Transcript Slide 1

Wells Fargo Economics
Scott Anderson, Ph.D.
Vice President
Senior Economist
Plunging Into The New Year
Durango, CO
January 9, 2008
U.S. Economy
Severe
Recession
Worst in PostWar Period
Change in Total Nonfarm Payroll
000s
300
Estimated Level of
Monthly Job Gains
Needed to Absorb
Labor Force Growth
200
100
(100)
(200)
(300)
(400)
(500)
(600)
11-06
Source: Bureau of Labor Statistics
5-07
11-07
5-08
11-08
Overall Unemployment Rate
Percentage
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
11-98 11-99 11-00 11-01 11-02 11-03 11-04 11-05 11-06 11-07 11-08
Source: Bureau of Labor Statistics
Retail Sales and Hourly Earnings Growth
Y/Y%
8%
Real ex. gasoline
retail sales
6%
4%
2%
0%
-2%
-4%
-6%
Real hourly
earnings
-8%
-10%
-12%
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Source: Census Bureau; Bureau of Labor Statistics; Wells Fargo Economics
Nov-07
Nov-08
Capital Expenditure Plans Plummet
45
Percent of Small Businesses Planning Capital Expenditures in 3-6 months
40
35
30
25
20
15
Nov-88
Nov-93
Nov-98
Nov-03
Source: National Federation of Independent Business; Wells Fargo Economics
Nov-08
YOY
Pct Chg
New Factory Orders
14
12
10
8
6
4
2
(2)
(4)
(6)
(8)
(10)
(12)
(14)
11-06
Source: Census Bureau
5-07
11-07
5-08
11-08
ISM Non-Manufacturing
Index
70
60
50
40
30
12-05
6-06
12-06
Source: Institute for Supply Management
6-07
12-07
6-08
12-08
Leading Economic Indicators
YOY
Pct Chg
4.0
2.0
-3.7
-
(2.0)
(4.0)
11-05
5-06
Source: The Conference Board
11-06
5-07
11-07
5-08
11-08
U.S. Recession Comparisons
Peak to trough changes
PCE
(%)
’73-’75 -1.8%
NRFI
(%)
NA
UE
(PP)
+4.1
Jobs
(%)
-2.0%
Jobs
(#, mil)
-1.6
’81-’82 -0.8%
NA
+3.3
-3.0%
-2.7
’90-’91 -1.1%
-8.2%
+2.3
-1.4%
-1.5
’08-’09 -3.1%
-12.3% +4.4
-4.0%
-5.5
Source: BEA; BLS; Wells Fargo Economics
U.S. Recessions
December 2008 - ?
12
Months (Peak to Trough)
7
Forecast
July 1981 November 1982
16
November 1973 March 1975
16
August 1929 March 1933
43
October 1873 March 1879
65
0
10
Source: NBER; Wells Fargo Economics
20
30
40
50
60
70
A Credit Crisis
In The Making
Home Mortgages
Bil
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$1958Q2
1968Q2
1978Q2
1988Q2
Source: Federal Reserve Flow of Funds; Wells Fargo Economics
1998Q2
2008Q2
Debt Ratios
160%
Percent of personal disposable income
140%
Total household
debt
120%
100%
80%
60%
Mortgage debt
40%
20%
0%
1958Q2
1968Q2
1978Q2
1988Q2
Source: Federal Reserve Flow of Funds; Wells Fargo Economics
1998Q2
2008Q2
Case-Shiller Home Price Index
Y/Y%
20
Top 20 U.S. cities
15
10
5
0
-5
-10
-15
-20
10/31/2003
-18.0
10/31/2004
Source: Case-Shiller
10/31/2005
10/31/2006
10/31/2007
10/31/2008
CME Real Estate Futures
Percent
Expected price growth from October 2008
0%
-5%
-10%
-15%
-20%
November 2008
August 2009
February 2009
November 2009
May 2009
February 2010
po
si
te
om
C
W
as
hi
ng
to
n
sc
o
ci
D
Sa
n
n
Sa
ew
N
Fr
an
ie
go
rk
Yo
m
ia
M
el
ng
A
s
Lo
Source: CME; Wells Fargo Economics
i
es
s
ga
Ve
La
s
en
ve
r
D
ag
o
hi
c
C
B
os
t
on
-25%
Billions
Wealth Destruction
$$(1,000)
$(2,000)
$(3,000)
$(4,000)
$(2,515)
$(2,744)
Decline from peak to Q308
$(5,000)
$(5,259)
$(6,000)
Real Estate
Source: Federal Reserve; Wells Fargo Economics
Stocks
Total
Banks
Tightening
Credit Across
