Strength of the United States Economy

Bank and Capital Markets Tax Institute WestSan Francisco Marriott MarquisSan Francisco, CA

December 2, 2014

Rob StrandSenior EconomistAmerican Bankers Association

“The world is a mess.” Madeline Albright, July 27, 2014

Source: Council on Foreign Relations, CNN, POLITICO

The World is a Mess

• Argentinean debt crisis• Palestinian-Israeli conflict • Syrian civil war• Ukrainian – Russian conflict• Egyptian coups • Lebanese crisis• Iraqi war and ISIS• Iranian nuclear crisis• North Korean turmoil• Thai coup• Ebola in West Africa• Yemeni terrorist insurgence• Military coup in Burkina FasoSource: Council on Foreign Relations, CNN, POLITICO

Quarterly Inflation-Adjusted GDP Growth

‐9%

‐6%

‐3%

0%

3%

2008 2009 2010 2011 2012 2013 2014Source: U.S. Bureau of Economic Analysis

90

100

110

120

130

2005 2008 2011 2014

GDP by Country

Sources: U.S. Bureau of Economic Analysis and OECD

Index (1Q05=100)

United States

Germany

France

Japan

Source: National Bureau of Economic Research

-40

0

40

80

120

WWII ends

Post WW II Average

Business Cycles

MonthsExpansion

Recession

Current

0

400

800

1200

1600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

S&P 500 Index

Source: Standard & Poor’s

Up 156%

Source: U.S. Bureau of Economic Analysis

-5%

0%

5%

2012 2013 2014

InventoriesNet ExportsGovernmentFixed InvestmentPersonal Consumption

Contrib

ution to GDP

 Growth

Total GDP Growth

Consumption Drives Growth

Consumer Confidence

Source: Thomson Reuters and University of Michigan

50

60

70

80

90

100

2007 2008 2009 2010 2011 2012 2013 2014

Debt Talks

Index Value

RecessionFiscal Cliff

Debate

FederalShutdown

-900

-700

-500

-300

-100

100

300

500

2005 2007 2009 2011 2013

Source: U.S. Bureau of Labor Statistics

8.7 Million Lost

9.8 Million Recoveredin 48 months of growth

Monthly Payroll Growth

0%

4%

8%

12%

16%

1994 1998 2002 2006 2010 2014

Source: U.S. Bureau of Labor Statistics

Underemployed 11.8%

5.9%Unemployed

Unemployment Rate

0%

4%

8%

12%

1994 1998 2002 2006 2010 2014

Source: U.S. Bureau of Labor Statistics, Eurostat

U.S. 6.1%

Unemployment Rate Comparison

Euro Area 11.6% 

June

Initial Claims Back to Normal Levels

0

100

200

300

400

500

600

700

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Source: U.S. Department of Labor (4-week moving average)

