strategic planning summit economic & market outlook...• consumers ok manufacturing output flat...

Strategic Planning Summit

Economic & Market Outlook

Jim Meil September 19, 2016

Email: [email protected] Follow on twitter: @actresearch & @jp_meil

mailto:[email protected]

Outline

• Overview

• Business Cycle – where we stand

• Key Lead Indicator Review

• Consumer look

• Industry, investment and inventories

• Fed, inflation, and interest

• Overseas and risk factors

• Summary and wrap up

2 ACT Research Co., LLC, Copyright 2016

• Very slow economic growth

• But no recession

• Sector by sector

• Consumers OK Manufacturing output flat

• Less despair in energy Construction on trend

• Investment weak – confidence low, capacity excess

• No growth catalyst

• Rest of world troubled – Brazil, Brexit, China, Turkey

• Fed rate hike likely in Dec, 2 more in 2017

Overview – Business Environment

Weak grade for the economy:

2016 gets a C, 2017 may be a bit better at B minus

Updated: September 9, 2016


Source: National Bureau of Economic Research

U.S. Business Cycles since 1960

4

Start End GDP Mfg IP

Feb-61 Dec-69 106 5.1 6.8

Nov-70 Nov-73 36 5.5 9.4

Mar-75 Jan-80 58 4.6 6.7

Nov-82 Jul-90 92 4.1 4.0

Mar-91 Mar-01 120 3.8 5.6

Nov-01 Dec-07 73 3.0 2.8

81 4.4 5.9

Jun-09 >Sep-16 86 plus 2.1 2.1

Compound Annual

Growth Rate

Average

Duration

(months)

ACT Research Co., LLC, Copyright 2016

Source: Fidelity Investments

Phases of the Business Cycle

5

U.S.

-10

-8

-6

-4

-2

0

2

4

6

8

10

09'Q

1

10'Q

1

11'Q

1

12'Q

1

13'Q

1

14'Q

1

15'Q

1

16'Q

1

-10

-8

-6

-4

-2

0

2

4

6

8

10

Real GDP

Mfg Industrial Production

GDP 1983-2007 Avg Growth = 3.4%

Mfg IP 1983-2007 Avg Growth = 4.0%

Real GDP and Mfg Output Growth

Source: BEA and Federal Reserve

Data through 2016q2 (2 quarter moving average)Bureau of the Census

Data through 2007q1

% G

row

th S

AA

R


Crosscurrents at work

• Consumer confidence

• Jobs (July strong, Aug OK)

• Consumer big ticket buys (but autos flattening)

• Oil prices (users)

• Low inflation, interest rates

• Stock market

• Most construction sectors

• Rest-of-world economies – China, Brazil, UK maybe

• US$ impact on exports

• Gov’t finance-worldwide

• Oil prices (producers)

• Beltway blues, ‘16 election

• Geopolitical risk (Turkey, China)


Good Not-so-good

7

Lead Indicator Review

• Yield curve (spread between long/short rates)

• Stock market trends

• Commodity prices

• Sentiment surveys

• Purchasing Managers Indices


-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

Perc

en

t

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

10-Year Treasury Rate

90-Day T-Bill Rate

U.S. 10-Year Treasury Rates and 90-Day T-bills • Yield curve spread wide = low recession risk

• Rates will stay low into 2017, perhaps after

• Fed’s next tightening Dec 2016 – 1 or 2x in 2017

9 Source: U.S. Federal Reserve Data through August 2016 ACT Research Co., LLC, Copyright 2016

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

Ind

ex

, 19

41

-43

= 1

00

, Lin

ea

r S

ca

le

600

800

1000

1200

1400

1600

1800

2000

2200

Ind

ex

, 19

41

-43

= 1

00

, Lin

ea

r Sc

ale

Source: U.S. Federal Reserve

Data through September 02, 2016 10

1400

1500

1600

1700

1800

1900

2000

2100

2200

13

14

15

16

Ind

ex

, 1

94

1-4

3 =

10

0, L

ine

ar

Sc

ale

1400

1500

1600

1700

1800

1900

2000

2100

2200

Ind

ex

, 19

41

-43

= 1

00

, Lin

ea

r Sc

ale

U.S. Stock Market S & P 500

Oct 2014

Sept 2015

Feb 2016

S&P near all-time high (just beyond the trading range of the last 7 quarters)


0.75

1.25

1.75

2.25

2.75

3.25

3.75

4.25

4.75

5.25

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Wee

kly

On

-Hig

hw

ay R

etai

l Reg

ula

r G

aso

line

($/g

allo

n)

10

25

40

55

70

85

100

115

130

145

WT

I Cru

de S

po

t Price ($/p

er barrel)

