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Prepared for:Equipment Leasing & Finance Foundation
Prepared by:Robert F. Wescott, Ph.D.
President, Keybridge
Presented:San Diego
October 20, 2014
State of the Equipment Finance IndustryReview and Economic Outlook for 2014-15
EQ UI PMENT LEAS I NG & F I NA NCE F O UNDAT I O N
2
Agenda
I. Snapshot of our 2013 Report on Equipment Finance Activity
II. U.S. Macroeconomic Outlook 2014-15, including geopolitical risks
III. Trends in Equipment Investment
3
2006.Q2
2006.Q3
2006.Q4
2007.Q1
2007.Q2
2007.Q3
2007.Q4
2008.Q1
2008.Q2
2008.Q3
2008.Q4
2009.Q1
2009.Q2
2009.Q3
2009.Q4
2010.Q1
2010.Q2
2010.Q3
2010.Q4
2011.Q1
2011.Q2
2011.Q3
2011.Q4
2012.Q1
2012.Q2
2012.Q3
2012.Q4
2013.Q1
2013.Q2
2013.Q3
2013.Q4
2014.Q1
2014.Q2
60
80
100
120
140
160
180
151
112
134
I. 2013 equipment finance report: First the good news--low interest rates and an expanding economy increased propensity to finance.
Source: ELFF 2014 Survey of Equipment Finance Activity
Propensity to Finance IndexIndex, 2005.Q4 = 100
4
More good news: Portfolio performance strengthened in 2013, as delinquencies and charge-offs dropped to very low levels.
2009 2010 2011 2012 20130%
1%
2%
3%
4%
5%
6%
1.4%0.8% 0.7% 0.7% 0.3%
1.9%
1.2%0.9% 0.5%
0.4%
1.6%
1.5%
0.4%0.3%
0.2%
Portfolio QualityWeighted Average
Source: ELFF 2014 Survey of Equipment Finance Activity
Non-AccrualsCharge-Offs
Delinquencies 90+ Days
5
Pretty good news: New business volume increased solidly in 2013, but not by the double-digit rates of the previous two years.
2008 2009 2010 2011 2012 2013-40%
-30%
-20%
-10%
0%
10%
20%
-2.2%
-30.3%
3.9%
16.5% 16.4%
9.3%
Source: ELFF 2014 Survey of Equipment Finance Activity
New Business VolumeAnnual Percent Change
54%33%
14%
Share of 2013 New Business Volume
Banks
Captives
Independents
6
Bad news: Abundant liquidity and intense competition meant the cost of funds, spreads, and yields further declined.
2009 2010 2011 2012 20130%
1%
2%
3%
4%
5%
6%
7%
8%
3.3%2.5%
1.8% 1.4% 1.4%
3.9%
3.6%
3.3%3.1% 3.0%
Yield Composition
7.2%
6.1%
5.1%4.4%4.5%
Weighted Average
Source: ELFF 2014 Survey of Equipment Finance Activity
Pre-Tax SpreadPre-Tax Yield
Cost of Funds
Return on Equity Return on Assets0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
4.3%
1.0%
9.5%
1.5%
13.0%
2.2%
16.3%
2.1%
14.7%
1.9%
Bottom line for the industry: Financial performance remained strong in 2013, but profitability dipped. The result: a huge focus on productivity.
Profitability RatiosMedian
Source: ELFF 2014 Survey of Equipment Finance Activity
7
20102009
201120122013
8
II. U.S. Macroeconomic Outlook 2014-15—finally achieving escape velocity?
Source: The Economist
9
On balance, bright spots in the U.S. economy are outweighing negative factors. 2013-14 have brought a lot of healing.
Headwinds:Slowing World Economy
Geopolitical Risks
Bright Spots:Improving Labor MarketCredit Flowing AgainFiscal Healing
First reason for optimism: The U.S. labor market is rapidly healing. Adding 3 million workers in a year is boosting income.
