Transcript The Economic Outlook - NCREIF | National Council of Real

The Economic Outlook
Presented by:
Augustine Faucher
Director of Macroeconomics
October 24, 2007
Growth, but Slow Growth...
Average monthly change in payroll employment, ths
Source: BLS
225
200
175
150
Trend
125
100
75
50
25
0
04
05
06
07YTD
07Q3
2
...Through This Time Next Year
Real GDP growth, % change year ago
4.0
December
2006 outlook
3.5
October
2007 outlook
3.0
Potential growth
2.5
2.0
Sources: BEA, Moody's Economy.com
1.5
05
06
07F
08F
09F
10F
3
The Subprime Financial Shock Is a Major Event...
TED spread, difference between 3 mo. Euro $ and T-bill
1.6
1.4
1.2
LTCM
Gulf war
1.0
0.8
0.6
Orange
County
Peso
crisis
Tech
bust
Subprime
financial
shock
Thai
baht
0.4
0.2
0.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
4
...And It Continues to Reverberate...
TED spread, difference between 3 mo. Euro $ and T-bill
2.5
Subprime
financial
shock
2.0
1.5
1.0
0.5
0.0
Jan-07
Mar-07
May-07
Jul-07
Sep-07
5
...And May Not Be Over...
$ mil, Source: Moody’s Economy.com
2,500
Jumbo IO
Alt-A
Subprime
2,000
1,500
1,000
500
0
Debt
outstanding,
2007Q1
Serious risk
of default,
2007Q1
Defaults,
Investor
2007-2008 losses, 20072008
6
...Given the Risk in the Banking System
Residential RE assets of large commercial banks
2,000
36
Source: FRB
Share of assets
% (R)
1,800
34
1,600
32
1,400
30
1,200
28
$ bil (L)
1,000
26
800
24
600
22
97
98
99
00
01
02
03
04
05
06
07
7
The Cost of Capital Has Risen...
CMBS inv grade to 10-yr Treasury spread, percentage points
2.25
Sources: Lehman, FRB
2.00
1.75
1.50
1.25
Average
1.00
0.75
0.50
98
99
00
01
02
03
04
05
06
07
8
...And Credit Is Less Ample
High-yield bond issuance, $ bil MA
16
14
Source: Lehman Brothers
Total
Caa
12
10
8
6
4
2
0
00
01
02
03
04
05
06
07H1
07q3
9
The Subprime Financial Shock Spooks Investors...
Bond Issuance, $bil, annualized
1,000
Jumbo
Alt-A
Subprime
800
600
400
200
0
'01
'02
'03
'04
'05
'06
'07q1 '07q2 '07q3
10
...Inducing a Mortgage Lending Crunch...
Net % of banks tightening mortgage loan standards
40
Sources: Senior Loan Officer Survey, Moody's Economy.com
30
20
10
0
-10
-20
90
92
94
96
98
00
02
04
06
11
...In These Housing Markets...
Non-conforming share of 2006 originations, U.S. = 50%
>=60%
60% - 40%
=<40%
Sources: 2006 HMDA, Moody's Economy.com
12
Housing Demand Slumps...
Home sales, ths, SAAR
9,000
Sources: Realtors, Census
8,500
8,000
7,500
7,000
6,500
6,000
5,500
00
01
02
03
04
05
06
07
13
...And Mortgage Loan Defaults Soar...
Default rate, % of residential mortgage debt, $
0.9
Sources: Equifax, Moody's Economy.com
0.8
0.7
0.6
0.5
0.4
0.3
0.2
00
01
02
03
04
05
06
07
14
...In Much of the Country...
Change in mortgage default rate, 2005Q4-2007Q3, ppt.
>=0.7%
U.S. = 0.54%
0.3% - 0.7%
=<0.3%
Sources: Equifax, Moody's Economy.com
15
...And More Are Coming
Mortgage debt outstanding facing first payment reset, $ bil
60
Source: First American LP
50
Prime
Unsecuritized
Alt-A
Agency
Option
Subprime
40
30
20
10
0
07
08
09
16
Already Swollen Inventories Will Swell More...
# of excess housing units, ths
1,000
New unsold
Existing vacant for sale
800
Sources: Census,
Moody's Economy.com
600
400
200
0
04
05
06
07
17
...Forcing Lower Construction and House Prices...
