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Economic and Investment Outlook
Dr. Rajeev Dhawan
Director
ECONOMIC Presented at the
Economic Outlook Conference
FORECASTING
Monroe, Louisiana
CENTER March 31st, 2006
Office: 404-651-3291
email: forecast@gsu.edu
http://www.robinson.gsu.edu/efc
It’s the economy, stupid!
It’s housing, folks!
U.S. Housing Starts
vs. Average Mortgage Rate
(Mil. Units) (%)
2.2 9.0
2.0
8.0
1.8
1.6 7.0
1.4
6.0
1.2
1.0 5.0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Total Housing Starts (L) Single Family (L)
Mortgage Rate (R)
Withdrawals From the Home ATM are Getting Expensive!
(% Ch.) (%)
50 7.5
7.0
40
6.5
30
6.0
20 5.5
5.0
10
4.5
0
4.0
-10 3.5
JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL OCT JAN
2003 2004 2005 2006
Home Equity (Left) Prime Rate (Right)
Bernanke’s Headaches
Higher energy prices may pass
through into the prices of non-energy goods and
services….inflation expectations.
Another factor bearing on the inflation outlook is that
the economy now appears to be operating at a relatively
high level of resource utilization…..with aggregate
demand exhibiting considerable momentum, output
could overshoot its sustainable path, leading ultimately--
in the absence of countervailing monetary policy
action--to further upward pressure on inflation.
Source: Testimony of Chairman Ben Bernanke on February 15th, 2006
Breakdown of Consumer Prices
Year-over-Year
Category (Weight) Feb’06 Jan’06 Dec’05 05Q4
1. Core (79%) 2.1 2.1 2.2 2.1
2. Non Durables (29%) 4.5 5.5 3.8 4.8
3. Durables (11%) -0.7 -0.7 -0.5 -0.2
4. Services (60%) 4.0 4.1 3.8 3.8
5. Housing (40%) 4.0 4.3 4.0 4.0
6. Commodities (40%) 3.2 3.8 2.7 3.6
7. Food (15%) 2.7 2.6 2.3 2.2
8. Gasoline (3%) 20.6 27.4 15.9 23.0
9. New Cars (5%) -0.4 -0.4 -0.4 0.2
10. Medical (6%) 4.1 4.0 4.3 4.3
Overall 3.6 4.0 3.4 3.7
Two Gloomy Forecasts from
George Soros and Bill Gross
As the housing boom cools off, the savings rate is
likely to rise, and that will lead to a shortfall in
demand that I think will bring a global slowdown…
I expect a slowdown in 2007, which will probably cast
its shadow over the markets in 2006.
…Yields have peaked in the bond market and will
soon peak in Fed Funds producing an economic
slowdown in 2006. If the Fed goes beyond 4.5% and
inverts the yield curve, the possibility of recession
will increase.
