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US Economic Outlook: The Home Stretch

This report provides an outlook on the US economy, including moderate GDP growth, the fiscal cliff, a turnaround in the housing market, and the effects of fiscal policy and household deleveraging.

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US Economic Outlook: The Home Stretch

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  1. US Economic Outlook: The Home Stretch Ryan WangUS Economist HSBC Securities (USA) Inc. ryan.wang@us.hsbc.com +1 212 525 3181 October 2012 Disclaimer & Disclosures: This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

  2. US Economic Outlook: The Home Stretch • Since coming out of recession in the middle of 2009, the US economy has expanded at about a 2% rate. We expect a similar pace of growth in 2013. • Moderate GDP growth has been too slow to generate a rapid recovery in the labor market. • Export growth has weakened this year, reflecting a widespread slowdown in global economic growth. • The federal government is approaching a “fiscal cliff” at the end of this year. Abrupt spending cuts and tax increases could derail an already fragile recovery. • Recent developments point to a turnaround in the housing market. Higher house prices could eventually lead to stronger economic growth.

  3. US GDP growth has averaged 2.2% over the past 3 years Source: Bureau of Economic Analysis 3

  4. Employment gains have only matched population growth Source: Bureau of Labor Statistics 4

  5. Unemployment and labor force participation Source: Bureau of Labor Statistics 5

  6. The labor market is a dynamic place Source: Bureau of Labor Statistics, HSBC 6

  7. Orders for capital equipment are falling Source: Census Bureau 7

  8. Export growth slowing fast Source: Institute for Supply Management, Census Bureau 8

  9. Global growth still intertwined despite divergences Source: International Monetary Fund

  10. Fiscal policy and the growth in federal debt • Combination of recession and deliberate fiscal stimulus has pushed federal borrowing up to record levels. • Commitments for income support and medical care for the elderly population have created longer-term fiscal problems. • The Budget Control Act of 2011 fell short of the $4.0 trillion in deficit reduction necessary to stabilize the nation’s debt to GDP ratio – a key criterion for a triple-A credit rating. • The federal government is approaching a “fiscal cliff” at the end of this year. Abrupt spending cuts and tax increases could derail an already fragile recovery.

  11. Record federal government budget deficits Source: OMB 11

  12. US debt outlook is becoming unsustainable Source: Congressional Budget Office, HSBC

  13. Federal pension and health care expenditures rise inexorably Source: Congressional Budget Office 13

  14. Higher debt leads to higher future interest payments Source: Congressional Budget Office 14

  15. State and local gov’ts: Budgetary stress despite stable debt Source: Securities Industry and Financial Markets Association, Bureau of Economic Analysis

  16. Four years of state and local government layoffs Source: Bureau of Labor Statistics

  17. Three years of falling public construction Source: Census Bureau

  18. Fiscal austerity has been a heavy drag on growth Source: Bureau of Economic Analysis

  19. Housing market and household deleveraging • Home sales are rising and house prices have bottomed out. • Higher house prices should eventually lead to the end of household deleveraging, setting the stage for stronger economic growth. • Timing will depends on the speed of the housing recovery. • Mortgage credit is likely to contract for at least another year.

  20. Housing market starting to show some signs of life Source: National Association of Realtors

  21. Home prices have turned up a little Source: CoreLogic

  22. Homeowners’ equity dropped from 60% to 40% Source: Federal Reserve

  23. What would it take to get back to 50% housing equity? Source: Federal Reserve

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