The Comerica U.S. Economic Outlook A Taxonomy of Economic Risk - PowerPoint PPT Presentation

The Comerica U.S. Economic Outlook A Taxonomy of Economic Risk Factors for 2017 Robert A. Dye Ph.D. Chief Economist, Comerica Bank September 2016

A Taxonomy of Economic Risk Factors Unknown Knowns Unknown Unknowns Standard economic metrics that come with We don’t see it coming significant lags…net migration, population, county business patterns Both immediate risks and long-term trends Known Knowns Known Unknowns Standard economic metrics like GDP, We know there is an issue but the data is unemployment rate, inflation rate, housing sketchy…financial engineering, student starts …etc debt, disruptive technology, political risk

A Taxonomy of Economic Risk Factors Unknown Knowns Unknown Unknowns Standard economic metrics that come with We don’t see it coming significant lags…net migration, population, county business patterns Both immediate risks and long-term trends Known Knowns Known Unknowns Standard economic metrics like GDP, We know there is an issue but the data is unemployment rate, inflation rate, housing sketchy…financial engineering, student starts …etc debt, disruptive technology, political risk

The Heartbeat of the U.S. Economy Real Gross Domestic Product, Annualized Percent Change Source: BEA

The Heartbeat of the U.S. Economy Real Gross Domestic Product, Annualized Percent Change “The Great Moderation” Federal Reserve Monetary Policy Services Manufacturing Source: BEA

The Heartbeat of the U.S. Economy Real Gross Domestic Product, Annualized Percent Change “The Great Moderation” Source: BEA

Potential GDP As a Guide to Economic Performance Productivity Growth and Labor Force Growth Output per Hour, Pchya 8MA Labor Force, Pchya 8MA Source: BLS

Potential GDP As a Guide to Economic Performance Productivity Growth and Labor Force Growth 6 Output per Hour, Pchya 8MA 5 4 3 2 1 0 Labor Force, Pchya 8MA -1 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 Source: BLS

GDP Forecast, Ongoing Moderate Expansion U.S. Real GDP Growth, Annualized Percent Change History Forecast Sources: BEA, Comerica Bank

Unemployment Rate Approaching Lower Bound +151k in August, U. Rate 4.9 Percent Forecast Payroll Employment, avg monthly diff, ths (L) Unemployment Rate, percent (R) Sources: BLS, Comerica Bank

Upward Pressure on Wages Will Continue Unemployment Rate and Hourly Earnings Unemployment Rate Average Hourly Earnings, percent change year ago Source: BLS

Interest Rate Outlook Clouded by Fed Uncertainty Yield, percent 30-Year FRM 10-Year Treasury Bond Fed Funds Sources: Federal Reserve, Comerica Bank

2017 Forecast…The 360 View Downside Risks Upside Risks • Inventory correction • Ongoing strong job growth • Global volatility, China, Japan, • Households unleash pent-up demand Eurozone/Brexit, Russia, MENA • Low energy prices for longer • Job growth steps down quickly • Consumer/Business confidence surges • Consumer spending slumps • Increased business investment • Housing stalls • Single-family housing market • Monetary policy stumbles • Increased gov./defense spending • Foreign exchange rates • China/Europe find traction • Investor confidence falls/sell-off • Risk On!

A Taxonomy of Economic Risk Factors…How Do We Push the Risk Analysis into the Unknown? Unknown Knowns Unknown Unknowns Standard economic metrics that come with We don’t see it coming significant lags…net migration, population, county business patterns Both immediate risks and long-term trends Known Knowns Known Unknowns Standard economic metrics like GDP, We know there is an issue but the data is unemployment rate, inflation rate, housing sketchy…financial engineering, student debt, starts …etc disruptive technology, political risk

Another Taxonomy of Economic Risk Factors Short Term Stability Volatility Services vs Manufacturing Financial Markets Consumer vs Export Rest of the World Countercyclical Monetary Policy Commodity Prices Fiscal Stabilizers Disruptive Technology Long Term Sustainable Non-sustainable

What Looks Like It Is Not Sustainable? Monetary Policy Negative Interest Rates, Quantitative Geopolitical Easing, Helicopter Money, The European Union, Currency Devaluation The United Kingdom, China, Japan, The Middle East, The United States Venezuela, Russia Healthcare, Federal Deficit, Income Inequality, Student Debt Commodities Pension Funds Excess Global Capacity, Oil Inventory Accumulation, High Oil Prices Environmental “Risk isn’t a word in my vocabulary. It’s my very existence.” - Slash

The Michigan Economy Gained Momentum in 2016 Michigan Total Economic Activity Index (2008=100) 140 130 120 110 100 90 80 70 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Robert A. Dye, Chief Economist Subscribe www.comerica.com/economics Follow on Twitter @Comerica_Econ