Transcript The Shape of Things to Come - business

Spring Thaw?
Before Looking At The Near
Term Situation, Let’s Take A
Longer Term Perspective
The U.S. Has A Good Record
The Pessimists are Usually Wrong
Real Gross Domestic Product, % Change
Recession years
5.8
5.6
5.3
5.3
7.2
4.6
4.5
4.5
4.1
4.1
3.5
3.5 3.4
3.2
4.0
4.2
3.7
4.5
3.7
3.6
3.3
2.7
2.5
2.9 2.8
2.5
2.5
2.0
1.9
1.6
1.1
0.8
-0.2
-0.5
72
74
76
-0.2
-0.2
78
80
-1.9
82
84
86
88
90
92
94
96
98
00
02
04
06
08
The U.S. Has A Good Record
The Pessimists are Usually Wrong
Real Gross Domestic Product, % Change
Recession years
5.8
5.6
5.3
5.3
Longest expansion in
history
7.2
4.6
4.5
4.5
4.1
4.1
3.5 3.4
3.2
4.0
3.5
3.7
4.2
4.5
3.7
3.6
3.3
2.7
2.5
2.9 2.8
2.5
2.5
2.0
1.9
1.6
1.1
0.8
-0.2
-0.5
72
74
76
-0.2
78
80
-0.2
Longest peace
-1.9
time
expansion
in94
82
84
86
88
90
92
history
Mild
96recession
98
00
02
04
06
08
The U.S. Has A Good Record
The Pessimists are Usually Wrong
Real Gross Domestic Product, % Change
Recession years
5.8
17 years of growth in real GDP
5.6
5.3
5.3
7.2
4.6
4.5
4.5
4.1
4.1
3.5 3.4
3.2
4.0
3.5
3.7
4.2
4.5
3.7
3.6
3.3
2.7
2.5
2.9 2.8
2.5
2.5
2.0
1.9
1.6
1.1
0.8
-0.2
-0.5
72
74
76
-0.2
78
80
-0.2
Longest peace
-1.9
time
expansion
in94
82
84
86
88
90
92
history
Mild
96recession
98
00
02
What about the economy now?
04
06
08
Things Look Pretty Bad Right Now, But
• The election delayed policy to aid the economy
for months
• Only recently has a tax and spending stimulus
plan been passed, let along had time to affect
the economy
• The new financial stability plan has just been
developed and not yet implemented
• Except for ½ of the TARP, the policy response
has been limited to monetary policy
– Liquidity has increased
– Credit markets have improved
Things Look Pretty Bad Right Now, But
• The election delayed policy to aid the economy
for months
• Only recently has a tax and spending stimulus
plan been passed, let along had time to affect
the economy
• The new financial stability plan has just been
developed and not yet implemented
• Except for ½ of the TARP, the policy response
has been limited to monetary policy
– Liquidity has increased
– Credit markets have improved
Let’s look at the numbers
Two Consecutive Declines in Real GDP
8.0
6.0
4.0
2.0
0.0
-2.0
Recession
Percent Change From Prior
Quarter at Annual Rate
Percent Change, Same Quarter,
Prior Year
-4.0
-6.0
-8.0
08:1
07:1
06:1
05:1
04:1
03:1
02:1
01:1
00:1
99:1
98:1
97:1
96:1
95:1
94:1
93:1
92:1
91:1
90:1
89:1
88:1
87:1
86:1
85:1
84:1
83:1
82:1
81:1
80:1
ISM Manufacturing Index Drops To
Very Low Levels
70.0
65.0
60.0
55.0
50.0
45.0
Sep-08
Jan-08
May-07
Sep-06
Jan-06
May-05
Sep-04
Jan-04
May-03
Sep-02
Jan-02
May-01
Sep-00
Jan-00
May-99
Sep-98
Jan-98
May-97
Sep-96
Jan-96
May-95
Sep-94
Jan-94
May-93
Sep-92
Jan-92
May-91
Sep-90
Jan-90
May-89
Sep-88
Jan-88
May-87
Sep-86
Jan-86
May-85
Sep-84
Jan-84
May-83
Sep-82
Jan-82
May-81
Sep-80
Jan-80
25.0
Some hope?