U.S. Oil and Gasoline Prices

Retail Gasoline Prices (left)

Source: U.S. DOE, Energy Information Agency Weekly data through September 05, 2016

WTI Crude Spot (right)

• WTI Crude in a 40-50 trading range, likely into 2017

• Year-over-year comps now roughly even for crude oil & refined


WTI ($/bbl) Gas ($/g)

Latest Week 45.11 2.22

One Year Ago 45.16 2.44

Price Points

NFIB Small Business Optimism Index

80

85

90

95

100

105

110

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Ind

ex (

1986 =

100)

80

85

90

95

100

105

110

Source: NFIB

Monthly data through July 2016

Average reading

1992 to 2007 = 100.2

Average reading

since July 2009

trough = 92.5

12

Small business confidence isn’t back to pre-recession levels


[VALUE]

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

30

35

40

45

50

55

60

651

99

5

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Ind

ex 5

0 =

Neu

tral

ISM Purchasing Managers’ Index

Manufacturing

Source: ISM Manufacturing Report on Business Monthly data through August 2016

Below 50 = declining

Above 50 = growing

13

• August dips below 50 after Mar-July above


Lead Indicator Review • Yield curve (long/short rate spread):

• Wide spread, very low rates

• Purchasing Managers’ Index: • Soft August after good Mar-July – problem?

• Commodity prices: • Off bottom, tentative signals of investment interest

• Stock market trends • Beyond high end of ‘trading range’

• Business Sentiment surveys: • Back to the 2010-2013 range after 2014-15 pickup


Consumers

• Confident and troubled

• Employed

• Spending

• Restored balance sheet post recession trauma

• Older

• Best sector performance (lackluster comps)


50

60

70

80

90

100

110

90 92 94 96 98 00 02 04 06 08 10 12 14 16

Ind

ex

, 1

98

5 =

10

0 (

SA

)

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

Pe

rce

nt

U.S. Consumer Attitudes Measures and Unemployment

Sources: U.S. Bureau of Labor Statistics, University of Michigan

Data through January 2016

Unemployment Rate

(right scale)

University of Michigan

Consumer Sentiment Index

(left scale)

190

200

210

220

230

240

250

260

270

280

290

300

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Ind

ex 1

99

6 =

10

0 (

SA, 3

mm

a)

190

200

210

220

230

240

250

260

270

280

290

300

Sources: US Census Bureau Data through July 2016

US Retail Sales (excl Auto, Gasoline) and adjusted for inflation

July 2016/July 2015 2.5

CAGR since June 2009 2.5

Growth Rates

2016-July YTD Change From 2015-July YTD

• Nonstore (online) up 10.5%

• Hot sectors: Health, personal care (up 7.1%) Building materials (up 6.4%)

• Cold sectors: Dept stores (down 3.9%) Electronics & appliance (down 3.0%)

9

10

11

12

13

14

15

16

17

18

19

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Mill

ion

s o

f u

nit

s -

3 M

on

th M

ov

Av

g

(SA

AR

)

9

10

11

12

13

14

15

16

17

18

19

Sources: Ward’s Automotive and Motor Intelligence Sales data through August 2016

U.S. Light Vehicle Retail Sales

18

August 2016/August 2015 (1.7)

CAGR since July 2009 8.1

Growth Rates %

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Millio

ns

of

Un

its

(S

AA

R / 3

mm

a)

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

U.S. Housing Starts

Source: U.S. Census Bureau Data through July 2016

Single-Family Units

Total Units

19

Total

Single

Family

July 2016/July 2015 1.2 6.7

CAGR since June 2009 13.3 9.0

Growth Trends

66.6

56.2 58.162.3 63.5

69.6

79.484.2

87.2 86.0 86.5 85.1 87.2 88.1

66.1

0

10

20

30

40

50

60

70

80

90

1002

00

6

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

15

q1

20

15

q2

20

15

q3

20

15

q4

20

16

q1

$ T

rill

ion

U.S. Household Net Worth (at period ending)

Source: U.S. Federal Reserve Board

June 9, 2016 Flow of Funds Release (2016q1)

https://www.federalreserve.gov/releases/z1/current/accessible/summary.htm

Up 32% from

Y/E 2007


No surprise . . . but effecting

change

21

Older demographics

Source: Shedlock Advisor Perspectives

http://www.advisorperspectives.com/dshor

t/Shedlock-.php

Industry, investment & Inventory

• Manufacturing output flat

• Traditional capital goods falling

• Inventories in excess


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

75

85

95

105

115

125

1351

99

7

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Ind

ex 2

00

2 =

10

0 (

3 M

o M

ov

Avg

)

