resolving uncertainties: the u.s. economic outlook presented to: council of economic advisors salt...
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Resolving Uncertainties: The U.S. Economic Outlook
Presented to:Council of Economic Advisors
Salt Lake City, UtahMarch 10, 2003
Presented by:Sara Johnson
Managing Director,Global Macroeconomics
Group781-860-6709
Copyright © 2003 Global Insight, Inc.
Copyright © 2003 Global Insight, Inc. 23/10/200
3
Another Jobless U.S. Recovery?
• The U.S. recovery lost momentum in late 2002. Investment and hiring plans are on hold until the Iraq situation is resolved.
• Consumer spending is driving the expansion; incomes continue to rise, but household finances and confidence have weakened.
• Business investment has stabilized, but excess capacity will limit its near-term growth.
• Europe, Japan, and South America are struggling, holding back the recovery in U.S. exports.
• Expect subpar growth through spring.
Copyright © 2003 Global Insight, Inc. 33/10/200
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No Employment Growth So Far
-3
-2
-1
0
1
2
3
1998 1999 2000 2001 2002 2003 2004 2005 2006
The U.S. lost 1.9 million jobs from March 2001 to February 2003.
(Percent change, annual rate)
Copyright © 2003 Global Insight, Inc. 43/10/200
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Recovery Forces Are in Place
• Expansionary monetary and fiscal policies—early and often
• Resilient consumer spending
• Strong housing demand
• End of high-tech bust
• Low inflation and strong productivity growth
• A successful outcome in Iraq will set the stage for solid growth in late 2003 and 2004.
Copyright © 2003 Global Insight, Inc. 53/10/200
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The U.S. Expansion Will Strengthen
(Percent change, annual rate) (Percent)
-2
0
2
4
6
8
1998 1999 2000 2001 2002 2003 2004 2005 2006
2
3
4
5
6
7
Real GDP Growth Unemployment Rate
Copyright © 2003 Global Insight, Inc. 63/10/200
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Asymmetric Global Risks
• Another major terrorist attack
• Escalation of Iraq war
• Nuclear weapons in Asia
• Potential housing market bubbles
• Policy inflexibility in Europe and Japan
• Global imbalances from too much dependence on the U.S. locomotive
Copyright © 2003 Global Insight, Inc. 73/10/200
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Five Scenarios for the Iraq Conflict
• Baseline—Short War: War starts by March, lasts two months or less, minimal coalition casualties, no oil field damage, oil prices spike to $40 and retreat quickly, 60% probability
• Victory Without War: A regime change in Iraq without war (or war lasting only a few days), sanctions against Iraq lifted, oil prices drop below $20 then recover as demand strengthens, 20% probability
• No War, No Resolution: No war but uncertainty over Iraq continues and geopolitical tensions remain high, oil prices are volatile, averaging $30 this year, under 10% probability
• Long War: War drags on for six months with higher coalition casualties; oil prices stay above $30 this year, under 10% probability
• Bad War: War escalates to regional conflict, oil prices spike to $60 and average $40 this year, dollar falls 20%, U.S. and world experience a double-dip recession, under 2% probability
Copyright © 2003 Global Insight, Inc. 83/10/200
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Real GDP Growth in Alternative Scenarios
-4
-2
0
2
4
6
8
1999 2000 2001 2002 2003 2004
Baseline (60%) Pessimistic (20%) Optimistic (20%)
(Percent change, annual rate)
Copyright © 2003 Global Insight, Inc. 93/10/200
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Crude Oil Prices Will Retreat After the War
(WTI price, dollars per barrel)
10
15
20
25
30
35
40
45
50
1995 1997 1999 2001 2003 2005 2007
Baseline (Short War) War with Oil Field Damage
Copyright © 2003 Global Insight, Inc. 103/10/200
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0
1
2
3
4
5
6
7
8
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
A Cold Winter Drives Up Natural Gas Prices
(Dollars per million Btus, Henry Hub)
Copyright © 2003 Global Insight, Inc. 113/10/200
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20
40
60
80
100
120
140
160
1974 1978 1982 1986 1990 1994 1998 2002 2006
A Modest Recovery in Copper Prices
(Cents per pound)
Copyright © 2003 Global Insight, Inc. 123/10/200
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Price and Wage Inflation Will Stay Mild
(Year-over-year percent change)
-3-2-10123456
1998 1999 2000 2001 2002 2003 2004 2005 2006
CPI Producer Prices Employment Cost Index
Copyright © 2003 Global Insight, Inc. 133/10/200
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200
250
300
350
400
450
500
1972 1976 1980 1984 1988 1992 1996 2000 2004
Federal Military Spending Is Surging
(Billions of 1996 dollars)
Copyright © 2003 Global Insight, Inc. 143/10/200
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Government Budgets Are Back in Deficit
-400
-300
-200
-100
0
100
200
300
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Federal State & Local
(Billions of dollars, fiscal years)
Copyright © 2003 Global Insight, Inc. 153/10/200
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The Federal Reserve Will Start to Raise Interest Rates in September 2003
(Percent)
0
2
4
6
8
10
1998 1999 2000 2001 2002 2003 2004 2005 2006
Federal Funds Municipal Bond Yield Mortgage Rate
Copyright © 2003 Global Insight, Inc. 163/10/200
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Beyond the Technology Bubble: Nasdaq and S&P 500 Indexes
0
1000
2000
3000
4000
5000
1995 1996 1997 1998 1999 2000 2001 2002 2003
0
600
1200
1800
2400
3000
Nasdaq S&P 500
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The Stock Market Will Recover: Returns on S&P 500 Stocks and Treasury Bonds
-20
-10
0
10
20
30
40
1990 1992 1994 1996 1998 2000 2002 2004 2006
Stock Market Return 10-Year Treasury Bond Yield
(Percent)
Copyright © 2003 Global Insight, Inc. 183/10/200
3
-100
0
100
200
300
400
500
600
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Capital Gains Have Disappeared
(Billions of dollars)
Copyright © 2003 Global Insight, Inc. 193/10/200
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When Will Profits Recover?
