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2018 Q4 2018 U.S. Economic and Credit Trends Outlook - FAQ

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Q4 U.S. Economic and Credit Trends Outlook These questions were answered by Cris deRitis Question: Can you define yield curve? Answer: The yield curve is a plot of bond yields (e.g. 1 year CMT, 10-year CMT) versus bond term (1- year, 10-year). You expect higher yields for longer term bonds. When that "inverts," it is a sign that markets are unwilling to pay a premium for longer term, because of economic uncertainty. Yield curve inversion is a leading indicator of recession, typically 12-18 months out. The curve has not yet inverted. Question: You indicated the South is most impacted by tariffs. Can you discuss further which industries are impacted by tariffs, and how that shakes out regionally? Are there any signs that some threats of tariffs are more or less likely to materialize, or that any particular tariffs would be more impactful than others? Answer: The tariffs with China will impact US businesses both directly and indirectly. The direct impact will be felt by key US exporters to China: agriculture, aircraft, petrochemicals and seafood. Regionally, the Midwest and South will be hit hardest due to the large concentration of producers of soybeans and other agricultural commodities as well as petroleum and chemicals. The Northwest around Seattle is hit disproportionately due to aircraft exports from Boeing. The biggest threat is simply an escalation of current tariff policies which could see tariffs expand on additional goods at higher rates. The indirect impact of tariffs will also be a negative given that over half of Chinese imports into the US are either capital goods or intermediate goods used by US manufacturers in the production of final goods. US consumers will face higher prices reducing their real income. Question: How would foreign governments or corporations or households be in causing a recession here in US? Answer: I believe this question refers to the chart comparing debt to GDP ratios for US government debt, household debt and business debt. Typically a recession requires two conditions: an overheating of the economy in some capacity leading to increased wage or price inflation and a structural imbalance where over-investment or mal-investment leads to instability and weakness. The labor market data suggests that the economy may be starting to overheat -- although there is some debate about the magnitude -- and the leverage data suggests that businesses and in particular highly leveraged businesses may be unable to make their payments if interest rates should rise and the economy softens. That said, the US is integrated with the global economy so a slowdown in Europe or Asia would certainly be felt by US businesses and consumers. At this point in the US business cycle, the global economy would need to fall dramatically to induce a recession. Question: Do you believe that the housing market will begin to slow in regards to overall appreciation? Are we looking at a small housing bubble, without the ARMs (Adjustable Rate Mortgage)? Answer: The Moody's Analytics forecast does call for continued moderation in housing activity over the next couple of years. Rising interest rates will continue to pressure affordability. The lack of homes

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