MACRO REPORT
US Economy Update
2015 Outlook Edition
Key Insights
Monica Defend
Head of Global Asset
Allocation Research
→
2015 Outlook: We expect the US Economy to grow strongly at above 3% in the next
couple of years, with a forecast of 3.4% for 2015. We have also lowered further our
baseline scenario for oil prices, and therefore lowered the CPI forecast for 2015 to 1.5%,
and expect CPI to trend higher from 2016 onwards.
→
Economic Conditions: The Bureau of Economic Analysis released the third estimate of
3Q14 GDP, lifting it to 5% annualized (quarter-over-quarter, seasonally adjusted). Based
on incoming data, we have revised up our forecasts for GDP growth across 2014-2016.
During its last meeting on December 17, the US Federal Reserve emphasized the solid
progress in the economy so far and saw the slowdown in inflation as transitory. We
expect the Fed to start slowly increasing rates during 2015.
→
Stability Conditions: Republicans gained control of the Senate in mid-term elections; the
election result, in our view, limits what President Obama can achieve during his final two
years. In the US political establishment, the focus has now shifted to the next
presidential election and little is likely to be achieved in terms of structural reforms in the
near-term. We therefore are somewhat concerned about the challenging fiscal outlook,
even if fiscal policy will be less of a drag on growth in 2015.
Elina Ribakova
Senior Economist
Global Asset Allocation Research
Annalisa Usardi
Economist
Global Asset Allocation Research
Also contributing
Riccardo Soggiu
Senior Economist, Central Banks
Global Asset Allocation Research
Macro Pulse
Source: Pioneer Investments, as of January 7, 2015.
1
U.S. Macro Report | 2015 Outlook Edition
Economic Conditions
Growth & Economic Trends
On December 23 , the Bureau of Economic Analysis released its third estimate for
3Q14 GDP, which at 5% was well above our and consensus estimates. The GDP
release highlighted strong contribution from personal spending, investments and
government spending. We now expect the US economy to grow above 3% in the
next couple of years.
Figure 1. US GDP
We expect US growth
closer to 3% in the next
couple of years, with 2015
at 3.4%.
5
4
3
2
1
0
% -1
-2
-3
-4
-5
-6
2,8
1,0
3,8
3,3
1,8
3,4
2,7
2,5
1,8
1,6
2,3
2,2
3,7
3,0
2,4
-0,3
-2,8
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 E2015 E2016 E2017 E
Pers. Cons. Exp.
Net Trade
Investments
Inv. Changes
Gov. Cons. Exp.
GDP
Source:U.S. Bureau of Economic Analysis, Datastream, Pioneer Investments, as of 7 January, 2015.
Real Personal Consumption Expenditure (PCE) for Q3 was revised upwards in the
third release to 3.2%, above our earlier forecast which was based on disposable
income and consumption expenditure data from the Personal Income and Outlays
report. Consumption remained the most important driver of growth. Going
forward, given the progressive improvement in the dynamics of the labour market
(in particular a decrease in underutilisation of labour and in labour market slack),
wages and disposable income, as well as a lower baseline oil price, we expect PCE to
get a significant boost towards 4% in 2015. After this, the likely outlook would be
for a gentle reversion towards a long-term average of about 2.5-3%.
We expect inflation at
about 1.8% in 2015 based
on lower oil and
commodity prices and
USD strength.
2
Positive developments in Q3 and Q2 are likely to carry over into Q4, given the data
releases so far. Lower oil prices have given a strong boost to consumption growth
already, particularly in retail and auto sales. Lower oil prices and significant job
market improvements in November have driven improvements in consumer
sentiment as reflected in surveys by the Conference Board and the University of
Michigan. November’s reading of 321,000 new non-farm jobs surprised all the
forecasters on the upside. Roughly one-third of the new jobs came from the highwage sectors such as business and professional services and the financial industry.
However, overall wage growth has remained moderate and broad-based indicators
suggest that slack remains in the labour market despite healthy progress.
We expect inflation somewhat below the Fed’s objective of 2% in 2015, staying near
1.8% on average owing to the lower oil and commodity prices and US dollar
strength. We see the inflation dip as temporary and expect inflation to revert to
U.S. Macro Report | 2015 Outlook Edition
about 2.3% over the medium-term. We expect inflation to remain well behaved and
expectations anchored with PCE inflation remaining below 2% given our current
scenario on unit labor costs, wages and dollar strength.
Monetary Policy
In October, the Fed carried out the final 15B taper of its quantitative easing, ending
bond purchases. The Fed in the December statement noted that “economic activity
is expanding at a moderate pace” and forecast that “economic activity will expand at
a moderate pace, with labor markets indicators and inflation moving towards levels
the Committee judges consistent with its dual mandate” (Unemployment 5.8% in
November). On inflation, the Fed expects it “to rise gradually toward 2% as the
labor market improves further” (November Headline CPI 1.3% YoY, October Core
PCE 1.6% YoY) and vowed “to monitor inflation developments closely”.