The Board
Senior Loan Officer Survey Credit Crunch
Net
Percent
of Banks
40
Net
Percent
of Banks
Willingness to Lend - Consumer Loans
30 More Willing
70
20
60
10
50
0
40
-10
30
-20
20
-30
0
-50
-10
1993Q4
1996Q4
1999Q4
2002Q4
2005Q4
2008Q4
Source: Federal Reserve Board
Net
Percent
of Banks
Demand for Consumer Loans
Stronger Demand
20
10
0
-10
-20
-30
-40
-60
1992Q4
Weaker Demand
1996Q4
Source: Federal Reserve Board
-20
1996Q4
Net
Percent
of Banks
30
-50
Credit Card Loans
Other than Credit
Card Loans
Easing Standards
1998Q4
2000Q4
2002Q4
2004Q4
2006Q4
2008Q4
Source: Federal Reserve Board
50
40
Tightening Standards
10
Less Willing
-40
-60
1990Q4
Standards for Approval
80
2000Q4
2004Q4
2008Q4
Mortgage Standards
100
Prime
Non-traditional
Sub-prime
90
80
70
60
50
40
30
20
Tightening Standards
10
0
-10
Easing Standards
-20
1996Q4 1998Q4 2000Q4 2002Q4 2004Q4 2006Q4 2008Q4
Source: Federal Reserve Board
Senior Loan Officer Survey Credit Crunch
Net
Percent
of Banks
Standards for C&I Loans
100
80
to Large and Medium Firms
60
40
Tightening
Standards
20
Net
Percent
of Banks
0
to Small Firms
-20
Easing
Standards
-40
1990Q4
Spreads
120
100
Increasing Spreads
to Large and Medium Firms
80
1993Q4
1996Q4
1999Q4
2002Q4
2005Q4
2008Q4
Source: Federal Reserve Board
60
40
Net
Percent
of Banks
20
Demand for C&I Loans
0
60
Stronger Demand
40
-40
-60
20
-80
1990Q4
0
Narrowing Spreads
1993Q4
Source: Federal Reserve Board
-20
-40
to Small Firms
-20
to Small Firms
Weaker Demand
-60
-80
1990Q4
to Large and Medium Firms
1993Q4
Source: Federal Reserve Board
1996Q4
1999Q4
2002Q4
2005Q4
2008Q4
1996Q4
1999Q4
2002Q4
2005Q4
2008Q4
Little Appetite
for Risk
Credit Spreads Near Record Peaks
Moody's Baa Corporate Bonds
Basis points
Spread over 10-year Treasury yield
Spread over theoretical U.S. zero coupon curve
1000
900
800
700
600
500
400
300
1/
2/
20
09
1/
2/
20
08
1/
2/
20
07
1/
2/
20
06
1/
2/
20
05
1/
2/
20
04
200
1/
2/
20
03
1/
2/
20
02
650
600
550
500
450
400
350
300
250
200
150
100
Emerging Markets Index
Basis points
100
1/2/2004
1/2/2005
1/2/2006
1/2/2007
1/2/2008
1/2/2009
Source: JPMorgan Bond Incides
Source: Bloomberg; Federal Reserve
High Yield Index
Basis
Points
30-Year Mortgage vs. 10-Year Treasury
Basis
points
300
Spread over 10-year Treasury yield
Spread over 10-year Treasury yield
280
1800
260
1600
240
1400
220
1200
200
1000
Dec-01
Source: Citigroup
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Source: Federal Reserve; Freddie Mac
9
2/
20
0
1/
8
2/
20
0
1/
7
2/
20
0
1/
6
2/
20
0
1/
5
2/
20
0
1/
2/
20
0
1/
0
Dec-00
2
200
4
120
2/
20
0
400
1/
140
2/
20
0
600
1/
160
3
180
800
Where Does This
Leave the
Housing Market?
Index
90
NAHB/Wells Fargo
Homebuilder Confidence Index
80
70
60
50
40
30
20
10
0
Dec-88
Dec-93
Source: National Association of Homebuilders
Dec-98
Dec-03
Dec-08
New Home Sales
000s
SAAR
1,400
Single-family
1,300
1,200
1,100
1,000
900
800
700
600
500
400
300
11-05
Source: Census Bureau
5-06
11-06
5-07
11-07
5-08
11-08
Months Supply
New Home Inventories
12
Single-family
10
8
6
4
2
0
Nov-05
Source: Census Bureau
Nov-06
Nov-07
Nov-08
SAAR
000's
Residential Building Permits
3000
2500
2000
1500
1000
500
0
Nov-63 Nov-68 Nov-73 Nov-78 Nov-83 Nov-88 Nov-93 Nov-98 Nov-03 Nov-08
Source: Commerce Dept.
