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© 2016 IHS

IHS

The US Economic OutlookFTA Revenue Estimating ConferenceAsbury Park, New JerseyOctober 17, 2016

Sara Johnson, Senior Research Director, Global Economics+1 781 301 9115, [email protected]

ECONOMICS

© 2016 IHS. ALL RIGHTS RESERVED.

The US economy on a 2% growth path

• A more balanced US expansion is emerging in late 2016.

• Consumer spending is decelerating as growth in employment, real incomes, and household net worth moderates.

• Rising domestic demand, a recovery in commodity prices, and low financing costs will support an uneven recovery in capital spending.

• The inventory correction will continue into 2017, restraining near-term growth in industrial production.

• Net exports will be a drag on economic growth through 2019, as a strong dollar impairs US competitiveness.

• The Federal Reserve will cautiously raise interest rates as labor markets tighten and core inflation approaches the 2% target.

2

US Economic Outlook / October 2016


Real GDP growth will pick up, but job growth will s low

3


Real GDP and payroll employment

-9

-6

-3

0

3

6

2007 2009 2011 2013 2015 2017

Per

cent

cha

nge,

ann

ual r

ate

Real GDP Employment

Source: IHS © 2016 IHS


-200 -100 0 100 200 300 400 500 600

Mining & loggingManufacturing

State governmentUtilities

InformationTransport & warehousing

Federal governmentWholesale trade

EducationOther services

Local governmentFinancial services

ConstructionRetail trade

Leisure & hospitalityHealth & social services

Prof. & business services

Services recorded the largest employment increases during the 12 months ended September 2016

4


Change in payroll employment, thousands

Total change = 2.45 million



Markit PMI indexes signal modest US growth

5


48

50

52

54

56

58

60

62

2010 2011 2012 2013 2014 2015 2016

Ove

r 50

indi

cate

s ex

pans

ion

Manufacturing Services

Markit US PMI indexes

Source: IHS Markit © 2016 IHS


-200

-150

-100

-50

0

50

100

150

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Bill

ions

, ann

ual r

ate

After excess accumulation from mid-2013 through 201 5, an inventory correction is under way

6


Change in nonfarm inventories, 2009 dollars



An inventory correction is holding back near-term industrial production growth

7


Industrial production and real GDP

-2

-1

0

1

2

3

4

2012 2013 2014 2015 2016 2017 2018

Yea

r-ov

er-y

ear

perc

ent c

hang

e

Industrial production Manufacturing production Real GDP



Industrial materials prices are beginning to recove r

IHS Materials Price Index

1

2

3

4

5

6

2002 2004 2006 2008 2010 2012 2014 2016

IHS

wee

kly

inde

xes,

200

2:1=

1



8


US crude oil and natural gas prices on different pa ths

9


US energy 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


Consumer price inflation will pick up in response t o a recovery in commodity prices

10


Personal consumption deflators

-1

0

1

2

3

4

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Yea

r-ov

er-y

ear

perc

ent c

hang

e

Personal consumption deflator Excluding food and energy



Wages and benefits will accelerate as the US labor market tightens

11


Employment cost indexes

0

1

2

3

4

5

6

7

8

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Yea

r-ov

er-y

ear

perc

ent c

hang

e

Total compensation Wages & salaries Benefits



Interest rates will gradually rise as the Federal R eserve normalizes monetary policy

12


Interest rates

0

2

4

6

8

10

12

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

Per

cent

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



Forces affecting consumer spending

13


Positive forces

• Employment growth

• Mild inflation

• Rising disposable income

• Rising asset values

• Low interest rates

Negative forces

• Sluggish wage gains

• High student debt burdens

• Precautionary saving


Real household net worth has reached a new high

14


Household assets and liabilities

0

20

40

60

80

100

120

1980 1985 1990 1995 2000 2005 2010 2015 2020

Trill

ions

of 2

015

dolla

rs

Assets Liabilities Net worth



Durable goods lead growth in real consumer spending

15


Real consumer spending

-6

-3

0

3

6

9

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Per

cent

cha

nge

Durable goods Nondurable goods Services



US light-vehicle sales are near their peak

16


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


Housing markets will continue to recover

• Housing demand is supported by low mortgage rates and sustained growth in employment and real incomes.

• Supply is constrained by shortages of labor and developed lots.

• As demand outpaces supply, home prices and rents are rising.

• With new households choosing to rent rather than own, the US homeownership rate has fallen to a 51-year low.

• Lean inventories of unsold homes, low rental vacancy rates, and rising prices will encourage builders to step up construction activity.

17



A protracted recovery in US housing starts since th e financial crisis

18


Housing starts

0.0

0.4

0.8

1.2

1.6

2.0

2.4

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Mill

ions

of u

nits

Single-family Multifamily



An upturn in energy-related investment will contrib ute to stronger growth in capital spending

19


Real business fixed investment

-30

-20

-10

0

10

20

30

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Yea

r-ov

er-y

ear

perc

ent c

hang

e

Equipment Structures Intellectual products



Growth in real business equipment investment will b e led by information technology

20


Real business equipment investment

-10

-5

0

5

10

15

Total Informationtechnology

Industrialequipment

Transportationequipment

Otherequipment

Per

cent

cha

nge

2015 2016 2017 2018



Investment in manufacturing structures will retreat , while investment in mines and wells will rebound

21


Investment in structures

0

25

50

75

100

125

150

1990 1995 2000 2005 2010 2015 2020

Bill

ions

of 2

009

dolla

rs

Manufacturing Mines & wells Utilities



Investment in commercial structures is recovering f rom its 2008-10 collapse

22


Real fixed investment

0

40

80

120

160

200

1997 2000 2003 2006 2009 2012 2015 2018

Bill

ions

of 2

009

dolla

rs

Commercial structures



US real import growth is outpacing real export grow th, as a strong dollar has hurt global competitiveness

23


US exports and imports

-20

-15

-10

-5

0

5

10

15

20

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Yea

r-ov

er-y

ear

perc

ent c

hang

e

Real US exports Real US imports



The dollar’s real exchange value will strengthen fu rther against European currencies in 2017

24


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



-4

-2

0

2

4

6

8

10

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

Per

cent

cha

nge

World Advanced countries Emerging markets

Emerging markets will lead a pickup in global growt h

25


Real GDP



-6

-4

-2

0

2

4

6

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Per

cent

cha

nge

United States Eurozone United Kingdom Japan

Real GDP growth in key advanced economies

26


Real GDP



-10

-5

0

5

10

15

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Per

cent

cha

nge

China India Brazil Russia

Real GDP growth in key emerging markets: Recessions in Russia and Brazil are abating

27


Real GDP



Forces driving state government revenues

28


State revenue drivers

-6

-4

-2

0

2

4

6

Nonfarmemployment

Wages perworker

Wageincome

Personalincome

Retail sales Before-taxprofits

Per

cent

cha

nge,

cal

enda

r ye

ars

2015 2016 2017 2018



Bottom line for the US economy

• After slowing from 2.6% in 2015 to 1.4% this year, real GDP growth is projected to pick up to 2.2% in both 2017 and 2018.

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

• Real business fixed investment will recover, led by gains in information technology and commercial structures.

• Foreign trade will remain a drag on real GDP growth, due to a strong dollar and weak expansions in major export markets.

• Core consumer price inflation will average close to 2%.

• The Federal Reserve will gradually raise the federal funds rate to an equilibrium level of 2.75% by the end of 2019.

29


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ECONOMICS

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