The Fed statement sounded relatively upbeat on the labor market, noting that
“conditions improved somewhat further, with solid job gains and a lower
unemployment rate. On balance, a range of labor market indicators suggests that
underutilization of labor resources continues to diminish”.
The committee indicated that “it can be patient in beginning to normalize the
stance of monetary policy”, this being defined as two meetings in the press
conference (rate hikes now possible from April 2015); future changes will be
“employment and inflation” data dependent. There were three dissenters out of 10
voters, with Fisher seeing the need for earlier rate hikes, Kocherlakota worried that
the statement reduced the credibility of the 2% inflation target in the context of the
current low inflation scenario, and Plosser who opposed the importance of the
passage of time as a key element of forward guidance. The next scheduled Fed
meeting is on January 28. Interest rates now look set to start to slowly increase
during 2015 (fed fund futures currently expect rates to start to rise above 0.25% in
the summer of 2015).
Fiscal Policy
Important consolidation has been achieved in the last couple of years, and in 2015
we expect fiscal policy to be less of a drag on economic growth. We remain
concerned, however, about the challenging fiscal outlook over the medium term.
The Congressional Budget Office (CBO) estimates that in order to stabilize the
debt-to-GDP ratio for the Federal government, fiscal adjustment equivalent to 1¼
percent of GDP per annum is needed over the next 25 years. A legacy of high
mandatory spending on health care and retirement, along with demographic trends,
will likely continue to put pressure on the country’s fiscal position. In the near term,
we see a gridlock in politics akin to the government shutdown in 2013 as unlikely,
but cannot rule it out.
Financial Conditions
The 2008 crisis was the first post-war recession where deleveraging played a key role.
States with the largest declines in home values have seen the slowest recovery to date.
It is therefore not surprising that the current recovery took longer to emerge and is
more tepid than in the past. Despite the large expansion of the Fed’s balance sheet, it
is likely that monetary policy by itself cannot reach all corners of the economy. The
Great Recession had a significant impact on household net worth and income. The
decline in home values resulted in negative equity for many homeowners and played
an important role in driving defaults.
3
U.S. Macro Report | 2015 Outlook Edition
According to the Federal Reserve Board of Governors Survey of Consumer
Finances collected every three years, the percent of households with negative equity
as a percent of all households with a mortgage decreased only marginally in 2013
compared to 2010. At 20.5%, the share of households with negative equity remains
highly elevated compared to the pre-crisis period.
Figure 2. Percentage of Households with Negative Equity
At the end of 2013 a large
proportion of homeowners
continued to have negative
equity.
25
20
%
15
10
5
0
2004
2007
Less than 10% of equity
2010
Negative equity
2013
Source:U.S. Federal Reserve Board’s Survey of Consumer Finances. Pioneer Investments, as of December 31, 2014.
From 2007 to 2013 American families saw a 12% decline in income and 40% in net
worth. Compared to the last survey in 2010, both income and net worth remained
lower in 2013. Median inflation-adjusted family income now stands at $46,668
(down from $49,022 in 2010) and net worth at $81,400 (from $82,521 in 2010). Real
household income and wealth are now still somewhat below 1989 levels. The most
vulnerable groups were the hardest-hit. According to research by the St. Louis Fed,
age, race and education are among the most significant predictors of gains or losses
in income and net wealth during the Great Recession.
Key Points on Economic Conditions
Healthy, broad-based
composition of growth. Watch for
slowing investments in shale oil
and gas, however.
poor
good
ECONOMIC
TREND
GROWTH
ECONOMIC
CONDITIONS
FINANCIAL
CONDITIONS
Improved momentum, 3q2014
GDP growth at 5%. Low
inflation.
poor
good
Source: Pioneer Investments, as of January 7, 2015.
4
Fed can start normalizing
monetary policy with
patience. Fiscal policy is no
longer a drag on growth.
poor
good
ECONOMIC
POLICIES
Household financial conditions
set to improve further.
poor
good
U.S. Macro Report | 2015 Outlook Edition
Stability Factors
Demographics
Participation rates should not pose a risk to the decline in unemployment. We expect
the participation rate to remain broadly stable in the near term. We might see some
improvements in the flows into the labour force, but the downward trend is a longterm issue and is mostly related to a change in demographics. Furthermore, we see
declines in unemployment as being driven by “good news”, where more people are
becoming employed rather than detached from the labour force.