• Profitability began to deteriorate in late 1997, three years ahead of the stock market downturn.
• After-tax earnings have fallen 26% from their peak.
• Earnings will be bolstered by rising productivity.
• Pricing power will be limited, although the dollar’s depreciation will help.
• Bottom line: a resurgence in 2003-04 and a slight retrenchment in 2005-06.
Copyright © 2003 Global Insight, Inc. 203/10/200
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Corporate Profits Will Rebound in 2003-04
-15
-10
-5
0
5
10
15
20
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
After-Tax Profits GDP
(Percent change, NIPA basis)
Copyright © 2003 Global Insight, Inc. 213/10/200
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Real Equity and Net Worth per Household
0
75
150
225
300
375
450
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Net Worth Equity Holdings
($Thousands per household, 2002 dollars)
Copyright © 2003 Global Insight, Inc. 223/10/200
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Bank Card Delinquency Rate Reaches New High
0
1
2
3
4
5
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005
2
4
6
8
10
12
Bank Card Delinquency Rate Unemployment Rate
(Percent) (Percent)
Copyright © 2003 Global Insight, Inc. 233/10/200
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Real Consumer Spending and Confidence
(Annual percent change, 1996$) (Michigan Index, 1967=1.0)
0
1
2
3
4
5
6
7
1998 1999 2000 2001 2002 2003 2004 2005 2006
75
80
85
90
95
100
105
110
Real Consumption Growth Consumer Sentiment
Copyright © 2003 Global Insight, Inc. 243/10/200
3
Light Vehicle Sales Responded to Incentives
(Millions of units)
0
4
8
12
16
20
1972 1976 1980 1984 1988 1992 1996 2000 2004
Cars Light Trucks
Copyright © 2003 Global Insight, Inc. 253/10/200
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Monetary Policy Has Stabilized Home-Building
(Housing starts, millions of units)
0.0
0.4
0.8
1.2
1.6
2.0
2.4
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Single-Family Multi-Family
Copyright © 2003 Global Insight, Inc. 263/10/200
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Allocation of Cash-outs from Home Refinance
Home Improvement
35%
Real Estate or Business
10%Stocks11%
Taxes2%
Debt Repayment
26%
Consumer Spending
16%
(Percent of total, January 2001-June 2002)
Copyright © 2003 Global Insight, Inc. 273/10/200
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Little Improvement in Capital Goods Orders
(Billions of dollars, annual rates)
0
100
200
300
400
500
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Computers & Electronics Aircraft Other Nondefense
Copyright © 2003 Global Insight, Inc. 283/10/200
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A Slow Recovery in Real Business Investment
-20
-10
0
10
20
30
Structures Computers Software Communic.Equipment
AllEquipment
2000 2001 2002 2003 2004
(Percent change, 1996 dollars)
Copyright © 2003 Global Insight, Inc. 293/10/200
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Office Vacancy Rates Have Soared in the Tech Centers, Depressing Construction
0
4
8
12
16
20
24
1996 1997 1998 1999 2000 2001 2002
Salt Lake City Seattle San Jose U.S.
(Percent of available space)
Source: CB Richard Ellis
Copyright © 2003 Global Insight, Inc. 303/10/200
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Computers and Software’s Share of GDP Will Rise
0.0
0.51.0
1.5
2.0
2.53.0
3.5
4.0
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Computers Software
(Consumer & business spending as a percent of GDP)
Copyright © 2003 Global Insight, Inc. 313/10/200
3
Real U.S. Exports and Imports Reflect the Business Cycle and Exchange Rates
(Year-over-year percent change)
-12
-8
-4
0
4
8
12
16
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Real Exports Real Imports
Copyright © 2003 Global Insight, Inc. 323/10/200
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Emerging Asia Will Achieve the Fastest Growth
-2-1012345678
Canada Mexico SouthAmerica
W. Europe Japan Other Asia
2000 2001 2002 2003 2004
(Percent change, real GDP)
Copyright © 2003 Global Insight, Inc. 333/10/200
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The Widening U.S. Current Account Deficit
(Billions of dollars) (Percent of GDP)
-800
-600
-400
-200
0
200
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
-8
-6
-4
-2
0
2
Current Account Deficit Deficit as % of GDP
Copyright © 2003 Global Insight, Inc. 343/10/200
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The U.S. Dollar Is Still Overvalued
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1976 1980 1984 1988 1992 1996 2000 2004
Industrial Countries Developing Countries
(Real Trade-Weighted Dollar Index, 1996=1.0)
Copyright © 2003 Global Insight, Inc. 353/10/200
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1.5 to 2.91.2 to 1.41.0 to 1.10.8 to 0.9
Western & Southern Regions Lead in Job Growth(Annual percent change, 2002-07)
Copyright © 2003 Global Insight, Inc. 363/10/200
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Utah’s Employment Downturn Was Severe
-4
-2
0
2
4
6
8
1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005
Utah U.S. (Sum of States)
(Year-over-year percent change)
Copyright © 2003 Global Insight, Inc. 373/10/200
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Utah’s Employment and Income Growth
-2
0
2
4
6
8
Employment Wage Rates Wage Income Other Income
2000 2001 2002 2003 2004 2005
(Percent change, state fiscal years)
Copyright © 2003 Global Insight, Inc. 383/10/200
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