What it would take to reach a bottom by year-end 2008
0
Peak-trough % price decline
Baseline outlook
-10
-20
-30
Job growth
1
0.5
0
-40
-50
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Housing starts, mil units
18
...In Much of the Country
Projected peak-to-trough % decline
< -15%
-15 < -5%
-5 < 0%
No correction
Source: Moody’s Economy.com
19
Negative Housing Wealth Effects Kick In...
20
Sources: Realtors, Census,
Moody's Economy.com
15
9.0
8.5
8.0
7.5
10
7.0
House-price growth
6 mo. lead (L)
5
0
6.5
6.0
5.5
Core retail sales growth
3 mo. MA (R)
5.0
4.5
-5
4.0
-10
3.5
05
06
07
08
20
...As Equity Withdrawal Fades...
Gross equity extraction, $ bil, Source: Moody's Economy.com
850
750
650
550
450
05
06Q1
06Q2
06Q3
06Q4
07Q1
07Q2
21
...Weighing on Lower-Mid Income Homeowners…
Personal saving rate
16
12
Homeowner no HELOC
8
4
Renter
0
-4
Homeowner HELOC
-8
-12
Source: Moody's Economy.com
-16
90
92
94
96
98
00
02
04
06
22
…Who Will Pack It in If the Job Market Weakens
Change in employment, 3 mo. MA
250
200
150
Non-housing
related
100
50
Housing related
0
Source: BLS
-50
05
06
07
23
Businesses Remain Highly Profitable...
Corporate profit margin
13
12
11
10
9
8
7
Source: BEA
6
60
65
70
75
80
85
90
95
00
05
24
...And Highly Liquid
Ratio of liquid assets to short-term liabilities,
nonfinancial corporations
50
45
40
35
30
25
20
Source: Federal Reserve Board
15
60
65
70
75
80
85
90
95
00
05
25
Trade Swings from Negative to Positive
Trade balance contribution to real GDP growth
1.00
0.75
0.50
0.25
0.00
-0.25
-0.50
-0.75
-1.00
00
01
02
03
04
05
06
07H1
26
…As Global Growth Remains Broad-Based
Recovery
Asia
Colombia
10
South America
Annualized % change
Hong Kong
Korea
6
Philippines
Malaysia
Czech Republic
Sweden
U.S.
Mexico
4
New Zealand
Australia
France
0
Norway
Hungary
2
Denmark
-2
Spain
Euro Zone
Italy
0
Brazil
U.K.
Belgium
Portugal
2
-2
India
Argentina
Canada
8
Recession
China
Chile
Europe
North America
Expansion
Real GDP growth, 2007Q2
12
4
6
Germany
Japan
Netherlands
8
Russia
10
12
Struggling
% change year ago
NOTE: Size reflects relative GDP
Confidence Doing Better in Asia, South America
Business confidence, 4 wk. MA, diffusion index
50
South America
40
Asia Pacific
30
20
U.S.
10
0
Europe
-10
J'07
J
A
S
O
28
China and India Still Going Strong
Industrial production, 4 mo. MA, % change year ago
20
18
China
16
14
12
10
8
6
India
4
2
00
01
02
03
04
05
06
07
29
Growth Strong But Variable Across Europe
Real GDP, % change year ago, 2007H1
Greece
Spain
Austria
Germany
U.K.
Euro zone
Switzerland
Netherlands
France
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
30
Policymakers Respond
Federal funds future contract for December 2007
5.50
Source: CBOT
5.25
5.00
4.75
4.50
4.25
Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07
31
Watch the CP Market...
Commercial paper outstanding, $ bil
2,300
Source: Federal Reserve Board
2,200
2,100
2,000
1,900
1,800
1,700
1,600
Jan-06
Jul-06
Jan-07
Jul-07
32
...The ARM Share...
ARM share of originations, %
40
35
30
25
Source: MBA
20
Jan-07
Apr-07
Jul-07
Sep-07
33
...Business Confidence...
Global confidence, present conditions diffusion index
40
Source: Moody's Economy.com
30
20
10
0
-10
Subprime
financial
shock
Iraq
invasion
-20
-30
03
04
05
06
07
34
...Consumer Confidence...
ABC/Washington Post consumer survey, index
5
0
-5
-10
-15
-20
06
07
35
...And UI Claims
Initial UI claims, ths, 4 wk. MA
350
350
Source: BLS
325
325
300
300
275
Sep-06
275
Dec-06
Mar-07
Jun-07
Sep-07
36
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