Economic Research: U.S. Economic Forecast: Leaning Into Growth€¦ · 13/11/2014 · Meanwhile, average hourly earnings rose 2.0% in October from a year earlier. With inflation,

Economic Research:

U.S. Economic Forecast: Leaning IntoGrowth

Credit Market Services:

Beth Ann Bovino, U.S. Chief Economist, New York (1) 212-438-1652;

[email protected]

Satyam Panday, U.S. Economist, New York (212) 438-6009; [email protected]

Table Of Contents

The Art Of Happiness

The Power Of Positive Thinking

Self-Reliance

How To Win Friends And Influence People

Feel The Fear And Do It Anyway

I'm OK--You're OK

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 13, 2014 1

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Economic Research:

U.S. Economic Forecast: Leaning Into Growth(Editor's Note: Standard & Poor's completed its forecast before the Bureau of Economic Analysis (BEA) released its GDP report

on Oct. 30, 2014.)

Since the end of the Great Recession, the U.S. economy has, in most years, started soft and finished strong--and this

year is proving to be no exception. Now, with the end of 2014 drawing near, we are looking toward the New Year to

see whether the momentum we've seen in recent months will carry over into 2015.

After contracting 2.1% in the first three months of the year, the world's biggest economy posted its strongest six

months of growth in a decade. The second-quarter GDP jump of 4.6% (annualized) preceded a 3.5% expansion in the

third quarter that was largely driven by a surprising bounce in defense spending and trade. In this light, Standard &

Poor's Ratings Services continues to expect the U.S. economic recovery to strengthen as we head into 2015. We also

expect a still-strong 2.9% expansion in the final three months of the year. However, the recent soft September data for

trade and construction suggest the third quarter 3.5% expansion may be revised down in the Bureau of Economic

Analysis' second estimate. So, we kept our forecast for full-year GDP growth at 2.2%--the same as in September.

Still, we don't think the U.S. will be down for long. Signs suggest that economic momentum will continue through

2015. While the debates over the debt ceiling will be dramatic, the drag from fiscal austerity is expected to ease further

next year. We also expect to see further job gains, and higher paychecks, in 2015. Because we expect private-sector

strength to continue to offset government austerity next year, as well as solid gains in companies' capital expenditures

(capex), we expect the economy to expand 3% for full-year 2015.

Overview

• The robust economic expansion in both the second and third quarters supports our view of solid growth for

this year and the next. We expect GDP to expand by 2.2% this year and 3% in 2015 as private-sector strength

offsets continued government austerity.

• We expect the solid jobs gains this year to continue into the New Year, with monthly job gains likely averaging

around 200,000. We expect to see some acceleration in wage growth next year.

• The Federal Reserve will likely raise its policy rate in June of next year, the first interest-rate hike since 2006.

We expect the federal funds rate to reach 1.25% by the end of next year.

• We see a 10%-15% chance that the U.S. economy will experience another recession in the next 12 months.

The economy added 248,000 jobs in September, according to the Bureau of Labor Statistics' (BLS) establishment

survey--beating the consensus forecast of 220,000 and pretty much squashing any doubts the markets had about the

improved labor-market momentum. It wasn't just that September's gains beat the consensus, but also that previous

months' data were revised upward to show solid momentum heading into the final quarter of 2014. October's numbers

bear this out, 214,000 jobs added, with eight of the last nine months reporting jobs gains above 200,000. The 31,000

net upward revisions for the prior two months brought the overall figure above the 235,000 job gains expected by


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consensus. The year-to-date average of payroll gains, at 228,500, is higher than last year's average of 194,000. We

expect this trend to continue next year, with monthly average jobs gains remaining in the 200,000 range.

Meanwhile, average hourly earnings rose 2.0% in October from a year earlier. With inflation, as measured by the

Consumer Price Index, currently running at 1.7%, helped by the drop in oil prices, real wage gains are finally positive,

improving consumers' purchasing power. We expect the oil-driven boost to real wages and consumers' purchasing

power to continue into 2016. And, as the jobs market tightens further, we expect paychecks to continue to climb

gradually next year, encouraging consumer spending and supporting economic activity in 2015.

Certainly, the Employment Cost Index supports that claim, with the wages and salaries component jumping by 0.8% in

the third quarter, and the year-over-year gain accelerating to 2.1% after a 1.8% rate in the second quarter. We expect

wages to pick up next year, possibly rising even closer to a 2.5% year-over-year rate later in 2015. That's higher than

this year's average 2.0% year-over-year rate, but still lower than the 3.8% peak in June 2007.

The Art Of Happiness

We expect increased labor compensation to support somewhat stronger household spending and housing activity next

year. This is reflected in The Conference Board's consumer confidence reading, which climbed to a seven-year high of

94.5 in October--much stronger than the 87 expected by economists. The Conference Board's job strength diffusion

index, calculated as the difference between the jobs plentiful and jobs hard to get indexes, has improved by 37% this

year to -12.6. While it's still negative, indicating that jobs are still hard to get, it's at its highest rate since the recovery

started in June 2009.

