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Economic OutlookRobert Fry
Robert Fry Economics LLC
Adhesive & Sealant CouncilIndianapolis, Indiana
October 18, 2016
RobertFryEconomics.comRobertFryEconomics@gmail.com
This presentation contains forward-looking statements based on expectations, estimates and projections that are not guarantees of future performance and involve a number of uncertainties and assumptions.
The content is provided “AS IS,” “AS AVAILABLE.” Robert Fry Economics LLC does not warrant the accuracy or completeness of the information, text, graphics, links, or other items contained in this communication, and Robert Fry Economics LLC expressly disclaims liability for errors or omissions in these materials. We reserve the right to make changes and corrections at any time, without notice.
Robert Fry Economics LLC expressly disclaims all liability for the use or interpretation by others of information contained in this communication. Decisions based on information contained in this communication are the sole responsibility of the reader, and in exchange for using this communication the reader agrees to hold Robert Fry Economics LLC harmless against any claims for damages arising from any decisions that the reader makes based on such information. Nothing contained in this Robert Fry Economics LLC communication constitutes investment advice.
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Excuse me. Can you tell me where I
am?
You’re in a balloon.
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You mustbe a economist. Your answer is
perfectly correct and totally useless.
You must be a manager. You have a great view, but don’t
know where you are.10/12/2016 Robert Fry Economics LLC 4
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Industrial Production ex ConstructionIndex, 2010 = 100
WorldAdvanced Economies
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Industrial Production ex ConstructionPercent Change from Year Ago
WorldAdvanced Economies
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Value Added of Industry (Industrial Production): ChinaPercent Change from Year Ago
Official Data
Median of 100 Products
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Industrial Production, Manufacturing: JapanIndex, 2010 = 100
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Industrial Production, Manufacturing: South KoreaIndex, 2010 = 100
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Industrial Production, Manufacturing: BrazilIndex, 2012 = 100
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Industrial Production, Manufacturing: MexicoIndex, 2008 = 100
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Industrial Production, Manufacturing: European UnionIndex, 2010 = 100
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US Industrial Production: ManufacturingPercent Change from Year Ago
RecessionsIndustrial ProductionNominal Industrial Production*
*Industrial Production Index times Producer Price
Global manufacturing has been stagnant since late 2014
Industrial production in US manufacturing has been essentially flat since November 2014; down 0.4% year-over-year in August.
Industrial production in European Union manufacturing has been stronger than you’ve been led to believe, but Brexit puts that at risk.
Industrial production in Japanese manufacturing near middle of 2011-2016 range.
Manufacturing in Brazil has fallen back to cyclical low after small increase.
Only a few countries are routinely setting record highs.
Official data show Chinese industrial production up 6.3% year-over-year in August. “Reality” hasn’t been that good, but has stopped deteriorating.
Overstatement of Chinese growth accounts for most growth in global manufacturing.
This is not a “manufacturing recession,” but price declines (and declines in mining and utilities) make it feel like one.
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“The accuracy of an economic vision is not always commensurate with the analytical ability of those who
hold it. Pessimistic visions about almost anything always strike the public as more erudite than optimistic ones.”
--Joseph Schumpeter, 1883-195010/12/2016 Robert Fry Economics LLC 16
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US Payroll EmploymentMillions
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Civilian Unemployment RatePercent
RecessionsU-3 (Headline) Unemployment RateU-6 Unemployment Rate
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US Real Consumer Spending & Disposable IncomePercent Change from Year Ago, Chained 2009 Dollars
Personal Consumption ExpendituresDisposable Personal Income
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US Housing StartsMillions
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US Home SalesMillions, Seasonally Adjusted Annual Rate
New (Left)
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US Investment in StructuresBillion Chained 2009 Dollars
Recession
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US Real Gross Domestic ProductAnnualized Growth Rates
RecessionQuarter-to-QuarterYear-over-Year
4.1 1.0 1.8 2.8 3.8 3.3 2.7 1.8 -0.3 -2.8 2.5 1.6 2.2 1.7 2.4 2.6 1.6 2.5
US consumer spending and housing are doing fine, but investment and net exports are hurting GDP growth.
Consumer spending grew at a 4.4% annual rate in Q2, driven by: • Employment growth.• Lower oil prices.• Rising wages and salaries (finally).
Consumer spending looks better in real terms than in nominal terms.
Housing is in a LONG, SLOW recovery.• Monthly/quarterly data have been very volatile around a steady upward trend.• Demographics argue for big increase in starts over next few years.• Low interest rates benefit housing & autos, but overall are negative for growth.
Weakness is concentrated in nonresidential investment and net exports.• Big drop in business investment has held down growth over last three quarters.
NET impact of lower oil prices turning positive as drilling turns up.
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US Industrial Production: Manufacturing ex high-techIndex, 2012=100
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US Industrial Production: Chemicals ex pharmaceuticalsIndex, 2012=100
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US Industrial Production: Plastic & Rubber ProductsIndex, 2012=100
US manufacturing has been flat since July 2014
Production has been held back by: • Strong dollar, slow growth abroad.
• Impact of low oil prices on machinery and metals.
Only a few industries have been much better or much worse than flat.• Machinery and metals hit by falling oil prices, strong dollar.
• Apparel, publishing in long-term declines.
• Most growth in computers and motor vehicle due to quality & features, not units.
Total industrial production has done much worse than IP in manufacturing.• Mining fell sharply because of collapse of oil and gas prices; up in recent months.
• Until recently, utilities were held down by good weather.
So far, low oil prices have not helped US industrial production.
