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Old Dominion University 2016 National Economic Forecast January 27, 2016 Larry “Chip” Filer Associate Professor of Economics Strome College of Business www.odu.edu /forecasting

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Page 1: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

Old Dominion University2016 National Economic Forecast

January 27, 2016

Larry “Chip” FilerAssociate Professor of Economics

Strome College of Business

www.odu.edu/forecasting

Page 2: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

• 2015 Scorecard

• Recap of 2015

• How Quickly Things Change

• 2016 Forecast

1

Presentation Outline

Page 3: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

2015 Scorecard(Macroeconomic Fundamentals)

2015 Q1 Forecast

2015 Q1Actual

2015 Q2Forecast

2015 Q2Actual

2015 Q3Forecast

2015 Q3Actual

Real Gross Domestic Product (GDP)

3.04% 0.64% 3.52% 3.92% 2.7% 1.98%

CPI Inflation 0.8% 0.0% 1.3% 0.03% 1.5% 0.13%

CPI - Core 1.6% 1.7% 1.8% 1.8% 1.6% 1.8%

EmploymentGrowth (thousands)

926 778 683 610 604 623

Unemployment Rate

5.6% 5.6% 5.6% 5.4% 5.5% 5.2%

2

Page 4: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

3

2015 Scorecard(Interest Rates)

2015 Q1 Forecast

2015 Q1Actual

2015 Q2Forecast

2015 Q2Actual

2015 Q3Forecast

2015 Q3Actual

3-Month Treasury Bill Rate

0.02% 0.03% 0.02% 0.02% 0.03% 0.04%

10-Year Treasury Bond Rate

2.27% 1.97% 2.32% 2.16% 2.45% 2.22%

AAA Corporate Bond Yield

3.83% 3.57% 3.74% 3.90% 3.71% 4.09%

Page 5: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

4

Growth in Real GDP (2000-present)

Gross Domestic Product, (Bil. Ch. 2009 USD, SAAR) for United States

0.00

2.00

4.00

6.00

8.00

-2.00

-4.00

-6.00

-8.00

2002Q4 2005Q4 2008Q4 2011Q4 2014Q4

2015 Q1 0.64%

2015 Q2 3.92%

2015 Q3 1.98%

Source: Bureau of Economic Analysis.

Page 6: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

-3

-2

-1

0

1

2

3

4

2014 Q4 2015 Q1 2015 Q2 2015 Q3

Consumption Fixed Investment Net Exports Government

Contributions to GDP Growth(Last 5 Quarters)

5Source: Bureau of Economic Analysis.

Annualized Percent Change

Page 7: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

The Labor Market Had a Really Good 2015

6

Page 8: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

Nonfarm Employment Continued Its Strong Growth

7Source: Bureau of Labor Statistics.

Employment: Total Nonfarm, (Ths. #, SA) for United States

130000.00

131000.00

132000.00

133000.00

134000.00

135000.00

136000.00

137000.00

138000.00

139000.00

140000.00

141000.00

142000.00

143000.00

2001M8 2003M4 2004M12 2006M8 2008M4 2009M12 2011M8 2013M4 2014M12

Page 9: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

Measures of Unemployment Continued to Decline(Headline=Black, U6=Red)

8Source: Bureau of Labor Statistics.

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

14.00

15.00

16.00

17.00

2001M8 2003M4 2004M12 2006M8 2008M4 2009M12 2011M8 2013M4 2014M12

Headline U6

Peak 10% 17%

Dec. 2015 5% 10%

Page 10: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

Private Wage Growth(Percent Growth from Same Month in Previous Year)

9

Median usual weekly earnings (second quartile): Wage and salary workers full time, (USD, NSA) for United States

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

2001Q2 2002Q4 2004Q2 2005Q4 2007Q2 2008Q4 2010Q2 2011Q4 2013Q2 2014Q4

Private wage growth in 2015 Q4Jumped 3.25% over 2014 Q4

Source: Bureau of Labor Statistics.

