U.S. Q3’12 Economic Overview and Outlook

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U.S. Q312 Economic Overview and
Outlook Bloomberg BRIEF Economics Joseph
Brusuelas July 2012
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Homeowners Submerged
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Central Bank Policy Outlook and Overview

• Fed balance sheet remains extremely
  accommodative.
• Shifting duration of assets out along curve.
• Fed likely to extended pledge to hold rates
  effectively at zero until 2015.
• Questionable efficacy of further asset purchases.
• September 2012 FOMC meeting likely will see
  decision made whether or not to purchase assets
  this year.

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Monetary Policy at the Zero Bound
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Monetary Policy at the Zero Bound
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Monetary Policy at the Zero Bound
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Monetary Policy at the Zero Bound
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Fiscal Drag

• Medium-term policy shift.
• Discretionary spending declining.
• Potential fiscal shock in first quarter of 2013.
• Expiration of Bush tax cuts, Obama Tax holiday,
  tax increases to support Affordable Healthcare
  Act, and fiscal sequestration begins. Equivalent
  to 4 of GDP.

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Fiscal Policy and Financial Conditions Mix
2009-2010
2011-2015
Source Bloomberg
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Fiscal Drag
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Fiscal Cliff Impact
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Government Transfers
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Commodities Outlook and Overview

• Commodity prices reverse slide.
• Middle East tensions.
• Speculation on further central bank easing.
• Domestic gasoline prices hold, albeit at elevated
  levels.
• Wholesale futures point to stabilization.
• Likely no further relief to U.S. consumer.

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Middle East Tensions, Speculation Driving Rally
in Commodities
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Gasoline Prices Stable For Now
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Alternative Economic Outlook The Long Malaise

• Housing remains deadweight on consumer and
  economy.
• Monetary policy fails to deliver as fiscal
  gridlock prevails.
• Long-term adjustment in consumption continues
  parallel with household deleveraging.
• Public sector still leveraging up, creating
  asymmetrical risks to growth once deleveraging
  starts.
• Elevated risk of policy error due to premature
  fiscal or monetary policy tightening.

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The Long Malaise Housing as Ground Zero
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The Long Malaise Rate Comparison
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Long Malaise Longer-Term Consumer Adjustment
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Bloomberg
Joseph Brusuelas, Senior Economist Bloomberg,
LP jbrusuelas3_at_bloomberg.net
Joseph Brusuelas is an analyst who writes for the
Bloomberg Economic Brief. The observations he
makes are his own. Bloomberg is a leading source
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Executive Summary

• Rates US 10-year yields likely to trade in range
  between 1.5 and 1.75 percent. External shocks
  posing downside risk of below 1.5 rate
• US Dollar Downside risk on consensus forecast of
  1.24 against euro at end of Q312. Given
  external risks a move to long term purchasing
  power parity of EUR/USD of 1.18 cannot be
  discounted.