MID-YEAR 2011 ECONOMIC OUTLOOK
SURVEY | 2011
U.S. ECONOMIC OUTLOOK; STEADY AT A SUBPAR RATE
Real GDP Growth Rate
Quarter over Quarter Change, annualized
2.0 GDP 1.5 SIFMA GDP Forecast, Mid-Year 2011 SIFMA GDP Forecast, End-Year 2010 1.0 Q1 Q2 Q3 Q4 Q1 Q2 (f) Q3 (f) Q4 (f) Q1 (f) 2012 Q2 (f) 2010 2011 *(f) Forecast Source: Actuals: Bureau of Economic Analysis; Forecasts: Median Response to the SIFMA Economic Advisory Roundtable Mid-Year 2011 Economic Outlook Survey
Members of the Securities Industry and Financial Markets Association’s Economic Advisory Roundtable forecast that U.S. economic growth will grow at steady rate of 2.5 percent in 2011 and 3.1 percent in 2012.1 This outlook is slightly weaker than at end-year 2010, when the Roundtable predicted a growth rate of 2.6 percent in 2011. Concerns over fiscal policy, European sovereign debt, regulatory uncertainties, and high commodity prices remain significant risks to the outlook.
MONETARY POLICY The Roundtable was unanimous in its opinion that the
Consumer Spending Growth Rate and Unemployment Rate
Calendar Year Averages
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5
Personal Consumption (y-o-y)
Personal Consumption Growth
Federal Open Market Committee (FOMC) would not change its current 0.0 to 0.25 percent target federal funds rate during 2011. The majority (approximately 85 percent) expected a rate hike in 2012, although the timing of the rate hike was evenly split among the first three quarters of 2012. The balance of respondents expected a rate hike in 2013. Respondents who did not put a date to rate hikes opined that the timing of future rate hikes was primarily dependent on improvement in payroll numbers and stable financial conditions, especially concerning inflation.
THE ECONOMY The median forecast called for gross domestic product
Unemployment Rate (cal. yr. avg)
2007 2008 2009 2010 2011 (f)* 2012 (f)* *(f) Forecast Source: Actuals: Bureau of Economic Analysis (Personal Consumption) & Bureau of Labor Statistics (Unemployment); Forecasts: Median Response to the SIFMA Economic Advisory Rountable Mid-Year 2011 Economic Outlook Survey
(GDP) to rise 2.5 percent in 2011 on a year-over-year basis, and by 2.6 percent on a fourth quarter-to-fourth quarter basis.2 On an annualized basis, respondents expected GDP to rise steadily from 2.0 percent in the second quarter of 2011 to 3.5 percent in the fourth quarter.3 For 2012, the median forecast was 3.1 percent year-over-year; on a quarterly basis, GDP growth was expected to fall slightly during the first two quarters of 2012 to an annualized rate of 3.0 percent and hold steady for the rest of the year.4
Unemployment was expected to remain at significantly elevated levels throughout 2011 and 2012, although at somewhat lower levels than forecasted at year end-2010. Survey respondents expected the full-year average unemployment rate to be 8.9 percent in 2011, declining to 8.2 percent in 2012.5 Full-year 2011 nonfarm payroll employment gains were estimated to total 1.6 million jobs;6 for 2012, the median expectation was for a stronger addition of 2.5 million jobs.7 Consumer spending trends were expected to mirror employment growth, with personal consumption estimated to rise to 2.5 percent in 2011, and increase to 2.7 percent in 2012.8
The survey was conducted from June 21 – July 6, 2011. The forecasts discussed in the text and appearing in the accompanying data table are the median values of the individual member firms’ submissions, unless otherwise specified. 2 The full-year 2011 GDP growth forecasts ranged from 2.1 percent to 2.9 percent and on a fourth-quarter-to-fourth quarter basis ranged from 1.7 percent to 3.4 percent. 3 On a quarterly basis, annualized GDP growth forecasts ranged from 1.0 percent to 3.5 percent in 2Q’11, 0.8 percent to 4.0 percent in 3Q’11, and 2.2 percent to 4.3 percent in 4Q’11. 4 The full-year 2012 GDP growth forecasts ranged from 2.0 percent to 3.9 percent. On a quarterly basis, GDP forecasts ranged from 2.0 percent to 4.0 percent in 1Q’12 and from 2.1 percent to 4.0 percent in 2Q’12. 5 The full-year 2011 average unemployment rate forecast ranged from 8.4 percent to 8.9 percent and for 2012 ranged from 7.3 percent to 8.5 percent. 6 The full-year 2011 non-farm payroll employment forecasts ranged from a gain of 1.2 million jobs to 2.4 million jobs. 7 The full-year 2012 non-farm payroll employment forecasts ranged from a gain of 1.6 million jobs to a gain of 3.0 million jobs. 8 Personal consumption forecasts ranged from 2.1 percent to 2.9 percent in 2011 and 1.5 percent to 3.5 percent in 2012.
