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Comerica economy forecast from Feb. 20, 2013

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					       U.S. and California Economic Outlook

Economic Geography Beyond the Sea of Uncertainty
     and the Fiscal Cliff: Draining the Swamp
                      Robert A. Dye
            Chief Economist, Comerica Bank
                     February, 2013
Mare Incognitum…The Sea of Uncertainty


                                  Economic Policy Uncertainty Index                                    U.S. and European
                                                                                                          Fiscal Issues
                                                                Lehman
                                                               and TARP
   250                                                                          Debt ceiling dispute
                              Treaty of
               9/11
                             Accession &
                            2nd Gulf War
   200
                                                       Bear Stearns



   150




   100




   50
         '00    '01   '02       '03        '04   '05     '06      '07     '08        '09      '10      '11     '12




                                                                                                                           3
EPUI Explains Persistent Weak Business Confidence



                   Economic Policy Uncertainty Index
                        and the NFIB Survey
 250                                                         110
                                                                   Components of NFIB Survey

                                                             105   Employment plans
 200                                                               Current job openings
                                                             100   Capital outlay plans
                                                                   Inventory plans
 150                                                         95    Current inventory
                                                                   Expectations about economy
                                                             90    Expectations about sales
 100                                                               Expected credit conditions
                                                             85    Good time to expand
                                                                   Earnings
  50                                                         80
       '00   '02       '04     '06     '08    '10      '12
               Economic Policy Uncertainty index (L)
               NFIB Business Optimism, (R)

                                                                                           4
The Still Unresolved Federal Fiscal Cliff


  •   Obama era payroll tax cut has expired for everyone

  •   Increased income, capital gains, dividend taxes for the wealthy 1%

  •   Will add up to about $160 billion in additional revenue in 2013

  •   RDPI set to fall about 3 percent annualized 2013Q1

  •   Debt ceiling debate still to come (positive signs?)

  •   Federal budget sequester still unresolved (negative signs)

  •   Long-term entitlement spending still unresolved

  •   Tax reform

  •   Healthcare costs ramping up

                                                                           5
Quantitative Easing: Stoking the Stock Market…

   Index         S&P 500 and Federal Reserve Announcements                          QE 3+
  1600                                                                              $85 bn
                                            S&P 500
                                                                                    per
              QE 1                                                     QE 3
                             QE1                                                    month
              $600 bn                                                  $40 bn per
                             Extended to                   OP Twist
                                                                       month
  1400                       $1.5 tn                       $400 bn
                                            QE 2
                                            $600 bn
  1200



  1000



   800



   600
         08             09             10             11              12             13



                                                                                             6
… And Devaluing the Dollar

           Value of Dollar and Federal Reserve Announcements                              100
                         Trade Weighted Dollar Broad Index                      QE 3+
                                                                         QE 3             98
                         QE1
                         Extended to $1.5 tn                             $40 bn
          QE 1                                           OP Twist                         96
                                                                         per month
          $600 bn                         QE 2           $400 bn
                                                                                          94
                                          $600 bn
                                                                                          92

                                                                                          90

                                                                                          88

                                                                                          86

                                                                                          84

                                                                                          82

                                                                                          80
     08             09              10              11              12               13




                                                                                                7
Recent U.S. Data Is Mixed


  • 2012Q4 weak at -0.1%, expect upward revision

  • Jan. payroll employment +157k

  • Unemployment rate stuck at 7.9%                         Dec. Home Sales Stalled
                                             5,500                                            700
                                                                           Existing, ths (L)
  • House sales                              5,000                                            600
                                             4,500                                            500
  • Home prices                              4,000                                            400
                                             3,500                                            300
  • Home construction                                                            New, ths (R) 200
                                             3,000
  • Jan. auto sales 15.2 million unit rate           2008    2009   2010      2011    2012

