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2013 Macroeconomic Outlook Arjun Chakravarti, Ph.D. January 2013. Prepared by:. General Overview. 2013 Economic Situation: Slow then Stable. 2012. We often underestimate the rate of contractions and overestimate the rate of growth because of shifts in closings/openings.

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  1. 2013 Macroeconomic OutlookArjun Chakravarti, Ph.D January 2013 Prepared by:

  2. General Overview

  3. 2013 Economic Situation: Slow then Stable 2012 We often underestimate the rate of contractions and overestimate the rate of growth because of shifts in closings/openings. • Up and down with upward revisions • Q3 revised upward to 3% GDP growth • But holiday spending looks flat (0.6%) • Major uncertainties • Europe and emerging market slowing • Fiscal cliff kicked down the road • Consumer confidence plummets Source: Federal Reserve, BLS unless otherwise noted

  4. 2013 Economic Situation: Slow then Stable Household sector and Fed action will help, but unresolved legislative issues will create a drag. Expect continued 1.7%- 2.3% growth. • Potential upsides • Major central bank interventions (with costs) • Housing starts, prices in many regions • Natural gas boom serving as a buffer • Corporate profits; small business credit higher • U.S. – Mexico energy-wage dynamic could make North America more globally competitive

  5. U.S. Market Situation

  6. CORE Inflation Is Low Estimated 1.7% in November 2013 6% 4% 2% 0 2000 2004 2008 2012

  7. Drought Could Prove Problematic in Retail Food Corn: Only 25% of crop in good condition Wheat: Crop collected early, less drought Meat prices: Drought leads to herd culling, prices fall then rise in mind 2013 Energy: 15% increase if Winter 2012 weather reverts to norm USDA: Retail food price inflation expected to be above 2-3% historical average (closer to 3-4 %).

  8. Unemployment Falling, but Sluggishly Percent Unemployed vs. Underemployed 14.1 Unemployment Rate 7.7 1994 2001 2007 2012 The Fed is now targeting a 6.5 % unemployment rate, which could take three years to achieve with pop growth (220k/month).

  9. Long-Term Unemployment Trend Is Poor Trend vs. Actual Civilian Employed 200k 150k 2037 2007 2012 The economic situation is still tenuous. At this pace total civilian employment will not return to 2007 trend until 2037!

  10. Where Is the Job Shift Coming From? Household sector and Fed action will help, but spending cuts and taxes will create a drag. Expect continued 2% growth Source: BLS adapted from Washington Post

  11. Group Unemployment Differentials Below Average Above Average Regional • Socio-economic The core foodservice consumer is recovering well, but regional differences and structural issues with younger, lower SES groups suggest major structural problems.

  12. Key Point Housing market performance and lower to middle class spending growth are intrinsically linked (men, construction jobs) Household sector and Fed action will help, but spending cuts and taxes will create a drag. Expect continued 2% growth Housing-related employment accounted for 38% of job loss during recession!

  13. Housing Prices Rising in Many Regions 2012 Household sector and Fed action will help, but spending cuts and taxes will create a drag. Expect continued 2% growth. • Housing starts are up • Supply is low, but shadow inventory lurks • Hedge funds are buying up homes in bulk

  14. Housing Prices Rising in Many Regions Case-shiller 20 City Composite Index(September 2012 2012 Household sector and Fed action will help, but spending cuts and taxes will create a drag. Expect continued 2% growth SEPT 2008 2012

  15. Negative Home Equity >30% by Region (approx.) Shadow inventory and differing foreclosure laws by state.

  16. Housing Is Showing Recovery in Some Regions 2013 Shadow inventory and differing foreclosure laws by state. • U.S. housing growth will need to buffer international slowdowns • Housing supplies low, rental inflation is affecting is lowering available DPI • Hedge funds are buying homes in bulk • Foreclosure resolution going faster • Each new household adds $145k to economy

  17. Personal Savings Rate Dec: 3.6 % 1980 1987 1990 2001 2007-8 2012 Federal Reserve Economic Data (FRED)

  18. Real DPI per Capita Slowly Ticking Upward Real DPI per capita: spending more with fewer dollars.

  19. Consumer Deleveraging Continues to Help Non-Revolving Revolving Dodd-Frank limiting revolving balances, student loans a major contributor to non-revolving debt.

  20. Details of Changes in Debt Structure More auto and durables purchases are a good sign, but limited revolving credit could limit nights out.

  21. Credit: Owner vs. Renter DPI Differentials The economy is still one million households short of projections but owners poised to spend on foodservice while renters a few years away. Household sector and Fed action will help, but spending cuts and taxes will create a drag. Expect continued 2% growth • Low rates have helped homeowners manage finances better than renters • Financial obligations/DPI: reaching all-time lows • Credit scores above 700 get 90% of mortgages • Low interest rates  investing instead of retiring debt • Renters doing better but face high rent inflation • Each new household adds $145k to economy

  22. In general, the news is looking up! Household sector and Fed action will help, but spending cuts and taxes will create a drag. Expect continued 2% growth.

  23. So Why Is Consumer Confidence Plummeting? DEC 72.3 2001 2007 2011 2012 Source: Univ. of Michigan Consumer Confidence 12/12

  24. Policy Issues: Fiscal Cliff Tax revenues and interest savings will produce $724 billion in deficit reduction • Tax and revenue increases (consumer losses) • + 400k: 39.6% marginal rate; 20% capital gains tax • Estate tax 40% after $5 million exemption • Itemized deduction limits over $250k income • Return to 6.2% payroll tax rate • Consumer gains • Credits: child-care, earned income remain the same • Alternative minimum tax adjusted to inflation • (3 million fewer people have to pay)

  25. Structural Issues Delayed: Expect No Action Continued housing growth could push GDP growth near 3% but legislative and political uncertainties suggests 2% • Debt ceiling and sequester deal not in sight • Expect more political uncertainty in Q1 and Q2 • Structural deficits will be very damaging long-term • No incentive to make a deal on structural deficits until we see real inflation • Hopefully markets have internalized how political brinksmanship could work

  26. Implications for Food Service Consumers • Highly Educated • Middle Class • Poor • Recovered in job market but youth underemployed • Rent inflation hitting the middle class into 2014 • Homeowners have more leeway in many markets • Payroll taxes rising but other tax expectations are low • Won’t recover without construction boom or other shock Employment and asset stability depends on US housing market growth outpacing losses in Europe and emerging markets. GDP Growth: 2013 (2%); 2014 (closer to 3%)

  27. Thank you! • Arjun Chakravarti • Email: arjunchakravarti@gmail.com

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