2007.10
2007.11
2007.12
2008.01
2008.02
2008.03
2008.04
2008.05
2008.06
2008.07
2008.08
2008.09
2008.10
2008.11
2008.12
2009.01
2009.02
2009.03
2009.04
2009.05
2009.06
2009.07
2009.08
2009.09
2009.10
2009.11
2009.12
2010.01
2010.02
2010.03
2010.04
2010.05
2010.06
2010.07
2010.08
2010.09
2010.10
2010.11
2010.12
2011.01
2011.02
2011.03
2011.04
2011.05
2011.06
2011.07
2011.08
2011.09
2011.10
2011.11
2011.12
2012.01
2012.02
2012.03
2012.04
2012.05
2012.06
2012.07
2012.08
2012.09
2012.10
2012.11
2012.12
2013.01
2013.02
2013.03
2013.04
2013.05
2013.06
2013.07
2013.08
2013.09
2013.10
2013.11
2013.12
2014.01
2014.02
2014.03
2014.04
2014.05
2014.06
2014.07
2014.08
2014.09
2014.10
0%
2%
4%
6%
8%
10%
12%
0
100
200
300
400
500
600
700
Unemployment Rate Initial Jobless Claims
10
Unemployment Rate
Source: Macrobond Financial
Initial Claims
Percent Thousands, 4-week Moving Average
11
Second reason: Credit is flowing again. Bank lending to businesses is up notably. Credit is finally flowing again to consumers as well.
Wells Fargo
J.P. Morgan
Bank of America
PNC
U.S. Bancorp
Citigroup
5.9%
6.6%
8.3%
9.5%
9.7%
11.0%
Commercial/Corporate Bank Loans, 2014.Q1Percent Change, Y/Y
Source: Forbes, “A Look at the Loan Portfolios of the Largest US Banks”, 6/14/14
12
2006.Q2
2006.Q3
2006.Q4
2007.Q1
2007.Q2
2007.Q3
2007.Q4
2008.Q1
2008.Q2
2008.Q3
2008.Q4
2009.Q1
2009.Q2
2009.Q3
2009.Q4
2010.Q1
2010.Q2
2010.Q3
2010.Q4
2011.Q1
2011.Q2
2011.Q3
2011.Q4
2012.Q1
2012.Q2
2012.Q3
2012.Q4
2013.Q1
2013.Q2
2013.Q3
2013.Q4
2014.Q1
2014.Q2
-2%
-1%
-1%
0%
1%
1%
2%
Third reason: Sharp U.S. fiscal contractions/spending cuts are largely finished. And state spending is finally rebounding.
Federal Government Contribution to GDP GrowthPercent
Source: Macrobond Financial
Obama Stimulus Package
Fiscal Contraction
Spending cuts are winding
down
13
1990.Q2
1991.Q1
1991.Q4
1992.Q3
1993.Q2
1994.Q1
1994.Q4
1995.Q3
1996.Q2
1997.Q1
1997.Q4
1998.Q3
1999.Q2
2000.Q1
2000.Q4
2001.Q3
2002.Q2
2003.Q1
2003.Q4
2004.Q3
2005.Q2
2006.Q1
2006.Q4
2007.Q3
2008.Q2
2009.Q1
2009.Q4
2010.Q3
2011.Q2
2012.Q1
2012.Q4
2013.Q3
2014.Q2
-30%
-20%
-10%
0%
10%
20%
30%
60%
65%
70%
75%
80%
85%
90%
95%
100%
Still mending: Business capital spending. Business confidence needs a boost. Capacity utilization hitting 80% would help.
Real Nonresidential Investment: Equipment Capacity UtilizationPercent Change Y/Y Percent
Source: Macrobond Financial
80% capacity utilization-threshold for firm expansion
Housing is also still disappointing. Despite improved fundamentals, the housing recovery remains subpar.