That extra boost to purchasing power from lower gasoline prices since the summer's peak also helped improve

American moods. While oil companies are feeling the sting, U.S. consumers will reap the benefits from this sizable 75

cent (20%) drop in gasoline prices. On the heels of this, we expect consumer spending to advance 2.3% for the full year

and accelerate to a 2.9% pace in 2015, the largest year-over-year gain since 2006. Residential construction will brush

off the recent chill and head back into double-digit territory next year.

Core retail sales--excluding autos, gasoline, and building materials--have risen in seven of the past eight months. The

combination of more jobs, falling gasoline prices, and historically low borrowing costs will likely help lift real consumer

spending this holiday season and into the next.

On the other hand, high raw material costs and potentially rising interest rates, as well as tighter bank lending

regulations, may weigh on the U.S. housing recovery a bit more than we previously expected. The latest

demand-supply indicators suggest the sector remains under pressure.

Existing home sales picked up sharply in the third quarter, following a weather-related lull in the first three months of

the year. Sales increased by 2.4% in September to a higher-than-expected annual rate of 5.17 million--well above the

4.59 million two-year low in March. Sales of both single-family homes and condos/co-ops increased and average

prices rose throughout most parts of the country. September's supply of single-family homes dipped to 5.3 months

after holding at 5.5 from May through August.


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Economic Research: U.S. Economic Forecast: Leaning Into Growth

However, new-home sales weren't as upbeat. September sales ticked up 0.2% to an annual rate of 467,000 units. But

that comes after August's too-good-to-be-true reading of 503,000 was revised down to 466,000. The new-home market

lags the existing-home market for a variety of reasons. New construction tends to be more expensive than existing

homes, and with much of last year's demand coming from older Americans looking to downsize, it's hard to imagine

they'd want to fork over the cash for a big new home. There are also a lot more existing homes on the market than

new ones. Last year, more than 5.1 million existing homes changed hands, while 430,000 new homes were sold.

But it's not all bad. Builder confidence is rising as prices for material inputs subside and credit begins to flow more

freely to land developers. More importantly, given recent job gains and higher wages, more Americans may want to

sign on the dotted line for a new home. And calls for higher mortgage rates down the road may push them to do so

sooner rather than later. We're looking for housing starts to reach 1.29 million in 2015, with residential construction to

grow by 12.8% next year after slowing to a 2.2% pace in 2014.

Table 1

Standard & Poor's U.S. Economic Overview

2013 2014e 2015e

Real GDP (year % change) 2.2 2.2 3.0

Real consumer spending (year % change) 2.4 2.3 2.9

Real equipment investment (year % change) 4.6 6.6 7.7

Real nonresidential construction (year % change) (0.5) 8.0 6.8

Real residential construction (year % change) 12.0 2.2 12.8

Core CPI (year % change) 1.8 1.7 1.9

Unemployment rate (average, %) 7.4 6.2 5.8

Housing starts (mil.) 0.93 1.02 1.29

S&P Case-Shiller 20-City Home Price Index (December to December % change) 13.4 6.0 3.5

e--Estimate.

While we expect wages to improve with a continued drop in the unemployment rate, we see some signs of slack in the

jobs market with still-high underemployment, a large number of long-term unemployed, and labor-market participation

at a 36-year low. While the U.S. has seen improvement here, with even the Fed's policy statement dropping its earlier

view that there was "significant underutilization" in the labor market, now saying that this was "gradually diminishing",

this slack still limits how high wages can go. We think the rebound in the participation rate will be mild and could

co-exist with rising wages. So, when will business investment pick up? There are signs that business investment

activity has already started to pick-up in 2014, and 2015 may be the year companies finally commit to spend more. We

expect capex to grow 7.7% next year--and nonresidential construction to be up 6.8%.

Recent business surveys point to strong activity into 2015. Businesses need a strong recovery to spend more. But if

they don't spend more, we won't see a strong recovery. We think that the recent pickup in domestic demand will

encourage U.S. businesses to move ahead. And with financing costs at historical lows and businesses sitting on record

amounts of cash, we suspect that they have their finger on the trigger. But, you only need to read the headlines from

abroad to know that risks remain.

Of course, higher interest rates can weigh on economic activity. But, as long as the Fed doesn't rush next year, we


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believe the economy will be firm enough to handle it. Indeed, businesses may be encouraged to borrow now and get

ahead of higher interest rates down the road.

Meanwhile, the U.S. dollar's recent appreciation against other benchmark currencies will likely weigh on the

competitiveness of U.S. exports in the near-term, but we expect the effects to be modest. Recognizing that the current

pains in Europe, if they continue next year, could chip away at U.S. export strength, firming global demand later next

year will likely help net exports expand by 5.5% in 2015. And we expect inflation to tick up slowly in 2015, with the

drop in oil prices keeping headline inflation under control. (While low oil prices will likely hurt the bottom lines of

energy companies, this "reverse-shock" will improve household purchasing power and reduce shipping costs, which

will be an overall net gain for U.S. economic growth.)

