Where Did Prosperity Go and How Do We Bring it Back?

Transcription

1 Where Did Prosperity Go and How Do We Bring it Back? by Lacy H. Hunt, Ph.D., Chief Economist Hoisington Investment Management Co. SIC 2016 May 24-27, Bee Caves Road Building 2, Suite 100 Austin, Texas Fax

2 Total Nonfinancial Debt as a % of GDP (Excluding Off Balance Sheet Liabilities) year ending levels Change in Debt per $ of GDP: $ $ $3.5 Q = 245. Q = Avg Debt: +1.9 tril. GDP: +.5 tril '00 '03 '06 '09 '12 '15 Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q page 1

3 8 Business Debt as a % of GDP (Excluding Off Balance Sheet Liabilities) quarterly Q = 73.4 Q = 70.3% 8 7 Q = 68.7% 7 6 Q = 68.1% 6 5 Avg. = Debt: +793 bil. Investment: +93 bil '00 '03 '06 '09 '12 '15 Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q page 2

4 Gross Federal Debt as a % of GDP (Excluding Off Balance Sheet Liabilities) quarterly Q1 2016: Debt = 19.3 tril. GDP = 18.2 tril. Debt/GDP ratio 10 Avg. = 55. Net present value of unfunded liabilities = $60 trillion in excess of Social Security and other trust funds '00 '03 '06 '09 '12 '15 Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q page 3

5 70 60 Total Private and Public Debt as a % of GDP Major Countries annual Japan U.K Canada Australia Eurozone U.S China Source: Bank of Japan, Cabinet Office, Statistics Canada, Federal Reserve, Bureau of Economic Analysis, Office for National Statistics of U.K., Statistical Office of the European Communities, Reserve Bank of Australia. Haver Analytics. Through Q Australia through Q1. U.S. Through page 4

6 Characteristics of Extremely Over-Indebted Economies 1. Transitory spurts in economic growth, inflation and high-grade bond yields cannot be sustained because debt constrains economic activity. 2. Due to debt repayment obligations, economies are subject to structural downturns without the cyclical excesses of rising interest rates and inflation. 3. Due to the start and stop economy, productivity growth deteriorates but this is not inflationary, just another symptom of the controlling debt influence. 4. Monetary policy is asymmetric - can restrain but not stimulate growth. 5. Fiscal policy options exist provided that they do not increase aggregate indebtedness. Historically, debt overhangs in major economies have only been cured by a significant multi-year rise in saving. 6. Inflation falls dramatically, increasing the risk of deflation. 7. Treasury bond yields fall to extremely low levels and remain depressed for a extended period since the Fisher equation ( ) states that the long risk-free yield is equal to the real yield plus expected inflation. 8. When multiple major economies are simultaneously over-indebted the world lacks an engine of growth. page 5

7 2 Nominal GDP, Y year over year % change, quarterly Q4 to Q4 % change (A) (B) (C) (D) Nominal GDP 4.1% 3.9% 3.1% Real GDP Y = P(price level)*q(real GDP) Y = M*V '04 '11 Source: Bureau of Economic Analysis. Through Q page 6

8 Eight Decades of the Wicksell Effect, WE WE = (BAA Corporate Bond Yield(Rm) less year over year Percent Change in Nominal GDP(Y)) annual WE = Rm-% change Y WE = Rm-% change (M*V) Avg. = WE = market rate of interest - % change in GDP 2015 BAA yield = 5. Nominal GDP = 3.1% BAA - GDP = 1.9% Sources: Federal Reserve Board, Bureau of Economic Analysis. Through page 7

9 % - -8% -1 GDP Implicit Price Deflator, P percent change in annual average P = Y/Q P = (M*V)/Q % - -8% Sources: Federal Reserve Board, Bureau of Economic Analysis, N.S. Balke & R.J. Gordon, C.D. Romer. Through page 8

10 2. Real Per Capita GDP Growth, Selected Periods average annual growth Real Per Capita GDP decade average growth % 3% 3% % % Sources: Bureau of Economic Analysis, Congressional Budget Office, Office of Management and Budget, N.S. Balke & R.J. Gordon, C.D. Romer, Measuring Worth. Through page 9

11 3. 2. Real Per Capita GDP Growth, Current Expansion vs. Prior Expansions average annual growth 2.7% % Sources: Bureau of Economic Analysis, Congressional Budget Office, Office of Management and Budget, N.S. Balke & R.J. Gordon, C.D. Romer, Measuring Worth. Through page 10

12 Corporate Profits: After Tax with IVA & CCAdj $1,700 billions billions $1,700 $1,600 $1,600 $1,500 $1,500 $1,400 $1,300 $1, Corporate Profits: After Tax with IVA & CCAdj 8 quarter % change, a.r '05 '12 '10 '11 '12 '13 '14 '15 '16 Source: Bureau of Economic Analysis. Through Q Lowest since Q $1,400 $1,300 $1,200 page 11