1990.091990.101990.111990.121991.011991.021991.031991.041991.051991.061991.071991.081991.091991.101991.111991.121992.011992.021992.031992.041992.051992.061992.071992.081992.091992.101992.111992.121993.011993.021993.031993.041993.051993.061993.071993.081993.091993.101993.111993.121994.011994.021994.031994.041994.051994.061994.071994.081994.091994.101994.111994.121995.011995.021995.031995.041995.051995.061995.071995.081995.091995.101995.111995.121996.011996.021996.031996.041996.051996.061996.071996.081996.091996.101996.111996.121997.011997.021997.031997.041997.051997.061997.071997.081997.091997.101997.111997.121998.011998.021998.031998.041998.051998.061998.071998.081998.091998.101998.111998.121999.011999.021999.031999.041999.051999.061999.071999.081999.091999.101999.111999.122000.012000.022000.032000.042000.052000.062000.072000.082000.092000.102000.112000.122001.012001.022001.032001.042001.052001.062001.072001.082001.092001.102001.112001.122002.012002.022002.032002.042002.052002.062002.072002.082002.092002.102002.112002.122003.012003.022003.032003.042003.052003.062003.072003.082003.092003.102003.112003.122004.012004.022004.032004.042004.052004.062004.072004.082004.092004.102004.112004.122005.012005.022005.032005.042005.052005.062005.072005.082005.092005.102005.112005.122006.012006.022006.032006.042006.052006.062006.072006.082006.092006.102006.112006.122007.012007.022007.032007.042007.052007.062007.072007.082007.092007.102007.112007.122008.012008.022008.032008.042008.052008.062008.072008.082008.092008.102008.112008.122009.012009.022009.032009.042009.052009.062009.072009.082009.092009.102009.112009.122010.012010.022010.032010.042010.052010.062010.072010.082010.092010.102010.112010.122011.012011.022011.032011.042011.052011.062011.072011.082011.092011.102011.112011.122012.012012.022012.032012.042012.052012.062012.072012.082012.092012.102012.112012.122013.012013.022013.032013.042013.052013.062013.072013.082013.092013.102013.112013.122014.012014.022014.032014.042014.052014.062014.072014.082014.090
20
40
60
80
100
0
500
1000
1500
2000
2500
NAHB Builder Housing Market Index New Housing Starts
14
New Housing Starts
Source: Macrobond Financial
NAHB Builder Index
Index Thousands
15
Two wild cards for 2015: Slumping world growth and lower oil prices.
World Growth• U.S. exports added 0.5 percent to GDP growth in the past 4 quarters• Stronger dollar and slow foreign growth could subtract 0.3 to 0.4% off GDP in
2015.
Oil• Oil prices are down to their lowest level in 4 years (down from $108 to
$82/barrel).• A further drop to $70/barrel could boost GDP growth in 2015 by 0.5 to 0.8%
16
Russia Italy Japan France Germany Canada UK US0%
1%
2%
3%
4%
0.5%0.8% 0.8% 1.0%
1.5%
2.4%2.7%
3.1%
Bottom line: Compared to the rest of the developed world, the U.S. should be the growth leader. Expect growth of 3 to 3-1/2% in 2015.
Projected 2015 G-8 Growth RateY/Y % Change
Source: IMF, “World Economic Outlook, October 2014”
17
The brewing battle at Yellen’s Fed. The fight between the doves and new “financial imbalances” hawks is heating up.
Source: The Federal Reserve; The Economic Club of New York
TRADITIONAL DOVES
Janet Yellen, Fed Chair
"Too many Americans still can't find a job or are forced to work part-time…I promise to do all that I can, working with my fellow policymakers, to achieve the very important goals Congress has assigned to the Federal Reserve.”
“FINANCIAL IMBALANCES” HAWKS
Richard Fisher, Dallas Fed
“There is a tipping point where monetary accommodation comes to be viewed not as a pleasant stimulus…but instead becomes an agent of financial recklessness.”
VS.