Page 11: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

Labor: Labor market conditions index [LMCI], (Index points, SA) for United States

0.00

5.00

10.00

-5.00

-10.00

-15.00

-20.00

-25.00

-30.00

-35.00

2001M8 2003M4 2004M12 2006M8 2008M4 2009M12 2011M8 2013M4 2014M12

Labor Market Conditions Index

10Source: Board of Governors of the Federal Reserve System

Page 12: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

Actual vs Projected Labor Force Participation Rates(Annual Percent, 1970-2015)

11

58

59

60

61

62

63

64

65

66

67

68

197

0

197

2

197

4

197

6

197

8

198

0

198

2

198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

201

6

201

8

202

0

202

2

Actual BLS Projections

Still Outpacing the Projections!

Source: Bureau of Labor Statistics.

Page 13: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

Labor Force Flows from Prior Month

12

Dec 2014 Aug 2015 Sep 2015 Oct 2015 Nov 2015 Dec 2015

Unem. To NLF 2243 2019 2006 1916 1805 1834

Emp. To NLF 4464 4717 4440 4377 4463 4304

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Down 18% from Dec. 2014

Down 4% from Dec. 2014

Source: Bureau of Labor Statistics

Page 14: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

A Bad 2015 Q4 is Looming

13

Page 15: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

InJanuary

In April In JulyIn

OctoberToday

Real GDP(AnnualizedGrowth)

2.73% 1.75% 2.06% 2.58% 0.64%

2015 Q4 Forecasts Deteriorated as 2015 Evolved

14

As data for October-December came inprojections of 2015 Q4 worsened substantially

Page 16: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

Industrial Production: Total index, (Index 2012=100, SA) for United States

0.00

2.00

4.00

6.00

8.00

-2.00

-4.00

-6.00

-8.00

-10.00

-12.00

-14.00

-16.00

2001M8 2003M4 2004M12 2006M8 2008M4 2009M12 2011M8 2013M4 2014M12

Industrial Activity Slowed From October-December(Percentage Change in Industrial Production from Year Ago)

15Source: Board of Governors of the Federal Reserve System

Page 17: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

Small Business Optmism Index: Net percent of firms expecting the economy to improve over the next 6 months, (%, SA) for United States

0.00

10.00

20.00

30.00

40.00

50.00

-10.00

-20.00

-30.00

2001M8 2003M4 2004M12 2006M8 2008M4 2009M12 2011M8 2013M4 2014M12

Firms Expecting “Better” or “Worse” Conditions in 6 Months(Net Percent Responding “Better” In 6 Months)

16Source: National Federation of Independent Business.

Positive values mean respondents expect conditions

to be “better” in 6 months

Positive values meanrespondents expect conditions

to be “worse” in 6 months

Page 18: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

Value of construction put in place: Private - Total, (Mil. $, SAAR) for United States

Value of construction put in place: Private - Nonresidential - Commercial, (Mil. $, SAAR) for United States

0.00

10.00

20.00

-10.00

-20.00

-30.00

-40.00

2001M8 2003M4 2004M12 2006M8 2008M4 2009M12 2011M8 2013M4 2014M12

17

Construction in Q4 Was Also Very Slow(Percentage Change from Year Ago)

Very rare forcommercial constructionto experience no growth

without a recession following!

Source: Bureau of Economic Analysis

Page 19: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

• Positive

– $1000 per household

– Equivalent to a $100 billion tax cut

• Negative

– Global contraction?

– Perhaps a .2 to .5 % decrease in fixed investment

– Certain regions may feel the squeeze

• Timing matters

– 2015 impact undoubtedly positive

– Positive impacts deteriorate in future years

18

Impact of Cheap Oil(Slide from Last January)

Page 20: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

19

Oil Spot Prices

Source: United States Energy Information Administration.

