United States Business Forecast Report Q1 2014

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Jan 28, 2014, 11:25 ET

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United States Business Forecast Report Q1 2014

Core Views

We remain positive on the growth trajectory for the US economy
over the next several years, as we believe that many structural factors
are aligning for a period of sustained growth, underpinning our
forecast for real GDP growth to average 2.4% per year from 2013-
2018, up from 0.8% per year from 2008-2012. The labour market
recovery has further to go, meaning that modest increases in job
creation will prove to be a boon to spending over the medium term.
Additionally, the cyclical components of GDP remain quite low as a
share of the economy but have begun to turn higher, and improving
trade dynamics will help reduce the drag of net exports on growth.
Our view for a narrowing US current account as a percentage of
GDP deficit continues to play out, largely on the back of falling
energy prices and higher domestic production. We believe export
growth will generally outpace import growth over the medium term,
and expect broad stability in the financial account.
Data continue to support our view that stronger revenues and an
abrupt slowdown in spending will help to narrow the US fiscal shortfall
in 2013 to 3.7% of GDP from 6.7% of GDP in 2012, a trend that
we forecast will continue in the years ahead. As a result, we also
forecast that the ratio of debt to GDP will stabilise and hold steady
around 70% over the next few years.

Major Forecast Changes

We have revised down our end-2013 and end-2014 unemployment
rate forecasts from 7.5% and 7.2% to 7.2% and 6.8% respectively
on the back of stronger than expected job gains and our view for
accelerating economic growth over the coming quarters.

Key Risks To Outlook

Downside Risks To Growth Forecast: There are growing political
risks that could weigh on growth in the final quarter of the year and
into 2014, posing downside risks to our 2013 and 2014 real GDP
forecasts of 1.8% and 2.8% respectively. The failure of the US
Congress to pass spending bills resulted in a government shutdown
that started October 1, a development that could cause significant
disruption to both consumer behaviour and business spending.

Downside Risks To Long-Term Outlook: The gaping fiscal deficit
and rising government debt burden are not an immediate concern,
but they do pose a risk to macroeconomic stability over the longer
term.
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Shutdown To Worsen Tensions And Increase Gridlock 8
We believe that the US government shutdown and debt ceiling fight will be resolved without a default or any major concessions on
President Obama's signature healthcare reform law, as public opinion seems to be against the demands being made by Republicans in
the House of Representatives That said, we believe the shutdown will make progress much harder on other issues and acknowledge
risks of an even larger crisis over the debt ceiling
table: Political Overview 8
Foreign Policy 10
Assessing US Geopolitical 'Credibility', 'Post'-Syria 10
The US's failure to take military action against Syria for allegedly crossing a 'red line' on the use of chemical weapons does not mean
that Washington would not uphold its security commitments elsewhere However, there are separate reasons to question whether the
US would intervene militarily on behalf of some of its allies in Eurasia
Long-Term Political Outlook 12
Tough Challenges In The Coming Years 12
The 2010s continue to be challenging for the US, mainly due to the aftermath of the 2007-2009 recession and several unresolved
foreign policy issues Meanwhile, two of the main trends in US politics will be the rise of the south-western states and Hispanic-
Americans as key forces
Chapter 2: Economic Outlook 15
SWOT Analysis 15
BMI Economic Risk Ratings 15
Economic Activity 16
GDP Set To Accelerate In 2014 16
Balance Of Payments 18
External Account Dynamics Improving On Energy Production 18
Our view for a narrowing US current account as a percentage of GDP deficit continues to play out, largely on the back of falling energy
prices and higher domestic production We believe export growth will generally outpace import growth over the medium term, and
expect broad stability in the financial account
table: CURENT ACOUNT 19
Monetary Policy 21
Policy Normalisation Ahead 21
We expect that the US Federal Reserve will begin to normalise monetary policy either in late 2013 or early 2014, as signs of economic
growth convince the Federal Open Market Committee that the current level of asset purchases is unnecessary to sustain growth We
expect the unemployment rate to stay above 6 5% until 2015, meaning no rate hikes until at least then
table: Doves Depart And Hawks Swoop In 22
table: FEDERAL RESERVE BOARD ECONOMIC PROJECTIONS & BMI FORECASTS 22
table: MONETARY POLICY 23
Fiscal Policy I 24
Fiscal Consolidation View Continues To Play Out 24
Data continue to support our view that stronger revenues and an abrupt slowdown in spending will help to narrow the US fiscal shortfall
in 2013 to 3 7% of GDP from 6 7% of GDP in 2012 - a trend that we forecast will continue in years ahead As a result, we also forecast
that the ratio of debt to GDP will stabilise and hold steady around 70% over the next few years That said, we acknowledge that there
are large political risks that could alter the trajectory of revenue, spending, and debt growth
table: FISCAL POLICY 24
Fiscal Policy II 26
State & Local Government Fiscal Picture Improving 26
The factors that are leading to an improving US federal government fiscal picture are also benefitting state and local governments'
balance sheets As a result, we see state governments and municipalities shedding fewer jobs, which will contribute to an ongoing
recovery in the labour market, and acting as less of a drag on GDP in the coming quarters
Labour Market Policy 27
Slow And Steady Labour Market Improvement Ahead 27
We expect the US labour market to steadily improve over the next several years, with the unemployment rate trending lower and job
growth increasing at a moderate pace While we see upside risks that faster economic growth this year and next could lead to greater
labour market strengthening, we also acknowledge that political brinksmanship in Washington could create problems for businesses and
delay hiring plans
Chapter 3: 10-Year Forecast 31
The United States Economy to 2022 31
Down But Not Out 31
The US economy's pace of growth is set to slow over the next 10 years to a long-term rate of 2 4% as deleveraging from a massive
credit binge takes its toll Nonetheless, BMI believes that the US is going to remain the world's greatest economic power over our 10-
year forecast period and beyond
table: Long-Term Macroeconomic Forecasts 31
Chapter 4: Business Environment 33
SWOT Analysis 33
BMI Business Environment Risk Ratings 33
Business Environment Outlook 34
Institutions 34
TABLE: BMI BUSINES AND OPERATION RISK RATINGS 34
Infrastructure 35
TABLE: BMI LEGAL FRAMEWORK RATINGs 35
TABLE: LABOUR FORCE QUALITY 36
Market Orientation 37
TABLE: TRADE AND INVESTMENT RATINGS 37
table: Top Export Destinations, 2002-2009 38
Operational Risk 39
Infrastructure 41
Chapter 5: Key Sectors 41
table: Construction And Infrastructure Data, 2011-2016 42
table: Construction And Infrastructure Long-Term Forecasts, 2017-2022 43
Oil & Gas 45
table: Oil Production, Consumption And Net Exports, 2011-2016 46
table: Oil Production, Consumption And Net Exports, 2017-2022 47
table: Gas Production, Consumption And Net Exports, 2011-2016 48
table: Gas Production, Consumption And Net Exports, 2017-2022 49
Other Key Sectors 52
table: Defence & Security Sector Key Indicators 52
table: Food & Drink Sector Key Indicators 52
Table: Freight Sector Key Indicators 52
table: Autos Sector Key Indicators 53
Table: Pharma Sector Key Indicators 53
table: Telecoms Sector Key Indicators 53
Chapter 6: BMI Global Assumptions 55
Increasing Confidence In Growth 55
Table: Global Assumptions 55
Table: Developed States, Real GDP GrowtH, % 56
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 56
Table: Emerging Markets, Real GDP Growth, % 57