ECONOMIC OUTLOOK SECOND-LONGEST US EXPANSION IN HISTORY, CAN IT SET A RECORD? Augustine Faucher Chief Economist Florida School Finance Officers Association Hyatt Regency Jacksonville June 15, 2018 Gus Faucher Chief Economist Stuart Hoffman Senior Economic Advisor William Adams Senior Economist Kurt Rankin Economist
NOW THE SECOND-LONGEST EXPANSION IN HISTORY Length of expansion, months, by starting date of recovery 140 120 100 80 60 40 20 0 120 106 108 92 80 73 50 37 45 58 39 36 24 12 3/33 6/38 10/45 10/49 5/54 4/58 2/61 11/70 3/75 7/80 11/82 3/91 11/01 6/09 Source: NBER 2
BETTER CONFIDENCE WITH THE ELECTION 135 130 125 120 115 110 105 100 95 90 Small business optimism index, 1986=100 (R) Consumer confidence index, 1985=100 (L) J'15 A J O J'16 A J O J'17 A J O J'18 A 108 104 100 96 92 Sources: The Conference Board, NFIB 3
RUNUP IN STOCK PRICES HAS STALLED, WITH HIGHER VOLATILITY 2800 30 CBOE Volatility Index (R) S&P 500 (L) 2600 25 2400 20 2200 15 2000 10 1800 J'15 A J O J'16 A J O J'17 A J O J'18 A 5 Sources: S&P, CBOE 4
AND HIGHER INTEREST RATES Interest rate, % 1.8 1.6 3.2 3.0 1.4 1.2 1.0 0.8 0.6 0.4 0.2 10-year Treasury bond (R) 3-month Treasury bill (L) J'16 A J O J'17 A J O J'18 A 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 Source: Federal Reserve 5
BETTER GROWTH OVER PAST YEAR, EVEN WITH HURRICANES Real, % change year ago 6 4 2 Final sales of domestic product Gross domestic income 0-2 -4 Gross domestic product -6 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: BEA 6
SYNCHRONIZED GLOBAL GROWTH, FOR FIRST TIME SINCE GLOBAL FINANCIAL CRISIS 7
WEAKER DOLLAR IS HELPING EXPORTS 20 15 10 5 0-5 -10-15 -20 U.S. exports, 3-mo. moving average, % change year ago (L) Broad U.S. $ index, 3-mo. moving average, % change year ago, reverse axis (R) -25 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17-10 -5 0 5 10 15 20 Sources: BEA, Federal Reserve 8
ENERGY NO LONGER A DRAG ON GROWTH, LOW PRICES ARE GOOD NEWS FOR LONGER RUN 16 12 8 4 0-4 Oil and gas extraction, 6-mo. moving average, % change year ago (L) Natural gas price, 6-mo. moving average, $ per mmbtu (R) 12 10 8 6 4-8 2-12 '80 '85 '90 '95 '00 '05 '10 '15 0 Sources: Federal Reserve, NYMEX 9
PRIVATE SERVICE INDUSTRIES, CONSTRUCTION DRIVING JOB GROWTH 3.5 3.0 Payroll employment, change year ago, mil 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 Government All other private Manufacturing, mining Retail Total '11 '12 '13 '14 '15 '16 '17 '18 Source: BLS 10
TAX CUTS ARE COMING Budget impact, fiscal year, $ bil 100 50 Personal Corporate/Small business International 0-50 -100-150 -200 '18 '19 '20 '21 '22 Source: JCT 11
MORE SPENDING, TOO Increase in spending caps, fiscal year, $ bil 155 150 145 140 '18 '19 Source: CBO 12
CONSUMERS BENEFITTING FROM JOB GAINS, TAX CUTS A PLUS IN 2018 Real, % change year ago 8 6 4 Consumer spending 2 0-2 -4-6 Personal disposable income '12 '13 '14 '15 '16 '17 '18 Source: BEA 13
AND WAGE GROWTH IS PICKING UP 2.4 2.2 2.0 Quit rate, % of employment, 3-quarter lead (L) Average hourly earnings, all private-sector workers, % change year ago (R) 4.0 3.5 3.0 1.8 1.6 Private-sector wages, ECI, % change year ago (R) 2.5 2.0 1.4 1.5 1.2 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 1.0 Source: BLS 14
HIGHER GASOLINE PRICES WILL EAT UP MUCH OF THE TAX CUT 4.00 Price of unleaded gasoline, $ per gallon (L) 450 3.50 400 3.00 2.50 2.00 1.50 Consumer spending on gasoline, annualized, $ bil (R) 350 300 250 200 150 1.00 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 100 Sources: Oil Price Information Service, BEA 15
AUTO SALES HOLDING UP IN 2018 20 10 Employment, motor vehicles and parts, 3-mo. moving average, change, ths (L) 20 18 0-10 -20-30 Cash for clunkers Light vehicle sales, SAAR, mil (R) 16 14 12-40 10-50 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 8 Sources: AutoData, BLS 16
STILL ROOM FOR IMPROVEMENT IN HOMEBUILDING 2,400 2,000 Residential construction employment, ths (R) 3,500 3,250 3,000 1,600 2,750 1,200 2,500 800 400 Housing starts, SAAR, 3-month moving average, ths (L) '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 2,250 2,000 1,750 Sources: Census, BLS 17
WITH HOUSE PRICE GROWTH RUNNING AT A SUSTAINABLE PACE 110 100 90 REO and short sale share of total existing single-family sales, reverse axis, % (R) Case-Shiller house price index, peak=100 (L) 0 5 10 15 80 20 70 25 30 60 '02 '04 '06 '08 '10 '12 '14 '16 '18 35 Sources: S&P/Case-Shiller, CoreLogic, PNC 18
