United States - The glass is still half empty - Samiran Chakraborty, Standard Chartered

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Published on March 6, 2014

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United States – The glass is still half empty Samiran Chakraborty 10 November 2013

G4: The US recovery stands out Rebased GDP (Q1-2008=100) 108 US 106 104 102 100 Japan Euro area 98 UK 96 94 92 90 Q1 2008 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Sources: Datastream, Standard Chartered Research 2

US GDP growth has shifted down a gear since the financial crisis Nominal US GDP growth (since 1990), % y/y 10 8 6 4 3.1 2 0 -2 -4 Dec-90 Jul-92 Feb-94 Sep-95 Apr-97 Nov-98 Jun-00 Jan-02 Aug-03 Mar-05 Oct-06 May-08 Dec-09 02 Jul-11 Feb-13 Source: Bloomberg, Standard Chartered Research 3

Business surveys are rather upbeat Businesses seem to have seen through the political uncertainty ISM business surveys Manufacturing 60 55 Non-manufacturing Non 50 45 40 35 30 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Sources: Bloomberg, Standard Chartered Research 4

But consumer surveys are less upbeat University of Michigan consumer confidence survey (index) 85 80 75 72.0 70 65 60 55 Nov-07 Nov-08 Nov-09 Nov-10 Nov Nov-11 Nov-12 Nov-13 Source: Bloomberg, Standard Chartered Research 5

Mortgage rates are higher than in early 2013, but gas prices are lower Average gasoline prices (USD/gallon) and average 30 30-year mortgage rates, % 5.5 4.5 Average gasoline prices (RHS) 5.0 4.0 4.5 3.5 4.0 MBA 30Y avg mortgage rate, % (LHS) 3.5 3.0 Oct-10 3.0 2.5 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Sources: Bloomberg, Standard Chartered Research 6

Car sales have moderated after a solid summer Monthly car sales, mn (annualised) 18 17 16 15 14 13 12 11 10 9 8 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Sources: Bloomberg, Standard Chartered Research 7

Unemployment vs. GDP growth: something will have to give The unemployment rate has dropped more than anticipated given the still still-soft growth backdrop US real GDP growth (%, y/y) vs. 1Y change in the unemployment rate, % -2.0 6 Unemployment, 1Y chg. (inverted, LHS) -1.0 4 0.0 2 1.0 Sep-93 2.0 GDP growth, % y/y (RHS Sep-95 Sep-97 Other assets Sep-99 Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 0 Sep-13 -2 3.0 4.0 5.0 -4 -6 Source: Bloomberg, Standard Chartered Research 8

US manufacturing ‘renaissance’: data is inconclusive, so far Unemployment rate, % 19 18 US manufacturing employment, mn (LHS) 105 US manufacturing production, index RHS 100 y/y gain: 2.6% 17 95 16 90 15 85 14 80 13 75 12 y/y gain: 0.5% 11 70 65 10 60 Oct-93 Feb-95 Jun-96 Oct-97 Feb-99 Jun-00 Oct-01 Feb-03 Jun-04 Oct-05 Feb-07 Jun-08 Oct-09 Feb-11 Jun-12 Oct-13 Source: Bloomberg, Standard Chartered Research 9

Still no signs that earnings growth is taking off Earnings growth (private sector), % y/y 4.0 3.5 3.0 2.5 2.0 1.5 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Source: Bloomberg, Standard Chartered Research 10

US growth: still-high headwinds in the near term high Growth expectations are being lowered (again) Evolution of the Bloomberg consensus forecast for annual GDP growth The Fed’s growth forecasts are too optimistic Current Fed forecasts (mid-point of central tendency) 3.5 Q4-2014 Q4-2016 GDP growth, % y/y 3.00 3.25 2.90 Unemployment rate, % 6.60 6.05 5.65 PCE inflation, y/y % 1.55 1.80 1.85 Core PCE, y/y % 3.0 Q4-2015 1.60 1.85 1.95 2014 2.6 2.5 N.B.:Our 2014 forecast is 2.4% 2013 2.0 1.6 1.5 Time forecast was made 1.0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Source: Bloomberg, Standard Chartered Research 11

US export growth is plateauing Top 3 partners: recent trends US exports, USD bn Other main trade partners: recent trends Exports, USD bn 350 80 Canada 300 Japan 70 60 250 Mexico 200 150 Germany 50 40 Netherlands HK China 30 100 Korea Brazil 20 50 0 Aug-03 Australia Aug-05 Aug-07 Aug-09 Aug-11 Aug-13 10 Aug-03 Aug-05 Aug-07 Aug-09 Aug-11 Aug-13 Source: Bloomberg, Standard Chartered Research 12

US imports: less reliance on energy suppliers Top 3 partners: recent trends US imports, USD bn Other main trade partners: recent trends Imports, USD bn 500 170 450 China Japan 150 400 130 350 Canada Germany 110 300 Mexico 250 90 200 70 Saudi Arabia Korea UK 150 50 100 France 30 50 0 Aug-03 India Aug-05 Aug-07 Aug-09 Aug-11 Aug-13 10 Aug-03 Aug-05 Aug-07 Aug-09 Aug-11 Aug-13 Source: Bloomberg, Standard Chartered Research 13

