ihs economics - the us economic outlook - january 14, 2016

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© 2016 IHS

US Economic Outlook

IHS

The US Economic Outlook14 January 2016

Patrick Newport, Director of Long Term Forecasting+1 781 301 9125, [email protected]

ECONOMICS

© 2016 IHS

The US economy on a moderate growth path

• An inventory correction held back growth in the second half of 2015.

• Consumer spending is supported by solid gains in employment, real disposable income, and housing asset values.

• Housing construction will steadily recover in response to rising employment, easing credit, and a higher household formation rate.

• International trade is creating headwinds for the US economy due to a strong dollar exchange rate and subpar growth in key export markets.

• A two-year federal budget agreement and suspension of the debt ceiling boosts near-term spending and reduces policy uncertainty.

• Interest rates will gradually increase through 2018.

• Real GDP growth will pick up from 2.4% in 2015 to 2.7% in 2016.

2

US Economic Outlook / January 2016

© 2016 IHS

Private employment at an all-time high

104,000

108,000

112,000

116,000

120,000

124,000

2000 2002 2004 2006 2008 2010 2012 2014 2016

Private employment

Source: Bureau of Labor Statistics © 2016 IHS

Thou

sand

s

© 2016 IHS

Steady job growth

-10

-8

-6

-4

-2

0

2

4

2000 2002 2004 2006 2008 2010 2012 2014

United States Michigan

Payroll employment growth


Y/y

perc

ent c

hang

e

© 2016 IHS

12-month payroll employment gains

-6

-4

-2

0

2

4

6

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

US 12-month payroll gains


Mill

ions

-300

-250

-200

-150

-100

-50

0

50

100

150

200

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Michigan12-month payroll gains


Thou

sand

s

© 2016 IHS

Close to full employment!!!

0

2

4

6

8

10

12

14

2000 2002 2004 2006 2008 2010 2012 2014

United States Michigan

Unemployment rate


Perc

ent

© 2016 IHS

Participation rate: near 1978 levels

62

63

64

65

66

67

68

2000 2002 2004 2006 2008 2010 2012 2014 2016

Labor force paticipation rate


Perc

ent

© 2016 IHS

US business-cycle expansions since start of recoveries

90

100

110

120

130

140

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

1961-1969 1982-1990 1991-2001 2001-2007 2009-present

Business-cycle expansions lasting six years or more

Source: Bureau of Economic Analysis

Quarters since start of recovery

(Firs

tqua

rter

= 1

00)

© 2016 IHS

Little Wage inflation

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2000 2002 2004 2006 2008 2010 2012 2014 2016

Employment cost index, wages and salaries


Year

-ove

r-ye

ar p

erce

nt c

hang

e

© 2016 IHS

Stagnant productivity growth

-1

0

1

2

3

4

5

6

2000 2002 2004 2006 2008 2010 2012 2014 2016

Nonfarm business output per hour


Year

-ove

r-ye

arpe

rcen

t cha

nge

© 2016 IHS

-150 0 150 300 450 600 750

Mining & loggingUtilities

Federal governmentState government

InformationManufacturing

Local governmentOther services

EducationWholesale trade

Transport & warehousingFinancial services

ConstructionRetail trade

Leisure & hospitalityHealth & social services

Prof. & business services

11

Services recorded the largest employment increases during the 12 months ended November 2015Change in payroll employment, thousands

Total change = 2.6 million

Source: IHS © 2015 IHS

© 2016 IHS 12

Oil prices and drilling activity have collapsed

Weekly oil rig count and West Texas Intermediate crude oil price

0

30

60

90

120

150

0.0

0.4

0.8

1.2

1.6

2.0

2007 2008 2009 2010 2011 2012 2013 2014 2015

Oil rigs (Left scale, thousands) WTI price (Right scale, USD/barrel)Sources: Baker Hughes [http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-reportsother] and EIA [http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=rwtc&f=w] © 2016 IHS

© 2016 IHS 13

A widening trade deficit will contribute to a retreat in the dollar’s real exchange value in 2017‒20


Real trade-weighted dollar index

0.6

0.8

1.0

1.2

1.4

1.6

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

Inde

x, 2

009

= 1.