1986.071986.081986.091986.101986.111986.121987.011987.021987.031987.041987.051987.061987.071987.081987.091987.101987.111987.121988.011988.021988.031988.041988.051988.061988.071988.081988.091988.101988.111988.121989.011989.021989.031989.041989.051989.061989.071989.081989.091989.101989.111989.121990.011990.021990.031990.041990.051990.061990.071990.081990.091990.101990.111990.121991.011991.021991.031991.041991.051991.061991.071991.081991.091991.101991.111991.121992.011992.021992.031992.041992.051992.061992.071992.081992.091992.101992.111992.121993.011993.021993.031993.041993.051993.061993.071993.081993.091993.101993.111993.121994.011994.021994.031994.041994.051994.061994.071994.081994.091994.101994.111994.121995.011995.021995.031995.041995.051995.061995.071995.081995.091995.101995.111995.121996.011996.021996.031996.041996.051996.061996.071996.081996.091996.101996.111996.121997.011997.021997.031997.041997.051997.061997.071997.081997.091997.101997.111997.121998.011998.021998.031998.041998.051998.061998.071998.081998.091998.101998.111998.121999.011999.021999.031999.041999.051999.061999.071999.081999.091999.101999.111999.122000.012000.022000.032000.042000.052000.062000.072000.082000.092000.102000.112000.122001.012001.022001.032001.042001.052001.062001.072001.082001.092001.102001.112001.122002.012002.022002.032002.042002.052002.062002.072002.082002.092002.102002.112002.122003.012003.022003.032003.042003.052003.062003.072003.082003.092003.102003.112003.122004.012004.022004.032004.042004.052004.062004.072004.082004.092004.102004.112004.122005.012005.022005.032005.042005.052005.062005.072005.082005.092005.102005.112005.122006.012006.022006.032006.042006.052006.062006.072006.082006.092006.102006.112006.122007.012007.022007.032007.042007.052007.062007.072007.082007.092007.102007.112007.122008.012008.022008.032008.042008.052008.062008.072008.082008.092008.102008.112008.122009.012009.022009.032009.042009.052009.062009.072009.082009.092009.102009.112009.122010.012010.022010.032010.042010.052010.062010.072010.082010.092010.102010.112010.122011.012011.022011.032011.042011.052011.062011.072011.082011.092011.102011.112011.122012.012012.022012.032012.042012.052012.062012.072012.082012.092012.102012.112012.122013.012013.022013.032013.042013.052013.062013.072013.082013.092013.102013.112013.122014.012014.022014.032014.042014.052014.062014.07-5
0
5
10
What should the Fed be doing if it followed its own historical experience? Taylor rules help to show this.
Source: Macrobond Financial, Keybridge
18
Taylor Rule Using PCE Inflation and Output GapPercent
Actual FFR
Taylor Rule
1986.071986.081986.091986.101986.111986.121987.011987.021987.031987.041987.051987.061987.071987.081987.091987.101987.111987.121988.011988.021988.031988.041988.051988.061988.071988.081988.091988.101988.111988.121989.011989.021989.031989.041989.051989.061989.071989.081989.091989.101989.111989.121990.011990.021990.031990.041990.051990.061990.071990.081990.091990.101990.111990.121991.011991.021991.031991.041991.051991.061991.071991.081991.091991.101991.111991.121992.011992.021992.031992.041992.051992.061992.071992.081992.091992.101992.111992.121993.011993.021993.031993.041993.051993.061993.071993.081993.091993.101993.111993.121994.011994.021994.031994.041994.051994.061994.071994.081994.091994.101994.111994.121995.011995.021995.031995.041995.051995.061995.071995.081995.091995.101995.111995.121996.011996.021996.031996.041996.051996.061996.071996.081996.091996.101996.111996.121997.011997.021997.031997.041997.051997.061997.071997.081997.091997.101997.111997.121998.011998.021998.031998.041998.051998.061998.071998.081998.091998.101998.111998.121999.011999.021999.031999.041999.051999.061999.071999.081999.091999.101999.111999.122000.012000.022000.032000.042000.052000.062000.072000.082000.092000.102000.112000.122001.012001.022001.032