We expect core inflation, excluding food and fuel, to remain comfortably below the Federal Reserve's 2% target into

next year. That should give the central bank some time before it begins to raise benchmark interest rates. Recent jobs

numbers are generally consistent with policy makers' economic forecasts, and therefore won't likely change their

thinking about when and by how much monetary policy should be tightened. We expect the Fed to begin the rate hike

cycle in June--the first such move in 11 years--with the federal funds rate reaching 1.25% by year-end.

Of course, how fast or slow the Fed reduces accommodation will depend on economic conditions, discussed later in

the report.

The Power Of Positive Thinking

While businesses have held back on capex, jobs numbers indicate that they are rebuilding their rosters. And data from

the payrolls report suggest that capacity levels are tight. The hours worked index is now at its highest rate since March

2008 and temporary hires are at their highest level since January 1990. This usually signals the need for businesses to

hire full-time workers next.

There's been scant reason for optimism on the wage front until recently, but we believe the move toward higher

salaries could continue. Some economists point to alternative measures that indicate a slack labor market and say that

the inevitable expansion in labor supply will keep a lid on wages and reduce the need for the Fed to raise interest rates

until sometime later in 2015. We see the unemployment rate as a more reliable indicator and expect wage growth to

accelerate next year. We were keeping an eye on short-term unemployment, in particular, which some research

suggests may be a better augur of wage growth today than the overall unemployment rate.


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Chart 1

Of course, other measures shouldn't be ignored when gauging the overall health of the labor market. But we believe

that the complex dynamics--which helps explain the low participation rate and the high long-term unemployment

rate--muddle the analysis of the effects on wages.

The labor-participation rate reflects early retirements, as well as workers out on disability who often don't return to the

workforce, and other demographic factors. And, while unemployment had historically been a good indicator of price

and wage movements, it has been off this time around, predicting more price deflation and weaker wages than we've

seen.

Conventional models (such as the Phillips curve, which suggests that inflation and unemployment have a steady

inverse relationship) have generally under-predicted compensation growth since 2009. These models often rely on the

total unemployment rate as the measure of labor market tightness. Some recent research has indicated that the

long-duration unemployment rate has a limited effect on wage growth. Given that the long-term unemployed have

made up a large share of the overall jobless rate in this recovery (it's now about 32%, but was 45% earlier in the

recovery), this helps explain why the overall unemployment rate may have been less accurate as a predictor this time

around, and why the short-term unemployment rate was more accurate in predicting wage growth. During this

recovery, the short-term unemployed are finding jobs while the long-term unemployed often remain unemployed or


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leave the jobs market altogether as causalities of the Great Recession.

Workers seem to agree with this reasoning and are now starting to vote with their feet.

According to the BLS' August job openings and labor survey (JOLTs), published in October, the quit rate has started to

climb, suggesting Americans are starting to feel more confident that they can leave their job to find another

opportunity that may pay a little bit more. The JOLTs quit rate (the percent of people who jumped ship voluntarily), at

2%, is hovering at its highest level of the four-year recovery. Granted, the rate is still below the pre-recession level,

where it held at around 2.5%. However, it is far from the dark days of the Great Recession when extreme job insecurity

was rampant, people clung to what they had, and the quit rate dropped to a record-low of 1.4% (2009).

That's a good thing. We want more people feeling confident enough of their job options and their own bargaining

power that they can walk away from their current job and expect to find a better opportunity elsewhere.

In any event, U.S. employers' labor costs have risen--a sign that worker pay could finally break out of its post-recession

pattern of sluggish growth. The BLS' Employment Cost Index (ECI), a broad gauge of wage and benefit expenditures,

rose to a seasonally adjusted 0.8% in the third quarter. But, where earlier much of the overall gain in the ECI was from

a jump in benefits, this time wages and salaries, which account for roughly 70% of compensation costs, jumped 0.8%.

This comes after a gain of 0.6% in the second quarter and a 0.3% gain in the first. The gauge for overall compensation

has now risen by at least 0.7% in two consecutive quarters for the first time since the middle of 2008. Wages and

salaries are now up 2.1% year-over-year, the highest level since fourth-quarter 2008.

Wages are climbing as the U.S. unemployment rate fell to 5.8% in October, down from 7.2% a year earlier. And,

year-to-date, nonfarm payrolls have posted the strongest year of hiring since 1999. A broad, sustained rise in wages

may lead to a corresponding increase in prices, which may prompt the Fed to raise interest rates a little sooner than

many expect. Of course, we can't forget that while there may be significant wage pressure in certain positions, a large

number of American workers aren't seeing any, or very little, wage growth at all.

Self-Reliance

The markets will of course be closely watching the Fed's interest rate moves in 2015, but the off-again on-again push

toward a rate hike may not be resolved quickly. Since the start of July, the dollar has appreciated sharply, rising to a

two-year high against the euro and close to a 6-year high against the Japanese yen. This surge has been enough to

encourage some Fed officials to talk about the value of the dollar (a rare event) and its effect on the economy. The

dollar's strength increases the chance that the Fed will delay its hiking cycle, depending on how much the appreciation

damages growth and slows inflation. For that, we should consider how much the greenback has strengthened and what

has driven the move.