0

Major trading partners Other important trading partners


© 2016 IHS 14

The Institute for Supply Management’s indexes signal a stall in manufacturing and moderate growth in services


30

35

40

45

50

55

60

65

2000 2002 2004 2006 2008 2010 2012 2014 2016

Ove

r 50

indi

cate

s ex

pans

ion

Manufacturing index Nonmanufacturing index

ISM indexes

Source: Institute for Supply Management (ISM) © 2016 IHS

© 2016 IHS 15

Industrial production growth has slowed sharply in response to the dollar’s appreciation


Real GDP and industrial production

-12

-8

-4

0

4

8

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

Perc

ent c

hang

e

Real GDP Industrial production


© 2016 IHS 16

Sources of growth in US real GDP US Economic Outlook / January 2016

-1

0

1

2

3

4

2012 2013 2014 2015 2016 2017 2018Real GDP Consumer spending Nonresidential investmentResidential investment Inventories ExportsImports Government Domestic demand

Perc

enta

ge p

oint

s

Contribution to real GDP growth


© 2016 IHS 17

US economic growth by sectorUS Economic Outlook / January 2016

Real GDP and its components

Percent change 2014 2015 2016 2017

Real GDP 2.4 2.4 2.7 2.9

Consumption 2.7 3.1 3.0 3.2

Residential investment 1.8 8.6 9.5 9.6

Business fixed investment 6.2 3.4 5.0 5.0

Federal government -2.4 -0.4 3.6 -0.8

State & local government 0.6 1.5 1.5 1.2

Exports 3.4 1.0 2.3 5.4

Imports 3.8 5.0 4.9 7.3

© 2016 IHS 18

Employment growth has been steadier than real GDP growth during the current expansion


Real GDP and employment growth

-9

-6

-3

0

3

6

2007 2009 2011 2013 2015 2017

Perc

ent c

hang

e, a

nnua

l rat

e

Real GDP Employment


© 2016 IHS 19

Other key US indicatorsUS Economic Outlook / January 2016

Key indicators

Percent change 2014 2015 2016 2017Industrial production 3.7 1.3 0.6 3.0

Payroll employment 1.9 2.1 1.7 1.3

Light-vehicle sales (Millions) 16.4 17.4 17.8 18.2

Housing starts (Millions) 1.00 1.11 1.26 1.42

Consumer Price Index 1.6 0.1 1.2 2.6

Core CPI 1.7 1.8 1.9 2.0

Brent crude oil price (USD/barrel) 100 54 48 58

Federal funds rate (%) 0.1 0.1 0.9 1.9

10-year Treasury yield (%) 2.5 2.1 2.6 2.9

© 2016 IHS 20

Interest rates will rise from exceptionally low levelsUS Economic Outlook / January 2016

Interest rates

0

2

4

6

8

10

12

1990 1994 1998 2002 2006 2010 2014 2018

Perc

ent

Federal funds 10-year Treasury 30-year mortgage BAA corporate


© 2016 IHS 21

Job growth will slow as the US economy approaches full employmentPayroll employment

-8

-6

-4

-2

0

2

4

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Perc

ent c

hang

e, a

nnua

l rat

e


© 2016 IHS 22

After an inventory correction, manufacturing production growth will rebound in the second half of 2016


Industrial production and real GDP

-4

-2

0

2

4

6

8

2011 2012 2013 2014 2015 2016 2017 2018

Year

-ove

r-ye

ar p

erce

nt c

hang

e

All manufacturing Excluding information technologies Real GDP


© 2016 IHS 23

US industrial production growthUS Economic Outlook / January 2016

Industrial production

Percent change 2014 2015 2016 2017

All manufacturing 2.8 2.3 1.5 2.8

Motor vehicles & parts 10.4 9.0 7.2 4.2

Computers & electronics 2.9 1.8 3.0 4.9

Electrical equip. & appliances 2.1 4.4 3.3 2.4

Machinery 4.7 0.1 -2.2 3.1

Textiles 3.4 0.2 2.7 -1.0

Furniture 6.5 4.3 3.3 2.8

Chemicals 1.8 3.3 1.4 3.5

© 2016 IHS 24

Consumer price inflation will pick up as commodity prices recover


Inflation rates

-2

-1

0

1

2

3

4

5

6

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Year

-ove

r-ye

ar p

erce

nt c

hang

e

All-urban CPI Core CPI (excluding food and energy)