Economic & Social Health
Politics: The policy Agenda for 2015 will remain challenging. Compromises are
likely to be reached in the following areas:
 Approval of Keystone XL Pipeline: opposed by Democratic Senate leadership
and put on hold President Obama
 Corporate Tax Reform: cut the corporate tax rate from 35% to between 2027%, tax profits earned overseas at between 5 and 20% and finally eliminate
loopholes and depreciation allowances that favor capital intensive
firms/industries.
 Trade Promotion Authority (TPA): TPA allows fast track consideration of
trade agreements, which is critical to approval prospects for the Trans-Pacific
Partnership (TPP).
 Energy Exports: there has been bi-partisan talk of liberalizing regulation in a
way that would lead to increased of exportation of domestically produced US
oil.
Other areas might be particularly difficult, such as immigration reform, Obamacare,
and fiscal policy. On fiscal policy, there could be room for an agreement with the
Republicans negotiating higher defense spending and the Democrats increasing
spending on infrastructure and raising the minimum wage. However, neither party
is likely to be ready to put forward a comprehensive fiscal adjustment package that
would put medium-term finances on a sustainable track. In the area of foreign
policy, we might see fewer compromises.
Key Points on Stability Conditions
Source: Pioneer Investments, as of January 7, 2015
5
U.S. Macro Report | 2015 Outlook Edition
2015 Triggers and Risks
Triggers
 Stronger-than-expected global growth and trade, resulting in higher demand
for U.S. exports, could lift confidence and add to internal demand drivers to
improve the growth profile.
 Improvements in consumer balance sheets, coupled with stable income growth
and anchored inflation expectations, could trigger higher confidence and
support more sustained patterns of consumption than we currently envisage.
 Upside for consumption could come from lower oil prices and lower inflation
that we currently embed in our scenario.
 Improving business sentiment underpinned by accelerating and external sales,
coupled with capacity utilization levels higher than we currently estimate,
could support further acceleration in capital expenditures. A new Corporate
Tax regime could be a key discussion topic for the new Congress, which could
gain bipartisan support and revive animal spirits.
Risks
 A significantly stronger dollar might adversely influence the export sector by
making U.S.-produced goods and services more expensive in foreign markets.
 Lower oil prices could have a sharper-than-expected effect on investments in
the oil and gas sector.
 Despite adjustments in fiscal policy so far, we remain concerned that over the
medium term healthcare and social spending could be a significant drag on
fiscal balances.
 Renewed geopolitical tensions, involving directly or indirectly the United
States, could be highly disruptive for the flow of oil and for financial markets in
general.
6
U.S. Macro Report | 2015 Outlook Edition
4. Macroeconomic Forecast
US
Macroeconom i c Forecasts
GDP & Com ponents
GDP
Personal Consumption Expenditures
Government Consumption Expenditures
Fixed Investment
Nonresidential
Residential
Total Internal Dem and
Total Consum pti on + Fi xed Investm ent+Inventori es
Fi nal Internal Dem and
Total Consum pti on + Fi xed Investm ent
Exports
Imports
GDP Contri buti ons
Net trade
Inventori es changes
Econom i c Trend
Industrial Production
Corporate Profits (with IVA and CCAdj)
Hourly Compensations
Unit Labour Cost