The recent 4.9% move in the trade-weighted dollar index (broad) will likely have a relatively small effect on GDP

growth and inflation because of the very weak pass-through of exchange-rate fluctuation into the price of traded

goods. Using the Fed's FRB/US model, even a 10% jump in the trade-weighted dollar, if sustained for the year, may

only cut around 0.5% off of GDP growth and slow inflation by a few basis points. For 2015, that would mean another


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year of growth in the 2% range, but not recession.

A strong dollar is bad for U.S. exports, but exports aren't leading this economic recovery. And even with the

appreciation in the dollar, it is still within historic norms. Indeed, the recent increase in the dollar looks downright puny

by historical standards (see chart 2). It also improves American consumers' purchasing power.

Chart 2

The good news behind the strength in the dollar is that the outlook for the U.S. economy has been relatively rosy. Data

from the housing sector to manufacturing all suggest that the U.S. recovery is solidifying. But, other disappointing

economic news also likely contributed to the dollar's strength. Weak growth and inflation overseas, as well as

loosening central bank monetary policy abroad, have pushed the dollar higher. While we expect the U.S. recovery to

continue to strengthen, all things being equal, problems in Europe have added some small downside risk to our

forecast.

Additionally, the September U.S. trade report, which showed the gap widening to $43.0 billion (thanks to a 1.5% drop

in exports), may be the harbinger of things to come if the dollar remains strong. That will likely shave a few basis

points off of the BEA's initial estimate of 3.5% for third-quarter growth.


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How To Win Friends And Influence People

With a newly elected Congress--and Republicans seizing control of the Senate--it seems appropriate to reflect on what

the U.S. economy has lost from government inaction over the last year and how a new government might act in 2015.

The budget deal reached in late-2013 by Rep. Paul Ryan (R-WI) and Sen. Patty Murray (D-WA) temporarily buried the

hatchet between the opposition parties, reducing the risk of another government shutdown. And, after Congress

passed another Continuing Resolution to fund the government until Dec. 11, the House then voted to extend the debt

ceiling deadline until March 2015. All this helped reduce the uncertainty around what to expect from Washington this

year. But it still left the door open for unwelcome guests, with the threat of a shutdown or something worse once again

lurking for 2015. While we expect lawmakers to act sensibly--or, at least, not completely irrationally--mistakes can

happen, as 2013 made clear.

That year, the fiscal shocks from gridlock cost the U.S. economy more than 1% in growth. And that doesn't take into

account the lost opportunities we could have realized if Congress had been able to compromise. Simply put, the 113th

Congress was the most divided in years, enacting only 142 laws through July, according to Pew Research--the fewest

in the past two decades over a similar duration. If you cut out purely ceremonial laws, such as the renaming of Post

Offices, that number goes down to 108.

Two significant lost opportunities come to mind. Standard & Poor's projected that sweeping reforms that would have

further opened U.S. borders to a significant number of highly skilled noncitizens would have boosted growth, adding as

much as 3.2 percentage points to real GDP over the next decade. It would likely add even more in the following

years--a meaningful bump for an economy continuing to recover from the Great Recession.

On another front, we found that a $1.3 billion investment in infrastructure would add 29,000 jobs to the construction

sector, even more when we count jobs in other infrastructure-related industries. In our analysis, the associated

multiplier effect would have resulted in an additional $2 billion of real GDP next year. On top of that, the economy's

production capacity and output would likely increase once the infrastructure is built and absorbed into the economy,

thus adding yet more jobs.

While another year of tense negotiations is in the cards, there may be some room to find common ground. A

Republican-led Congress in power after the midterm elections increases chances that trade agreements, such as the

Transatlantic Trade and Investment Partnership (TTIP), will be ratified before the Presidential election in 2016.

Now, we're faced with another year of debt negotiations and, once again, the debt ceiling could be held hostage. Given

the short-term nature of the current continuing resolution, the risk of another shutdown is on the table.

Feel The Fear And Do It Anyway

Elsewhere in Washington, the Fed's policy-making Federal Open Market Committee (FOMC) has said farewell to its

bond purchases. And, while that was only the beginning of the Great Unwind, FOMC members have made it clear they

will take their time in normalizing monetary policy.


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Certainly, the financial markets may grieve the beginning of the end of easy money, but we see this as confirmation

that the Fed is confident that the recovery is in place. We still expect the Fed to make its first interest rate hike in the

second quarter of next year, at its June FOMC meeting. And we see the Fed funds rate reaching 1.25% by year-end

and slowly climbing until reaching the so-called "exit rate" of 3.75% by third-quarter 2017

In a global marketplace, the problems--or successes--in other economies will factor into the Fed's policy decisions.

With the eurozone struggling to get back on its feet, and facing the very real threat of a third recession, the risk that

U.S. central bankers will wait a little longer than our June forecast is a possibility. But we expect they will need to see

signs that the struggles abroad are hurting economic activity here. Given exports aren't leading this economic recovery

and, even with its appreciation, the dollar is still within historic norms, we expect the impact on U.S. growth will

modest. We expect the Fed will need to see the dollar appreciate a lot more than it has before they decide to delay

normalizing monetary policy with the first rate hike in nine years and the first start of a rate hike cycle in 11.

