2018 Economic Outlook AWS
2018 Economic Outlook
A presentation to the
Risk Management Association February 9, 2018 Hauppauge, NY Albert J. Brenner, CFA Director of Asset Allocation Strategy
Contents 1. Recap of 2017 2. A long expansion 3. Outlooks for 2018 and beyond
Wealth Management
1
2017 Recap • The U.S. was in a Goldilocks economy throughout. • In July, the U.S. entered the ninth year of expansion. • In February, we entered the late cycle phase of this expansion. • For the first time since 2007, all 47 countries tracked by the OECD had expanding economies. • Capital markets were surprisingly calm as risk assets produced very strong returns while inflation and interest rates remained low. • Tensions abroad, uncertainties in Europe, political dysfunction in Washington, and weather disasters were all sloughed off. 2 2
GDP growth stronger than 2016
Source: Bureau of Economic Analysis
3
Job growth continued – 2 million new jobs
Source: Bureau of Labor Statistics
4
Job growth continued But will we run out of workers?
Answer to come. 5
Inflation remained low
Source: Bureau of Labor Statistics
6
Inflation remained low
Source: Bureau of Labor Statistics
7
Inflation remained low But is trouble brewing?
More on this later. 8
Consumer confidence hit a new peak
Source: University of Michigan Surveys of Consumers
9
Asset markets were up Asset Class
Name
for 2017
U.S. Large-cap LC growth LC value Mid-cap Small-cap Broad market
S&P 500 Rusell 1000 growth Russell 1000 value S&P 400 Russell 2000 Russell 3000
21.82% 30.21% 13.64% 16.23% 14.63% 21.12%
DM DM Hedged DM small cap
MSCI EAFE (net) HEDJ MSCI EAFE small cap
25.03% 13.50% 33.47%
EM
MSCI EM (net)
37.28%
REITs Commodities Gold
NAREIT index Bloomberg TR comm Spot Gold
8.67% 1.70% 13.09%
Aggregate IT Treasuries LT Treasuries IT Corporates LT Corporates MBSs High-yield
Bloomberg/Barclay's Bloomberg/Barclay's Bloomberg/Barclay's Bloomberg/Barclay's Bloomberg/Barclay's Bloomberg/Barclay's Bloomberg/Barclay's
3.54% 1.14% 8.53% 3.67% 12.21% 2.47% 7.50%
10
2017 Recap – But not all was rosy • Income inequality • Labor force developments • Life expectancy - mortality and morbidity and the opioid crisis
11 11
Income inequality continues to rise
12
Income inequality - comparisons
Source: CIA World Fact Book
13
Income inequality - comparisons Consider the following: Option A: Blues receive $100, Greens receive $100, Yellows receive $100. Option B: Blues receive $110, Greens receive $125, Yellows receive $105. Option C: Blues receive $130, Greens receive $120, Yellows receive $115. Option D: Blues receive $125, Greens receive $120, Yellows receive $150.
Which option is fairest? Which is the most unequal? Which option is best? For Blues? For Greens? For Yellows? For everyone?
14
Labor force – what happened to the men?
Source: Bureau of Labor Statistics
15
Labor force – what happened to the men?
Source: U.S. Bureau of Justice Statistics
16
Life expectancy
Source: U.S. Bureau of Justice Statistics
17
Life expectancy
Chart source: NCHS Data Brief 293, Mortality in the United States, 2016
18
Mortality and Morbidity
19
Mortality and Morbidity
20
The Opioid Crisis
21
The Opioid Crisis
22
A Long Expansion • We are in the ninth year of the current economic expansion. - In February 2017 we entered the late cycle phase of this expansion. • Our Economic indicators all point to continued growth. • Tax reform and a tightening Fed remind us of 1983. • More inflation to come?
23 23
The Economy has grown during the expansion
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, Bloomberg 24
24
And more than recovered from the Great Recession
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, Bloomberg 25
25
But after adjusting for inflation, the picture is a little different
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, Bloomberg 26
26
But not a full recovery everywhere . . .
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, Bloomberg 27
27
How long can the current expansion continue? Since 2009 we have been in the midst of the second longest and one of the slowest expansions on record.
28 28
Economic Overview SEVEN KEY INDICATORS
Indicator
Late- cycle warning signal/trend
Leading Economic Indicator
Surpassing previous peak
Monetary Policy - Treasury Yield Curve (10yr – 2yr)
Flat to inverted
+ 0.56 slope
Monetary Policy – Real Fed Funds rate
> 3% - 4%
-0.06% (est.)
