1. 2016 – What’s Ahead? Jonathan Basile
Head of Business Cycle Research, AIG Global Economics
Business Survey Chair, ISM-New York
February 24, 2016

2. Act I: How Did We Get Here?
: Fed casts QE, investors go out risk curve, stocks/EM benefit, US recession ends
2011: Global commodity super-cycle peaks, Euro crisis, US debt downgrade
2012: EM industrial slowdown, Euro crisis ends
2013: Fed signals QE rollback, EM taper tantrum
2014: Oil price crash/energy bust, US dollar rallies, Fed ends QE
2015: Chinese devaluation, EM industrial recession, US industrial slowdown, Fed raises rates, Negative interest rates in Euro Area
2016: Global financial market turmoil, Negative interest rates in Japan, Brexit/risk of UK leaving EU, US recession risk rising
(Did I miss anything?)

3. Construction & Services
Will We Avoid a Domino Effect?
Construction & Services
Oversupply red flag still waving
Mfg
If these fall, job market goes with it
Oil price crash
Energy
Confidence in central banks is glue that keeps this domino from falling

4. Where Are We Going?
2016 US Outlook: Less Visibility, Mini-Down Cycle (highest probability)
Business sector
Headwinds more intense on exports, investment, profits
Risks from EM industrial recession hit home
US oversupply conditions in manufacturing persist
Downside risks to goods prices from lower import prices
Household sector
Tailwinds not as strong
Gradual housing recovery should continue
Slower job/income growth  slower discretionary spending growth
Rising unemployment expectations, stalling income expectations
Service prices underpinned by house prices/rents, health care
Government sector
Tailwinds modest
Local government supported by housing market
Federal highway bill supportive
Presidential election-year uncertainty

5. When Will Fed Raise Rates Again?
Central bank guidance is hooked closely to financial market developments. Two things happen:
Visibility in the forecast diminishes
Confidence in the forecast drops
This creates doubt. And when in doubt, central banks stay sidelined – unless and until the storm passes.
Market priced out 2016 rate hikes

6. Intermission: Any Questions?

7. Act II: Follow the Profit/Credit Cycle 
Early business cycle: Profits accelerate, Credit decelerates/declines
Late business cycle: Profits decelerate/decline, Credit accelerates
Tighter Credit Conditions
Tighter Budgets
Slower Credit Growth
Slower Purchasing Volume
More Competitive Pricing Environment

8. Act II: Follow the Profit/Credit Cycle 
Early business cycle: Profits accelerate, Credit decelerates/declines
Late business cycle: Profits decelerate/decline, Credit accelerates
Where are we now? Late business cycle.

9.  Tighter Credit Conditions  Tighter Budgets 
More costly to borrow from banks
and in corporate bond markets
Above Zero = Tighter
exception
Above Zero = Tighter

10.  Slower Credit Growth  Slower Purchasing Volume 
Ask Credit Managers
Manufacturing
Services

11.  More Competitive Pricing Environment
Ask Purchasing Managers
Manufacturing
Services

12. Thank you for your attention
Q&A
Thank you for your attention

13. American International Group, Inc
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