Initial Unemployment Claims, 000s

400K

295K

Voluntary Quits and Layoffs Picking Up

Source: U.S. Bureau of Labor Statistics

0

1,000

2,000

3,000

2000 2002 2004 2006 2008 2010 2012

Recession

Layoffs

Voluntary Quits

0

5

10

15

1971 1976 1981 1986 1991 1996 2001 2006 2011

Less than 5 Weeks

5–14 Weeks

Millions

27+ Weeks

Duration of Unemployment

Source: U.S. Bureau of Labor Statistics

-24% -20% -16% -12% -8% -4% 0% 4% 8%

Health Services

Prof. & Bus. Services

Leisure & Hospitality

Education

Trade & Transportation

Financial Services

Government

Information

Manufacturing

Construction

Change in Employment from Pre-2011 Peak

Source: U.S. Bureau of Labor Statistics

Over 3%

2%—3% 

1½%—2%

1%—1½%

¼%—1%

Employment Growth Since 2010

Source: U.S. Bureau of Labor Statistics, May 2014

6.5%

Home Prices

Source: Case-Shiller/S&P 20-City Index. Not seasonally adjusted

0

50

100

150

200

2002 2004 2006 2008 2010 2012 2014

Conventional 30-Year Mortgage Rate

0%

2%

4%

6%

8%

10%

1990 1993 1996 1999 2002 2005 2008 2011 2014

Source: Federal Reserve

Home Sales

-

3

6

9

1999 2004 2009 2014

Millions of UnitsSAAR

Sources: U.S. Census Bureau, National Association of Realtors

New Homes

Existing Homes

0

1

2

1963 1970 1977 1984 1991 1998 2005 2012

Housing Starts

Source: U.S. Census Bureau

Millions of Units

1959‐2010 Average

Retail Sales

Inflation & Seasonally‐Adjusted Semi‐Annual Growth Rate on Quarter Average

‐15%

‐10%

‐5%

0%

5%

1994 1999 2004 2009 2014Source: U.S. Bureau of Economic Analysis

Retail Sales without Gas

Source: U.S. Department of the Census

$100

$110

$120

$130

$140

2007 2008 2009 2010 2011 2012 2013 2014

Thou

sand

s

$Billions, Seasonally Adjusted

Price of a Gallon of Gas vs. Milk

$3.00

$3.50

$4.00

2012 2013 2014

Premium Gas

Whole Milk

Source: BLS and US Energy Information Administration

Crude Oil Exports

0

100

200

300

400

2002 2004 2006 2008 2010 2012 2014

Source: U.S. Energy Information Administration

Thousands of Barrels per Day

$0

$5

$10

$15

1960 1970 1980 1990 2000 20100%

8%

16%

24%

Debt / Assets

Trillions

Household Liabilities

Source: Federal Reserve Flow of Funds

Household Financial Obligation Ratio

10%

12%

14%

16%

18%

1980 1985 1990 1995 2000 2005 2010Source: Federal Reserve

Overhang of Student Debt

$0

$5,000

$10,000

$15,000

$20,000

$25,000

0%

10%

20%

30%

40%

50%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Proportion with Student Loans at age 25

Source: Federal Reserve Bank of New York

Balance of those with Student Loans

Corporate Profits

Source: U.S. Bureau of Economic Analysis

$0

$5

$10

$15

2002 2004 2006 2008 2010 2012 2014

With inventory valuation and capital consumption adjustments, SAAR, $Billions

Business Indexes

80

90

100

30

40

50

60

2006 2007 2008 2009 2010 2011 2012 2013 2014

Industrial ProductionISM Non-

Manufacturing

Contraction          Expa

nsion

ISM Manufacturing

Sources: Federal Reserve, Institute for Supply Management

Small Business Optimism

Source: National Federation of Independent Business

Index Values (2

005=10

0)

50

60

70

80

90

100

2006 2008 2010 2012 2014

-2%

0%

2%

4%

6%

2007 2010 2013

Target

Source: U.S. Bureau of Labor Statistics (CPI), ECB

U.S. and Euro Inflation

United States

Euro Zone

Source: FOMC (September 2014)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2014 2015 2016 Long Run

FOMC Federal Funds Rate Forecast

FOMC Fed Funds Forecast for 2015

0%

1%

2%

3%

March 2014 FOMC Meeting

September 2014 FOMC Meeting

Source: Federal Reserve Federal Open Market Committee

Federal Reserve Timeline

$25

$15

$0Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec

Asset Purchases ($B)Fed Funds Rate

0.125%

2.75%

6 Months

20152014

Federal Funds Rate Outlook

1.25%

2016Source: Federal Reserve Federal Open Market Committee

Periods of Federal Reserve Tightening

0%

1%

2%

3%

4%

5%

6%

7%

-1 1 3 5 7 9 11 13 15 17 19 21 23 25

Fed

Fund

s Ta

rget

Rat

e

Months Since Tightening Began

19942004

2000

Long Term Forecast

Source: Federal Reserve

$0

$1

$2

$3

$4

2008 2009 2010 2011 2012 2013 2014

Federal Reserve Balance Sheet Growth

Source: Federal Reserve

$Trillion

MBS & Agency Debt U.S. Treasury 

Securities

LiquidityPrograms

$1.8 Trillion

$2.5 Trillion

Yield Spreads Shrink when the Fed Tightens

0%

2%

4%

6%

8%

10%

1990 1994 1998 2002 2006 2010 2014

Tightening Begins

Source: Federal Reserve

10-Year Bonds

3-Month Bills

Economic Uncertainties

• Interest Rates

• Consumer and Business Confidence

• Housing Recovery

• Income and Wealth Inequality

• Government Finances

• International Turmoil

U.S. Traditional Advantages

• Strong global competitor

• Robust entrepreneurial culture

• Flexible capital and labor markets

• Technological leader

• Highly diverse mix of industries

Patent Applications

0

200,000

400,000

600,00019

6319

6619

6919

7219

7519

7819

8119

8419

8719

9019

9319

9619

9920

0220

0520

0820

11

Source: United States Patent and Trademark Office