Transcript Slide 1

A Severe Global
Manufacturing Recession
Presented by
Dan Meckstroth
Chief Economist
[email protected]
The Root of the Crisis--Misguided Policy, Greed, Poor Decisions
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Taxpayer Relief Act of 1997
o Exempted $500,000 in home equity from personal taxation
1997 Asian Currency Crisis
o Developing countries’ central banks manipulated exchange rates to build
currency reserves
o Global savings glut lowered mortgage rates (homebuyers) and fixed
investment yields (domestic and foreign investors)
Public Policy (for both Parties) to Increase Homeownership Rates,
Especially by Minorities
o Pressure on Fannie and Freddie to lower lending standards
o Fannie and Freddie remained severely undercapitalized but able to borrow
at below market rates
Bush Administration’s Financial Market Deregulation Philosophy
Federal Reserve Policy to Clean Up After Bubbles, Not Prevent Them
Financial Industry Creates and Brokers Complex and Opaque Derivatives
Home Equity Loans Finance a Consumer Spending Spree
Vicious Circle of Financial Deleveraging
Risk
aversion of
investors
Rising losses in
subprime markets
Falling asset
prices
Banks & hedge funds
need to liquidate
positions
Announcement of
financial losses
Banks
reduce
funding to
other banks
Investors avoid
lending to banks
Banks without
sufficient liquidity
pay inflated prices
for liquidity
Source: McKinsey & Company
Credit Conditions: Banks Tightening Business and Consumer
Lending Standards
Senior Loan Officer Opinion Survey
Source: Federal Reserve Board
The Financial Crisis Has Spread Worldwide
Index, January 2007=100
World Stock Prices
Source: Yahoo Finance
Vicious Circle From Financial Sector to Real Economy
Rising losses in
subprime markets
Consumer
spending
declines
Negative wealth effect of
declining home and stock
prices
Credit quality deteriorates,
banks more reluctant to lend
Source: MAPI
Global recession
reduces capital
spending and U.S.
