SECOND-LONGEST us EXPANSION IN HISTORY, CAN IT SET A RECORD? ECONOMIC OUTLOOK SECOND-LONGEST us EXPANSION IN HISTORY, CAN IT SET A RECORD? Augustine Faucher Chief Economist Accounting CPE Conference 2018 Power Center Ballroom, Duquesne University, Pittsburgh November 15, 2018 Gus Faucher Chief Economist Stuart Hoffman Senior Economic Advisor William Adams Senior Economist Kurt Rankin Economist

NOW THE SECOND-LONGEST EXPANSION IN HISTORY Length of expansion, months, by starting date of recovery Source: NBER 2

BETTER CONFIDENCE SINCE THE ELECTION Small business optimism index, 1986=100 (R) Consumer confidence index, 1985=100 (L) Sources: The Conference Board, NFIB 3

INTEREST RATES CONTINUE TO MOVE HIGHER… 10-year Treasury bond (R) 3-month Treasury bill (L) Source: Federal Reserve 4

…AND STOCK MARKET IS NOT SIGNALLING PROBLEMS Sources: S&P, CBOE 5

GRADUAL ACCELERATION IN GROWTH OVER THE PAST FEW YEARS Real, % change year ago Gross domestic income Gross domestic product Source: BEA 6

SYNCHRONIZED GLOBAL GROWTH, FOR FIRST TIME SINCE GLOBAL FINANCIAL CRISIS…

…AND WEAKER DOLLAR IS HELPING EXPORTS Sources: BEA, Federal Reserve 8

ENERGY NO LONGER A DRAG ON GROWTH, LOW PRICES ARE GOOD NEWS FOR LONGER RUN Sources: Federal Reserve, NYMEX 9

MOST PRIVATE INDUSTRIES ARE DRIVING JOB GROWTH Payroll employment, change year ago, mil Source: BLS 10

TAX CUTS ARE HERE… Budget impact, fiscal year, $ bil Source: JCT 11

…AND MORE SPENDING, TOO Increase in spending caps, fiscal year, $ bil Source: CBO 12

WITH UPWARD REVISION TO INCOME, CONSUMERS IN GOOD SHAPE IN 2018… Real, % change year ago Personal disposable income after revisions Consumer spending Personal disposable income before revisions Source: BEA 13

…AND WAGE GROWTH IS PICKING UP Average hourly earnings, all private-sector workers, % change year ago (R) Quit rate, % of employment, 3-quarter lead (L) Private-sector wages, ECI, % change year ago (R) Source: BLS 14

AUTO SALES SOLID FOR FOURTH STRAIGHT YEAR Cash for clunkers Sources: AutoData, BLS 15

STILL ROOM FOR IMPROVEMENT IN HOMEBUILDING… Residential construction employment, ths (R) Housing starts, SAAR, 3-month moving average, ths (L) Sources: Census, BLS 16

…WITH HOUSE PRICE GROWTH RUNNING AT A SUSTAINABLE PACE Sources: S&P/Case-Shiller, CoreLogic, PNC 17

SLOW RECOVERY IN Business INVESTMENT Real business fixed investment, 2012$ bil Source: BEA 18

Small Business Hiring Intentions ARE VERY strong Expectations of own hiring, % of respondents Source: PNC 19

TARIFFS WILL DO LITTLE TO REDUCE TRADE DEFICIT Net lending or borrowing, % of GDP Source: BLS 20

SHORT-TERM INTEREST RATES WILL CONTINUE TO RISE AS FED KEEPS AN EYE ON INFLATION… Personal consumption expenditures price index, % change year ago Excluding food and energy Overall Sources: BEA, PNC 21

…BUT WATCH OUT FOR INVERTED YIELD CURVE Yield spread: interest rate on 10-year U.S. government bond minus interest rate on 3-month U.S. government bill, percentage points Sources: Federal Reserve Board; NBER 22

STRONGER ECONOMIC GROWTH IN 2018 AND 2019, MOVING PAST FULL EMPLOYMENT Real GDP, % change year ago (L) Unemployment rate, % (R) Sources: BEA, BLS, PNC 23

POCKETS OF WEAKNESS IN THE FALL OF 2017…

…WITH BETTER GROWTH NOW…

…AND BROAD-BASED GROWTH IN EARLY 2019

JOB GROWTH IN PITTSBURGH HAS STALLED AGAIN… Payroll employment, 3-month moving average, cyclical peak=100 U.S. Pittsburgh Pennsylvania Source: BLS 27

…ACROSS THE BOARD Payroll employment, 3-month moving average, change year ago, ths Source: BLS 28

expected sales growth in Pennsylvania PICKED UP THIS YEAR… Expectations of own sales, % of respondents Source: PNC 29

…As did hiring expectations Expectations of own hiring, % of respondents Source: PNC 30

LIMITED EXPOSURE TO POTENTIAL TRADE WAR Exports as % of GDP/GSP/GMP Source: BEA 31

FALLING POPULATION A BIG LONG-RUN CONCERN Population, % change U.S. Pennsylvania Pittsburgh Source: Census 32

BIG RISKS TO THE UPSIDE AND DOWNSIDE President Trump ↓ Trade war ↕ Fiscal policy ↓ Monetary policy/interest rates ↓ Business leverage/commercial real estate ↕ Global economy/dollar ↕ Stock market ↑ Jobs/income/confidence ↑ Regulatory reform ↓ Immigration ↓ Budget deficit ↓ Brexit/Europe ↕ China/emerging economies ↕ Housing market ↑ Commercial construction ↓ Terrorism

STRUCTURAL SLOWDOWN IN PRODUCTIVITY GROWTH IS BAD NEWS FOR LONG RUN Productivity, nonfarm business sector, 4-quarter MA, % change year ago Source: BLS 34

HIGHER GASOLINE PRICES WILL EAT UP MUCH OF THE TAX CUT Price of unleaded gasoline, $ per gallon (L) Consumer spending on gasoline, annualized, $ bil (R) Sources: Oil Price Information Service, BEA 35

CONSUMERS WILLING TO TAKE ON MORE DEBT, AND THAT’S NOT A PROBLEM % of disposable income Financial obligations ratio (R) Mortgage debt service ratio (L) Source: Federal Reserve 36

PUT IT ALL TOGETHER, THREE GOOD YEARS FOR REAL INCOMES Real median household income, % change Source: Census Bureau 37

…as will long-term rates, but more SLOWly, as fed reduces balance sheet… Federal Reserve assets, $ tril Source: Federal Reserve 38

Q&A PNC Economic Outlook For more information from PNC Economics: www.pnc.com/economicreports Twitter: @GusFaucherPNC

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