The Comerica Economic Outlook

The Oil Price Roller Coaster and the U.S. Economy

Robert A. Dye Ph.D. Chief Economist, Comerica Bank

April 2015

2

Drivers of Economic Volatility in 2015

• Energy prices…stabilizing at a lower level

• Inflation…depressed by energy, lifting in 2015H2

• Interest rates…Fed lift-off this year

• Labor markets…tightening, with more wage inflation

• Rest of world…Europe, China, Japan, Russia, MENA

3

The U.S. Economy: Improving, but Many Moving Parts

• The U.S. economy is mid-cycle

• Labor metrics are tightening

• Manufacturing impacted by low oil, strong dollar

• U.S. economic growth remains hindered by wealth destruction, risk

aversion and tight housing credit

• Housing metrics range bound, spring breakout?

• Oil prices have eased, creating winners and losers

• Inflation indicators are bottoming out

4

The End of an Era for Global Monetary Policy

2007-2014 Globally coordinated extraordinary monetary policy

Very low interest rates

Special programs

Expanded currency swap lines

Asset purchases

2015- De-synchronization

Bank of Japan aggressive easing, beginning late 2012

European Central Bank doing “whatever it takes”

U.S. Federal Reserve pivots

Bank of England next to pivot?

5

Foreign Exchange Rates Moved by Monetary Policy

7580859095100105110115120125

0.680.700.720.740.760.780.800.820.840.860.880.900.920.94

2011 2012 2013 2014 2015

The Dollar, the Euro and the Yen

Euro/$ (L)

Yen/$ (R)

$

Source: Federal Reserve

6

Fed Policy: Countdown to Interest Rate Lift-off

• Labor market metrics are improving

• Fiscal drag easing

• Strong consensus for good 2015 U.S. GDP growth

• Next step in Fed pivot…forward guidance at end of April

• Fed brackets lift-off…June-December 2015

• Interest rate lift-off around mid-year 2015, perhaps September

• However, low oil prices and rising dollar complicate inflation outlook

• Shallow trajectory, rates may not “normalize” before next recession

7

U.S. Oil Production and Consumption, Monthly Data

14,000

16,000

18,000

20,000

22,000

100,000

150,000

200,000

250,000

300,000

'80 '82 '84 '86 88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

U.S. Shale Revolution Contributing to Global Oil Glut

U.S. crude oil production, ths barrels, (L)

U.S. petroleum demand, ths barrels per day (R)

Source: Energy Information Agency

8

800

1000

1200

1400

1600

1800

2000

2200

20

40

60

80

100

120

140

160

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

WTI Crude Price Through March 2015

WTI Crude Oil Spot Price at Cushing, $/barrel (L)

Falling Crudes Prices Suppress Oil Field Activity

Average Active Rotary Rigs, Total Number U.S. (R)

Sources: Energy Information Agency, Baker Hughes

9

0

20

40

60

80

100

120

140

160

121110 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 101112

WTI Oil Price 12 Months Before and After Peak, $/bbl

June 2007 – June 2009

Peak Oil Price $133.88, June 2008

WTI Oil Prices, 2 Cycles Overlaid

June 2013 – March 2015

Peak Oil Price $105.79, June 2014

March 2015 Oil Price $47.82

Source: Energy Information Agency

10

0

500

1000

1500

2000

2500

121110 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 101112

Rig Count 12 Months Before and After Peak

September 2007 – September 2009

Peak Rig Count 2014, September 2008

Total U.S. Rig Count, 2 Cycles Overlaid

September 2013 – March 2015

Peak Rig Count 1930, September 2014

March 2015 Rig Count 1108

Source: Baker Hughes

11

Impact of Low Oil Prices on Oil-Producing Areas

• Reduced oil royalties for landowners

• Reduced value of energy-related investments

• Reduced tax revenue for state

• Reduced employment in energy sector

• Reduced demand for goods and services related to drilling

• Reduced household consumption of laid-off workers

• Reduced employment in non-energy sectors

• Reduced values in commercial property markets

• Reduced values in residential property markets

12

Recent Job Growth Very Strong, March was Fluky

4

5

6

7

8

9

10

-800

-600

-400

-200

0

200

400

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16

+126k in March, U. Rate 5.5 Percent Forecast

Payroll Employment, avg monthly diff, ths (L)

Unemployment Rate,

percent (R)

Sources: Bureau of Labor Statistics, Comerica Bank

13

The Potential For Wage Inflation is Increasing

0

2

4

6

8

10

12

'70 '80 '90 '00 '10

Sub-5.5 Percent Unemployment Rate Associated with

Accelerating Wages

Unemployment Rate, percent

Avg Hourly Earnings, Prod Workers, pchya

5.5%

Source: Bureau of Labor Statistics

14

GDP Forecast Through 2015, Ongoing Moderate Expansion

(9)

(7)

(5)

(3)

(1)

1

3

5

2008 2009 2010 2011 2012 2013 2014 2015

U.S. Real GDP Growth, annualized rate

History Forecast

Sources: Bureau of Economic Analysis, Comerica Bank

15

Interest Rates Face Upward Pressure with Monetary Policy Unwind

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Yield, percent

Fed Funds

10-Year Treasury Bonds

Sources: Federal Reserve, Comerica Bank

16

Forecast Risks

Downside Risks

• Global volatility, China, Japan, Eurozone,

Russia, Middle East/North Africa

• Foreign exchange rates

• Consumer spending slumps

• Housing stalls

• Job growth weakens

• Monetary policy stumbles

• Inventory correction

Upside Risks

• Lower energy for longer

• Consumer/Business confidence surges

• Strong job growth

• Households unleash pent-up demand

• Single-family housing market

• Increased gov./defense spending

• Manufacturing renaissance

• Europe and Japan turn the corner

17

Global Debt and GDP Growth

United States

China

Japan

Germany

France

U.K.

Brazil

Italy

Russia

India

CanadaAustralia

South Korea

Spain

MexicoIndonesiaTurkey

Saudi ArabiaNigeria

Poland

Argentina

Belgium

Norway

Colombia

Thailand

Denmark

South Africa

Malaysia

Singapore

Israel

PhilippinesEgypt

Finland

Greece

Peru

VietnamMorocco

0

50

100

150

200

250

300

350

400

450

-2 -1 0 1 2 3 4 5 6 7 8

Re

al E

con

om

y D

eb

t-to

-GD

P R

atio

20

14

2015 Projected GDP Growth, Constant Prices

Watch ListHigher Risk

Medium Risk Lower Risk

Sources: McKinsey, IMF

18

North Texas Will Feel the Drag from Lower Oil Prices

2,800

2,900

3,000

3,100

3,200

3,300

3,400

-6

-4

-2

0

2

4

6

8

10

12

2008 2009 2010 2011 2012 2013 2014 2015

Unemployment Rate, percent,

U.S. North Texas (L)

Job Growth, y/y percent,

U.S. North Texas (L)

Payroll employment, ths,

North Texas (R)

Source: Bureau of Labor Statistics

Robert A. Dye

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