13 Employment Cost Index: Compensation year-over-year percent change, quarterly 3% 3% 1% '00 '02 '04 '06 '08 '10 '12 '14 '16 Source: Bureau of Labor Statistics. Includes all civilian workers. Through Q % page 12

14 3% Nonfarm Business Sector: Productivity 4 year % change a.r., quarterly 58 Thousands levels Thousands Real Median Household Income annual % Avg. 1% 1% -1% -1% '00 '03 '06 '09 '12 '15 Sources: Census Bureau. Bureau of Labor Statistics. Through Q Real Median HH Income through page 13

15 The Monetary Base vs. Excess Reserves of U.S. Depository Institutions bil. monthly level '02 '05 '08 '11 '14 Source: Federal Reserve Board. Through May 11, Monetary Base: orange line Excess Reserves: red line bil page 14

16 % % - M2 Money Stock 3 and 6 month % change, a.r. and y-o-y % change '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: Federal Reserve. Through May 2, M2 Money Stock annual % change mo 6 mo y-o-y % % - page 15

17 = 2.0 Velocity of Money Equation of Exchange: GDP(Y) = M*V annual V = Y/M avg to present = = 2.2 avg to 1983 = 1.75 Lowest since = 1.2 GDP = MB*m*V Sources: Federal Reserve Board; Bureau of Economic Analysis; Bureau of the Census; The Amercian Business Cycle, Gordon, Balke and Romer. Through Q Q1 2016; V = GDP/M, GDP = 18.1 tril, M2 = 12.5 tril, V = page 16

18 Nominal Broad Trade Weighted Dollar Index monthly highest since 11/02 QE1 starts QE2 starts QE3 starts Taper announcement '01 '03 '05 '07 '09 '11 '13 '15 Source: Federal Reserve. Through May 6, page 17

19 1 GDP Composite Growth for China, U.S., Japan and Europe annual % change 1 8% 8% Avg. = 4.7% Sources: Bureau of Economic Analysis, European Central Bank, Bank of Japan, China National Bureau of Statistics, Haver Analytics, World Bank, U.S.D.A. Through Q page 18

20 1 M2 Composite Growth for China, U.S., Japan and Europe annual % change % Avg. = 7. 8% Sources: Bureau of Economic Analysis, European Central Bank, Bank of Japan, China National Bureau of Statistics, Haver Analytics, World Bank, U.S.D.A. Through Q page 19

21 M2 Velocity annual U.S. Euro Japan China Sources: Bureau of Economic Analysis, Federal Reserve, European Central Bank, Bank of Japan, China National Bureau of Statistics, People's Bank of China, Haver Analytics. Through Q page 20

22 7% Long-Term Government Bond Yields Starting with Historic Panic Years: Japan 1989, U.S and 1929 Japan 1989 annual average U.S. panic year 1873 = year 1 U.S. panic year 1929 = year 1 Japan panic year 1989 = year 1 7% U.S % U.S U.S % 1% Sources: Federal Reserve Board, Homer & Sylla. Bank of Japan. 1% page 21

23 Possible Federal Reserve Actions 1. Additional federal funds rate increases 2. Negative short interest rates 3. Q.E Helicopter 5. Forward guidance page 22

24 3 28% % % - Personal Saving Rate annual average 1929 level Sources: Bureau of Economic Analysis, Martha L. Olney University of California. Through % % % - page 23

25 Appendix

26 0.0 bil. Trade Deficit: Goods billions chained 2009$, s.a., 3 month average bil non-petroleum trade deficit trade deficit U.S. Net Petroleum Imports monthly, s.a, millions of barrels a day mil mil '03 '07 '11 ' '00 '02 '04 '06 '08 10 '12 '14 '16 Source: Census Bureau. Through March page A-1

27 Crude Oil Production and North American Rig Count monthly Crude oil production: right scale thin line mil. BPD Rig count: left scale thick line '01 '04 '07 '10 '13 '16 Source: Energy Information Administration, Baker Hughes Inc. Through May 6, page A-2

28 1 8% Real Inventory Investment as a % of Real GDP quarterly, a.r. Avg. Since 1990 = 1.1% '04 '11 Source: Bureau of Economic Analysis. Through Q % page A-3

29 Industrial Production year over year % change 1 8% % % Gross value added as a % of GDP = Industrial sector Service sector % of employment 13% % % of S&P 500 earnings '01 '03 '05 '07 '09 '11 '13 '15 Source: Federal Reserve. Through April % % % Industrial Production: ex Auto y-o-y % change - '01 '03 '05 '07 '09 '11 '13 '15 1 8% % % - 1 8% % % page A-4

