The Financial Outlook Financial Outlook Issues, ASU Forecasting - - PowerPoint PPT Presentation

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The Financial Outlook Financial Outlook Issues, ASU Forecasting - - PowerPoint PPT Presentation

Nov 17, 2022 123 likes •469 views

Financial Outlook Themes The Financial Outlook Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013 Pessimists Spoiler Financial Outlook Themes Wilshire 5000 (Dec 31, 1970 = 830.27) 20,100 20,100 18,090

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Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Financial Outlook Themes

The Financial Outlook

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Wilshire 5000 (Dec 31, 1970 = 830.27) Source: Dow Jones. Updated through November 27, 2013.

Pessimist’s Spoiler

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2,010 4,020 6,030 8,040 10,050 12,060 14,070 16,080 18,090 20,100 2,010 4,020 6,030 8,040 10,050 12,060 14,070 16,080 18,090 20,100 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Interest Rates

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Federal funds rate and nominal 10-year Treasury yield (percent) Sources: Vertical bars denote recessions and are designated by the NBER; Federal Reserve Board. Updated through September 9, 2013.

Three rate levers: fed funds, communications, LSAPs

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4 8 12 16 20 4 8 12 16 20 60 65 70 75 80 85 90 95 00 05 10 Federal funds rate 10-year Treasury yield

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Nominal and inflation-adjusted 5-year Treasury yield 5 years in the future (percent) Source: Federal Reserve Board. Updated through November 8, 2013.

Bond yields and asset purchases

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1 2 3 4 5 6 7

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1 2 3 4 5 6 7 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Five-year forward Treasury yield (5 x 5) Five-year forward inflation expectations plus inflation risk premium (5 x 5 breakeven) Five-year forward real Treasury yield (5 x 5 TIPS)

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Monetary base (billions of dollars) M2 (billions of dollars) Source: Federal Reserve Board. Updated through June 2013.

P.S. No QE, no money, no inflation ...

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2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000 26,000 28,000 30,000 32,000 34,000 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 2,600 2,800 3,000 3,200 3,400 1970 1975 1980 1985 1990 1995 2000 2005 2010 Monetary base (left scale) The money stock (right scale)

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Selected components of the monetary base (billions of dollars) Source: Federal Reserve Board. Updated through July 2012.

... because the “base” is piling up as excess reserves

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2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000 26,000 28,000 30,000 32,000 34,000 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 2,600 2,800 3,000 3,200 3,400 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 The monetary base = currency in circulation + required reserves + excess reserves (left) M2 (right scale)

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Unemployment rate (percent) Sources: Vertical bars denote recessions and are designated by the NBER; US Department of Labor. Updated through October 2013 (unemployment) and September 18, 2013 (FOMC forecast).

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On the “maximum employment” mandate ...

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Horizontal bars denote the Fed's view (forecast range) about the near-term and sustainable unemployment rate (often referred to as the Nairu, or nonincreasing inflationary rate of unemployment)¹

Note: The red boxes identify the first step in each Fed tightening sequence.

Proved to be premature and the Fedbacked down

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

... including dropouts ...

Selected populations not classified as employed (percentage of the respective population) Source: US Department of Labor. Updated through October 2013.

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0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.20 0.25 0.30 0.35 0.40 0.45 0.50 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 All over 16 years of age or older who are not classified as employed 16- to 54-year olds who are not classified as .............. employed

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

... call it the 5th inning

Selected employment reference points (thousands) Source: US Department of Labor. Updated through October 2013.

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128,000 130,000 132,000 134,000 136,000 138,000 140,000 142,000 144,000 146,000 148,000 150,000 152,000 154,000 156,000 158,000 160,000 162,000 128,000 130,000 132,000 134,000 136,000 138,000 140,000 142,000 144,000 146,000 148,000 150,000 152,000 154,000 156,000 158,000 160,000 162,000 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Official labor force plus 16- 54-year old dropouts since December 2007 Official labor force plus 16- 44-year old dropouts since December 2007 Nonfarm employment needed to return the official unemployment rate to 5% Actual nonfarm employment

8.7m 7.5m 4.3m 6.8m new jobs since the bottom

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

If credit speed bumps get in the way, the Fed will have to act

Bank credit (annualized percent change from six months earlier) Source: Federal Reserve Board. Updated through October 2013.

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5 15

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5 15 2007 2008 2009 2010 2011 2012 2013 2014 Total bank credit (grey shaded area) Securities Loans & leases

Growthof Bank Credit (break adjusted, annualized percent change over the most recent 6 months)

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Core PCE chain price index (percent change from 12 months earlier) Sources: Vertical bars denote recessions and are designated by the NBER; US Department of Commerce. Updated through September 2013 (inflation) and September 18, 2013 (FOMC forecast).

Ultimately the 2% inflation mandate rules

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1 2 3 4 5 6 7 8 9 10 11 1 2 3 4 5 6 7 8 9 10 11 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

The FOMC's forecast for PCE chain price inflation and long- run goal¹

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Credit

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

High yield spread (basis points) Sources: Federal Reserve Board, JPMorgan. Updated through November 22, 2013.

Credit spreads

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200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Ibbotson Associates J.P. Morgan Securities LLC high yield index

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Equities

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Wilshire 5000 price-earnings ratio Wilshire 5000 (December 31, 1970 = 830.27) Source: US Department of Commerce. Updated through 2013 Q2.

Stocks ...