001.042001.052001.062001.072001.082001.092001.102001.112001.122002.012002.022002.032002.042002.052002.062002.072002.082002.092002.102002.112002.122003.012003.022003.032003.042003.052003.062003.072003.082003.092003.102003.112003.122004.012004.022004.032004.042004.052004.062004.072004.082004.092004.102004.112004.122005.012005.022005.032005.042005.052005.062005.072005.082005.092005.102005.112005.122006.012006.022006.032006.042006.052006.062006.072006.082006.092006.102006.112006.122007.012007.022007.032007.042007.052007.062007.072007.082007.092007.102007.112007.122008.012008.022008.032008.042008.052008.062008.072008.082008.092008.102008.112008.122009.012009.022009.032009.042009.052009.062009.072009.082009.092009.102009.112009.122010.012010.022010.032010.042010.052010.062010.072010.082010.092010.102010.112010.122011.012011.022011.032011.042011.052011.062011.072011.082011.092011.102011.112011.122012.012012.022012.032012.042012.052012.062012.072012.082012.092012.102012.112012.122013.012013.022013.032013.042013.052013.062013.072013.082013.092013.102013.112013.122014.012014.022014.032014.042014.052014.062014.07-5
0
5
10
Crisis: QE was a logical policy choice, because of the difficulty of negative rates.
Source: Macrobond Financial, Keybridge
19
Taylor Rule Using PCE Inflation and Output GapPercent
Actual FFR
Taylor Rule
1986.071986.081986.091986.101986.111986.121987.011987.021987.031987.041987.051987.061987.071987.081987.091987.101987.111987.121988.011988.021988.031988.041988.051988.061988.071988.081988.091988.101988.111988.121989.011989.021989.031989.041989.051989.061989.071989.081989.091989.101989.111989.121990.011990.021990.031990.041990.051990.061990.071990.081990.091990.101990.111990.121991.011991.021991.031991.041991.051991.061991.071991.081991.091991.101991.111991.121992.011992.021992.031992.041992.051992.061992.071992.081992.091992.101992.111992.121993.011993.021993.031993.041993.051993.061993.071993.081993.091993.101993.111993.121994.011994.021994.031994.041994.051994.061994.071994.081994.091994.101994.111994.121995.011995.021995.031995.041995.051995.061995.071995.081995.091995.101995.111995.121996.011996.021996.031996.041996.051996.061996.071996.081996.091996.101996.111996.121997.011997.021997.031997.041997.051997.061997.071997.081997.091997.101997.111997.121998.011998.021998.031998.041998.051998.061998.071998.081998.091998.101998.111998.121999.011999.021999.031999.041999.051999.061999.071999.081999.091999.101999.111999.122000.012000.022000.032000.042000.052000.062000.072000.082000.092000.102000.112000.122001.012001.022001.032001.042001.052001.062001.072001.082001.092001.102001.112001.122002.012002.022002.032002.042002.052002.062002.072002.082002.092002.102002.112002.122003.012003.022003.032003.042003.052003.062003.072003.082003.092003.102003.112003.122004.012004.022004.032004.042004.052004.062004.072004.082004.092004.102004.112004.122005.012005.022005.032005.042005.052005.062005.072005.082005.092005.102005.112005.122006.012006.022006.032006.042006.052006.062006.072006.082006.092006.102006.112006.122007.012007.022007.032007.042007.052007.062007.072007.082007.092007.102007.112007.122008.012008.022008.032008.042008.052008.062008.072008.082008.092008.102008.112008.122009.012009.022009.032009.042009.052009.062009.072009.082009.092009.102009.112009.122010.012010.022010.032010.042010.052010.062010.072010.082010.092010.102010.112010.122011.012011.022011.032011.042011.052011.062011.072011.082011.092011.102011.112011.122012.012012.022012.032012.042012.052012.062012.072012.082012.092012.102012.112012.122013.012013.022013.032013.042013.052013.062013.072013.082013.092013.102013.112013.122014.012014.022014.032014.042014.052014.062014.07-5
0
5
10
However, today, Taylor rules would suggest that the long period of zero rates should be ending. Might the Fed be behind the curve?
