Transcript U.S. Macroeconomic Outlook 2009-2010

U.S. Macroeconomic
Outlook 2009-10 & Beyond
Dr. Edward J. Deak
Professor of Economics
Fairfield University, and
ABA Graduate Banking School
Edwardjdeak.com
ABA’ Seminar For Presidents
March 2, 2009
U.S. Macro Overview
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Where we are today?
The forces that brought us to the brink
The issue of financial structural change
A look at the current-historical data
Federal fiscal actions – TARP + Obama
Monetary policy actions
The prospects for 2009-10
There is no Plan B
What about 2011-15?
Where Are We Today?
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Worst Economic Decline Since 1930’s
Not a Traditional Downturn
Structural Change in Financial Sector
Massive in Size + Asset Value Loss
Less Responsive to Traditional
Monetary + Fiscal Policy Actions
• Global in Scope
The Forces that Brought US
to the Brink of Economic Abyss
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The events of 9/11 -> Fed  (i) – Too much, Too Long
Excessive stimulus to U.S. housing
BOP deficits - Excess global supply of $
Excessive Securitization - Housing assets + others
Rating agencies + Credit default swaps
Excessive Capital Leverage – Not 12:1 but 34:1
Unsound Lending Practices – Lax underwriting
Exotic Mtgages – NINJA, Exploding + Option ARMs
Lax Supervision - Allowed Wall St greed
Alphabet soup credit instruments – ABS, CDOs, etc
Phased collapse of housing 2006-09
Speculators, resets, under water, recession
Financial Structural Change
• The Pre-2008 Financial System is Gone
– The death of traditional investment banking
– The squeeze on insurance companies
– The weakening of nationwide + regional commercial banks
• A list of likely survivors
– Community banks
– Boutique investment banks: ex: Raymond James
– Private equity + hedge funds
• Intensified federal regulation
– Likely to be excessively restrictive
• Rebirth of financial structure
– Financing is a service – Channel $ to opportunity
– Requires a new wave of real technological change
• Entrepreneurship  financial intermediation
Current-Historical Data:
Housing + Financial
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Existing Home Sales
Median Sale Price Existing Homes
Median Sale Price Case-Shiller Index
Housing Affordability Index
Loan Delinquency Rates
Loan Charge-off Rates
Consumer Credit Outstanding
Dow Industrial Average
Existing Home Sales:
Single Family + Condo
8
7
6
7.1
Mill. Units: NAR
4.91
5
4
3
2
1
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Median Sale Price $:
Existing Home
250
221
Nom$th: NAR
198.6
200
150
100
50
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Median Existing Sale Price $:
Constant Home – Case/Shiller
250
Nom$Th
200
207
155
150
100
50
0
Ja00 Ja01 Ja02 Ja03 Ja04 Ja05 Ja06 Ja07 Ja08 No08
Housing Affordability Index
160
Index Val: NAR
140
120
100
80
60
40
20
0
2005
2006
2007
Ja-08 Ma-08 Ju-08 Se-08 No-08
U.S. Housing Permits Th:
Single family & Condos
2500
2155.3
2000
1500
852.5
1000
500
0
2000
2002
2004
2006
2008YTD
Delinquency Rates %:
All Comm Bks (FR: sa)
6
5
4
Tot Loans/Leases
Residential RE
Commer RE
All Consumer
3
2
1
0
3:04
1:05
3:05
1:06
3:06
1:07
3:07
1:08
3:08
Charge-off Rates %:
All Comm Bks (FR: sa)
Tot Loans/Leases
Residential RE
Commer RE
All Consumer
4
3.5
3
2.5
2
1.5
1
0.5
0
3:04
1:05
3:05
1:06
3:06
1:07
3:07
1:08
3:08
Consumer Credit:
(% Chg - FR: sa)
8
6
Revolving
Non-Revol
4
2
0
-2
-4
2003 2004 2005 2006 2007 1:08 2:08 3:08 8-Oct
8Nov
Dow Industrial Average:
Monthly Range/Close 1/07-1/09
Current-Historical Data:
Main St Economy
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Initial Claims Unemployment Insurance
Net Change in Non-farm Payrolls
Unemployment Rate
Real Gross Domestic Product
Consumer Price Index
Initial New Claims UE Insurance:
U.S. DOL 1st Week of Month 08-09
800,000
Seas Adj
Not SA
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
Jan
Mar
May
Jul
Sept
Nov
Jan09
U.S. Net Chg Total Nonfarm Employ:
12:07-12:08 U.S. DOL
100,000
0
-100,000
-200,000
-300,000
Net Job Chg
-400,000
-500,000
-600,000
7:12
8:02
8:04
8:06
8:08
8:10
8:12
U.S. Unemployment Rate %:
12/07-12/08 U.S. DOL
8
UE Rate
7
6
5
4
3
2
1
0
7:12 8:01 8:02 8:03 8:04 8:05 8:06 8:07 8:08 8:09 8:10 8:11 8:12
U.S. Real GDP:
Quarterly % Chg (saar)
5
4
3
2
1
0
-1
-2
RGDP % Chg
-3
-4
07-Q1 07-Q2 07-Q3 07-Q4 08-Q1 08-Q2 08-Q3 08-Q4
Consumer Price Index:
Quarterly % Chg (saar)
3
2
1
0
-1
CPI % Chg
-2
-3
-4
07-Q1 07-Q2 07-Q3 07-Q4 08-Q1 08-Q2 08-Q3 08-Q4
Federal Fiscal Action -1
• TARP - $700 Bil.
