Positive Surprises in Store for 2012? Macro Overview January 19, - - PowerPoint PPT Presentation

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Positive Surprises in Store for 2012?

Macro Overview January 19, 2012

Robert Johnson Director of Economic Analysis

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U.S. Economic Forecast

×2011: Soft, but No Recession; Growth Accelerated Through the Year × GDP Growth: 1.7%-1.9%, less in the first half × Inflation: Peaked at 3.9% this fall, now 3.1% × Unemployment: Dipped to 8.5% × Job Growth: 160,000 per month

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U.S. Economic Forecast

× 2012 Outlook, Slow Start Before an Acceleration × Real U.S. GDP growth of 2.0% - 2.5% × Inflation slows to 2% or less due to falling commodities × Employment growth accelerates to 180,000 per month × Unemployment rate drops to 8.0% - 8.5%

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Economic Drivers

×Consumer Spending ×Housing and Construction ×Balance of Trade ×Lower Inflation

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Risks to Economic Growth

×Inflation: Gasoline and commodities on the rise again ×Consumer spending outpacing incomes ×Geopolitical issues ×European sovereign debt ×Slowing manufacturing economy outside of the U.S.

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Where Are We Now?

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This Recovery Has Grown at Half of the Normal Rate

Year After Bottom, 27 Month GDP Growth Rate Prior GDP Contraction 1969 14.6%

• 1.1%

1981 13.7%

• 2.6%

1957 12.4%

• 3.7%

1960 12.1%

• 1.0%

1973 11.7%

• 3.2%

1953 10.4%

• 2.6%

1990 6.7%

• 1.4%

2001 4.0%

• 0.3%

1980 1.6%

• 2.2%

Average 9.7%

• 2.0%

2007 5.5%

• 5.1%

Sources: BEA, Morningstar calculations.

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Consumer, Exports Drive GDP Overall

% Contribution to GDP Growth by Category

Sources: Bureau of Economic Analysis, Morningstar, updated December 22, 2011.

Recovery Begins Whole Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Recovery Consumer Goods 1.7 0.1 1.5 0.9 1.1 1.9 1.1

• 0.4

0.3 2.2% Consumer Services 0.0 0.2 0.5 1.2 0.8 0.6 0.4 0.9 0.9 1.3% Business Structures

• 0.7
• 1.1
• 0.8

0.2 0.1 0.3

• 0.4

0.5 0.4

• 0.3%

Equipment & Software 0.4 0.7 1.3 1.5 0.9 0.6 0.6 0.4 1.1 2.1% Residential Construction 0.4

• 0.1
• 0.4

0.5

• 0.8

0.1

• 0.1

0.1 0.0

• 0.1%

Inventory 0.2 3.9 3.1 0.8 0.9

• 1.8

0.3

• 0.3
• 1.4

1.4% Exports 1.5 2.5 0.9 1.2 1.2 1.0 1.0 0.5 0.6 2.7% Imports

• 2.1
• 2.4
• 1.8
• 3.1
• 1.9

0.4

• 1.4
• 0.2
• 0.2
• 3.2%

Government 0.3

• 0.2
• 0.3

0.8 0.2

• 0.6
• 1.2
• 0.2

0.0 0.1

• 0.3%

Other

• 0.1
• 0.4%

Total GDP Growth(annualized) 1.7 3.8 3.9 3.8 2.5 2.3 0.4 1.3 1.8 Total Recovery GDP growth 5.5% Boxes are two best categories for the period

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Exports a Big Contributor to Growth

Source: St. Louis Federal Reserve, updated December 22, 2011.

Exports As % of GDP

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 1947 1957 1967 1977 1987 1997 2007

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A Fall in U.S. Exports to Europe Won’t Kill the Economy by Itself

Sources: Bureau of Economic Analysis, Census Bureau, Morningstar Calculations, updated November 22, 2011.

Year to Date U.S. Exports to: Billions $, Sept., 2011 % of % of Billions of $ U.S. Exports U.S. GDP North America 356 33% 4.5% Europe 245 22% 3.1% Pacific Rim 270 25% 3.4% South America 124 11% 1.6% Other 100 9% 1.3% Total 1095 100% 13.9%

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Consumer Takes the Stage, Represents 71% of the Economy

Source: topnews.net.nz

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Watching the Consumer Is Key

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Private Sector Employment Continues to Grow

Source: Bureau of Labor Statistics, updated January 6, 2012. Employment Growth Year Over Year (3-month moving average)

• 5.00%
• 4.00%
• 3.00%
• 2.00%
• 1.00%

0.00% 1.00% 2.00% 3.00% Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

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Initial Claims Point to a Stronger Job Market

Source: Bureau of Labor Statistics, updated January 12, 2012.