© 2016 IHS 25

Worker compensation will accelerate as labor markets tighten and the Affordable Care Act is implemented


Labor compensation

0

1

2

3

4

5

6

7

8

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Year

-ove

r-ye

ar p

erce

nt c

hang

e

Total compensation Wages & salaries Benefits


© 2016 IHS 26

The consumer market environment is improvingUS Economic Outlook / January 2016

Consumer market indicators

Percent change 2014 2015 2016 2017

Real consumption 2.7 3.1 3.0 3.2

Real disposable income 2.7 3.6 3.1 3.3

Real household net worth 4.8 3.2 3.4 3.1

Payroll employment 1.9 2.1 1.7 1.3

Real wage rate 0.6 1.9 1.2 0.6

Consumption price deflator 1.4 0.3 1.0 2.0

Light-vehicle sales (Millions) 16.4 17.4 17.8 18.2

Single-family home sales (Millions) 4.77 5.10 5.27 5.46

© 2016 IHS 27

Crude oil prices will gradually recoverUS Economic Outlook / January 2016

0

25

50

75

100

125

150

2000 2005 2010 2015 2020 2025

Dol

lars

/bar

rel

Current US dollars 2014 US dollars

Price of Dated Brent crude oil


© 2016 IHS 28

US crude oil prices and natural gas prices US Economic Outlook / January 2016

Crude oil and natural gas prices

0

2

4

6

8

10

12

14

0

20

40

60

80

100

120

140

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Dol

lars

/mill

ion

Btu

Dol

lars

/bar

rel

Crude oil, WTI (Left scale) Natural gas, Henry Hub (Right scale)Source: IHS Energy © 2016 IHS

© 2016 IHS 29

Lower gasoline prices have brought substantial savings for US households


Retail gasoline price and annualized spending on motor fuels

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Thou

sand

dol

lars

/hou

seho

ld

Dol

lars

/gal

lon

Retail gasoline price Spending on motor fuels per household (Right scale)Source: IHS © 2016 IHS

© 2016 IHS 30

Consumer spending will be supported by solid growth in real disposable income


Real consumer spending and disposable income

-2

0

2

4

6

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Perc

ent c

hang

e

Real consumer spending Real disposable income

Tax increases under-mined growth in 2013


© 2016 IHS 31

Real household net worth has reached a new highUS Economic Outlook / January 2016

Household assets and liabilities

0

20

40

60

80

100

120

1980 1985 1990 1995 2000 2005 2010 2015 2020

Trill

ions

of 2

014

dolla

rs

Assets Liabilities Net worth


© 2016 IHS 32

Light-vehicle sales will peak in 2017; low gasoline prices boost demand for light trucks


Light-vehicle sales

0

4

8

12

16

20

1980 1985 1990 1995 2000 2005 2010 2015 2020

Mill

ions

of u

nits

, ann

ual r

ates

Total Cars Light trucksSource: IHS © 2016 IHS

© 2016 IHS 33

The consumer spending expansion is broadening

Nominal consumer spending

0 1 2 3 4 5 6 7

Apparel

Recreation services

Computers & software

Home furnishings

Food & beverages

Vehicles & parts

Transportation services

Medical care & products

2016 2015 2014

Percent change


© 2016 IHS 34

Healthcare will take a rising share of personal consumption expenditures in the decade ahead Personal consumption by category

0

5

10

15

20

25

1960 1968 1976 1984 1992 2000 2008 2016 2024

Perc

ent o

f tot

al c

onsu

mpt

ion

Food Energy Health Housing services


© 2016 IHS

The recovery in housing markets is gaining momentum

• Sustained job growth will support increases in housing demand.

• Credit availability is improving for home buyers and builders.

• Supplies of new and existing homes are tight, driving up prices.

• Multifamily units will account for about one-third of housing starts.

• Young adults have postponed homeownership, resulting in pent-up demand.

• Sales to first-time buyers are rising rapidly.

• Baby boomers are starting to downsize.