– Original plan – Bank stabilization: Bad assets
– Bank capital infusion - $350 Bil.
– Housing stabilization - $350 Bil.?
• Obama Recovery Plan - $825 Bil.+?
– Twin goals
• Macro stabilization
• Self-sustaining recovery
– Social goals?
– Plan structure
Federal Fiscal Action-2
• Critique: Recovery Plan Focus (Deak)
– Quick aid to distressed households + bus
– Short-run & intermediate stimulus - Infrastructure
– Long-run support for self-sustaining growth
• Recovery Plan Problems (Deak)
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Too small - $1.2Tril+ needed
Too little for housing market stabilization
Too short – Needed 4 year focus
Too much for tax cuts – Limited bang for buck
Too little for growth stimulus
Federal Fiscal Action -3
Financial Market Action
• “Bad Bank” – Distressed asset aggregator
– FDIC RTC model from 1980’s
– Problem: Pricing of assets from banks
• Implicit taxpayer subsidy vs. Mark-to-market
• Asset acquisition method
• Nationalization – Takeover failing banks
– Problems: The $ size of the banks
• Interim management
• Ultimate asset disposition
• Ring fencing bad assets – Federal insurance
Federal Reserve Policy Actions
• Traditional Monetary Policy
– Federal funds rate – Cut to ZERO
– OMO – Infuse reserves = money supply
• Non-traditional Monetary Actions
– Direct loans to investment banks (IB)
– Convert IB + insurance co to comm banks
– Extend credit directly to bus + households
– Purchase agency + mgt backed securities
• Result – Boost FR bal sheet +$1.25 Tril.
Economic Outlook 08:Q4-10:Q1
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Real Gross Domestic Product
Change in Non-farm Payrolls
Unemployment Rate
Consumer Price Index
Average Oil Price (nymex)
Housing Starts, Existing home sales, Prices
Consumer Spending
Business Investment
Fed Funds Rate Target
10-year T-Note
Real GDP % Change:
Quarterly (saar)
3
2
1
0
-1
RGDP % Chg
-2
-3
-4
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4
10:01
Non-farm Payroll Jobs:
Ave Monthly Chg (000’s) (sa)
100,000
0
-100,000
8:04
9:01
9:02
9:03
9:04
-200,000
-300,000
-400,000
-500,000
-600,000
Job Chg
10:01
U.S. Unemployment Rate %:
Quarterly 08:4-10:1
8.8
9
8
UE Rate
7.2
7
6
5
4
3
2
1
0
8:04
9:01
9:02
9:03
9:04
10:01
Consumer Price Index:
% Chg Quarterly 08:4-10:1
2
1.5
CPI %Chg
1
0.5
0
-0.5
-1
-1.5
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4
10:Q1
Average Oil Price Per BL:
08:Q1-10:Q1(nymex)
60
Bl price $
50
40
30
20
10
0
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4
10:Q1
Housing Starts (saar)
900,000
876,000
791,000
Starts
800,000
650,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
08-Q3
08-Q4
09-Q1
09-Q2
09-Q3
09-Q4
10-Q1
Existing Home Sales (mil)
6
4.96
5
5.26
Existing Sales
4.38
4
3
2
1
0
2007
2008
2009
2010
2011
2012
Existing Home Sale Price:
Nominal $
200,000
199,000
195,000
191,000
Median Price
190,000
185,000
180,000
175,000
169,000
170,000
165,000
160,000
155,000
150,000
2008
2009
2010
2011
2012
Real Consumer Spending:
% Chg (saar)
3
2
Real Cons Spending
1
0
-1
-2
-3
08:Q4
09:Q!
09:Q2
09:Q3
09:Q4
10:Q1
Real Business Investment:
% Chg (saar)
4
2
0
-2
-4
-6
-8
% Chg
-10
-12
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4
10:Q1
Fed Funds Rate Target %
0.5
0.45
0.4
0.35
0.3
FF Rate %
0.25
0.2
0.15
0.1
0.05
0
08:Q$
09:Q1
09:Q2
09:Q3
09:Q4
10:Q1
10-Year T-Note Yield %
3.5
10-year yield
3
2.5
2
1.5
1
0.5
0
08:Q4
09:Q1
09:Q2
09:Q3
09:Q$
10:Q1
There is No Plan B
• The risk of fiscal + monetary failure
– Short-run stimulus v. self-sustaining
recovery
• Plan needs domestic cooperation
• Recovery needs global coordination
– Multi-national government action
– Global business buy-in
– Global financial buy-in
• There is no going back for round-2
What About 2011-2015?
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Real risk of massive global inflation
Crush of medicare + social security
Financing U.S. budget deficits
Correcting U.S. Balance of Payments
Constructing a U.S. energy policy
Constructing a global environmental
policy