I'm OK--You're OK

As the U.S. slowly heals from the worst financial and economic crisis since the Great Depression, there's a chance

things could turn out better--or worse--than we expect. So, each quarter, Standard & Poor's projects two additional

scenarios, one with slower growth than the baseline forecast and one with faster growth. We can then use these to

estimate the credit effects of better- or worse-than-expected economic conditions.

Recent economic data offer some strong positive signals for the consumer sector. Americans seem to feel more secure

about their job situation and are significantly more optimistic about the economic outlook for the next one-year and

five-year periods. The Fed's Financial Accounts (formerly Fed Funds Account) show that household deleveraging has

come a long way, with indebtedness now at 2002 levels. Taken together with the strong auto sales, healthy retail sales,

and modest inflation, the consumer sector looks to be on the rise for now.

This is the start of our upside case, in which the private sector would continue on its upward path as the excessive

caution in spending dissipates. In this scenario, the European Central Bank (ECB) would expand its monetary base,

guiding the region away from a dangerous path. Eurozone growth would strengthen more than in the baseline, and

fiscal conditions would improve.

In response to the much improved conditions in the eurozone, the euro stabilizes against the dollar and confidence is

restored in the region. That, together with a stronger global market, would help support American exports abroad. U.S.

real GDP would expand 2.3% this year, followed by 3.5% in 2015 and 3.3% in 2016.

In this scenario, domestic private demand would increase substantially more than in our baseline case as the labor

market improves (with 275,000 or more monthly payroll gains on average in the last quarter of 2014 and for the

following two years). The unemployment rate would drop to 5.5%. The improvement in the labor market would help

remove the slack in the economy and tilt the wage-bargaining power toward jobseekers. This, in turn, would allow

them to add to their disposable income. Combine this with the much-improved balance sheets of households on

aggregate, which now owe $1.07 on every dollar earned (the lowest since 2002 and well below the 2007 peak of $1.35),

and a rebound in home values and stock prices, and both income and wealth effects would help erase excessive


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caution in the private sector, leading to increased consumer spending.

With wages on the rise, consumer confidence would jump. Investor confidence in the path of the U.S. economy would

also climb, the S&P 500 Index would rise toward 2,300 over the next 12 months, and the pace of technology adoption

by businesses would accelerate. Business equipment spending could increase 9.6% next year, compared with 7.7% in

our baseline forecast.

Moreover, with homebuilders' confidence picking up, the housing market's rebound would gain momentum. Permits

for single-family homes (a forward-looking indicator for housing starts) would recover to a point that suggests they're

ready to catch up with the multifamily sector, which has already reached prerecession levels. With credit conditions

easing, a stronger labor market, and rising incomes, interest rates would tick higher, spurring demand as potential

homeowners look to get in while borrowing costs remain relatively low. Counterintuitively, home affordability could

improve as price increases slow amid a pullback in investor purchases, allowing families to make more successful bids.

In this case, housing starts would increase at a 1.12 million pace by the end of the fourth quarter and 1.32 in 2015.

As economic growth picks up and wages rise, core inflation (excluding food and fuel) would likely heat up as well.

Increased productivity would act as a counterbalance, and a major structural force--demographics--may be a

headwind to inflation. As Baby Boomers age, leave the workforce, and focus more on divesting as opposed to

investing, demand for products and services (outside of health care) will likely decline.

In response to much stronger growth and signs of inflation, the Fed would hike interest rates in the first quarter of next

year, sooner than in our baseline case, and continue tightening through 2015 and 2016.

In our downside scenario, headwinds from abroad would become storms, with global conditions suffering. In this case,

the U.S. economy would sputter for the rest of this year and into 2015.

While the U.S. would avoid recession in the most common sense of the term (consecutive quarters of contraction), it

would suffer a period of below-trend growth as exports take a hit, credit tightens, consumer confidence reverses recent

gains, and capital investment never materializes--with the result being subpar growth in the fourth quarter and into

next year. U.S. real GDP would expand just 2% this year and 1.2% in 2015, before picking up a notch to 1.7% in 2016.

In our downside view, exports would falter as global trade and investment growth falls because of geopolitical

uncertainty, and as major economies such as the eurozone and China are unable to rebound. A stronger U.S. exchange

rate against major trading partners wouldn't help the case for exports either. U.S. export growth would fall to 2.6% this

year (versus 3.6% in the baseline and 3% in 2013) and 1.4% next year, before picking up to 5.1% in 2016.

Meanwhile, home sales would weaken because of the decline in affordability and the shrinking supply of investment

properties. Tight credit, a scarcity of developed lots, and rising material costs would be the main restraints on the

supply side, while slower income growth would price out potential homebuyers. These factors, together with

decreasing investors' share of home purchases, would continue to weigh on the housing market. Demographic

changes--which have led to declining homeownership rates--would cause additional weakness. Newly released data on

household formation show an unexpectedly soft reading of 500,000 for year-end 2013 and early 2014, compared with

growth of 1.4 million and 2.4 million the prior two years. In our downside scenario, household formation stagnates and


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the housing recovery goes on life support. Housing starts would fail to reach the 1 million mark both this year and next

before finally picking up to 1 million in 2016.