SMALL BUSINESSES HIRING INTENTIONS HAVE IMPROVED IN 2018 Expectations of own hiring, % of respondents 120 100 Decrease Same Increase 80 60 40 20 0 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: PNC 19
SHORT-TERM INTEREST RATES WILL CONTINUE TO RISE AS FED WORRIES ABOUT INFLATION Personal consumption expenditures price index, % change year ago 2.4 2.0 1.6 FOMC s 2% target Excluding food and energy 1.2 0.8 0.4 Overall 0.0 '14 '15 '16 '17 '18F '19F Sources: BEA, PNC 20
AND WATCH OUT FOR INVERTED YIELD CURVE Yield spread: interest rate on 10-year U.S. government bond minus interest rate on 1-year U.S. government bill, percentage points 4 3 2 1 0-1 -2-3 Shaded areas are recessions -4 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 Sources: Federal Reserve Board; NBER 21
STRONGER ECONOMIC GROWTH IN 2018 AND 2019, MOVING PAST FULL EMPLOYMENT 4.0 8 3.5 3.0 2.5 Real GDP, % change year ago (L) 7 6 2.0 1.5 1.0 0.5 Unemployment rate, % (R) '14 '15 '16 '17 '18F '19F '20F 5 4 3 Sources: BEA, BLS, PNC 22
A FEW POCKETS OF WEAKNESS IN MID-2017 23
BUT EXPANSION ALMOST EVERYWHERE IN THE SPRING OF 2018 24
AND IMPROVEMENT THROUGHOUT THE YEAR 25
STEEP RECESSION, BUT STRONG EXPANSION IN FLORIDA Payroll employment, 3-month moving average, cyclical peak=100 112 108 104 100 U.S. 96 92 Florida 88 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: BLS 26
SERVICES ARE LEADING FLORIDA JOB GROWTH 300 200 Payroll employment, 3-month moving average, change year ago, ths 100 0-100 -200-300 Government -400 Private service-providing -500 Goods-producing Total -600 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: BLS 27
MIAMI HAS THE GREATER EXPOSURE TO TRADE RETALIATION Goods exports, 2016, % of GDP/GSP/GMP 10 9 8 7 6 5 4 3 2 Orlando Tampa Bay Florida US Greater Miami Source: BEA, Census 28
30 LESS VULNERABLE THAN LAST TIME TO BIG HOUSE PRICE SWINGS Purchase-only home price index, % change year ago 20 10 0-10 -20-30 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 US Florida Source: FHFA 29
SALES EXPECTATIONS IN FLORIDA HAVE IMPROVED Expectations of own sales, % of respondents 120 100 Increase Same Decrease 80 60 40 20 0 Spring '17 Fall '17 Spring '18 Source: PNC 30
WITH A BIG JUMP IN HIRING EXPECTATIONS Expectations of own hiring, % of respondents 120 Increase Same Decrease 100 80 60 40 20 0 Spring '17 Fall '17 Spring '18 Source: PNC 31
POPULATION GROWTH ONCE AGAIN WELL ABOVE AVERAGE Population, % change 2.5 2.0 Florida 1.5 1.0 0.5 U.S. 0.0 '00 '02 '04 '06 '08 '10 '12 '14 '16 Source: Census 32
BIG RISKS TO THE UPSIDE AND DOWNSIDE President Trump Fiscal policy Monetary policy/interest rates Trade war Business leverage/commercial real estate Global economy/weak dollar Stock market Jobs/income/confidence Regulatory reform Immigration Budget deficit Brexit/Europe China/emerging economies Housing market Commercial construction Terrorism 33
PNC ECONOMIC OUTLOOK Q&A For more information from PNC Economics: www.pnc.com/economicreports Twitter: @GusFaucherPNC 34
Disclaimer: The material presented is of a general nature and does not constitute the provision of investment or economic advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions and forecasts expressed herein are subject to change without notice. Relevant information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. 2018 The PNC Financial Services Group, Inc. All rights reserved. 35
PUT IT ALL TOGETHER, TWO GREAT YEARS FOR REAL INCOMES Real median household income, % change 6 4 2 0-2 -4 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12 '16 Source: Census Bureau 36
CONSUMERS WILLING TO TAKE ON MORE DEBT, BUT THAT S NOT A PROBLEM % of disposable income 7.5 18.5 7.0 6.5 6.0 5.5 5.0 4.5 Financial obligations ratio (R) Mortgage debt service ratio (L) 18.0 17.5 17.0 16.5 16.0 15.5 15.0 4.0 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 14.5 Source: Federal Reserve 37
STRUCTURAL SLOWDOWN IN PRODUCTIVITY GROWTH IS BAD NEWS FOR LONG RUN Productivity, nonfarm business sector, 4-quarter MA, % change year ago 5 4 3 2 1 0-1 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: BLS 38
AS WILL LONG-TERM RATES, BUT MORE SLOWLY, AS FED REDUCES BALANCE SHEET Federal Reserve assets, $ tril 5.0 4.5 Treasury Bills 4.0 3.5 3.0 Other Treasuries MBS/GSA Debt Other 2.5 2.0 1.5 1.0 0.5 0.0 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: Federal Reserve 39