Source: Macrobond Financial, Keybridge
20
Taylor Rule Using PCE Inflation and Output GapPercent
Actual FFR
Taylor Rule
21
Larry Summers’ worry – are rich countries doomed to “secular stagnation”?
Source: The Atlantic; Reuters
“We may be in a period of secular stagnation in which sluggish
growth, output, and employment at levels well below potential, and problematically low real interest
rates might coincide for quite some time to come.”
22
Might rich countries have permanently lower economic growth?
The Secular Stagnation Debate
Factors that could indicate “secular stagnation”:
• Aging population• Interest rates at their zero bound• Lack of productive investments• Inflation that is “too low”• Increased inequality• Lack of innovation
23
Are we stuck in a 2% growth world? This is too pessimistic. U.S. potential GDP growth = %CH (labor force) + %CH (productivity).
1974 1984 1994 2004 20140%
1%
2%
3%
1.8%
1.2% 1.2%0.8% 0.9%
Civilian Non-institutional Population, Ages 20-64Y/Y % Change
Source: Census Bureau
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-5%
0%
5%
10%
And productivity is not as bad as pessimists say. It should average 1.6% a year over the next decade. Potential growth can be 2.4% to 2.7%.
Source: Macrobond Financial
24
Nonfarm Business Sector Labor Productivity, Output per HourY/Y % Change
1974 - 1984:1.5%
1994 - 2004:2.8%
1984 - 1994:1.7%
2004 - 2014:1.5%
25
Where will growth come from? A strong construction rebound offers the best short-run hope.
Source: World Property Channel
26
Possible sources of longer-term growth—high-growth, high-reward industries.
Source: National Science Foundation, AdvaMed, International Federation of Robotics
Industrial AutomationAdvanced Medical Technology
Nanotechnology
By 2020, forecast to:• Create 2 million jobs in US• Build $1 trillion final products market• Boost productivity in energy, medicine, and
electronics industries
Currently generates:• 300,000 jobs directly• $17.1b market, cost has fallen 50% since 1990• Boosts manufacturing productivity
Currently generates:• 1.9 million jobs• $381 billion in US economic output• For every 1 billion in industry revenues, estimated
$1.69 billion added to GDP
By 2020, forecast to:• Save $5.8b/year on consumer fuel costs• Add 300,000 jobs• Add $38.1 billion to GDP in 2020
Unconventional Oil Exploration
27
Geopolitical risks that keep me awake at night.
Russia-Ukraine
LibyaSyria/Iraq/ISIS
China Growth Slowdown
Ebola Outbreak
28
How do geopolitical risks affect global financial markets?
Transmission Mechanisms
Global Oil Prices
Business & Investor Confidence
Capital Outflows & Safe Haven Effects
Regional Contagion Effects
Risk of Expropriation
Flows of People & Goods
29
Putin’s aggression seems driven by Russia’s “inferiority complex” after losing the cold war. Economic problems have contributed.
“First and foremost it is worth acknowledging that the demise of the
Soviet Union was the greatest geopolitical catastrophe of the 20th century.”
-Putin, 2005
Source: The Guardian, The Washington Post, “Russia is re-making itself as the leader of the anti-Western world” 03/30/14, NBC
30
My Russian concerns:
• Crimea or economic growth? Putin will take Crimea.
• Sanctions are biting—maybe a little too tough? If oil prices drop further, how will Russia endure the pain?
• Impact on business confidence in the EU (and Germany) has been worse than expected
• Natural gas games this winter?
• Geopolitical accidents? (Russia playing games in Sweden, Lithuanian, etc., doing trial incursions, submarine probes, Cold War tricks)
31
China: Construction slowdown is well-entrenched. How much will it slow the overall Chinese economy? (and the world economy)?
32
Xi Jinping’s balancing act: Sustaining growth and social cohesion as construction slows. Can consumption pick up the ball?