ISM – Purchasing Managers’ Indices
Below 50 / declining
Unemployment rate v NAIRU
Current rate falls below NAIRU
Actual unemployment at 4.1% < 4.7% NAIRU
Consumer sentiment/ expectations
Peaked / declining
Sentiment off peak but > avg. for expansions
Composite Global LEI
Peaked / declining
100.2 & Increasing
Positive
Neutral Wealth Management
Current/Latest 131.7 new post-recession high and > previous peak
Mfg. ~ 60, Serv. ~56, Positive trend
Negative 29
LEI - nearly four years until the next recession.
30 30
The yield curve is flattening . . . but not the reliable signal of old
Source: Federal Reserve, H.15 Statistical Release
31 31
Real Fed Funds rate
• • 32
Source: Federal Reserve and Bureau of Economic Analysis
We are leaving nine years of unprecedented monetary stimulus The tide goes out . . .
32
Institute of Supply Management Indices
Source: Institute for Supply Management
• Composite indices indicate growth in business. 33
33
Unemployment
When the unemployment rate drops below the natural rate, the late cycle begins. Unemployment is likely to decline to 3% before the expansion is done. 34 34
Consumer confidence hit a new peak
Source: University of Michigan Surveys of Consumers
35
Consumer Confidence
Shiller - “Fluctuations in animal spirits remain an essential mystery for economists.” We see nothing on the horizon to dampen consumer confidence. 36
36
The Global Economy
Wealth Management
37
The Global Economy
• A synchronized global expansion. 38 38
Economic Outlook
Economic Metric*
2017
2018
Actual/Estimate**
Estimate
U.S. GDP (y-o-y)
2.6%
2.6% - 2.9%
Global GDP
3.6%
3.7%
Inflation (CPI)
2.1%
2.2%
1.25%-1.50%
2.25%
10yr Treasury
2.41%
2.90%
Unemployment
4.1%
3.9%
Crude Oil (WTI)
$60.42
$60 - $70
Fed Funds
*All values are period-end except GDP. Global GDP estimates are from IMF October World Economic Outlook ** Arrows denote revisions to prior estimates
• Slow acceleration in U.S. and global growth through 2018. • Interest rate hikes subject to domestic and international economic conditions. • Stable equilibrium price for oil will depend upon OPEC supply & U.S. output. • Less than 25% probability of a U.S. recession within 18 months.
39 People’s United Wealth Management views as of January 2018.
2018 GDP projections
Source: People’s United Wealth Management
40
Recession Prediction Analysis AGGREGATE OF SIX INDICATORS
Indicator
Signal Reached?
Recession Calculation
United States LEI
Feb 2017
August 2021 54 months from Feb ’17
Treasury yield curve (10yr – 2yr)
No
> 10 months after signal, but far from signal
Real Federal Funds rate
No
3.39 years on average
Nominal Fed Funds rate
Dec 2015
Jan 2020 49 months from Dec ‘15
Average hourly earnings
Feb 2015? Uptick in YoY
from trough has occurred, but growth rate since has been slow
June 2018 at earliest 40 months from Feb ’15
Unemployment rate
Feb 2017
Dec 2019 34 months from Feb ’17
Aggregate Calculation
Recession not before mid-2019, likely not until 2021 41
But what about inflation?
Source: Bureau of Labor Statistics
• Wage inflation does not become a problem until it reaches 3.5%. 42 42
Inflation and unemployment – who broke the Phillips Curve?
Source: Bureau of Labor Statistics
Blanchard estimates unemployment could drop below 3% without pushing the PCE cost index above 2%. 43
43
Is inflation still a monetary phenomenon?
QE had no apparent impact on inflation despite its explosive potential. 44
44
Interest rates – still the governor on money?
If interest rates are not governing the money supply, what is? 45
45
Inflation in the “new” World Cost-push versus demand-pull Cost-push – cost increases have been constrained by: • Global oversupply of commodities, labor, and manufacturing capacity • Stabilized energy costs • Increased use of technology in production and delivery • Changes in business models (Amazonification, Uberation) • Reduced bargaining power of labor
46
Inflation in the “new” World
From the Financial Times
47
Inflation in the “new” World Demand-pull – weak demand and increased access to competitive price information in developed countries has limited pricing power. • Demographics • Reduced credit appetite. o Proctor & Gamble cuts prices of Gillette razors up to 20% o Colgate Palmolive reports average price decline in 4Q 2017 o Mondelez Int’l (Oreo & Ritz) reports prices down 0.6% in North American in 2017 o Unilever reports prices down 1% in 4Q
Conclusion – Inflation likely to remain moderate.
48
People’s People’s United United Wealth Wealth Management Management Important Disclosures Important Disclosures
Investments and assets held in a fiduciary account are not deposits, or other obligations, are not guaranteed by People’s United Bank, N.A., are not insured by the FDIC, by any other government agency, or by People’s United Bank, N.A., or any of its affiliates, and may lose value.