35


© 2016 IHS 36

A recovery in household formation will support further gains in housing starts


Housing starts and formation

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Mill

ions

Housing starts Household formation


© 2016 IHS 37

Single-family home sales and construction are not expected to regain 2005 peaks


Single-family housing starts and sales

1

2

3

4

5

6

7

8

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Mill

ions

of u

nits

Mill

ions

of u

nits

Housing starts (Left scale) Home sales (Right scale)


© 2016 IHS

Nonresidential fixed investment has slowed

• Most companies are investing at steady rates

• However, companies exposed to foreign competition (manufacturing), low oil and gas prices, and falling agricultural prices have cut capital spending sharply• Agricultural machinery is down 48% year-over-year, due to falling agricultural

prices

• Mining and oilfield machinery equipment is down 48% year-over-year—blame low oil prices

• Railroad equipment is down 56% year-over-year

• Special industrial machinery is down 20% year-over-year, thanks to the strong dollar

• Mine and well structures are down 44% year-over-year

US Webcast / January 2016

38

© 2016 IHS 39

Core capital goods orders and shipments remain weakUS Economic Outlook / January 2016

Nondefense capital goods excluding aircraft

45

50

55

60

65

70

75

2000 2002 2004 2006 2008 2010 2012 2014 2016

3-m

onth

mov

ing

avg.

, bil.

USD

New orders Shipments


© 2016 IHS 40

Business fixed investment growth is held back by the plunge in spending on mining and petroleum structures


Real business fixed investment

-30

-20

-10

0

10

20

30

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Year

-ove

r-ye

ar p

erce

nt c

hang

e

Equipment Structures Intellectual products


© 2016 IHS

Business equipment investment spending will pick up

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

2014 2015 2016 2017 2018

Contributions to annualized real GDP growth


Perc

enta

ge p

oint

sUS Webcast / January 2016

41

© 2016 IHS

Building structures: A small plus for growth

-0.3-0.2-0.10.00.10.20.30.40.50.6

2014 2015 2016 2017 2018

Contributions to annualized real GDP growth


Perc

enta

gepo

ints


42

© 2016 IHS

Drilling for oil will edge up as oil prices rise

-0.8

-0.6

-0.4

-0.2

0

0.2

2014 2015 2016 2017 2018

Mining and wells’ contribution to annualized real GDP growth


Perc

enta

gepo

ints


43

© 2016 IHS 44

US real construction growth by sectorUS Economic Outlook / January 2016

Real investment in structures

Percent change 2014 2015 2016 2017Total construction 4.7 3.9 6.4 6.6

Residential 1.7 8.7 9.6 9.7

Commercial 19.3 12.3 8.3 11.0

Manufacturing 11.2 49.9 9.7 -16.9

Mines & wells 6.5 -34.7 -20.1 17.3

Healthcare -7.6 15.0 5.3 7.0

Public utilities 6.2 -9.9 2.5 -5.0

Highways & streets 2.4 6.3 7.6 0.4

Public education -1.7 5.9 5.3 2.1

© 2016 IHS

The Bipartisan Budget Act of 2016 and other legislation bring clarity to federal fiscal policy• The federal debt ceiling is suspended through March 2017 and the

federal government is funded through September 2017.

• In December, Congress enacted appropriations and tax legislation.• A $1.1-billion omnibus spending bill specifies fiscal 2016 expenditures, as

well as a five-year highway funding bill.

• Numerous temporary tax credits are made permanent, including the R&D tax credit, child tax credit, and earned income tax credit.

• Some taxes enacted under Obamacare are delayed, including the excise tax on medical equipment sales and the tax on higher-premium employer-provided health insurance (postponed to 2020).

• The Export-Import Bank is reauthorized.

• Budget actions will add 0.2 percentage point to 2016 real GDP growth.

45


© 2016 IHS 46

The US federal budget will remain in deficit

US federal budget balance

-12

-9

-6

-3

0

3

-2,000

-1,500

-1,000

-500

0

500

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Bill

ions

of U

SD, f

isca

l yea

rs

Unified budget balance (Left scale) Balance as percent of GDP (Right scale)


© 2016 IHS 47

The gap between federal expenditures and revenues will stay in the 2–3% range of GDPFederal revenues and expenditures*

14

16

18

20

22

24

26

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Perc

ent o

f GD

P

Federal revenues Federal expenditures* Fiscal years, unified budgetSource: IHS © 2016 IHS

© 2016 IHS 48

Federal government debt remains high relative to GDP

Publicly held federal debt

0

10

20

30

40

50

60

70

80

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Perc

ent o

f GD

P


© 2016 IHS

A gradual acceleration in the global economy

• The world economy remains in low gear; only a modest pickup in growth is expected in 2016.