Thou Shalt Not Take
The “R” Word
in Vain
UK Retail Sales and Short-Term Rates
(Y/Y %) (%)
10 6.5
8 6.0
5.5
6
5.0
4
4.5
2
4.0
0
3.5
-2 3.0
FEB JUL DEC MAY OCT MAR AUG JAN JUN NOV APR SEP FEB JUL DEC
00 01 02 03 04 05
Retail Sales 3-Month T-Bill (Right)
Breakdown of Retail Sales
Year-over-Year
Category (Weight) Feb’06 Jan’06 Dec’05 05 Q4
1. Motor Veh. (26%) -0.9 5.6 -1.9 -2.8
2. Furnishings (6%) 6.7 11.3 5.2 6.2
3. Build. Mat. (10%) 20.5 17.6 9.8 12.0
4. Food (15%) 5.4 4.5 5.1 5.1
5. Health (6%) 7.1 7.3 7.6 7.1
6. Gasoline (8%) 17.7 22.1 16.5 20.1
7. Clothing (5%) 1.6 8.1 6.5 6.8
8. Gen. Merch. (14%) 5.3 7.1 5.3 6.2
9. Non-store (5%) 13.3 9.4 13.4 12.6
Overall 6.7 9.4 5.7 6.2
Excl. Autos 8.9 10.4 8.0 8.8
EFC@GSU Forecast vs. Blue Chip Consensus
GDP
5.5
5.0
4.5
4.0
3.5
(%)
3.0
2.5
2.0
1.5
1.0
06q1 06q2 06q3 06q4 07q1 07q2 07q3 07q4
EFC Blue Chip
U.S. Short-Term Forecast
2005 2006 2007 2008
Real GDP Growth 3.5 3.2 2.5 2.7
06q1: 5.3 06q2: 2.7 06q3: 2.6 06q4: 2.5 07q1: 2.4
Consumption Growth 3.6 3.1 2.6 2.8
06q1: 4.5 06q2: 3.0 06q3: 2.9 06q4: 2.6 07q1: 2.6
Bus. Investment Growth 8.5 7.6 5.9 4.7
Federal Purchases 2.0 5.5 3.6 1.5
State & Local Purchases 1.5 1.2 1.7 1.2
Oil Prices
($/Barrel)
70
Hurricanes Katrina and Rita
68
66
64
62
60
58
56
JUL AUG AUG SEP OCT OCT NOV DEC JAN JAN FEB MAR
2005 2006
Gas Spending Dings Discretionary Expenses
(Bil.$) (%)
350 10.0
300 8.0
250 6.0
200 4.0
150 2.0
100 0.0
I II III IV I II III IV I II III IV I II III IV
2002 2003 2004 2005
Spending on Gasoline (Left)
Grow th in Food, Clothing & Shoe Spending (Right)
Anonymous Vent
In January my electric bill was $180 and my
gas bill was $338.
I purchased electric space heaters and stopped
using the gas heater. My electric bill was only
$195 in February. Residential Natural Gas Price and Consumption
($/Thou. Cubic Feet) (Bil. Cubic Feet)
Bye bye, gas! 14.0 4500
12.0
4300
10.0
4100
8.0
3900
6.0
3700
4.0
2.0 3500
2001 2002 2003 2004 2005
Consumption Residential Price (Left)
Source: AJC, February 19th, 2006
2005 Jet Orders
1031 1111 86*
* Projections based on 10-Q filings
Geographical Distribution of Boeing Suppliers
Source: Boeing.com; EFC Mapping
Durable Goods Orders
($ Bil.)
230
Ongoing
Recovery
210
Tech Bust
Roaring 90s
190
170
150
1 6 11 4 9 2 7 12 5 10 3 8 1 6 11 4 9 2 7 12 5 10 3 8 1
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Residential Slowdown and "Total" Investment
(% Ch. of 4-Qtr. Mov. Avg.)
20
10
0
-10
-20
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Total Business Fixed Residential
Winners and Losers in the Job Market
Sector Job Gains Sector Job Gains
(‘000) (‘000)
Since In % of ‘05 Since In % of ‘05
2001 2005 2001 2005
1. Education and Health 1,681.0 362.0 18.3% 1. State Government 77.0 29.0 1.5%
2. Construction 610.0 293.0 14.8% 2. Mgmt/Companies -1.1 14.8 0.7%
3. Admin and Support 624.4 266.7 13.5% 3. Durable manuf. -1,033.0 10.0 0.5%
4. Leisure and Hospitality 881.0 253.0 12.8% 4. Utilities -38.1 4.7 0.2%
5. Retail Trade 132.2 163.2 8.3% 5. I-net publishing -11.0 -0.4 -0.0%