Claims % of Covered Employment

0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 0.70% 0.80% 0.90%

1970 1975 1980 1985 1990 1995 2000 2005 2010

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Gasoline Prices Beginning to Ease

Source: St. Louis Federal Reserve, updated January 9, 2012.

Regular Gasoline Prices per Gallon, Weekly

$2.00 $2.20 $2.40 $2.60 $2.80 $3.00 $3.20 $3.40 $3.60 $3.80 $4.00 Jan-10 Apr-10 Jun-10 Sep-10 Dec-10 Mar-11 May-11 Aug-11 Nov-11 Feb-12 Price per Gallon

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Consumer Fixed Payments Improve Sharply

Sources: U.S. Federal Reserve, Morningstar, updated December 8, 2011.

Financial Obligations Ratio

15.00 15.50 16.00 16.50 17.00 17.50 18.00 18.50 19.00 19.50 20.00 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12

Average =17.2

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Retail Sales Continue to Chug Along

Source: International Council of Shopping Centers, updated January 11, 2012. Year-Over-Year Shopping Center Sales Growth (Five-Week Moving Average)

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

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Improved Consumer Confidence Means More Car Sales …

Interpretation: December 2011 sales were 77% of 2005 levels.

Sources: BEA, Bureau of Labor Statistics, Morningstar, Updated January 4, 2012.

Auto Sales vs. Mid-2005

0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 J u n

• 4

D e c

• 4

J u n

• 5

D e c

• 5

J u n

• 6

D e c

• 6

J u n

• 7

D e c

• 7

J u n

• 8

D e c

• 8

J u n

• 9

D e c

• 9

J u n

• 1

D e c

• 1

J u n

• 1

1 D e c

• 1

1 Ratio Compared to 2005 High

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… but Not Enough to Help the Housing Market

Sources: Census Bureau, Morningstar, updated December 20, 2011.

Monthly Total Housing Starts (SAAR, thousands) 500 1,000 1,500 2,000 2,500 3,000 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009

Red bar represents average natural demand, Morningstar estimate.

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Corporations Will Continue Their Struggle to Raise Prices as Savvy Consumers Fight Back

Sources: Bureau of Economic Analysis, Census Bureau, Morningstar Calculations, updated November 16, 2011.

Auto Sales Auto Units Apparel Apparel Price Change Mil (SAAR) Price Change Sales Change January

• 0.1%

12.6 1.0% 0.8% February 1.0% 13.2

• 0.9%

1.9% March 0.7% 13.0

• 0.5%

1.0% April 0.7% 13.1 0.2% 0.1% May 1.1% 11.7 1.2% 0.2% June 0.6% 11.5 1.4% 1.2% July 0.0% 12.2 1.2%

• 0.1%

August 0.0% 12.1 1.1%

• 0.4%

September 0.0% 13.1

• 1.1%

1.3% October

• 0.3%

13.2 0.4%

• 0.7%

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Upside Potential

Source: psoutowood.wordpress.com.

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U.S. Oil and Gas Production Accelerates

Source: North Dakota State Government, updated January 10, 2012.

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Boeing Production Set to Boom

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Auto Sales Could Jump Again in 2012 U.S. Auto Sales Year Millions of Units 2009 10.4 2010 11.6 2011 12.8 2012E 13.6

Source: Automotive News, updated January 4, 2012.

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Housing???

Source: newhomessection.com.

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Housing, a Lot of Potential Positives

× Improved housing starts × Increased existing home sales/pending home sales × Artificially small household formations can’t last forever × Record high affordability ratio × Lennar, a leading home builder, announces new orders up 20% in Q4 × Non-U.S. and income investors looking to buy large blocks of foreclosed homes

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Lennar, a Leading Builder, Sees Improvement …

In our fourth quarter, we have seen real evidence of these changes in the field. We are experiencing more traffic in

• ur Welcome Home centers and customers are actively discussing their desire to find a way to purchase and avoid

the rental market and its re-pricing. Perhaps most importantly, we've seen consistent sales pace at stabilized prices throughout our fourth quarter and even through December during the season that is generally the most difficult time of the year.

• -Stuart Miller, Chief Executive Officer, Lennar, Inc.

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… but Negatives Remain

× Credit requirements remain tight × Foreclosure pipeline is still large × Prices are down during the last year