and from 3.0
2-Year Treasury Note 10-Year Treasury Note
9/10 12/10 3/11 6/11 9/11 (f) 12/11 (f) 3/12 (f) Source: Actuals: Bureau of Economic Analysis. Forecasts: Median Response to the SIFMA Economic Advisory Roundtable Mid-Year 2011 Economic Outlook Survey
Federal Funds Target Rate and Treasury Yields
4.5 4.5 3.9 percent in 2011 and continue shrinking another 0.0
PCE Deflator (q-o-q.7 percent in 2012.0 0. the end of the survey period. Over 70 percent of survey respondents expected the Fed Funds to two-year Treasury yield curve to steepen over the next six months.5 percent in December 2011. Economic slack/ unemployment was cited as the predominant factor in the inflation outlook for 2012. with the balance expressing only moderate concern.4 percent and for 2012 from negative 2. Forty percent of respondents did not believe inflation to be a concern in 2012. and the balance expecting the yield curve to remain the same. to a lesser extent. [an] aging population and sluggish wages will rein in price inflation indefinitely.2 percent to 5.5 1.5 percent in full-year 2011. followed by inflationary expectations and.10 The median forecast for “headline” inflation. 13 The average 10-year Treasury yield forecasts ranged from 2.5 1.0
2. One economist noted that “borrowing restraint.2 percent to 3.25 percent for September 2011.0 percent to 4.0 2.” and labor market improvement. Forecasts: Median Response to the SIFMA Economic Advisory Roundtable Mid-Year 2011 Economic Outlook Survey
terest rate policy. and global economic conditions were ranked as the three most important factors supporting U. MID-YEAR 2011 ECONOMIC OUTLOOK
SURVEY | 2011
PCE Deflator & Core PCE Deflator
4. 3.8 percent to 3.5 percent.” INTEREST RATES As noted earlier.S.2 percent to 2.25 percent federal funds target rate throughout 2011.4 percent for full-year 2011 and 1. 3. Federal Reserve.5 percent.0 percent and for 2012. the Roundtable expected the FOMC to continue maintaining its 0.
. a resolution to the “foreclosure mess.9 State and local government spending was expected to shrink by 1. The majority of the respondents (81 percent) expected the TED spread (Treasury bill less LIBOR rate) to remain unchanged during the next six months.0 1.12 The outlook for inflation remained relatively benign in 2012.5 0.8 percent to 9. Investment-grade credit spreads were expected to continue to narrow over the next six months by 63 percent of respondents. Opinions diverged.85 percent in June 2012. from 1. however.0 Q1 Q2 Q3 Q4 Q1 Q2 (f) Q3 (f) Q4 (f) Q1 (f) Q2 (f) 2010 2011 2012 *(f) Forecast Source: Actuals: Bureau of Economic Analysis.3 percent for December 2011. self-correcting adjustments by business and real estate markets.1 percent for June 2012.2 percent and for 2012. followed by global conditions and gasoline prices. was 2. As of July 6. with the remainder expecting no change.S.5 3. and 3.1 percent to 3. with a more robust 8.7 percent in March 2012.3 percent for full-year 2011 and 1. annualized)
Business capital investment growth was expected to rise by 7.3 percent to a positive 1. Treasury yield was 3. the 10-year U.0 3.16 percent. Other factors mentioned as contributing to growth were gasoline prices. the median forecasts for 10year Treasury rates in 2011 were 3.S. 10 The full-year 2011 real state and local government spending forecasts ranged from negative 3. FOMC in-
0. on the performance of the two.11 The median forecast for the core PCE chain price index was 1.to 10-year Treasury yield curve.2 percent to 12.9 percent for full-year 2012. measured by the personal consumption expenditures (PCE) chain price index.8 percent for March 2012.7 percent for September 2011. another 41 percent expecting it to flatten. 11 The full-year 2011 PCE deflator forecasts ranged from 1. economic growth.5 2.5 percent predicted for 2012.1 percent and for 2012 ranged from 4.U. A panelist noted that the biggest driver to interest rates would be speculation of timing of either tightening or easing by the Federal Reserve.0 percent to 2. Economic Growth The normalization of private credit markets.0 to 0. 3. 12 The full-year 2011 core PCE deflator forecasts ranged from 1.5 percent to negative 1. from 3. from 1.9 percent.0 1.5 2.0 percent to 4. annualized)
The full-year 2011 business fixed investment forecasts ranged from 5.5
Core PCE Deflator (q-o-q.0 3. 13 Survey respondents expected economic growth prospects to have the greatest impact on long-term Treasury yields in 2012.1 percent. High-yield credit spreads expectations yielded the same outlook.7 percent for full-year 2012. with 41 percent expecting it to steepen.