6. Local Government 573.0 143.0 7.2% 6. ISP, Data Providers -97.6 -1.5 -0.1%
7. Finance and Insurance 276.2 97.9 5.0% 7. Federal Government -50.0 -13.0 -0.7%
8. Wholesale Trade 59.1 84.1 4.3% 8. Telecom -289.5 -18.6 -0.9%
9. Real Estate, Rent 118.7 50.8 2.6% 9. Air Transportation -113.6 -23.4 -1.2%
10. Mgmt. Sci. & Tech 126.3 49.2 2.5% 10. Nondurable manuf. -727.0 -91.0 -4.6%
GE Annual Revenue Growth
1995 to 2005
20%
Momentum
15% Carries Over
From 2004
10%
5%
0%
-5%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Consumer Sentiment and Job Growth
(Index: 1966 = 100) ('000)
160 Russian Crisis 400
Aug’98
300
140 Hurricanes
9-11 Sept’05
200
120
War in Iraq
March’03 100
100
0
80
-100
60 -200
40 -300
1998 1999 2000 2001 2002 2003 2004 2005
Consumer Confidence (L) Jobs Added (R)
Trade Deficit vs. Fiscal Deficit
Federal Budget, Trade Deficits and Interest Rate
(Bil. $) (%)
200 14
12
0
10
-200
8
-400
6
-600
4
-800 2
1977 1981 1985 1989 1993 1997 2001 2005
Budget Deficit Trade Deficit 10-Year Bond Rate (R)
Anonymous Vent
With as much Chinese-made merchandise as Wal-
Mart sells, perhaps they should change their name
to Great Wall Mart.
Source: AJC, January 12th, 2006
High Trade Deficit Numbers
Keep US Long Term
Interest Rates Low!
Global Current Account Balances
(Billions of U.S. Dollars)
Countries 1996 2003 Countries 1996 2003
Industrial 46.2 -342.3 Developing -87.5 205.0
United States -120.2 -530.7 Asia -40.8 148.3
Japan 65.4 138.2 China 7.2 45.9
Euro Area 88.5 24.9 Hong Kong -2.6 17.0
France 20.8 4.5 Korea -23.1 11.9
Germany -13.4 55.1 Taiwan 10.9 29.3
Italy 39.6 -20.7 Thailand -14.4 8.0
Spain 0.4 -23.6 Latin America -39.1 3.8
Other 12.5 25.3 Argentina -6.8 7.4
Australia -15.8 -30.4 Brazil -23.2 4.0
Canada 3.4 17.1 Mexico -2.5 -8.7
Switzerland 21.3 42.2 Middle East and Africa 5.9 47.8
United Kingdom -10.9 -30.5 E. Europe and ex-USSR -13.5 5.1
Source: Remarks by Governor Ben S. Bernanke, March 10, 2005
Net Foreign Purchases of U.S. Financial Instruments
($. Bil)
500
T-Bonds
400
Global Savings Glut
Is Showing up in T-Bond Holdings
300
Corp. Bonds
200
100
0
Stocks Agency
-100
-200
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
Source: FRB Flow of Funds Data
Trade and Holding of US Treasuries
by Central Banks
Trade in Goods and Services U.S. Treasury Securities Holdings Currency
2005* 03-05 ∆ 2005* 03-05 ∆ Appreciation
Japan
Japan
-80.6
-75.2 -11.4
-9.3 681
702 220.7
353.7 4.3
4.3
China -183.6 -69.6 243.7 96.6 0.0
South Korea -19.3 -7.0 59.6 -0.6 13.4
Taiwan -12.8 1.6 71.3 28.3 6.7
Hong Kong 4.9 4.8 28.9 3.5 0.0
Singapore 7.3 5.9 48.2 5.2 4.1
Germany -48.6 -9.5 61.1 19.5 8.0
UK -10.0 -1.8 145.5 93.4 7.1
Japanese Bought
$220+ Bil. worth of Treasuries to
Keep their Currency from Appreciating
* Period from July 1st’ 2004 to June 30th’ 2005
* All numbers are in billions of U.S. dollars
Source: BEA (Trade) and US Treasury Department
10-Year Bond Rate and Trade Deficit
10-Year Bond Regression
Source: May 2005, Forecast of the Nation
2005 2006 2007 2008
10-Year Bond Rate 4.3 5.1 5.4 5.7
Trade Deficit (Bil. $) -726 -780 -779 -771
CPI Inflation 3.4 3.3 2.2 2.0