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2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 2 4 6 8 10 12 14 16 18 20 22 24 26 28 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Price-earnings ratio (left scale) Wilshire 5000 (right scale)

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Wilshire 5000 (Dec 31, 1970 = 830.27) After-tax GDP profits (billions of dollars) Note: scales aligned to the historical 10.6 times price-earnings average (for these measures) ex. the 1990s. Sources: US Department of Commerce; Dow Jones. Updated through 2013 Q2 (profits) and Nov. 27, 2013.

... are about business earnings, not the Fed

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190 380 570 760 950 1,140 1,330 1,520 1,710 1,900 2,010 4,020 6,030 8,040 10,050 12,060 14,070 16,080 18,090 20,100 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Line represents the Wilshire 5000 index (left scale) Shaded area represents after-tax GDP profits (right scale)

Note: theWilshire 5000 P/E has averaged 10.6 since 1947, excluding the unprecedented multiples from 1997 - 2001.

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Net interest margin (percent of a dollar of real GDP produced) Source: US Department of Commerce. Updated through 2013 Q2.

Profits are about business, not the Fed’s low rates

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0% 1% 2% 3% 4% 5% 6% 0% 1% 2% 3% 4% 5% 6% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

After-tax GDP profits of all US businesses (percent of nominal Gross Domestic Income) Sources: Vertical bars denote recessions and are designated by the NBER; US Department of Commerce. Updated through 2013 Q2.

Business is thinking forward again, with margins at records

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1 2 3 4 5 6 7 8 9 10 11 1 2 3 4 5 6 7 8 9 10 11 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

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Layoffs (the one true measure) are back to normal

Real GDP (percent change from four quarters earlier) Jobless claims (thousands weekly) Sources: US Deps. of Labor and Com. Updated through 2013 Q3 (GDP) and November 23, 2013 (claims). 50 100 150 200 250 300 350 400 450 500 550 600 650 700

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1 2 3 4 5 6 7 8 9 10 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 Real GDP growth (left) Jobless claims (right, scale is reversed)

Forecast

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

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Employment is rebounding ...

Nonfarm payroll employment Percent change from 12 months earlier Monthly change in thousands of jobs Source: US Department of Labor. Updated through October 2013.

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100 200 300 400 500

  • 8.0
  • 7.5
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  • 2.5
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0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Line represents the percent change in nonfarm payroll employment over the most recent 12 months (left scale) Bars are monthly change in nonfarm payroll employment, thousands of jobs per month (right scale)

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

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... and doors are opening again for college grads

Nonfarm payrolls and unemployment beneficiaries (average mon. ch. over the most recent 12 months) Sources: US Department of Labor.. Updated through October 2013.

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100 200 300 400 500 600

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100 200 300 400 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Nonfarm Payrolls (Left Scale) Change in the Number Receiving Unemployment Benefits from All Programs (Right Scale is Reversed) Gap denotes net hiring of new or re-entering job seekers

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

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Everyone is swimming upstream

Employment (ratio to December 2007 level) Source: US Dep. of Labor. Updated through October 2013 (US) and October (states). 0.85 0.87 0.89 0.91 0.93 0.95 0.97 0.99 1.01 1.03 1.05 1.07 0.85 0.87 0.89 0.91 0.93 0.95 0.97 0.99 1.01 1.03 1.05 1.07 2007 2008 2009 2010 2011 2012 2013 2014 2015

US Forecast US TX AK DC SD UT NY W Va OK MA LA CO NE MT MN MD VA IA VT WY AR CA CT DE GA HI ID IL IN KS KY ME MI MS MO NH NJ NM NC PA SC TN OH OR RI FL AL AZ NV WA WI

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Commodities

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Selected commodity indexes (1967 = 100) Sources: NBER recession columns; US Department of Commerce. Updated through October 2013.

Commodity prices are not just about demand

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100 200 300 400 500 600 700 100 200 300 400 500 600 700 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Knight-Ridder CRB spot commodities Reuters/Jefferies CRB commodities futures index

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

The Dollar

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

Selected trade weighted US dollar indexes (March 1973 = 100) Source: Federal Reserve Board. Updated through October 2013.

This is about market trends, not the role of the dollar

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75 85 95 105 115 125 135 75 85 95 105 115 125 135 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2008 2013 Nominal trade- weighted dollar index versus G10 countries (1972-76 = 100) Broad real trade- weighted dollar index

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

US current account deficit (percent of GDP) Source: US Department of Commerce. Updated through 2013 Q2.

This trade imbalance will balance naturally

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1 2

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1 2 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Petroleum balance Current account balance

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

The Fiscal Outlook

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

It’s not what you see that matters ...

Federal deficit (percent of nominal GDP) Sources: Vertical bars denote NBER-designated recessions; US Treasury. Updated through October 2013.

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1 2 3 4

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100 200 300 400 1960 1970 1980 1990 2000 2010 Line is % of GDP (right scale) $ billions over the most recent 12 months (left scale)

Forecast

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

... the challenge is in our (the CBO’s) mind’s eye ...

Long-term revenue and spending projections (percent of GDP) Source: Congressional Budget Office. Updated through September 2012.

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5 10 15 20 25 30 35 40 5 10 15 20 25 30 35 40 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 Debt service Other Medicare and Medicaid Social Security Revenues (shown holding at the historical average of 18.1% of nominal GDP)

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013

... taxes and ad hoc spending cuts don’t fix health care

Federal healthcare spending (percentage of GDP) Source: Congressional Budget Office. Updated through 2012.

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0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.00 0.01 0.02 0.03 0.04 0.05 0.06 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

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Financial Outlook Themes

Financial Outlook Issues, ASU Forecasting Luncheon, Phoenix, Arizona, December 4, 2013