Treasury obligations. and an unresolved Federal budget process were the most oft-cited risks.S. The general consensus was that such defaults would be generally negative to all credits. contagion from the European sovereign debt crisis (or a “hard landing” from China).respondents generally based forecasts on WTI prices. The negative impact of not addressing the path of deficits did not appear to be temporary. and a less than 10 percent chance of oil prices moving above the $150 per barrel range.S. and cost of credit to households and business over the next 18 months. did not bring deficits into line. and tightening too soon at the federal level could risk a renewed recession. Assuming a debt ceiling package was agreed upon. such as what we’re seeing in state and local government[s].S.
. On the downside. Respondents were generally negative about the impact the Dodd-Frank Wall Street Reform and Consumer Protection Act would have on economic growth. the majority of respondents noted that the economic impact of the package would be negative if the deal did not improve the projected path of deficits. availability of credit. with 65 percent and 53 percent predicting a negative impact on the availability of credit and cost of credit. Another noted that with the Federal Reserve currently on hold.S. Treasury debt obligations. with the majority expecting both inflation and interest rates to rise and the dollar to fall in that case. respondents expected these effects to continue over the long-term. were mixed on its impact. Asked about the expected impact on households. Panelists placed a greater than 50 percent chance on oil prices remaining below the $100 per barrel range in 201114 . although a number of respondents were split as to the impact on high quality issuers. respondents. “ill-timed” fiscal tightening on both the state and local government level. MID-YEAR 2011 ECONOMIC OUTLOOK
SURVEY | 2011
The strong performance and/or growth of the corporate sector.” A majority (85 percent) of survey respondents expected an extremely negative impact to the markets (“Armageddon”) when asked about the effect of a potential default of U. although negative. The $101 to $150 per barrel scenario would have the probability-weighted estimated effect of reducing GDP growth by a little over half a percentage point. and more generally commodity prices.and long-term. Survey respondents unanimously agreed that deficit reduction was critically important in the medium. Oil Prices: 2008 All Over Again Oil prices. continual sustained rise in energy prices. “the outcome of the budget negotiations will have a bigger impact on the economy than monetary policy over the next couple of years.U. and pent-up consumer demand were dominant upside risks to the economic forecasts. over 75 percent expected a negative impact on credit availability and nearly 60 percent expected a negative impact on the cost of credit. respectively. The forecast for impact on the business sector was only slightly less negative. with oil rising over the $100 per barrel level for the first time since October 2008. Financial Regulatory Reform The survey asked a number of questions about both governmental policy and other regulatory reform measures.” The current situation in Greece was cited as an “extreme” but “illustrative” example of a possible glimpse into the future if the U. The most important factor is whether the long-run cuts are believable. with an approximately 36 percent chance of oil prices moving into the $101 and $150 range. experienced a spike during the first six months of 2011. Deficit Reduction Debate Over half the survey respondents (65 percent) believed that the impasse over the debt ceiling and budget deficit had a negative impact on strategic business planning. are not helpful to the recovery. while the $150+ per barrel scenario would
Due to price fluctuations in both WTI and Brent – WTI fell below $100 per barrel while Brent remained above $100 per barrel during the survey period . significant progress made on the budget process. but cautioned that short-term measures could put economic recovery at risk: “Austerity measures. On potential defaults outside of U.
The most likely scenario .7 percent. MID-YEAR 2011 ECONOMIC OUTLOOK
SURVEY | 2011
have the effect of reducing GDP growth by 1.S.
.remaining below $100 per barrel – was predicted to boost GDP growth by half a percentage point.U.