export growth
Further declines in
employment
Declining
consumer
income
A Severe Decline in Household Wealth
Housing Prices and Common Stock Prices
Source: OFHEO, S&P 500, MAPI
F=Forecast
Home Equity No Longer Supports Spending
Mortgage Equity Withdrawal
Source: Federal Reserve Board, Calculatedrisk.com
Overextended Consumer: Confidence Plummets
Consumer Confidence Index
Source: University of Michigan
Consumers Drastically Cut Big-Ticket Spending
Motor Vehicles and Housing Starts
Source: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, MAPI
F=Forecast
Widespread Job Loss in the Economy
Job Loss in the Recession
Industry
Total nonfarm
Government
Professional and
business services
Health care and social
assistance
Retail trade
Leisure and hospitality
Manufacturing
Construction
Finance and insurance
Dec. 07 to Jan. 09
Dec. 07 to Jan. 09
1000
%
% of
1
Jobs chg. total2 Industry
-3572 -2.6 100.0Wholesale trade
1000
%
% of
1
Jobs chg. total2
-222 -3.7
4.3
170
0.8
-848
-4.7
447
-570
2.9
-3.7
16.7Other services
Transportation and
12.8 warehousing
-266 -2.0
-1064 -7.7
-781 -10.4
-182
-3.0
1Change
Source: U.S. Bureau of Labor Statistics, MAPI
2Industry
11.9Educational services
11.1Information
Real estate and rental
9.9 and leasing
9.4Mining
5.0Utilities
-44
-0.8
4.1
-202
-4.4
3.2
125
-105
4.2
-3.5
2.3
2.2
-87
51
9
-4.0
7.4
1.6
1.5
0.5
0.4
4.4
in jobs as a percent of the Dec. 2007 level
employment as a percent of all jobs in Jan. 2009
Widespread Job Loss in Manufacturing
Job Loss in the Recession
Dec. 07 to Jan. 09
Dec. 07 to Jan. 09
1000
%
% of
1000
%
% of
Industry
Jobs chg.1 total2 Industry
Jobs chg.1 total2
Manufacturing
-1064 -7.7 100.0 Paper
-26 -5.6
3.4
Food manufacturing
-20 -1.4 11.6 Primary metals
-39 -8.7
3.2
Semiconductors and
Fabricated metal
-137 -8.8 11.2 electronic components
-30 -6.7
3.2
Electrical equipment
Machinery
-58 -4.9
8.9 and appliances
-20 -4.5
3.2
Chemicals
-23 -2.7
6.6 Wood products
-93 -18.7
3.2
Motor vehicles and parts -204 -21.3
5.9 Beverage and tobacco
-4 -1.9
1.5
Plastics and rubber
-72 -9.6
5.3 Computer & peripherals
-2 -1.1
1.4
Printing and support
-57 -9.2
4.4 Apparel
-30 -14.5
1.4
Nonmetallic mineral
-53 -10.9
3.4 Textile product mills
-15 -9.8
1.1
Electronic instruments
-7 -1.5
3.4 Textile mills
-29 -17.7
1.1
Furniture and related
-86 -16.7
3.4 Communications equip.
0
0.3
1.0
Petroleum and coal
-1 -1.0
0.9
1Change
Source: U.S. Bureau of Labor Statistics, MAPI
2Industry
in jobs as a percent of the Dec. 2007 level
employment as a percent Mfg. in Dec. 2007
Consumer Industries Led Manufacturing into Recession
Consumer-Related Manufacturing Production
Percent Change
Industry
Motor Vehicles & Parts
Percent Change
2008 2009 2010 Industry
2008 2009 2010
-14
-24
5
HVAC Equipment
-12
-15
5
Petroleum & Coal
0
-2
2
Textile Products
-7
-9
-2
Plastic Products
-4
-10
5
Paints, Soaps
-1
-8
1
Logging
-1
-20
2
Food
2
-1
1
Wood Products
-13
-20
10
Apparel
-5
-6
-5
Furniture
-11
-15
3
Pharmaceuticals
1
-2
2
Source: Federal Reserve Board, Global Insight Model, MAPI
Excess Capacity in the Economy Depresses Capital Investment
Labor Unemployment Rate and Excess Factory Capacity
Source: U.S. Bureau of Labor Statistics , Federal Reserve Board, MAPI
F=Forecast
Falling Capacity Utilization and Tight Credit Conditions Drive Down
Business Investment Spending
Business Investment, Inflation-Adjusted
Source: U.S. Bureau of Economic Analysis , MAPI
F=Forecast
Capital Equipment Industries Were Pulled Into Recession
Investment-Related Manufacturing Production
Percent Change
Industry
Percent Change
2008 2009 2010 Industry
Electrical Equipment
Architectural &
Structural Metals
1
-11
1
-2
-19
Construction Machinery
-7
Engines & Turbines
Ag. Equipment
Mining and Drilling
Equipment
Metalworking
Machinery
2008 2009 2010
-14
-14
4
-1
Industrial Machinery
Commercial, Service &
Other Machinery
0
-14
2
-21
5
Forging and Stamping
2
-10
3
-9
-11
5
Aerospace
-1
7
4
-4
-3
3
-11
-17
-1
13
-13
12
-12
-17
-2
-13
2
-1
5
Ship & Boat Building
Private Nonresidential
-24 Construction
4
Source: Federal Reserve Board, Global Insight Model, MAPI
Public Construction
Intermediate Industries Are In Recession
Material Manufacturing Production
Percent Change
Industry
Percent Change
2008 2009 2010 Industry
2008 2009 2010
Paper
-3
-8
0
Resins & Synthetic
-10
-15
5
Iron & Steel
-9
-33
5
Organic Chemicals
-15
-15
7
Alumina & Aluminum
0
-12
5
Inorganic Chemicals
3
-9
0
Glass
3
-15
4
Ag. Chemicals
-4
-7
4
Source: Federal Reserve Board, Global Insight Model, MAPI
Declining U.S. Steel Production
U.S. Steel Production
U.S. Steel Production
Source: Left – Federal Reserve Board, Right – Federal Reserve Board
F=Forecast
A Massive Federal Stimulus is On the Way
$787 Billion Stimulus Package by Major Category (Percent of Total)
Sources: Joint Committee on Taxation, House Committee on Rules,
Congressional Budget Office
Infrastructure and Energy Projects, Education and State Governments
Receive the Most Funding
Major Categories of Discretionary Spending in Stimulus Package
(Billions of Dollars)
Sources: Joint Committee on Taxation, House Committee on Rules,
Congressional Budget Office
US Dollar Appreciation and Global Recession Hurts Exports Which
Have Been a Pillar of Strength in Manufacturing
U.S. Dollar Exchange Rates
World Trade Weight GDP Growth
Source: Left – Federal Reserve Board, Right – Federal Reserve Board
F=Forecast
A Severe Manufacturing Recession
Non-High Tech
Manufacturing Production
Non-High Tech
Manufacturing Production
Source: Left – Federal Reserve Board, Right – Federal Reserve Board
The 2008-2009 Recession is As Severe As 1973-75
Length and Depth of Selected Post-World War II Recessions
Peak-to-Trough Percent Change
Recession years
Length in months
GDP
Private-sector
employment
Manufacturing
production
2008-09 (forecast)
18
-3.0
-3.9
-12.2
2001
9
-0.5
-2.7
-6.6
1990-91
8
-1.5
-1.9
-4.7
1981-82
16
-2.9
-3.5
-9.5
1973-75
16
-3.4
-4.2
-15.6
1957-58
8
-3.7
-5.3
-14.5
Source: National Bureau of Economic Research, Bureau of Economic Analysis, Bureau of Labor
Statistics, Federal Reserve Board and Manufacturers Alliance/MAPI
Two Speed World: Advanced Countries In Manufacturing Recession
Manufacturing Production Growth
Source: Government Statistical Agencies, Global Insight, MAPI
F=Forecast
Two Speed World: Developing Countries Grow At A Decelerating Rate
Manufacturing Production Growth
Source: Government Statistical Agencies, Global Insight, MAPI
F=Forecast
A Severe Global Recession
World GDP & Manufacturing Production
World Manufacturing Production
Source: Left – Federal Reserve Board, Right – Federal Reserve Board
F=Forecast
World Steel Production Collapsed at the End of 2008
Global Steel Production
Source: World Steel Association
Pervasive Decline in Global Steel Production
Global Steel Production
Million Metric Tons
Percent Change
2006
2007
2008
2007
2008
IQ to IVQ
2008
U.S.
99
98
92
0
-7
-39
EU-27
207
210
199
1
-5
-28
Brazil
31
34
34
9
0
-21
Russian Federation
71
72
69
2
-5
-40
China
423
489
502
16
3
-11
Japan
116
120
119
3
-1
-14
Korea
49
52
54
6
4
-8
Taiwan
20
21
20
4
-3
-20
India
50
53
55
7
4
-2
Other
285
293
279
3
-5
-33
Country
Source: World Steel Association