The federal government would be of little help. Political uncertainty would rise as Congressional Republicans clash

with a Democratic White House, and the Continuing Resolution and debt ceiling come knocking on the door again.

And, lest we forget, sequestration is still in place. The total government investment and spending (federal, state, and

local combined) would increase by only 0.2% (versus 0.4% in our baseline case) and another 0.2% in 2016 (versus

0.4% in the baseline). With no credible fiscal policy in place, and no end in sight to the persistent uncertainty,

private-sector confidence would deteriorate, business investment wouldn't pick up, and stock markets would suffer a

sharp pull-back, with the S&P 500 declining almost 8% by year-end. As businesses curb hiring and government jobs

disappear, the unemployment rate would reach 6.5% by fourth-quarter 2015.

With equity prices declining and the labor market sputtering, consumption would make a meager contribution to

growth, as worried households keep their wallets shut. Consequently, real consumer spending would weaken to 0.6%

growth in the fourth quarter and 1.1% next year (versus 3.2% and 2.9%, respectively, in our baseline forecast). With

weak demand at home and abroad for U.S. goods, real final sales of domestic products would take a hit, rising just

0.8% in the fourth quarter and 1% in 2015, before picking up to 1.8% in 2016.

All of this would cap inflation, with the core measure rising only 1.6% (year-over-year) in 2015--below the Fed's target,

which would give the central bank enough room to maintain its low benchmark rate for much longer than in our base

case. Core prices would rise 1.9% in 2016, but the unemployment rate would still be elevated at 6%. In this light, the

Fed's first hike of its benchmark rate would be unlikely to come before the beginning of 2017, when the labor market

would have improved to bring the unemployment rate under 6% and closer to the natural rate of unemployment.

Writer: Joe Maguire

Table 2

Standard & Poor's Economic Outlook

November

2014 --2014-- --2015--

Q2 Q3e Q4e Q1e Q2e 2009 2010 2011 2012 2013 2014e 2015e 2016e

(% change)

Real GDP 4.6 3.2 2.8 3.0 2.9 (2.8) 2.5 1.6 2.3 2.2 2.2 3.0 2.7

Real final

sales--domestic

product

4.8 2.1 3.2 3.2 3.0 (3.8) 2.9 1.6 2.2 1.9 2.3 3.1 2.8

Real--PCE total 2.5 2.2 3.2 3.3 3.1 (1.6) 1.9 2.3 1.8 2.4 2.3 2.9 2.7

Equipment

investment,

2009$

11.2 9.2 7.2 7.3 7.1 (22.9) 15.9 13.6 6.8 4.6 6.6 7.7 6.6

Real intellectual

property

5.5 6.7 6.0 2.4 4.2 (1.4) 1.9 3.5 3.9 3.4 4.3 4.3 3.7

Real

nonresidential

construction

12.6 2.7 7.5 8.3 6.8 (18.9) (16.4) 2.3 13.1 (0.5) 8.0 6.8 4.6


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Table 2

Standard & Poor's Economic Outlook (cont.)

Residential

structures

construction,

2009$

8.8 5.2 10.0 18.1 15.6 (21.2) (2.5) 0.5 13.5 11.9 2.2 12.8 9.7

Federal

government

purchases, 2009$

(0.9) (0.2) (0.5) (0.8) (0.8) 5.7 4.3 (2.7) (1.8) (5.7) (2.7) (0.7) (0.8)

State and local

purchases, 2009$

3.4 0.2 1.0 0.9 0.9 1.6 (2.7) (3.3) (1.2) 0.5 0.8 1.0 1.1

Total exports,

2009$

11.0 8.0 3.4 5.1 5.1 (8.8) 11.9 6.9 3.3 3.0 3.6 5.4 4.8

Goods and

services imports,

2009$

11.3 0.1 5.9 6.4 5.8 (13.7) 12.7 5.5 2.3 1.1 3.8 5.4 5.1

CPI 3.0 1.1 0.5 1.7 2.0 (0.3) 1.6 3.1 2.1 1.5 1.7 1.5 1.6

Core CPI 2.5 1.3 1.3 2.0 2.1 1.7 1.0 1.7 2.1 1.8 1.7 1.9 1.9

Nonfarm unit

labor costs

1.4 0.7 2.2 1.9 1.8 (2.7) (1.5) 2.9 2.6 0.8 3.5 1.7 1.4

Nonfarm

productivity

3.2 1.7 1.3 0.7 0.5 1.0 3.1 1.0 0.5 1.2 0.6 1.1 1.5

(Levels)

Unemployment

rate (%)

6.2 6.1 6.0 5.9 5.8 9.3 9.6 8.9 8.1 7.3 6.2 5.8 5.7

Payroll

employment

(mil.)