30.0
Institiute for Supply
Management, Manufacturing
Index
35.0
Recession
40.0
0.0
-2.0
-4.0
1980-Jan
1980-Sep
1981-May
1982-Jan
1982-Sep
1983-May
1984-Jan
1984-Sep
1985-May
1986-Jan
1986-Sep
1987-May
1988-Jan
1988-Sep
1989-May
1990-Jan
1990-Sep
1991-May
1992-Jan
1992-Sep
1993-May
1994-Jan
1994-Sep
1995-May
1996-Jan
1996-Sep
1997-May
1998-Jan
1998-Sep
1999-May
2000-Jan
2000-Sep
2001-May
2002-Jan
2002-Sep
2003-May
2004-Jan
2004-Sep
2005-May
2006-Jan
2006-Sep
2007-May
2008-Jan
2008-Sep
Real Consumer Spending
Drops To Very Low Levels
8.0
6.0
4.0
2.0
Recession
Real Consumer
Spending, %Change
From Prior Year
Some hope?
Employment Decline Worse Than 1982
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Sep-08
Jan-08
May-07
Sep-06
Jan-06
May-05
Sep-04
Jan-04
May-03
Sep-02
Jan-02
May-01
Sep-00
Jan-00
May-99
Sep-98
Jan-98
May-97
Sep-96
Jan-96
May-95
Sep-94
Jan-94
May-93
Sep-92
Jan-92
May-91
Sep-90
Jan-90
May-89
Sep-88
Jan-88
May-87
Sep-86
Jan-86
May-85
Sep-84
Jan-84
May-83
Sep-82
Jan-82
May-81
Sep-80
Jan-80
-4.0
Nonfarm Employment
%Change From Prior
Year
-3.0
Recession
-1.0
-2.0
Unemployment Rate Still Below 1982 Levels
12
11
10
9
8
7
6
Sep-08
Jan-08
May-07
Sep-06
Jan-06
May-05
Sep-04
Jan-04
May-03
Sep-02
Jan-02
May-01
Sep-00
Jan-00
May-99
Sep-98
Jan-98
May-97
Sep-96
Jan-96
May-95
Sep-94
Jan-94
May-93
Sep-92
Jan-92
May-91
Sep-90
Jan-90
May-89
Sep-88
Jan-88
May-87
Sep-86
Jan-86
May-85
Sep-84
Jan-84
May-83
Sep-82
Jan-82
May-81
Sep-80
Jan-80
2
Unemployment
Rate
3
Recession
5
4
As long as we’re talking about employment
Unemployment Claims Exaggerated
Initial Claims
Date
Claims
Workers
%
Apr 4, 2009
654,000
134,500,000
0.49%
Oct 2,1982
695,000
88,894,000
0.78%
Also Continuing Claims
Unemployment Claims Exaggerated
Continuing Claims
Date
Continuing
Claims
Workers
%
Mar 28, 2009
5,840,000
133,019 ,000
4.4%
Nov 6, 1982
4,713,000
88,770,000
5.3%
Anything positive?
7.0
Yes! Productivity
Growth Remains Strong
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
Recession
Ouput Per Hour, Percent Change
From Prior year
-3.0
72:1 74:1 76:1 78:1 80:1 82:1 84:1 86:1 88:1 90:1 92:1 94:1 96:1 98:1 00:1 02:1 04:1 06:1 08:1
7.0
Yes! Productivity
Growth Remains Strong
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
Recession
Ouput Per Hour, Percent Change
From Prior year
Anything else positive?
72:1 74:1 76:1 78:1 80:1 82:1 84:1 86:1 88:1 90:1 92:1 94:1 96:1 98:1 00:1 02:1 04:1 06:1 08:1
Oil/Gasoline Prices Are Down Sharply
$4.50
$150
$4.00
$130
$3.50
$110
$3.00
$90
$2.50
$70
Gasoline Price (left)
$2.00
$1.50
$1.00
WTI Oil Price (right)
Higher oil prices in 2008 were like a $170
billion tax increase and lower prices in 2009
are like a $355 billion tax cut = $525 billion
positive swing
$50
$30
$10
Oil/Gasoline Prices Are Down Sharply
$4.50
$150
$4.00
$130
$3.50
$110
$3.00
$90
$2.50
$70
Gasoline Price (left)
$2.00
$1.50
$1.00
WTI Oil Price (right)
Higher oil prices in 2008 were like a $170
billion tax increase and lower prices in 2009
are like a $355 billion tax cut = $525 billion
positive swing
It’s not just energy
$50
$30
$10
200
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
250
Dec-07
300
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
Commodity Prices Are Down Sharply
CRB Indexes
600
1000
550
900
500
800
450
700
400
600
350
Foodstuffs (left scale)
500
Livestock (left scale)
400
Metals (right scale)
300
Commodity Prices Are Down Sharply
CRB Indexes
600
1000
550
900
500
800
450
700
400
600
350
500
Foodstuffs (left scale)
300
Livestock (left scale)
400
250
Then why are things bad?