• Eurozone growth will improve slightly, aided by monetary stimulus, currency depreciation, and pent-up demand.

• China’s economic growth will slow further in 2016 because of imbalances in credit, housing, and industrial markets.

• The plunge in materials prices is restraining growth in the commodity-exporting countries of the Americas, Africa, and Asia-Pacific.

• Prospects for emerging markets depend on structural reforms that raise productivity and allocate capital more efficiently.

49


© 2016 IHS

-2-10123456

NAFTA OtherAmericas

WesternEurope

EmergingEurope

Mideast-N. Africa

Sub-Saharan

Africa

Japan OtherAsia-

Pacific

Ann

ual p

erce

nt c

hang

e

2014 2015 2016 2017 2018-22

50

Asia-Pacific (excluding Japan) will achieve the fastest growth in real GDP


Real GDP


© 2016 IHS 51

The US current account will remain in deficitUS Economic Outlook / January 2016

Current-account balance

-7.5

-6.0

-4.5

-3.0

-1.5

0.0

1.5

-1,250

-1,000

-750

-500

-250

0

250

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Current-account balance (Left scale, billion US dollars)Balance as percent of GDP (Right scale)


© 2016 IHS 52

A widening trade deficit will contribute to a retreat in the dollar’s real exchange value in 2017‒20


Real trade-weighted dollar index

0.6

0.8

1.0

1.2

1.4

1.6

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

Inde

x, 2

009

= 1.

0

Major trading partners Other important trading partners


© 2016 IHS 53

Risks to the US forecast US Economic Outlook / January 2016

Scenario Characteristics

Mild recession(Probability = 20%)

• Weaker global growth and a stronger dollar hurt exports.• A stock market plunge undermines consumer confidence.• Businesses reduce hiring and investment in structures.• As a result, the US experiences a mild recession in the second and third quarters of 2016.

Recovery gains momentum(Probability = 15%)

• Productivity accelerates, raising potential GDP growth.• Stronger global economic growth lifts US exports.• Construction surges in response to increased household formation and easing credit standards.

• The Fed raises interest rates more quickly in 2016‒17.

Baseline forecast(Probability = 65%)

• The Fed gradually raises interest rates in 2016–18.• Housing markets steadily recover over the next five years.• Global economic growth picks up moderately.• The Bipartisan Budget Act of 2016 sets the parameters for federal fiscal policy over the next two years.

© 2016 IHS 54

Real GDP growth in alternative scenariosUS Economic Outlook / January 2016

Real GDP

-2

-1

0

1

2

3

4

5

2010 2011 2012 2013 2014 2015 2016 2017 2018

Perc

ent c

hang

e, a

nnua

l rat

e

Baseline (65%) Pessimistic (20%) Optimistic (15%)


© 2016 IHS 55

Light-vehicle sales in alternative scenariosUS Economic Outlook / January 2016

Light-vehicle sales

8

10

12

14

16

18

20

2006 2008 2010 2012 2014 2016 2018

Mill

ions

of u

nits

, ann

ual r

ate



© 2016 IHS 56

Housing starts in alternative scenariosUS Economic Outlook / January 2016

0.4

0.7

1.0

1.3

1.6

1.9

2.2

2006 2008 2010 2012 2014 2016 2018

Mill

ions

of u

nits

, ann

ual r

ate


Housing starts


© 2016 IHS

Bottom line for the US economy

• Consumer spending will be supported by gains in employment, real disposable income, and household net worth.

• Homebuilding will rise as credit availability improves and demand from young adults strengthens.

• Foreign trade will be a drag on US economic growth through 2018, due to a strong dollar and sluggish growth in major export markets.

• Real business fixed investment will post solid gains, led by information technology equipment and commercial structures.

• The Federal Reserve will gradually raise the federal funds rate; it will reach an equilibrium at 3.25% in late 2018.

• Core inflation will edge upward to the central bank’s 2% target.

• Forecast risks are weighted to the downside.

57


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ihs economics - the us economic outlook - january 14, 2016

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