West Texas Intermediate Spot: Cushing, (FOB $ per Barrel, NSA) for United States

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

110.00

120.00

130.00

2001M8 2003M4 2004M12 2006M8 2008M4 2009M12 2011M8 2013M4 2014M12

Feb. 2009 –$39.09

Jan. 19th –$28.47

Page 21: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

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The Tipping Point on Oil Prices(Percentage Change from Year Ago)

Industrial Production: Crude petroleum and natural gas extraction [211111], (Index 2012=100, SA) for United States

Industrial Production: Drilling oil and gas wells [213111], (Index 2012=100, SA) for United States

0.00

20.00

40.00

60.00

-20.00

-40.00

-60.00

2001M8 2003M4 2004M12 2006M8 2008M4 2009M12 2011M8 2013M4 2014M12

Source: Board of Governors of the Federal Reserve System

Page 22: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

10.2%

6.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2011Q1

2011Q2

2011Q3

2011Q4

2012Q1

2012Q2

2012Q3

2012Q4

2013Q1

2013Q2

2013Q3

2013Q4

2014Q1

2014Q2

2014Q3

2014Q4

2015Q1

2015Q2

2015Q3

2015Q4

21

China’s Economic Slowdown

Source: China National Bureau of Statistics

Page 23: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

3.36%

2.31%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3

22

Europe Continues to Grow Erratically(Real GDP Growth in EU 19)

Source: Eurostat, European Commission

Page 24: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

Dow Jones: Composite Average - Price daily close, (Index, Average, NSA) for United States

Stock Price Index: S&P 500, (Index, NSA) for United States

0.00

10.00

20.00

30.00

40.00

50.00

-10.00

-20.00

-30.00

-40.00

2001M8 2003M4 2004M12 2006M8 2008M4 2009M12 2011M8 2013M4 2014M12

23

… And Markets Become Volatile

Source: S&P Dow Jones Indices, LLC

Page 25: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

• 2015 started off with a poor Q1

– This was consistent with previous years

• Most economic indicators were strong through the summer

• There has been a significant weakening of the economy in Q4.

• I expect a little chaos when the GDP figures for 2015 Q4 are given on Friday, but most are expecting a weak Q4.

24

2015 Recap

Page 26: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

A Look Ahead to 2016

25

Page 27: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

• 2015 Q4 illustrates why the Fed did not “commit” to any path for normalization.

• The Fed has flexibility

• The Fed is unlikely to raise rates at every meeting during 2016.

• We are forecasting 4 increases during 2016 putting the Fed Funds Rate in the 1.25% - 1.50% range by the end of 2016.

26

The Fed in 2016

Page 28: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

0.34

0.495

0.505

0.595

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7

January 2016

July 2016

August 2016

December 2016

27

The Fed Funds Futures Market is “Bearish”

Source: CME Group

Page 29: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

0

1

2

3

4

5

6

7

8

September 2015 December 2015

28

The Federal Reserve Governors are More Hawkish(Projected Median Federal Funds Rate for 2016)

Source: Board of Governors of the Federal Reserve System

Page 30: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

• Expect oil prices to remain low

– Should end the year in the $50-$55

– This could put additional pressure on banks that have financed the massive growth in energy related cap ex. over the last 10 years.

• We just had a major snowstorm, so expect some weakness in 2016 Q1 again.

– That could lead to some pessimism for the near term

• Given the dynamics of the economy, 2%-2.5% real GDP growth should be our expectation.

29

Overview of 2016

Page 31: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

Historical Forecast

2013 2014 2015 2016

Real Gross Domestic Product 1.49% 2.42% 2.38% est. 2.03%

Employment Growth 1.70% 1.90% 2.11% 1.50%

Unemployment Rate 7.4% 5.6% 5.3% 5.1%

Consumer Price Index 1.22% 0.70% 0.13% 1.34%

CPI - Core 1.71% 1.60% 1.83% 2.03%

3-Month Treasury Bill (end of year) 0.06% 0.03% 0.05% 1.25%

10-Year Treasury Bond 2.35% 2.55% 2.14% 3.15%

30-Year Conventional Mortgage Rate 3.98% 4.17% 3.85% 4.25%

30

National Economic Outlook for 2016

Page 32: Old Dominion University 2016 National Economic Forecast...Jan 26, 2016  · 2015 Q3 Forecast 2015 Q3 Actual Real Gross Domestic Product (GDP) ... 9 Median usual weekly earnings (second

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