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
200
Metals (right scale)
300
What Happened
• Very low interest rates to prevent deflation
• Government pressure to increase home ownership
• Excess global savings created demand for assets
• Securitization created supply of complex securities
backed by subprime adjustable rate mortgages
• Complex securities rated too high leading to excess
leverage
•
•
•
•
•
Easy mortgages drove up house prices and construction
Houses became unaffordable
Interest rates increased
Remaining buyers couldn’t afford houses
House prices dropped and construction tanked
House Prices & Starts Soar
Case Schiller House Price Index & Housing Starts
2,300
25%
2,100
Housing Starts (left)
20%
1,900
House Price %Change (right)
15%
10%
1,700
5%
1,500
0%
1,300
-5%
1,100
-10%
900
700
-15%
What stopped the party?
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
-20%
House Affordability Collapses
Median Household Income/Median New House Price
26%
25%
24%
23%
22%
21%
20%
19%
There was
nobody that could
afford the houses
being built
18%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F 09F
Interest Rates
10
9
8
7
6
5
4
3
2
Recession
1
Federal Funds
Jan-09
May-08
Sep-07
Jan-07
May-06
Sep-05
Jan-05
May-04
Sep-03
Jan-03
May-02
Sep-01
Jan-01
May-00
Sep-99
Jan-99
May-98
Sep-97
Jan-97
May-96
Sep-95
Jan-95
May-94
Sep-93
Jan-93
May-92
Sep-91
Jan-91
May-90
Sep-89
Jan-89
0
10Y TBond
Interest Rates
10
9
8
7
6
5
4
3
2
Recession
1
Federal Funds
Jan-09
May-08
Sep-07
Jan-07
May-06
Sep-05
Jan-05
May-04
Sep-03
Jan-03
May-02
Sep-01
Jan-01
May-00
Sep-99
Jan-99
May-98
Sep-97
Jan-97
May-96
Sep-95
Jan-95
May-94
Sep-93
Jan-93
May-92
Sep-91
Jan-91
May-90
Sep-89
Jan-89
0
10Y TBond
House Prices & Starts Collapse
Case Schiller House Price Index & Housing Starts
2,300
25%
2,100
Housing Starts (left)
20%
1,900
House Price %Change (right)
15%
10%
1,700
5%
1,500
0%
1,300
-5%
1,100
-10%
900
-15%
700
-20%
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Foreclosures
8
Subprime - Adjustable
7
6
5
4
3
Subprime - Fixed
2
1
Prime - Fixed
Prime - Adjustable
0
1
2
3
05
4
1
2
3
06
4
1
2
3
07
4
1
2
3
08
4
Results
• Home foreclosures
• Mortgage backed securities declined in value and
were down-rated
• Holders, including most major financial
institutions, were forced to mark them down
sharply (recently modified)
• Capital problems for financial institutions
• Uncertainty about future capital positions created
a general tightening of credit to all borrowers
• Without access to credit overall spending
collapsed
All Home Mortgages Suffer as Banks Tighten
Net % Senior Loan Officers Reporting Tighter Lending Standards
120
100
Recession
All Mortgages
Prime
Subprime
80
60
40
20
0
-20
-40
09:1
08:3
08:1
07:3
07:1
06:3
06:1
05:3
05:1
04:3
04:1
03:3
03:1
02:3
02:1
01:3
01:1
00:3
00:1
99:3
99:1
98:3
98:1
97:3
97:1
96:3
96:1
95:3
95:1
94:3
94:1
93:3
93:1
92:3
92:1
91:3
91:1
90:3
Business Loans Also Suffer As Banks Tighten
Net % Senior Loan Officers Reporting Tighter Lending Standards
100
80
Recession
Commercial & Industrial
Commercial Real Estate
60
40
20
0
-20
-40
09:1
08:3
08:1
07:3
07:1
06:3
06:1
05:3
05:1
04:3
04:1
03:3
03:1
02:3
02:1
01:3
01:1
00:3
00:1
99:3
99:1
98:3
98:1
97:3
97:1
96:3
96:1
95:3
95:1
94:3
94:1
93:3
93:1
92:3
92:1
91:3
91:1
90:3
Consumer Loans Also Harder to Get
Net % Senior Loan Officers Reporting Tighter Lending Standards
80
Recession
70
Credit Cards
60
Other Consumer Loans
50
40
30
20
10
0
-10
-20
09:1
08:3
08:1
07:3
07:1
06:3
06:1
05:3
05:1
04:3
04:1
03:3
03:1
02:3
02:1
01:3
01:1
00:3
00:1
99:3
99:1
98:3
98:1
97:3
97:1
96:3
96:1
Doesn’t sound good,
what’s being done?
