuts provided extra income
• Lower mortgage rates freed up funds
• Confidence is up
• But the saving rate is negative
• Tax cuts are over
• Interest rates are up
• Home prices are dropping
• Net result will be a slowdown, not a retreat
• Helped by lower energy prices
• The saving rate will remain low
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22.
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But Wealth Continues Strong, Helped By Housing Markets
(Percent of after-tax income)
700%
600%
500%
400%
300%
200%
100%
0%
1990 1993 1996 1999
Net worth
2002 2005 2008
Financial assets
Source; Federal Reserve
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23.
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Debt Service Now Above 1986 Record
(Household obligations as percent of after-tax income)
22
20
18
16
14
12
10
8
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Financial Obligations
Source: Federal Reserve
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24.
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Debt
Debt Repayments Are Evenly Distributed
(Average debt repayment as percent of income by income percentile)
20
16
12
8
4
0
0-20
20-40
1995
40-60
60-80
80-90
2004
Source: SCF
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25.
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90-100
Household Debt By Country
(Percent of income, 2005)
Canada
France
Germany
Italy
Japan
UK
US
0%
50%
100%
Source: IMF
CONFIDENTIAL AND PROPRIETARY.
26.
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150%
US Is Actually Low-Debt
(Assets as percent of GDP, 2004)
EU
Japan
US
0
100
Private debt
200
300
Bank loans
400
Govt debt
Source: IMF
CONFIDENTIAL AND PROPRIETARY.
27.
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500
Equity
A Housing Bubble?
• Housing remains affordable
• Thanks to low mortgage rates
• But what happens when rates go up?
• Home prices have outpaced incomes
• Ratio of home price to income is at a record high
• There are big local bubbles
– E.g., New York, California, Boston, Florida
• And higher mortgage rates will cause starts and sales to drop
• Housing looks less overvalued than other assets
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28.
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Home Prices Are High Relative to Household Income
(Ratio of average home price to average household disposable income)
4.5
4
3.5
3
2.5
2
1975
1979
1983
Existing
1987 1991
New
1995
1999
2007
Quality-adjusted
Source: BEA
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29.
2003
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Bubbles Are Everywhere
(Percent increase in home prices, 1997-2005)
US
Canada
Germany
Switzerland
Netherland
Britain
Ireland
Italy
Sweden
France
Spain
Japan
Australia
China
NewZealan
Hong Kong
-100
-50
0
50
100
Source: The Economist and S&P
CONFIDENTIAL AND PROPRIETARY.
30.
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150
200
250
The Stock Market Will Recover, But Slowly
• Market rose over 20%/year from 1995 -99
• But dropped from March 2000 through June 2003
• Biggest drop since 1929-32
• Double-digit earning gains for a record 17 quarters; profits are a
record high relative to GDP
• Earnings must slow
• Share prices cannot continue to outpace earnings
• As interest rates rise
• Stocks will thus yield less in the future than in the recent past.
• But the current rally is being spurred by strong earnings and dividend
tax cuts
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31.
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Largest Stock Markets Remain Below 2000 Peaks
(Change in S&P stock indexes since March 2000 peak)
Australia (50)
Asia/Pacific (50)
Japan (150)
Europe (350)
Lat Am (40)
Canada (60)
US (500)
World (1200)
-60
-30
0
Oct-02
30
60
90
Sep-06
Source: S&P
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32.
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120
150
Most US Sectors Have Recovered From The Bear Market
(Change in S&P 500 sectors since March 24, 2000 peak)
Utilities
Telecomm
Materials
Technology
Industrials
Health Care
Financials
Energy
Cons Staples
Cons Discr
S&P 500
-100 -75
-50
Oct-02
-25
0
25
50
Sep-06
Source: S&P
CONFIDENTIAL AND PROPRIETARY.
33.
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75
100
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of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received
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during each analytic process.
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