30 Industrial Production year over year % change '06 '13 Source: Federal Reserve Board. Through Q Last plot 3 months ending April vs. same period a year ago. page A-5

31 Nondefense Capital Goods ex Aircraft: Orders and Shipments y-o-y % change, quarterly 1 Shipments 1-1 Orders '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: Census Bureau. Through Q page A-6

32 Nonfarm Payroll Growth average monthly change Nonfarm Manufacturing (A) (B) (C) Source: Bureau of Labor Statistics. Through April page A-7

33 Labor Market Conditions Index index change '01 '05 '09 '13 Source: Federal Reserve Board. Through April page A-8

34 Merchant Wholesalers: Sales year-over-year % change, monthly '00 '04 '08 '12 '16 Source: Census Bureau. Through March page A-9

35 Housing Starts monthly level Housing Starts: Single Family monthly level 2600 thousands thousands thousands thousands '01 '04 '07 '10 '13 '16 Source: Bureau of Census. Through April '01 '04 '07 '10 '13 '16 Source: Bureau of Census. Through April New Home Sales monthly level (thousands) '01 '04 '07 '10 '13 '16 Source: Bureau of Census. Through March New Home Sales year-over-year % change, monthly '01 '05 '09 '13 Source: Bureau of Labor Statistics. Through March page A-10

36 Foreign Holdings of U.S. Securities Long Term Securities (col. 2) Long Term Debt (col. 4) U.S. Treasury Securities ( col. 7 plus Treasury bills ) Long-Term securities Equities Debt Corporates U.S. Agency U.S. Treasury 5 years and less 5-10 years over 10 years * ($trillions) * ($trillions) % 38% 73% 21% * ($trillions) % 63% % * ($trillions) % 59% 19% % * may not sum due to rounding. Source: U.S Treasury Department Privately held 73% 18% 9% marketable interest-bearing public debt: page A-11

37 Interest Rates monthly 7% 7% -84 bps 30 year FOMC central tendency 3% 3% 72bps 10 year 1% 5 year 1% -1% Short term trough in yields Fed Funds '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: Federal Reserve. Through April FOMC Dots -1% page A-12

38 U.S. Private and Public Debt as a % of GDP annual Current total debt = $67.2 trillion, GDP = 18.1 trillion Debt/GDP of 189. would require total debt of $34.3 trillion Debt/GDP of 171% would require total debt of $31.0 trillion Real GDP avg. growth: % Difference between and equals 1.8% Panic Year 1873 Panic Year avg. = 189. Panic Year avg. = 171% Sources: Bureau of Economic Analysis, Federal Reserve, Congressional Budget Office. Census Bureau: Historical Statistics of the United States Colonial Times to Through Q page A-13

39 Real Yield, r annual (nominal yield less annual change in GDP deflator) Long term avg.: Rates = 4. Inflation = 2.1% Real yield = 2.1% - r = Rtb - Pe Pe = (M*V)/Q Sources: Federal Reserve Board, Bureau of Economic Analysis, N.S. Balke & R.J. Gordon, C.D. Romer. Through page A-14

40 S&P GSCI vs. Bloomberg Commodity Index monthly level '03 '07 '11 '15 Source: Standard and Poor s, Haver Analytics. Through May 10, S&P GSCI Bloomberg page A-15

41 140 Nominal Broad Trade Weighted Dollar vs. Nonpetroleum Imports monthly; indexed to July Nominal Broad Trade Weighted Dollar Index: Nonpetroleum Imports Price Index: -5. '11 '12 '13 '14 '15 '16 Source: Federal Reserve and Bureau of Labor Statistics. Through March page A-16

42 1 Long Term Treasury Rate annual average Fall of Berlin Wall % Interest rate avg. = 2.8% Inflation rate avg. = 1. Onset of Iron and Bamboo Curtains Interest rate avg. = 5.9% Inflation rate avg. = 3.9% 1 8% avg. = 4. Global market Restricted market Sources: Federal Reserve Board, Homer & Sylla, Wall Street Journal. Through Initial global market period interrupted by WWI. Global market page A-17

43 Global Interest Rates 10 Year Yields Spread from U.S. 10 Year Yields 30 Year Yields Spread from U.S. 30 Year Yields 1. U.S % 2. Canada % 1.98% 0.63% 3. Sweden 0.47% 1.28% Netherlands % % 5. France % 1.13% 6. Austria Germany % 0.87% Taiwan 0.78% 0.97% Switzerland % 0.18% 2.43% 10. Japan -0.13% 1.88% % Through May 12, Source: Bloomberg. page A-18