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Crude Oil PricesDollars per barrel
Brent BlendWest Texas Intermediate
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Global Crude Oil and US Natural Gas Prices$/bbl $/mmbtu
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US Oil & Gas ProductionTrillion Cubic Feet per Month Million Barrels per Day
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US Rig Count versus WTI Oil PriceRig Count $/Barrel
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US Gasoline PricesDollars per gallon
RBOB Futures (Left)Regular Gasoline (Right)
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Oil Prices & US Economic Growth10-Year Moving Average 10-Year Annualized Growth Rate
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Industrial Production, Mfg (Right)
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Brent Blend Oil Price2015 US Dollars per Barrel
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1957-73 $17.10 5.3%
1974-85 71.98 2.2
1986-03 31.57 3.6
2004-14 88.98 0.0
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I still believe cheap oil is a good thing . . . in the long run.
This is a regime shift, not a temporary blip. (Lower for longer.)
In short run, drop in drilling activity offset boost to rest of economy.
Longer-term, potential growth is boosted significantly.
Vehicle sales, travel and hospitality benefit the most.
Japan, Korea, India among biggest winners; US & China also benefit.
Russia, Iran, and Venezuela are biggest losers.
Losses are concentrated; gains are dispersed.
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Brent Oil Price vs Industrial Chemical Prices$/Barrel Index, 1982 = 100
Brent Crude Oil (Left)
PPI, Industrial Chemicals (Right)
“Prediction is very difficult, especially about the future.”
--Niels Bohr, 1885-196210/12/2016 Robert Fry Economics LLC 40
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US Industrial Production: Manufacturing ex high-techIndex 2012 = 100
RecessionIndustrial ProductionLeading Indicator Model*
*Based on Baa bond yield, yield spread, stock prices, housing permits, ISM new orders index, and dollar.
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US Industrial Production: Manufacturing ex high-techPercent Change from Year Ago
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US Industrial Production vs ISM New Orders IndexDiffusion Index Percent Change from Year Ago
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Real GDP(Annual % Change)
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2014 2015 2016 2017 2018World 2.6 2.6 2.3 2.7 2.9North America 2.4 2.5 1.5 2.5 2.2Latin America (x Mex) 0.8 -1.3 -1.7 0.8 1.9Western Europe 1.3 2.1 1.6 1.3 1.7C & E Europe 1.9 0.3 1.6 2.4 2.4Middle East & Africa 3.1 2.5 2.5 3.1 3.5Asia/Pacific 4.3 4.3 4.3 4.3 4.3 China 7.3 6.9 6.6 6.3 6.0 Japan 0.0 0.6 0.6 0.8 0.4 India 7.2 7.3 7.2 7.2 7.6
Industrial Production(Annual % Change)
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2014 2015 2016 2017 2018
World 3.2 1.8 0.8 2.5 2.6
Advanced economies 2.2 0.8 0.1 1.7 1.7 United States 2.9 0.3 -0.8 2.0 2.0 Japan 1.9 -1.3 -2.0 1.0 1.0 Euro Area 0.9 2.1 1.0 1.5 1.5 Other advanced 2.9 1.4 2.0 2.0 2.0
Emerging economies 4.3 2.9 1.9 3.9 3.9 Emerging Asia 6.4 4.6 4.5 5.0 5.0 C & E Europe 0.8 -3.8 0.0 3.0 3.0 Latin America -0.4 -2.1 -3.0 3.0 3.0 Middle East & Africa 0.6 1.5 1.5 3.0 3.0
China has held back global growth
China decelerated in 2014 & 2015, but has stopped decelerating.• Manufacturing decelerated (officially) or stagnated (in reality).• Construction contracted sharply.• Shift from export-led growth to consumer-led growth implies big downshift.
Slowdown in China hurt commodity producers and machinery exporters.
Brazil has been worst-performing major economy, but may have bottomed.
Europe continues to muddle through (at least until Brexit).• Those who constantly knocked Europe had unrealistic expectations, or• They’re focused too much on deflation rather than growth.• Brexit a big problem only if “leaders” refuse to do their jobs.
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Federal Reserve Broad Dollar Index
NominalReal
Forecasting exchange rates has a success rate no better than that of forecasting the
outcome of a coin toss. -- Alan Greenspan
November 19, 2004
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US Personal Consumption Expenditures Price IndexPercent Change from Year Ago
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You want to know what Janet Yellen is thinking?Hey. I’m good, but I’m not that good.
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The real issue is slow long-term growth, not recession.
Globally, the story is persistently slow growth.• High government debt slows long-term growth (Reinhart and Rogoff).• Tax and regulatory complexity a bigger problem than macroeconomic policy.• Demographics also contribute to slower trend.• Increased industry concentration may be holding back growth.• Oil prices were at historically high levels from 2003 to 2014.
Disinflation means that nominal growth has slowed even more than real growth.• Growth in corporate earnings is tied to growth in nominal GDP.• For most companies, double-digit earnings growth is a fantasy.
Potential GDP growth is below 1% in Japan, below 2% in Europe, around 2% in US.
Growth in South America held down by bad policies; may be getting less bad.
Growth in China has downshifted, and not as gradually as official data show.
But I still believe that cheap oil is good for economic growth!
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Key takeaways
Long-term growth has slowed.
Earnings growth targets need to be more realistic.
Oil prices will stay lower for longer.
Vehicle sales are at or near peak, but not likely to weaken significantly.
Slow expansions are long expansions.Stop worrying about short-term cycles & quarterly earnings;start doing something to boost long-term growth.
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Free trade, one of the greatest blessings which a
government can confer on a people, is in almost every
country unpopular.
Thomas Macaulay 1824
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Robert Fry Economics LLC
RobertFryEconomics.comRobertFryEconomics@gmail.com
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