Source: U.S. Federal Reserve Bank

through July 2016

Manufacturing Industrial Production Indices Non-durables and Durables Sectors

Durables

Nondurables

Durables Nondurables

Latest 12 Months 0.1 (0.1)

CAGR since June 2009 3.8 0.3

Growth Trends

• Durables flat since mid-2014 after 5 years of pent-up demand fueling growth

• Nondurables flat for 6 years


U.S. Industrial Production by NAICS sector

ACT Research Co., LLC, Copyright 2016 24

US Industrial Sector Performance 2009 to date

NAICS

code Sector

%Share of

IP Output

July 2015 to

July 2016

CAGR

since June

2009

Total (Mfg, Mining, Utilities) 100.0 -1.4 2.3

Manufacturing Total 74.4 0.0 2.1

Nondurable manufacturing 34.5 -0.1 0.3

311 Food 6.2 2.0 0.6

312 Beverage and tobacco product 1.9 -4.1 0.3

313-4 Textiles and products 0.7 1.6 0.6

315-6 Apparel and leather goods 0.2 -11.6 -3.9

322 Paper 2.6 -1.5 0.1

323 Printing and related support activities 1.5 -3.8 -0.1

324 Petroleum and coal products 2.7 -0.1 1.1

325 Chemical 12.3 0.9 -0.6

326 Plastics and rubber products 3.5 -1.8 3.0

Durable manufacturing 39.9 0.1 3.8

321 Wood product 1.2 -0.3 3.2

327 Nonmetallic mineral product 2.1 2.6 3.7

331 Primary metal 2.3 -1.7 1.3

332 Fabricated metal product 5.6 -2.5 2.7

333 Machinery 5.9 -3.4 2.9

334 Computer and electronic product 5.9 2.9 5.7

335 Electrical equipment, appliance, and components 2.0 0.2 2.0

3361-3 Motor vehicles and parts 5.8 1.8 9.1

3364-9 Aerospace and miscellaneous transportation eq. 4.6 -1.1 3.4

337 Furniture and related product 1.3 -1.6 2.4

339 Miscellaneous 3.2 6.4 0.4

Rate of Change

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

40.0

45.0

50.0

55.0

60.0

65.0

70.0

75.01

99

4

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

$B

il -

3 M

o M

ov

Avg

(se

as a

dj a

nn

ual

ized

rat

e)

Source: U.S. Census Bureau

Data through August 2016

U.S. Non-defense Cap Goods (excluding aircraft)

Shipments

Orders

Latest 12 month trend (6.7)

CAGR since June 2009 3.1

Shipments Rates of Change


Sources: U.S. Census Bureau Data through June 2016

Inventory-to-Sales Ratios Total Business (Mfg+Wholesale+Retail) & Retail

Total Business

Retail

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1.2

1.3

1.4

1.5

1.6

1.7

1.81

99

3

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Inve

nto

ry/S

ales

Rat

io (

seas

ad

j dat

a)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

15

20

25

30

35

40

45

50

55

60

65

70

75

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Un

its

- Th

ou

san

ds

NA Class 8 Inventories (new)

Source: ACT Research

Data through July 2016 27

Total Trucks

Tractors

• Inventory trimming likely to take to 17Q1

• Need to get below 45K total, 28K tractors


Fed, inflation, and interest rates

• Inflation benign

• Commodity prices likely weak for some time

• Labor costs could be rising, some risk here

• Interest rates likely to remain low

• Federal reserve under scrutiny – Easy target (recent WSJ Hilsenrath, Warsh op-ed)

– Political scrutiny

– Over-optimistic forecasts

– Expectations too high


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.51

99

6

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Def

lato

rs-

Pers

on

al C

on

sum

p. E

xp.

Year

/Yea

r Pe

rcen

tage

Ch

ange

Consumer Spending Deflator

Total and “Core” excluding food & energy

Source: U.S. Bureau of Economic Analysis

Data through July 2016

Total PCE Deflator

Excl Energy & Food

29

No Commodity Price Pressure


Sources: Nasdaq & Quandl

30

-10

-8

-6

-4

-2

0

2

4

610

'Q1

11'Q

1

12'Q

1

13'Q

1

14'Q

1

15'Q

1

16'Q

1

Manufacturing Unit Labor Costs

Nonfarm (total business) Unit Labor Costs

Unit Labor Costs (compensation less productivity)

Source: Bureau of Labor Statistics

Data through 2016q2 Data through 2007q1

% C

han

ge Y

ear/

Year


-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

Perc

en

t

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

10-Year Treasury Rate

90-Day T-Bill Rate

U.S. 10-Year Treasury Rates and 90-Day T-bills • Yield curve spread wide = low recession risk