Productivity (H Compensation - ULC)
Import Prices Index
Disposable Income
Producer Prices Index
Consumer Prices Index
Export Prices Index
Capacity Utilization
Unemployment Rate
MZM Monetary Index
2013 2014E 2015E 2016E 2017E
Q1
Y oY %
2013
Q2
Q3
Q4
% QoQ Annual i zed
Q1
2014 E*
Q2
Q3
% QoQ Annual i zed
4,6
5,0
2,5
3,2
1,7
4,2
9,5
7,8
9,7
8,9
8,8
3,3
Q4E
Q1E
1,7
3,7
2,0
3,6
4,3
0,4
2,5
4,5
2,0
2,3
2,0
3,3
2015 E*
Q2E
Q3E
% QoQ Annual i zed
4,4
4,0
4,2
4,3
2,0
2,0
4,9
7,2
3,8
6,8
10,1
9,1
Q4E
Q1E
4,0
3,6
2,0
9,0
9,0
8,9
3,2
3,1
2,4
7,0
7,8
3,8
2016 E*
Q2E
Q3E
% QoQ Annual i zed
3,8
3,2
3,1
3,7
2,4
2,4
6,6
5,4
7,2
6,2
4,2
2,2
Q4E
2,2
2,4
-2,0
4,7
3,1
12,0
2,4
2,5
0,1
5,3
6,3
1,4
3,4
4,0
2,3
5,2
5,1
5,4
3,7
3,5
2,3
6,9
7,1
5,6
3,0
3,0
2,6
4,1
4,7
1,7
2,7
3,6
-3,9
2,6
1,5
7,8
1,8
1,8
0,2
4,8
1,6
19,0
4,5
2,0
0,2
6,6
5,5
11,2
3,5
3,7
-3,8
6,4
10,4
-8,5
-2,1
1,2
-0,8
0,3
1,6
-5,3
1,9
2,4
3,4
4,0
3,2
2,8
2,0
3,6
2,4
-0,4
4,9
4,1
2,0
2,4
4,1
4,5
4,5
3,6
4,1
3,6
3,2
1,9
3,1
1,2
2,5
3,1
3,6
3,9
4,8
4,3
3,8
7,3
8,8
3,1
5,5
6,4
2,0
-0,8
-0,2
2,0
6,3
8,5
2,4
5,1
0,6
2,8
10,0
1,3
0,8
-9,2
2,2
3,6
11,0
11,3
4,1
4,6
-0,9
3,2
2,7
3,9
3,6
1,8
2,6
4,1
6,9
4,1
4,5
6,1
7,5
4,1
8,7
10,8
3,6
7,5
9,4
3,6
8,4
9,7
3,6
4,7
7,9
3,2
6,5
6,9
0,2
0,0
-0 , 1
0,0
0,0
-0 , 5
-0 , 4
0,2
-0 , 3
0,1
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,9
4,1
1,1
0,3
0,9
-1,1
-0,2
1,2
1,5
-0,4
77,9
7,4
7,3
4,1
-0,4
2,5
2,0
0,4
-1,0
2,5
2,1
1,8
-0,3
79,1
6,1
6,0
5,0
7,1
2,7
1,3
1,5
-6,3
3,2
-0,1
1,5
-2,8
78,4
5,3
6,3
5,5
3,6
2,8
1,5
1,3
2,7
3,0
3,6
2,8
1,4
76,8
4,8
6,8
3,4
-0,5
2,9
1,3
1,6
-0,2
2,9
2,9
2,5
1,4
74,9
4,6
7,1
3,0
3,1
1,0
0,4
-1,4
-0,1
1,4
1,7
1,0
77,7
7,7
7,9
2,5
3,9
1,7
1,5
-1,5
0,3
1,6
1,4
-0,3
77,8
7,5
7,6
2,7
4,9
1,9
1,2
0,1
0,9
1,1
1,5
-0,8
77,9
7,2
7,1
3,3
4,7
-0,1
-2,1
-1,6
-1,9
0,8
1,2
-1,6
78,4
7,0
6,6
3,3
-4,8
2,8
2,5
-1,0
2,4
1,6
1,4
-0,5
78,6
6,7
6,2
4,2
0,1
2,0
1,5
0,4
2,2
2,8
2,1
0,2
79,1
6,2
6,2
4,4
1,7
2,5
2,9
-3,4
3,1
1,4
1,8
-1,0
79,3
5,6
5,8
4,4
13,1
2,7
0,7
-8,0
3,2
-0,1
1,3
-3,4
78,9
5,5
6,0
5,9
4,4
2,8
1,2
-1,9
3,0
1,4
2,1
-1,5
77,9
5,1
6,6
6,3
4,4
2,8
1,5
3,2
2,8
3,2
2,8
0,5
77,5
5,0
6,5
% Y oY
% Y oY
4,6
1,4
2,2
1,2
-0,2
2,2
2,4
1,8
0,1
79,2
5,8
5,9
% Y oY
4,5
5,2
6,3
4,6
2,8
2,8
1,0
2,2
-8,3
-7,1
3,3
3,3
-0,9
-0,6
1,1
1,6
-3,5
-3,0
78,6
78,2
5,4
5,3
6,2
6,4
% Y oY
6,0
5,2
4,2
3,3
2,8
2,9
1,4
1,5
3,6
2,7
2,9
3,1
3,9
3,9
3,0
2,8
1,6
1,9
77,1 76,5
4,9
4,8
6,7
6,9
3,3
3,1
2,4
4,7
5,1
3,1
4,4
2,4
2,9
1,5
1,3
3,1
3,5
2,6
1,7
76,0
4,7
7,1
Source: Pioneer Investments Forecast. Update as of January 7, 2015; for time series with higher frequency (monthly or daily) than quarterly, we consider the quarterly average;
in Italic exogenous variables; GDP components on quarterly frequency are %Q/Q annualized rates; all other figures, if not otherwise specified, are %Y/Y.
Important Information
Unless otherwise stated, all information contained in this document is from Pioneer Investments and is as of December 31, 2014. Unless otherwise stated, all
views expressed are those of Pioneer Investments. These views are subject to change at any time based on market and other conditions and there can be no
assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment
return and principal value may go down as well as up and could result in the loss of all capital invested. This material does not constitute an offer to buy or a
solicitation to sell any units of any investment fund or any services.
Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies.
Date of First Use: 7 January, 2015.
Follow us on:
www.pioneerinvestments.com
7