138.5 139.2 139.8 140.5 141.0 131.2 130.3 131.8 134.1 136.4 138.8 141.2 142.7

Federal funds

rate

0.1 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.5 2.1

10-year

Treasury-note

yield

2.6 2.5 2.5 2.7 2.8 3.3 3.2 2.8 1.8 2.4 2.6 3.0 3.8

AAA' corporate

bond yield

3.2 3.1 3.2 3.4 3.6 4.7 3.9 3.5 2.5 3.1 3.3 3.9 5.1

Mortgage rate

(30-year

conventional)

4.2 4.1 4.2 4.2 4.3 5.0 4.7 4.5 3.7 4.0 4.2 4.5 5.6

Three-month

Treasury-bill rate

0.0 0.0 0.0 0.1 0.1 0.2 0.1 0.1 0.1 0.1 0.0 0.4 1.9

S&P 500 Index 1,900.4 1,976.0 1,983.0 2,006.6 2,038.4 946.7 1,139.3 1,268.9 1,379.6 1,642.5 1,923.4 2,046.9 2,106.8

S&P operating

earnings

($/share)

94.74 94.71 95.18 96.34 99.24 18.96 68.86 85.70 85.51 90.49 94.86 100.32 105.01

Current account

(bil. $)

(394.0) (355.0) (318.1) (320.4) (322.0) (380.8) (443.9) (459.3) (460.8) (400.3) (368.9) (317.7) (334.2)

Exchange rate

(major trade

partners)

76.6 78.0 82.0 82.6 83.0 77.7 75.3 70.9 73.5 76.0 78.4 83.3 84.5

Crude oil ($/bbl,

WTI)

103.32 97.78 80.00 80.00 80.00 61.69 79.43 95.08 94.20 97.94 94.96 80.00 80.00

Saving rate 5.4 4.8 4.6 4.4 4.5 6.1 5.6 6.0 7.2 4.9 4.9 4.6 5.1

Housing starts

(mil.)

0.99 1.04 1.12 1.19 1.27 0.55 0.59 0.61 0.78 0.93 1.02 1.29 1.47


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Table 2

Standard & Poor's Economic Outlook (cont.)

Unit sales of light

vehicles (mil.)

16.6 16.8 16.8 16.7 16.7 10.4 11.6 12.8 14.5 15.6 16.5 16.7 16.7

Federal surplus

(fiscal year

unified, bil. $)

(241) 47 (80) (144) (283) (1,416) (1,294) (1,297) (1,089) (680) (445) (439) (516)

E--estimate. Note: Quarterly percent change represents annualized growth rate; annual percent change represents average annual growth rate

from a year ago. Quarterly levels represent average during the quarter; annual levels represent average levels during the year. Quartlery levels

of housing starts and unit sales of light vehicles are in annualized millions.

Table 3

Upside Case

November 2014

2009 2010 2011 2012 2013 2014e 2015e 2016e

(% change)

Real GDP (2.8) 2.5 1.6 2.3 2.2 2.3 3.6 3.3

Real final sales--domestic product (3.8) 2.9 1.6 2.2 1.9 2.4 3.7 3.4

Real--PCE total (1.6) 1.9 2.3 1.8 2.4 2.4 3.4 3.6

Equipment investment, 2009$ (22.9) 15.9 13.6 6.8 4.6 6.9 9.8 6.6

Real intellectual property (1.4) 1.9 3.5 3.9 3.4 4.4 5.3 3.0

Real nonresidential construction (18.9) (16.4) 2.3 13.1 (0.5) 8.4 9.8 4.6

Residential structures construction,

2009$

(21.2) (2.5) 0.5 13.5 11.9 2.3 14.2 10.2

Federal government purchases,

2009$

5.7 4.3 (2.7) (1.8) (5.7) (2.7) (0.7) (0.8)

State and local purchases, 2009$ 1.6 (2.7) (3.3) (1.2) 0.5 0.8 1.0 1.1

Total exports, 2009$ (8.8) 11.9 6.9 3.3 3.0 3.6 6.0 5.1

Goods and services imports, 2009$ (13.7) 12.7 5.5 2.3 1.1 3.9 6.2 5.3

CPI (0.3) 1.6 3.1 2.1 1.5 1.8 2.3 2.8

Core CPI 1.7 1.0 1.7 2.1 1.8 1.8 2.5 2.4

Nonfarm unit labor costs (2.7) (1.5) 2.9 2.6 0.8 3.6 2.4 2.3

Nonfarm productivity 1.0 3.1 1.0 0.5 1.2 0.7 1.6 1.9

(Levels)

Unemployment rate (%) 9.3 9.6 8.9 8.1 7.3 6.2 5.7 5.4

Payroll employment (mil.) 131.2 130.3 131.8 134.1 136.4 138.9 141.5 143.3

Federal funds rate 0.1 0.1 0.1 0.1 0.1 0.1 0.8 2.9

10-year Treasury-note yield 3.3 3.2 2.8 1.8 2.4 2.6 3.3 4.6

AAA' corporate bond yield 4.7 3.9 3.5 2.5 3.1 3.2 4.2 5.8

Mortgage rate (30-year conventional) 5.0 4.7 4.5 3.7 4.0 4.2 4.6 6.2

Three-month Treasury-bill rate 0.2 0.1 0.1 0.1 0.1 0.0 0.8 2.7

S&P 500 Index 946.7 1,139.3 1,268.9 1,379.6 1,642.5 1,938.0 2,184.8 2,326.4

S&P operating earnings ($/share) 18.96 68.86 85.70 85.51 90.49 94.86 100.44 106.54

Current account (bil. $) (380.8) (443.9) (459.3) (460.8) (400.3) (376.4) (355.2) (423.2)

Exchange rate (major trade partners) 77.7 75.3 70.9 73.5 76.0 78.4 84.4 86.4

Crude oil ($/bbl, WTI) 61.69 79.43 95.08 94.20 97.94 95.92 85.06 93.57


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Table 3

Upside Case (cont.)