Existing Home Sales
7.50
Total
Millions
SAAR
7.00
6.50
6.00
5.50
5.00
4.50
4.00
11-05
5-06
11-06
Source: National Association of Realtors
5-07
11-07
5-08
11-08
Existing Home Inventory
14.00
12.00
Total
Months
Supply
11.2
10.00
8.00
6.00
4.00
2.00
0.00
Nov-05
Nov-06
Source: National Association of Realtors
Nov-07
Nov-08
Annualized
Qrtly % change
30
Housing Market Outlook
H
Ths., SAAR
2,300
F
2,100
20
1,900
10
1,700
0
1,500
-10
1,300
Private Housing
Starts (R)
-20
1,100
900
-30
-40
Residential
Fixed
Investment (L)
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2006
2007
2008
2009
Source: Census Bureau; Bureau of Economic Analysis; Wells Fargo Economics
700
500
Washington to
the Rescue!
Stimulus,
Stimulus, and
More Stimulus
Fed Activity
6
FCST
Federal Funds
Target Rate
5
4
3
2
1
0
Dec-04
Dec-05
Source: Federal Reserve
Dec-06
Dec-07
Dec-08
Fed Balance Sheet
Mil, NSA
$2,500,000
$1.3 trillion increase since August 2008
$2,000,000
$1,500,000
$1,000,000
$500,000
Source: Federal Reserve
20
08
/2
7/
12
20
07
/2
7/
12
20
06
/2
7/
12
20
05
/2
7/
12
20
04
/2
7/
12
20
03
/2
7/
12
20
02
/2
7/
12
20
01
/2
7/
12
12
/2
7/
20
00
$-
Commercial Paper Spread
Basis points
450
400
90-day asset-backed commercial paper yield
less 3-month Treasury yield
Liquidity Improved
350
300
250
But Still Abnormal!
200
150
Despite Fed’s Extensive Credit
Facilities and Lending
100
50
2/
20
09
1/
2/
20
08
1/
2/
20
07
1/
2/
20
06
1/
2/
20
05
1/
2/
20
04
1/
2/
20
03
1/
1/
2/
20
02
0
Source: Bloomberg
LIBOR Spread
Basis points
450
3-month LIBOR less 3-month Treasury yield
400
350
300
250
200
150
100
50
Source: Bloomberg
09
2/
20
1/
08
2/
20
1/
07
2/
20
1/
06
2/
20
1/
05
2/
20
1/
04
2/
20
1/
03
2/
20
1/
1/
2/
20
02
0
Excess Bank Reserves
Mil, NSA
$900,000
$800,000
$765.4 billion increase since August 2008
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08
Source: Federal Reserve
Money Supply (M2)
Y/Y%
12%
9%
6%
3%
0%
Nov-00
Nov-01
Source: Federal Reserve
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Federal Budget Surplus/Deficit
Billions
$500
H
F
$-
$(500)
$(1,000)
$(1,500)
Source: CBO
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
$(2,000)
10.0
5.0
Federal Budget Surplus/Deficit (% of
GDP)
H
F
.0
-5.0
-10.0
-15.0
-20.0
-25.0
-30.0
-35.0
1939
1949
1959
1969
Source: CBO; Economic Report of the President
1979
1989
1999
2009
2019
Federal Debt (% of GDP)
120.0
H
F
100.0
80.0
60.0
40.0
20.0
.0
1939
1949
1959
1969
Source: CBO; Economic Report of the President
1979
1989
1999
2009
2019
Q/Q%
Change
Real GDP
Annualized
6
Outlook Darkens
4.8
4
4.8
4.8 HISTORY
2.8
2.7
1.5
2
FORECAST
1.2
0.9
0.8
0.1
0
-0.2
-0.5
-1.3
-2
-4
-4.2
-6
-6.2
-8
2006.1
2007.1
2008.1
2009.1
1.6
Inflation Turns
into Deflation??
MOM
Pct Chg
Consumer Price Index
1.4
1.2
1.0
0.8
0.6
0.4
0.2
(0.2)
(0.4)
(0.6)
(0.8)
(1.0)
(1.2)
(1.4)
(1.6)
(1.8)
(2.0)
11-05
-1.7
5-06
Source: Bureau of Labor Statistics
11-06
5-07
11-07
5-08
11-08
Yield
3.0
Inflation Expectations
2.5
2.0
1.5
1.0
10-Year Treasury less TIPS Yields
0.5
0.0
1/2/2005
1/2/2006
1/2/2007
Source: Federal Reserve; Wells Fargo Economics
1/2/2008
1/2/2009
BOND YIELDS
Percent
10
BAA Corporates
9
30 Yr Mortgage Rate
8
7
6
5
AAA Corporates
4
3
10-Year Treasury
2
1/2/2008
3/2/2008
5/2/2008
7/2/2008
9/2/2008
11/2/2008
Source: Moody's Investors Service; Federal Reserve; Freddie Mac; Wells Fargo Economics
1/2/2009