11 0.0 3. $ billions) 2011 2.7 8. unless otherwise specified.1 N/A 2.9 1.500 4.2 2.5 8.0 1.5 1.2 3.6 1.5 1.250 1.9 6.5 II 3.600 3.410 Mar.430
.6 2.2 2.6 2.S.5 1.9 N/A 1.700 4.6 2.225 3.9 N/A 1. 12 0.0 1.400.3 5.U.1 2.405 Jun.9 1.0 II 2.8 1.5 2.9) 491.5 1.0 0.0 4.4 2.0 3.9 (1. MID-YEAR 2011 ECONOMIC OUTLOOK
SURVEY | 2011
SIFMA ADVISORY ROUNDTABLE FORECAST
Inflation adjusted year-over-year percentage change.0
Exchange Rates (monthly average %)
Yen/Dollar Dollar/Euro Sep.6 3.2 (1. 11 0.7 8.5 0.6 3.2 III IV
Real GDP CPI Core CPI PCE deflator Core PCE deflator Personal Consumption Nonresidential Fixed Investment
Interest Rates (monthly average %)
Fed Funds 2 Year Treasury Note 10 Year Treasury Note 30 Year Fixed-Rate Home Mortgages Sep.0 9.1 N/A 1.5 7.8 1. 12 85.7 1.7 N/A 2.7) 484.100.8 2.1 1.7 1.128 0.250 4. 11 82.500 3.0 1.850 5.0 9.9 1.9 1.2 7.9 Jun. 12 84.3 2.3 0.0 1.250 1.4 5.9 2012 I 2.7 1.0)
Quarter-to-Quarter % Changes in Annual Rates
2011 I 1.7 (0.6 (1.6 1.3 III 3.6 8.0 IV 3.6 2.5 3.5 0. 11 83.128 0.1 1.8 Mar.800 3.6 Dec.3 1.0) 2012 3.1 2. 12 0.0 1.4 2.5 7.8 1.430 Dec.7 2.7 1.
Real GDP Real GDP (4Q – 4Q) CPI CPI (4Q – 4Q) Core CPI Core CPI (4Q – 4Q) PCE deflator PCE deflator (4Q – 4Q) Core PCE deflator Core PCE deflator (4Q – 4Q) Personal Consumption Nonresidential Fixed Investment Housing Starts (millions) Real State & Local Government Spending Current Account Deficit ($ billions) New Home Sales (millions of units) Existing Home Sales (millions of units) Nonfarm Payroll Employment (change in millions) Unemployment Rate (calendar year average) Federal Budget (FY.
U. Jan Hatzius Goldman. job creation and economic growth. however. with offices in New York and Washington. modify or amend this information or to otherwise notify a reader thereof in the event that any such information becomes outdated.P. Neal Soss Credit Suisse Brett Ryan Deutsche Bank Securities Inc. Brown Raymond James & Associates. Sachs & Co. SIFMA.sifma.org. LLC
The Securities Industry and Financial Markets Association (SIFMA) prepared this material for informational purposes only. Berner Morgan Stanley & Co. Scott J. is the U.S. Richard B. Inc. Robert Mellman J. SIFMA's mission is to support a strong financial industry. makes no representations as to the accuracy or completeness of such third party information. Director of Research Sharon Sung Manager. visit www.C.
. or incomplete.. Diane Swonk Mesirow Financial Holdings. while building trust and confidence in the financial markets. D. capital formation. The Securities Industry and Financial Markets Association (SIFMA) brings together the shared interests of hundreds of securities firms. Morgan Chase & Co. inaccurate. Jim O’Sullivan MF Global Inc. Christopher Low FTN Financial Ward McCarthy Jefferies & Co. banks and asset managers.. SIFMA obtained this information from multiple sources believed to be reliable as of the date of publication. Inc. Resler Nomura Securities International. investor opportunity. Inc. David H. SIFMA. regional member of the Global Financial Markets Association (GFMA). For more information. SIFMA has no obligation to update. Inc. Bethann Bovino Standard & Poor’s Rating Services SIFMA Staff Advisors Kyle Brandon Managing Director. Research Dean Maki Barclays Capital Inc. Inc. MID-YEAR 2011 ECONOMIC OUTLOOK
SURVEY | 2011
John Silvia (Chair) Wells Fargo Ethan Harris Bank of America Merrill Lynch Research Robert DiClemente Citigroup Michael Moran Daiwa Securities America Inc. Inc Stuart Hoffman PNC Financial Services Group Stephen Gallagher Societe Generale Corporate and Investment Banking Maury Harris UBS Securities. John Lonski Moody’s Analytics.S.