  • Jan. ISM MF Survey 53.1 percent


                                                                                                    8
Early 2013 Helped by Household Sector, Hurt by
Uncertainty

  •   Vehicle sales, Sandy

  •   Housing sector strengthening         Auto Sales and Consumer Confidence
                                      18                                               120
  •   Other credit fueled purchases   17
                                                        Auto Sales, millions SAAR (L)
                                                                                       110
                                      16                                               100
  •   Labor markets                   15                                               90
                                      14                                               80
  •   Consumer confidence shaky       13                                               70
                                      12                                               60
  •   Asia                            11                                               50
                                      10                                               40
  •   U.S. policy uncertainty          9
                                                                  Confidence Index (R) 30
                                       8                                               20
                                        2006   2007   2008   2009 2010 2011 2012 2013
  •   Fiscal drag

  •   Europe continues to melt


                                                                                         9
Consumer Deleveraging...And Releveraging


                        Non-revolving Consumer Credit and
                            Financial Obligations Ratio

     16         Non-revolving cons. credit, pchya (L)                             19

     12
                                                                                  18
      8

      4                                                                           17

      0
                                                                                  16
     -4
                                               Financial Obligations Ratio, (R)
     -8                                                                           15
          '90   '92   '94   '96   '98   '00   '02   '04   '06   '08   '10   '12




                                                                                       10
Forecast for 2013, Fiscal Tightening Versus
Monetary Easing



                    U.S. Real GDP Growth, annualized rate
                                                        History   Forecast
     5
     3
     1
    (1)
    (3)
    (5)
    (7)
    (9)
          2008   2009     2010        2011       2012         2013




                                                                             11
Interest Rates Face Upward Pressure As Flight to
Quality and Financial Repression Eventually Unwind

                           Yield, percent
     5.0
     4.5
     4.0
     3.5
     3.0
     2.5                         10-Year Treasury
     2.0
     1.5
     1.0                              Fed Funds
     0.5
     0.0
        2008 2009 2010 2011 2012 2013 2014 2015 2016 2017




                                                            12
Forecast Risks

Downside Risks                             Upside Risks

•   Consumer spending                      •   QE3 gains traction

•   Job growth                             •   Equity markets rally

•   Biz investment                         •   Jobs!

•   Federal spending sequester             •   Construction

•   Eurozone and Asia                      •   Households unleash pent-up demand

•   More “transitory” factors/oil prices   •   Low interest rates/investment boom

•   Housing market languishes              •   Energy/manufacturing renaissance

•   Healthcare costs                       •   Technology




                                                                                    13
California Regional Labor Markets

             Regional Labor Market Indicators
    4

    2

    0

    -2

    -4

    -6

    -8
      2008   2009      2010       2011        2012
                U.S.   North CA    South CA




                                                     14
 California Metro Area Employment Forecasts


           Annual Percent Change 2012, 2013, 2014

3.0

2.5

2.0

1.5

1.0

0.5
0.0
         U.S.             Southern CA               Northern CA
                   2012      2013       2014

                                                                  15
Robert A. Dye


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www.comerica.com/economics



Follow on Twitter
@Comerica_Econ




                             16
2013 Economic and Investment Outlook
2013 Global Financial Market Outlook


        Dennis A. Johnson, CFA
        Chief Investment Officer
Asset Allocation




                   19
Asset allocation is the most important
decision we can make.




Source: Brinson, Hood, and Beebower – Financial Analysts Journal, January/February 1995.



                                                                                           20
Income will be the primary source of the
return from investing in bonds.




                                           21
The equity market is in the early stages of a
cyclical improvement in performance relative to
the bond market.




                                                  22
Equity Markets




                 23
“Policy responses could increase the likelihood
for above average returns for risk assets like
stocks and commodities.” (Investment Commentary June 10, 2012)
•   European finance ministers $125 billion rescue package for Spain’s banking industry.

•   Greece’s elections.

•   U.S. Supreme Court ruling on the Affordable Care Act.

•   Federal Reserve extension of Operation Twist.

•   European Central Bank President’s pledge to “save the euro at any cost.”

•   Germany’s Supreme Court ruling support the constitutionality of the Euro Zone Rescue Fund.

•   Quantitative easing by the U.S. Federal Reserve.

•   Completion of the U.S. elections.

•   Completion of China’s elections.

•   Completion of Japan’s elections.

•   Resolution of the Fiscal Cliff.