Saving rate 6.1 5.6 6.0 7.2 4.9 4.9 4.3 4.2

Housing starts (mil.) 0.55 0.59 0.61 0.78 0.93 1.02 1.31 1.49

Unit sales of light vehicles (mil.) 10.4 11.6 12.8 14.5 15.6 16.5 16.8 16.9

Federal surplus (fiscal year unified,

bil. $)

(1,416) (1,294) (1,297) (1,089) (680) (445) (427) (488)

E--estimate. Note: Annual percent change represents average annual growth rate from a year ago. Annual levels represent average levels during

the year. Annual levels of housing starts and unit sales of light vehicles are in annualized millions.

Table 4

Downside Case

November 2014

2009 2010 2011 2012 2013 2014e 2015e 2016e

(% change)

Real GDP (2.8) 2.5 1.6 2.3 2.2 2.0 1.2 1.8

Real final sales--domestic product (3.8) 2.9 1.6 2.2 1.9 2.1 1.0 1.8

Real--PCE total (1.6) 1.9 2.3 1.8 2.4 2.1 1.1 1.3

Equipment investment, 2009$ (22.9) 15.9 13.6 6.8 4.6 5.9 0.3 2.2

Real intellectual property (1.4) 1.9 3.5 3.9 3.4 4.1 0.2 0.2

Real nonresidential construction (18.9) (16.4) 2.3 13.1 (0.5) 7.4 1.4 3.9

Residential structures construction,

2009$

(21.2) (2.5) 0.5 13.5 11.9 1.7 6.5 17.9

Federal government purchases,

2009$

5.7 4.3 (2.7) (1.8) (5.7) (2.7) (0.7) (0.8)

State and local purchases, 2009$ 1.6 (2.7) (3.3) (1.2) 0.5 0.8 0.8 0.8

Total exports, 2009$ (8.8) 11.9 6.9 3.3 3.0 2.6 1.4 5.1

Goods and services imports, 2009$ (13.7) 12.7 5.5 2.3 1.1 3.4 1.1 4.7

CPI (0.3) 1.6 3.1 2.1 1.5 1.6 1.5 1.5

Core CPI 1.7 1.0 1.7 2.1 1.8 1.7 1.6 1.9

Nonfarm unit labor costs (2.7) (1.5) 2.9 2.6 0.8 3.6 2.0 1.0

Nonfarm productivity 1.0 3.1 1.0 0.5 1.2 0.5 0.1 1.1

(Levels)

Unemployment rate (%) 9.3 9.6 8.9 8.1 7.3 6.2 6.4 6.2

Payroll employment (mil.) 131.2 130.3 131.8 134.1 136.4 138.8 140.0 140.8

Federal funds rate 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

10-year Treasury-note yield 3.3 3.2 2.8 1.8 2.4 2.6 2.8 2.1

AAA' corporate bond yield 4.7 3.9 3.5 2.5 3.1 3.3 3.6 3.3

Mortgage rate (30-year conventional) 5.0 4.7 4.5 3.7 4.0 4.2 4.3 3.8

Three-month Treasury-bill rate 0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.0

S&P 500 Index 946.7 1,139.3 1,268.9 1,379.6 1,642.5 1,922.8 1,983.6 2,106.1

S&P operating earnings ($/share) 18.96 68.86 85.70 85.51 90.49 94.84 99.66 102.28

Current account (bil. $) (380.8) (443.9) (459.3) (460.8) (400.3) (362.1) (226.9) (274.3)

Exchange rate (major trade partners) 77.7 75.3 70.9 73.5 76.0 78.3 82.7 83.4

Crude oil ($/bbl, WTI) 61.69 79.43 95.08 94.20 97.94 94.46 75.95 80.10


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Table 4

Downside Case (cont.)

Saving rate 6.1 5.6 6.0 7.2 4.9 5.1 5.8 6.4

Housing starts (mil.) 0.55 0.59 0.61 0.78 0.93 0.99 0.92 0.99

Unit sales of light vehicles (mil.) 10.4 11.6 12.8 14.5 15.6 16.3 16.1 16.4

Federal surplus (fiscal year unified,

bil. $)

(1,416) (1,294) (1,297) (1,089) (680) (446) (504) (604)

E--estimate. Note: Annual percent change represents average annual growth rate from a year ago. Annual levels represent average levels during

the year. Annual levels of housing starts and unit sales of light vehicles are in annualized millions.


1369075 | 302136118


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