October payrolls: revisions helped push up moving averages Non-farm payrolls and averages (3 and 6 months), ‘000s farm 350 NFP 300 3-month avg. 250 6-month avg. 200 150 100 50 0 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Sep Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Source: Bloomberg, Standard Chartered Research 14

The household survey posts a big drop due to a different methodology for furloughed federal staff Employment gains (‘000s) according to the two surveys 1,000 800 600 Payroll survey 400 200 0 -200 -400 Household survey -600 -800 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Source: Bloomberg, Standard Chartered Research 15

A continued fall in the US participa ipation rate, contrasting with other advanced countries’ situation Labour-force participation rate, % (seasonally adjusted) force 68 Canada 67 66 65 64 UK 63 US 62 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Source: Bloomberg, Standard Chartered Research 16

Services jobs continue to lead the job recovery, while the decline in federal jobs has decelerated Employment by sector, rebased 2005=100 130 Health and education 120 110 Other services Government (federal and local) 100 Finance & real estate 90 Manufacturing 80 Construction 70 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Note: Oil & mining jobs are not shown (c. 890,000 jobs). Source: Bloomberg, Standard Chartered Research 17

Part-time employment has moderated recently after strong gains time in the spring Part-time vs. full-time split (rebased Dec 2006=100) 115 Part-time jobs 110 105 100 Full-time jobs 95 90 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Source: Bloomberg, Standard Chartered Research 18

Hours worked have been stagnating Weekly hours worked (private sector) 41.5 34.8 41.0 34.6 Manufacturing (LHS) 40.5 40.0 34.4 39.5 34.2 39.0 Other assets Hours worked (RHS) 38.5 34.0 38.0 33.8 37.5 37.0 Dec-06 33.6 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Source: Bloomberg, Standard Chartered Research 19

The increase in mortgage rates over the summer has cooled the housing market, but fundamentals remain supportive Builders are still enthusiastic, despite higher rates NAHB survey (home builders) and new home sales, ‘000s House prices are recovering from low levels FHFA and Case-Shiller house price indices 2,500 220 80 2,000 230 FHFA index (purchase), RHS 200 60 New home sales, LHS NAHB survey, RHS 1,500 220 180 210 160 200 40 1,000 20 500 0 Oct-04 140 Oct-07 Oct-10 0 Oct-13 120 Aug-05 190 Case-Shiller 20, LHS Aug-07 Aug-09 Aug-11 180 Aug-13 Source: Bloomberg, Standard Chartered Research 20

Low inflation moving higher on the Fed’s worry list Selected core inflation measures, % y/y 3.0 2.5 Core CPI index 2.0 1.5 Core PCE index 1.0 0.5 0.0 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Source: Bloomberg, Standard Chartered Research 21

US economic dashboard moderate bond-buying programme Low inflation and still-moderate growth: no rush to reduce the Fed’s bond 6.5 7.0 US Economic Dashboard (1) 7.5 5.5 1.5 8.5 2.0 2.5 1.0 9.0 7.3 9.5 4.5 4.0 5.5 6.5 0.0 4.0 4.5 4.0 1.2 4.5 -0.5 -1.0 5.0 Core PCE inflation, % y/y 1.6 -1.0 7.5 8.0 4.5 5.0 Percent of jobs recovered 5.5 -1.5 8.5 4.6 9.0 9.5 3.5 3.0 3.5 0.0 3.5 0.5 -0.5 7.0 5.0 4.0 3.0 0.5 3.0 10.0 Unemployment rate 6.0 2.5 1.0 8.0 6.0 5.0 2.0 1.5 2 . 8 75.9 (3 months ago) Real GDP growth, y/y Legend 10.0 High-yield bond spread 6.0 -2.0 8 (3) Current levels (2) 3 months ago (1) Illustration inspired by a Dallas Fed 2013 presentation; (2) spread of the FINRA US high igh-yield corporate index (yield to maturity) to the UST 5Y yield, in percent; (3) total non-farm payrolls, as of the latest data, compared to trough versus peak; Sources: Bloomberg, Standard Chartered Research 22

The current FOMC on a dovish-hawkish scale hawkish Narayana Kocherlakota Minneapolis Fed Janet Yellen Fed Vice Chair Ben Bernanke Chairman Jeremy Stein Fed Board Esther George Kansas City Fed William Dudley New York Fed Daniel Tarullo Fed Board Sandra Pianalto Cleveland Fed Charles Plosser Philadelphia Fed James Bullard St Louis Fed Jerome Powell Fed Board Eric Rosengren Boston Fed Dennis Lockhart Atlanta Fed Charles Evans Chicago Fed John Williams San Francisco Fed Two vocal hawks are voting next year Richard Fisher Dallas Fed Jeffrey Lacker Richmond Fed Many doves were voting this year Permanent vote – dark blue | Voters in 2013 – dark green | Voters in 2014 – green Dove | Voters in 2015 – blue Hawk Note: Federal Reserve Board Member Elizabeth Duke left in August (vacant seat); Sarah Bloom Raskin was appointed to the Treasury. Sandra Pianalto indicated she will be leaving the Cleveland Fed in early 2014. Source: Fed, Standard Chartered Research 23

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