49
A presentation to the
Risk Management Association February 9, 2018 Hauppauge, NY Albert J. Brenner, CFA Director of Asset Allocation Strategy
Contents 1. Recap of 2017 2. A long expansion 3. Outlooks for 2018 and beyond
Wealth Management
1
2017 Recap • The U.S. was in a Goldilocks economy throughout. • In July, the U.S. entered the ninth year of expansion. • In February, we entered the late cycle phase of this expansion. • For the first time since 2007, all 47 countries tracked by the OECD had expanding economies. • Capital markets were surprisingly calm as risk assets produced very strong returns while inflation and interest rates remained low. • Tensions abroad, uncertainties in Europe, political dysfunction in Washington, and weather disasters were all sloughed off. 2 2
GDP growth stronger than 2016
Source: Bureau of Economic Analysis
3
Job growth continued – 2 million new jobs
Source: Bureau of Labor Statistics
4
Job growth continued But will we run out of workers?
Answer to come. 5
Inflation remained low
Source: Bureau of Labor Statistics
6
Inflation remained low
Source: Bureau of Labor Statistics
7
Inflation remained low But is trouble brewing?
More on this later. 8
Consumer confidence hit a new peak
Source: University of Michigan Surveys of Consumers
9
Asset markets were up Asset Class
Name
for 2017
U.S. Large-cap LC growth LC value Mid-cap Small-cap Broad market
S&P 500 Rusell 1000 growth Russell 1000 value S&P 400 Russell 2000 Russell 3000
21.82% 30.21% 13.64% 16.23% 14.63% 21.12%
DM DM Hedged DM small cap
MSCI EAFE (net) HEDJ MSCI EAFE small cap
25.03% 13.50% 33.47%
EM
MSCI EM (net)
37.28%
REITs Commodities Gold
NAREIT index Bloomberg TR comm Spot Gold
8.67% 1.70% 13.09%
Aggregate IT Treasuries LT Treasuries IT Corporates LT Corporates MBSs High-yield
Bloomberg/Barclay's Bloomberg/Barclay's Bloomberg/Barclay's Bloomberg/Barclay's Bloomberg/Barclay's Bloomberg/Barclay's Bloomberg/Barclay's
3.54% 1.14% 8.53% 3.67% 12.21% 2.47% 7.50%
10
2017 Recap – But not all was rosy • Income inequality • Labor force developments • Life expectancy - mortality and morbidity and the opioid crisis
11 11
Income inequality continues to rise
12
Income inequality - comparisons
Source: CIA World Fact Book
13
Income inequality - comparisons Consider the following: Option A: Blues receive $100, Greens receive $100, Yellows receive $100. Option B: Blues receive $110, Greens receive $125, Yellows receive $105. Option C: Blues receive $130, Greens receive $120, Yellows receive $115. Option D: Blues receive $125, Greens receive $120, Yellows receive $150.
Which option is fairest? Which is the most unequal? Which option is best? For Blues? For Greens? For Yellows? For everyone?
14
Labor force – what happened to the men?
Source: Bureau of Labor Statistics
15
Labor force – what happened to the men?
Source: U.S. Bureau of Justice Statistics
16
Life expectancy
Source: U.S. Bureau of Justice Statistics
17
Life expectancy
Chart source: NCHS Data Brief 293, Mortality in the United States, 2016
18
Mortality and Morbidity
19
Mortality and Morbidity
20
The Opioid Crisis
21
The Opioid Crisis
22
A Long Expansion • We are in the ninth year of the current economic expansion. - In February 2017 we entered the late cycle phase of this expansion. • Our Economic indicators all point to continued growth. • Tax reform and a tightening Fed remind us of 1983. • More inflation to come?
23 23
The Economy has grown during the expansion
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, Bloomberg 24
24
And more than recovered from the Great Recession
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, Bloomberg 25
25
But after adjusting for inflation, the picture is a little different
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, Bloomberg 26
26
But not a full recovery everywhere . . .
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, Bloomberg 27
27
How long can the current expansion continue? Since 2009 we have been in the midst of the second longest and one of the slowest expansions on record.
28 28
Economic Overview SEVEN KEY INDICATORS
Indicator
Late- cycle warning signal/trend
Leading Economic Indicator
Surpassing previous peak
Monetary Policy - Treasury Yield Curve (10yr – 2yr)
Flat to inverted
+ 0.56 slope
Monetary Policy – Real Fed Funds rate
> 3% - 4%
-0.06% (est.)