Core 2.2 2.3 2.2 2.1
2004 US Balance in International Trade
What We Buy From Them What They Buy From Us*
Crude Oil -135.7 Airplanes 13.2
Vehicles -123.2 Chemicals (Plastic) 10.9
Clothing -67.9 Airplane parts 10.5
Home Electronics -67.8 Soybeans 6.6
Office Electronics -65.6 Corn 6.0
Petroleum Preparations -28.3 Wheat 5.0
Furniture and Bedding -23.7 Scientific Instruments 4.5
Natural Gas -21.1 Cotton 4.2
Electrical Machinery -20.2 Metal ores 3.2
Toys, Sporting good -19.1 Animal Feeds 3.0
* Billions of Dollars
Source: US Bureau of Economic Analysis
2003 Total Vehicle Production & Sales
Country Production Sales Deficit/Surplus
U.S. 12,116,061 16,967,442 -4,851,381
Japan 10,286,318 5,828,178
4,458,140
Germany 5,506,629 3,501,303
2,005,326
China 4,443,686 4,390,806 52,880
France 3,620,056 2,440,692 1,179,364
S. Korea 3,177,870 1,318,312 1,859,558
Spain 3,031,192 1,716,204 1,314,988
Canada 2,552,862 1,625,050 927,812
U.K. 1,846,429 2,942,737 -1,096,308
Brazil 1,827,038 1,314,882 512,156
Mexico 1,577,205 1,001,040 576,165
India 1,162,159 1,076,318 85,841
Sweden 323,032 295,484 27,548
Source: Ward’s World Motor Vehicle Data 2004
GM’s Financials in the Eye of Wall Street
Assets Liabilities
Market Value $10-30B Debt -$32B
GMAC $25B Current Pension Plan $6B
Cash $14B Future Pension Plan -$31B
“Cash Burn” -$6B Foreign Plans -$9B
Total $63B Health Care Costs -$27B
Delphi -$12B
Total -$105B
How to fill the hole?
Bankruptcy? Liability 43%
Source: The Wall Street Journal, January 14th, 2006
END OF AN ERA
DAWN OF A NEW DAY
But Statistically One
Can’t Prove That There
is a Home Price Bubble!
Home Price Appreciation and Aggregate Income Growth by State
(1991:1 - 2004:4)
17
Median = 4.97 DC
15 Red Zone CA
Annualized home price appreciation (%)
13
FL NV
11 NY
Median = 7.74 VA
MN
9
AZ
7 PA
WA
GA
5 TX
OH NC
TN Safe Zone
3
1
3 3.5 4 4.5 5 5.5 6 6.5 7 7.5
Annualized aggregate income grow th (%)
Source: EFC May 2005 Conference Presentation
Source: The 2005 National Association of Realtors,
Profile of International Home Buyers in Florida
Source: The 2005 National Association of Realtors,
Profile of International Home Buyers in Florida
FED’s
Alan Greenspan
CHAIRMAN’S CORRECT DIAGNOSIS
To the American Bankers Association Annual Convention
September 26th, 2005
These estimated LTVs are highest in states…,
such as California and Massachusetts…most
people buying a home in California are probably
also selling a home in California and using at
least part of their accumulated home equity
capital gains as a down payment on their new
house. Apparently, many households are
foregoing some consumption to lower their new
mortgage balances.
Top 5 National Predictions
1. Enjoy 2006, Expect a Soft Landing in 2007
2. Housing Market Displays Orderly Moderation
3. Long-Term Rates Will Rise Mildly
4. Bet on Manufacturing of the RIGHT Type!
5. Oil Remains Above $50/Barrel for Next Few Years
Special Thanks to the Center’s
Executive Sponsors
Carl R. Zwerner
Chair of Family
Owned Businesses
The Usery Center
for the Workplace
at Georgia State University
Sponsors