-73.3%-17.0%
-15%Drop in sales price in large and medium-
sized cities from Jan-Aug 2014
Decline in Y/Y change of total floor space under construction
Drop in housing rent
Vacancy Rate in 2013
22.4%
In the first seven months of 2014:
Source: Mingtiandi, “China Housing Sales Drop 10.5% in 2014 as Credit Dries Up”, 8/14/14; Macrobond
33
Ebola: Low probability but high impact risk. Africa is largely disconnected from the world economy, but…
Source: Wired
34
8 years 6 years
1999.Q2
1999.Q4
2000.Q2
2000.Q4
2001.Q2
2001.Q4
2002.Q2
2002.Q4
2003.Q2
2003.Q4
2004.Q2
2004.Q4
2005.Q2
2005.Q4
2006.Q2
2006.Q4
2007.Q2
2007.Q4
2008.Q2
2008.Q4
2009.Q2
2009.Q4
2010.Q2
2010.Q4
2011.Q2
2011.Q4
2012.Q2
2012.Q4
2013.Q2
2013.Q4
2014.Q2
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
III. Equipment investment has clawed its way back to a reasonably normal share of GDP. Further growth requires a breakout of demand.
Source: Macrobond Financial, Keybridge
Equipment & Software InvestmentShare of Real GDP
Software Investment
Equipment Investment
35
Illustrating the need for a new investment breakout is the fact that new leasing business volume in 2014 is roughly flat with 2013 levels.
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
$56.6
$82.9 $87.0$80.2
$54.6 $59.3
$74.0$84.4 $87.3 $86.7
MLFI-25 New Business VolumeBillion Dollars
*ProjectedSource: ELFA MLFI-25, 2014 projection from Keybridge
Annualized rate through August 2014. Down
0.7% from 2013.
36
Most likely source of a breakout? Capacity utilization rising above 80% would likely support a new wave of capex spending.
Oil & Gas
Mining
Coal
Syth
ethic F
ibers
Moto
r Veh
icles
Primary
Meta
l
Mac
hinery
Fabric
ated M
etal
Food &
Bevera
geTo
tal
Plastics
Non-Durables
Durables
Aerosp
ace
Chemica
ls
Texti
les
Comm. Equip.
Apparel
Computers
Semico
nductors
0%
20%
40%
60%
80%
100%
Capacity Utilization, August 2014Percent of Capacity
Source: Macrobond Financial
80% Threshold Indicates Expansion
37
Meanwhile, the energy boom is for real: As domestic oil production has jumped (5 mbd to 8.8 mbd), rail shipments of oil have surged.
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Rail Traffic – Carloads Originated
Source: Macrobond Financial
Y/Y Percent Change, 6-month Moving AveragePetroleum
CoalOther Commodities
38
And finally, the U.S. manufacturing renaissance is for real and should be sustained.
Boston Consulting Group Manufacturing Cost Competitiveness
Out of the 25 largest exporters, the U.S. is now the 2nd most competitive, behind China. European firms are looking to shift production to the U.S.
U.S. manufacturing costs are 10-25% lower than all other top 10 goods-exporting countries (except China).
The gap between the U.S. and China is narrowing: In 2004, U.S. manufacturing costs were 14% higher, compared to only 5% today.
On current trends, U.S. manufacturing will be less expensive than China’s by 2018.
Source: Boston Consulting Group, NPR, “Study: U.S. Manufacturers Gaining Competitiveness,” 04/25/14
1
2
3
4
39
In conclusion: U.S. growth seems on track, but turbulence abroad creates risks. Getting capacity utilization above 80% is key.
Source: Getty Images, CosmeticsDesign
The U.S. economy is healing. 2015 should be the best year since 2006.
The Fed may face pressure to raise rates sooner than planned. U.S. potential growth may be better than the 2% rate pessimists fear.
Russia and China and Ebola present geopolitical worries.
Capacity utilization reaching 80% and a strong housing rebound are probably necessary for an acceleration in business investment.