•   Extension of the U.S. Debt Ceiling



                                                                                                 24
Investors still have “bearish” view of the
equity markets; which is positive for future
returns.




                                               25
We are entering a P/E driven equity market
after being in an earnings growth driven
market.
             S&P 500
       Price/Earnings Ratio

                                 Quarter End              Earnings Per   Yr./Yr. Percent
                                                            Share ($)        Change


                              Dec. 2012 (Est.)               23.83            0.4

                                  Sept. 2012                 24.00            -5.1

                                  June 2012                  25.43            2.3

                                 March 2012                  24.24            1.1

                               December 2011                 23.73            8.2

                              September 2011                 25.29            17.3


                              Source: Standard & Poor’s




                                                                                           26
Increasing our allocation to international
equities as the risk/reward trade-off for the
global equity market is in balance.




                                                27
Relative performance for the international
equity market should continue to improve.




                                             28
Fixed Income




               29
We need to think differently about
investing in bonds.




 Source: Thomson Reuters

                                     30
Bonds are no longer preserving
purchasing power.




                                 31
Alternative Investments




                          32
Alternative assets provide diversification
benefits.
                                    Correlation Matrix
Asset Class        MSCI Global    3 Month T-Bill   Merrill Lynch   Barclays Global   MSCI World
                   Equity Index                    Global Govt.     Macro Hedge      Commodity
                                                   Bond Index        Fund Index        Index


MSCI Global            1.00
Equity Index

3 Month T-Bill        -0.13           1.00

Merrill Lynch          0.18           0.01             1.00
Global Govt.
Bond Index

Barclays Global        0.52           -0.13            -0.17            1.00
Macro Hedge
Fund Index

MSCI World             0.92           -0.53            -0.28            0.76            1.0
Commodity Index



  Source: Zephyr



                                                                                                  33
Can invest in gold and oil now during a
period of relatively low volatility.




                                          34
Gold has pulled back in price…creating an
opportunity for investment.




                                            35
A basket of developed and emerging
market currencies is an attractive
alternative investment.




 Source: Thomson Reuters             36
Real estate is attractive as housing
affordability has improved.




                                       37
Low inventory of housing stock should
help sustain the recovery.




                                        38
House prices have stabilized.




                                39
Commercial real estate is
attractive…prices have stabilized.




                                     40
Declining delinquency rates will improve
cash flows from commercial real estate.




                                           41
Pay close attention to the risks.


          Corporate profit cycle is maturing.




                                                42
Pay close attention to the risks.

                  Political risks




                                    43
Pay close attention to the risks.


                   Euro zone




                                    44
Comerica’s Point of View


• Determine and implement the correct asset allocation.


• Positive global and U.S. economic growth should provide
  a constructive environment for returns from risk assets.


• Controlled inflation in the range of 2% should support a
  continuation of accommodative monetary policies by
  central banks around the world.




                                                             45
Comerica’s Point of View

•   Equities should perform well in 2013

    a)   We find the U.S. and international equity markets equally
         attractive.


    b)   Favor defensive sectors of the market like Consumer Staples,
         Health Care and Utilities.


    c)   Companies with high recurring revenues in the technology,
         financial and consumer cyclical sectors are attractive.


    d)   Stocks with high dividend yields should perform well.



                                                                        46
Comerica’s Point of View


• Think differently about bond investments.


• Invest in alternative assets for their diversification
  benefits.
   a) Diversify holdings in the alternative asset class.
      i.     Real estate
      ii.    Commodities
      iii.   Currencies
      iv. Other




                                                           47
Thank You!
Disclosure


 Comerica’s Wealth Management team consists of various divisions and affiliates of
 Comerica Bank and also subsidiaries of Comerica Bank including World Asset
 Management, Inc.; Wilson, Kemp & Associates, Inc.; Comerica Insurance Services,
 Inc. and its affiliated insurance agencies; and Comerica Securities, Inc. Securities
 offered by Comerica Securities, Inc. are not insured by the FDIC, are not deposits or
 other obligations of or guaranteed by Comerica Bank or any of its affiliates, and are
 subject to investment risks, including possible loss of the principal invested.
 Comerica Securities, Inc. is a broker/dealer, federally Registered Investment
 Advisor, member FINRA/SIPC and subsidiary of Comerica Bank.




                                                                                         49
Q&A

				
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Description: Comerica economy forecast from Feb. 20, 2013.