ISM – Purchasing Managers’ Indices
Below 50 / declining
Unemployment rate v NAIRU
Current rate falls below NAIRU
Actual unemployment at 4.1% < 4.7% NAIRU
Consumer sentiment/ expectations
Peaked / declining
Sentiment off peak but > avg. for expansions
Composite Global LEI
Peaked / declining
100.2 & Increasing
Positive
Neutral Wealth Management
Current/Latest 131.7 new post-recession high and > previous peak
Mfg. ~ 60, Serv. ~56, Positive trend
Negative 29
LEI - nearly four years until the next recession.
30 30
The yield curve is flattening . . . but not the reliable signal of old
Source: Federal Reserve, H.15 Statistical Release
31 31
Real Fed Funds rate
• • 32
Source: Federal Reserve and Bureau of Economic Analysis
We are leaving nine years of unprecedented monetary stimulus The tide goes out . . .
32
Institute of Supply Management Indices
Source: Institute for Supply Management
• Composite indices indicate growth in business. 33
33
Unemployment
When the unemployment rate drops below the natural rate, the late cycle begins. Unemployment is likely to decline to 3% before the expansion is done. 34 34
Consumer confidence hit a new peak
Source: University of Michigan Surveys of Consumers
35
Consumer Confidence
Shiller - “Fluctuations in animal spirits remain an essential mystery for economists.” We see nothing on the horizon to dampen consumer confidence. 36
36
The Global Economy
Wealth Management
37
The Global Economy
• A synchronized global expansion. 38 38
Economic Outlook
Economic Metric*
2017
2018
Actual/Estimate**
Estimate
U.S. GDP (y-o-y)
2.6%
2.6% - 2.9%
Global GDP
3.6%
3.7%
Inflation (CPI)
2.1%
2.2%
1.25%-1.50%
2.25%
10yr Treasury
2.41%
2.90%
Unemployment
4.1%
3.9%
Crude Oil (WTI)
$60.42
$60 - $70
Fed Funds
*All values are period-end except GDP. Global GDP estimates are from IMF October World Economic Outlook ** Arrows denote revisions to prior estimates
• Slow acceleration in U.S. and global growth through 2018. • Interest rate hikes subject to domestic and international economic conditions. • Stable equilibrium price for oil will depend upon OPEC supply & U.S. output. • Less than 25% probability of a U.S. recession within 18 months.
39 People’s United Wealth Management views as of January 2018.
2018 GDP projections
Source: People’s United Wealth Management
40
Recession Prediction Analysis AGGREGATE OF SIX INDICATORS
Indicator
Signal Reached?
Recession Calculation
United States LEI
Feb 2017
August 2021 54 months from Feb ’17
Treasury yield curve (10yr – 2yr)
No
> 10 months after signal, but far from signal
Real Federal Funds rate
No
3.39 years on average
Nominal Fed Funds rate
Dec 2015
Jan 2020 49 months from Dec ‘15
Average hourly earnings
Feb 2015? Uptick in YoY
from trough has occurred, but growth rate since has been slow
June 2018 at earliest 40 months from Feb ’15
Unemployment rate
Feb 2017
Dec 2019 34 months from Feb ’17
Aggregate Calculation
Recession not before mid-2019, likely not until 2021 41
But what about inflation?
Source: Bureau of Labor Statistics
• Wage inflation does not become a problem until it reaches 3.5%. 42 42
Inflation and unemployment – who broke the Phillips Curve?
Source: Bureau of Labor Statistics
Blanchard estimates unemployment could drop below 3% without pushing the PCE cost index above 2%. 43
43
Is inflation still a monetary phenomenon?
QE had no apparent impact on inflation despite its explosive potential. 44
44
Interest rates – still the governor on money?
If interest rates are not governing the money supply, what is? 45
45
Inflation in the “new” World Cost-push versus demand-pull Cost-push – cost increases have been constrained by: • Global oversupply of commodities, labor, and manufacturing capacity • Stabilized energy costs • Increased use of technology in production and delivery • Changes in business models (Amazonification, Uberation) • Reduced bargaining power of labor
46
Inflation in the “new” World
From the Financial Times
47
Inflation in the “new” World Demand-pull – weak demand and increased access to competitive price information in developed countries has limited pricing power. • Demographics • Reduced credit appetite. o Proctor & Gamble cuts prices of Gillette razors up to 20% o Colgate Palmolive reports average price decline in 4Q 2017 o Mondelez Int’l (Oreo & Ritz) reports prices down 0.6% in North American in 2017 o Unilever reports prices down 1% in 4Q
Conclusion – Inflation likely to remain moderate.
48
People’s People’s United United Wealth Wealth Management Management Important Disclosures Important Disclosures
Investments and assets held in a fiduciary account are not deposits, or other obligations, are not guaranteed by People’s United Bank, N.A., are not insured by the FDIC, by any other government agency, or by People’s United Bank, N.A., or any of its affiliates, and may lose value.
49