Past Fed/Treasury Actions
• Lowered interest rates
• Increased lending to major financial
institutions
• Provided liquidity directly to credit
markets
• Supported money market funds
• Supported commercial paper
market
• Injected capital directly into banks
How did it work?
Short-Term Interest Rates
6
5
Fed cuts not working
4
Federal Funds
3
3M LIBOR
2
3M Financial
Commercial Paper
3M Nonfinancial
Commercial Paper
1
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
Jan-07
0
Long-Term Interest Rates
10
9
Fed actions will bring mortgage rates
down from 6.5% to about 4.5%,
equivalent to a 20% reduction in
mortgage principal
8
7
6
5
4
Federal Funds
10Y Treasury Bond
Baa Corp
30Y Fixed Mortgage
Aaa Corp
3
2
1
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
0
Further Help Is On The Way
Economic Recovery & Reinvestment Plan
• $500 billion government spending
• $287 billion of tax cuts
• Largest fiscal stimulus since World
War II (bigger than Great Depression
stimulus)
Federal Budget Deficit
% of GDP
13.0
11.0
Recession
That’s a lot of stimulus
9.0
7.0
5.0
3.0
1.0
-1.0
-3.0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Further Help Is On The Way
Financial Stability Plan + Fed
• Major expansion of support for consumer, auto,
floorplan, student, commercial real estate, and
small business loan securitization (up to $1
trillion)
• Mortgage/home owner support program
• Expanded support for mortgage market ($1.25
trillion)
• Program to reduce the negative impact of
troubled assets on the banking system (up to $1
trillion)
• Fed purchase of long term Treasury securities
($300 billion in next 6-months)
Further Help Is On The Way
Financial Stability Plan + Fed
• Major expansion of support for consumer, auto,
floorplan, student, commercial real estate, and
small business loan securitization (up to $1
trillion)
• Mortgage/home owner support program
• Expanded support for mortgage market ($1.25
trillion)
• Program to reduce the negative impact of
troubled assets on the banking system (up to $1
trillion)
• Fed purchase of long term Treasury securities
($300 billionHow
in nextmany
6-months)
$
As Of April 1, 2009
Total Commitment
$12.1 trillion
Total Spent
$2.5 trillion
http://www.nytimes.com/interactive/2009/02/04/
business/20090205-bailout-totals-graphic.html
As Of April 1, 2009
Total Commitment
$12.1 trillion
Total Spent
$2.5 trillion
http://www.nytimes.com/interactive/2009/02/04/
business/20090205-bailout-totals-graphic.html
What Will Happen?
• It hasn’t happened before
• Unprecedented global financial crisis
• Unprecedented global response
Net result – serious recession
• 2.0% decline in 2009 real GDP and
peak unemployment rate of about 10%
• May or may not be the worst recession
since World II, but not a depression!
What Will Prevent A Depression And Make
The Decline Stop?
• Automatic stabilizers that did not exist at the
beginning of the depression
–
–
–
–
Social Security
Unemployment compensation
Welfare, Medicare, Medicaid
Large federal government
• Massive fiscal stimulus
• Extremely aggressive Federal Reserve and
Treasury actions
• Lower energy prices
• Higher housing affordability
• Pent-up auto demand
• Inventory swing
•&
Policy Makers Are Determined
“… we must move forward, quickly and aggressively, with
a middle-class rescue plan that will create jobs, provide
relief to families, help homeowners and restore our
financial system,"
This is a challenge more complex than any our financial
system has ever faced, requiring new programs and
persistent attention to solve. But the President, the Treasury
and the entire Administration are committed to see it through
because we know how directly the future of our economy
depends on it.
But we will not stand down until we have achieved our
goals of repairing and reforming our financial system
and restoring prosperity.
Summary in Numbers
%Change
2006
2007
2008
2009
2010
Real GDP
2.8
2.0
1.2
-2.0
3.0
Consumer Price
Index
3.2
2.9
3.8
0.0
2.0
Core Consumer Price
Index *
2.5
2.3
2.3
1.0
1.5
Federal Funds Rate
5.0
5.0
2.0
0.1
0.5
10 Year Treasury
Bond
4.8
4.6
3.7
3.0
3.5
Unemployment Rate
(%)
4.6
4.6
5.8
9.1
9.5
* Excluding food and energy
Take Aways