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The U.S. Economic Outlook

The U.S. Economic Outlook. Nigel Gault Chief U.S. Economist, IHS Global Insight Jackson, Mississippi September 14, 2010. The U.S. Recovery: Uneven and Subpar. Growth boost from fiscal stimulus and inventories is fading Headwinds are blowing from consumer and business caution

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The U.S. Economic Outlook

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  1. The U.S. Economic Outlook Nigel Gault Chief U.S. Economist, IHS Global Insight Jackson, Mississippi September 14, 2010

  2. The U.S. Recovery: Uneven and Subpar • Growth boost from fiscal stimulus and inventories is fading • Headwinds are blowing from consumer and business caution • No underlying housing improvement • Non-residential construction remains a drag; stimulus is propping up state and local spending • Exports, business spending on equipment and software remain the main growth areas • Inflation is a long way off; deflation is the immediate threat

  3. Deeper Recession, Slower Recovery:The Damage from the Financial Crisis Lingers (Real GDP compared with recession trough) * Assumes 2009Q2 trough

  4. Still Growing, Just Slowly

  5. ISM Indicators Off Their Highs, But Show Growth:Small Business Still Lagging Behind (ISM Diffusion Indexes, 50 = breakeven) (NFIB Optimism Index,1986=100)

  6. Employment Is Turning, But Not Rapidly Private Payroll Employment* Unemployment Rate** Length of Workweek*** Temporary Employment* *Thousands, monthly change, SA; **Percent; ***Hours, SA

  7. Inventory Cycle Support For Growth Has Peaked (Annualized real rate of growth, Q/Q, percent)

  8. U.S. Economic Growth by Sector (Percent change unless otherwise noted)

  9. Other Key Indicators (Percent unless otherwise noted)

  10. The Housing Cycle: Still At The Bottom

  11. House Price Adjustment Has Gone a Long Way:Probably Not Complete (FHFA house price index* divided by average labor compensation, 2000 = 1.0) * Purchase-only index from 1991 onwards

  12. Housing Supply Overhang Still Severe (Proportion of homeowner inventory vacant and for sale, percent) Source: Census Bureau

  13. Key Single-Family Housing Indicators:No Underlying Improvement Yet Existing Home Sales* New Home Sales* Months’ Supply of Homes** Housing Starts* *Millions, SA; **Single-Family Homes for sale divided by monthly selling rate

  14. Housing Starts Have Hit Bottom:Prices Not Quite There Yet (Purchase-only index, 1991Q1 = 100) (Million units)

  15. The Consumer : Reviving, But Without Vigor

  16. The Personal Saving Rate Has Risen (Personal savings rate, percent of disposable income) Economic Recovery Payments Stimulus Payments Microsoft Dividend 9/11 Post 9/11 vehicle incentives

  17. Consumer Sentiment Off the Floor But Still Weak (Reuters/University of Michigan Index, 1966=100)

  18. Consumer Spending Stabilizing, But Not a Strong Driver of Recovery (Annualized rate of growth)

  19. Business Investment:A Mixed Picture

  20. Business Equipment Demand Recovering (Non-defense capital goods ex-aircraft, 3-mo moving average, US$ billions)

  21. Nonresidential Construction: Architects’ Billings Still Soft, But Off the Floor (Diffusion Index) * Source: American Institute of Architects

  22. Business Capital Spending Cycle:Construction Lags (Percent change annualized rate, real spending)

  23. Foreign Trade:A Drag Now, A Plus Later

  24. Export Growth By Destination:All Strong Except for Europe (Percent growth, merchandise exports, YTD, as of June 2010) Export shares are in parentheses. Latin America includes Mexico.

  25. We Expect Exports to Outpace Imports (Percent change annualized rate, volumes)

  26. The U.S. Dollar: Secular Weakness Against EMG Currencies (2005=1.0, inflation-adjusted)

  27. Inflation and Interest Rates

  28. Headline CPI Inflation Is Positive Again;But Core Inflation Is Still Easing (Percent change from a year earlier)

  29. Federal Funds Rate to Stay Near Zero Until 2012:More Quantitative Easing Is Probable (Percent)

  30. Federal Government Budget:Harsh Realities

  31. Federal Fiscal Policy Assumptions • Long-run tightening essential......but immediate tightening risky...and markets are not demanding it • We assume • Bush tax cuts extended for one more year (1.1% of GDP in CY 2011) • Making Work Pay tax credit extended one more year (0.3% of GDP in CY 2011) • Upper-income tax cuts (0.3% of GDP) and Making Work Pay tax credit (0.3% of GDP) assumed to expire in 2012 • Further income-tax increases in 2013 and beyond

  32. The Federal Budget Gap (Percent of GDP)

  33. Federal Spending Shares in GDP (percent of GDP)

  34. Taxes Must Rise For Everybody (Effective federal personal income tax rate, percent)

  35. Implications • Growth boost from the inventory cycle and stimulus is fading • Employment and consumption improving, but slowly • Exports, business equipment spending moving higher • Nonresidential construction still declining; no sustainable residential construction recovery yet • Inflation trend is down; Fed to stay loose • “Double-dip” risk: 25% • The question is not whether taxes will rise but when and how • A deficit reduction plan is needed—but not yet action

  36. Thank you! Nigel Gault Chief U.S. Economist nigel.gault@ihsglobalinsight.com

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