• Rates will stay low into 2017, perhaps after

• Fed’s next tightening Dec 2016 – 1 or 2x in 2017

32 Source: U.S. Federal Reserve Data through August 2016 ACT Research Co., LLC, Copyright 2016

Federal Reserve Under Scrutiny

o Easy target

Recent WSJ Hilsenrath article before Jackson Hole

Kevin Warsh op-ed

o Political lightning rod

o Criticism on ZIRP (rates too low too long), QE

o Over-optimistic forecasts

o What’s in the toolkit for the next recession?

o Expectations too high


Overseas & risk factors

• Global lack of growth (Europe, Brazil, China)

• Risks

– Expansion geriatrics

– USA political dysfunction

– European banks (Greece, Italy)

– Middle East disorder

– Russia and China aggression

– International trade under fire


Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16

Global 50.6 51.4 51.2 50.7 50.9 50.0 50.5 50.1 50.0 50.4 51.0 50.8

United States 53.1 54.1 52.8 51.2 52.4 51.3 51.5 50.8 50.7 51.3 52.9 52.0

Canada 48.6 48.0 48.6 47.5 49.3 49.4 51.5 52.2 52.1 51.8 51.9 51.1

Mexico 52.1 53.0 53.0 52.4 52.2 53.1 53.2 52.4 53.6 51.1 50.6 50.9

Eurozone 52.0 52.3 52.8 53.2 52.3 51.2 51.6 51.7 51.5 52.8 52.0 51.7

Germany 52.3 52.1 52.9 53.2 52.3 50.5 50.7 51.8 52.1 54.4 53.8 53.6

France 50.6 50.6 50.6 51.4 50.0 50.2 49.6 48.0 48.4 48.3 48.6 48.3

Italy 52.7 54.1 54.9 55.6 53.2 52.2 53.5 53.9 52.4 53.5 51.2 49.8

Spain 51.7 51.3 53.1 53.0 55.4 54.1 53.4 53.5 51.8 52.2 51.0 51.0

UK 51.5 55.2 52.7 51.9 52.9 50.8 50.7 49.2 50.1 52.1 48.2 53.3

Russia 49.1 50.2 50.1 48.7 49.8 49.3 48.3 48.0 49.6 51.5 49.5 50.8

Japan 51.0 52.4 52.6 52.6 52.3 50.1 49.1 48.2 47.7 48.1 49.3 49.5

China 47.2 48.3 48.6 48.2 48.4 48.0 49.7 49.4 49.2 48.6 50.6 50.0

India 51.2 50.7 50.3 49.1 51.1 51.1 52.4 50.5 50.7 51.7 51.8 52.6

Brazil 47.0 44.1 43.8 45.6 47.4 44.5 46.0 42.6 41.6 43.2 46.0 45.7

Manufacturers’ Purchasing Managers Indexes

>54 51-54 45-51 <45

Above

TrendTrend Flat Recession

Source: Markit Economics

Key takeaways • Business picture

• Sluggish economy but no recession

• Solid consumer, construction OK, weak mfg

• Esp machinery/capital goods and energy

• Financial mkts steady after start of year volatility

• Consumer is the place to be

• 2017 and beyond

• Auto sales may be on a plateau

• Hard to see a catalyst for growth

• Maybe election in the rear view

• Extended duration expansion

• But perhaps slow growth gives long legs

• History suggests inverted yield curve + shock



U.S. Macroeconomic Outlook 2013 2014 2015 2016 2017

Actual Actual Actual Forecast Forecast

Real GDP 1.7 2.4 2.6 1.5 2.4

Consumer Spending 1.5 2.9 3.2 2.6 2.4

Capital Spending 3.5 6.0 2.1 -0.8 3.1

Equipment 4.6 5.4 3.5 -1.5 3.4

Structures 1.4 10.3 -4.4 -5.0 2.5

Intellectual Property 3.4 3.9 4.8 3.5 3.0

Residential Investment 11.9 3.5 11.7 4.9 3.3

Government Consumption -2.9 -0.9 1.8 0.8 0.9

Net Exports (2009 $B) -405 -426 -540 -580 -630

Mfg Industrial Production 1.1 1.3 1.1 0.2 2.5

Housing Starts (M) 0.92 1.00 1.11 1.20 1.33

US Light Vehicle Sls (M) 15.5 16.4 17.4 17.2 17.1

NA Lt Veh Production (M) 16.1 17.0 17.4 17.4 17.3

Unemployment Rate (%) 7.4 6.2 5.3 4.9 4.6

90 Day Treasury Yield 0.1 0.0 0.1 0.3 0.8

10 Year Treasury Yield 2.4 2.5 2.2 1.7 1.8

GDP Deflator 1.6 1.6 1.0 1.3 2.0

Percent Changes except where indicated

37


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