Transcript Slide 1

Economic Outlook:
Navigating the Recovery
Chris Low
Chief Economist
March 2010
The Big Themes
•
•
•
•
Waves of crisis subsiding, but still an issue (Greece).
Washington’s challenges to investors.
Timing the most important economic signals.
Staying a step ahead of the Fed.
2
2010 Political Calendar (The Plan)
Jan
Healthcare
Feb
Mar
Apr
Jun
No bill
in Jan.
Jul
Aug
Sep
Oct
Nov
WH
wants
Budget
FY 2011
Taxes
Debate
Financial
Reform
1st time HB
tax credit
May
House
Senate
End
Campaign
Limited agenda
Election
11/02
3
Dec
2010 Political Calendar (The Reality)
Jan
Healthcare
Feb
Mar
Apr
Jul
Aug
Sep
Oct
Nov
Delayed
until healthcare
debate ends.
Taxes
1st time HB
tax credit
Jun
White House stretched health
reform debate into the spring.
Budget
Financial
Reform
May
Senate?
Reconciliation?
End
Campaign
Limited agenda
Election
11/02
4
Dec
2010 Fed Calendar (highlights)
Jan
FOMC mtg
End most liq
progs
End mtge
purchases
Feb
1/27
Mar
Apr
3/16
4/28
May
Jun
6/23
Jul
Aug
Sep
8/10
9/21
Oct
Nov
Dec
11/03
12/14
2/28
3/31
End
“extended
period”
6/23
FF rate to
0.25%
8/10
Rate hikes
?
Earliest
likely
date.
5
GDP is growing again
10.00%
8.00%
GDP
Forecast
6.00%
4.00%
2.00%
0.00%
-2.00%
-4.00%
Recession
-6.00%
-8.00%
2000
2002
2004
2006
6
2008
2010
Thanks to stimulus
25%
Federal outlays as a
% of GDP
23%
20%
18%
15%
13%
10%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
7
But stimulus is
not forever, and
sustainable
recovery
depends on the
private sector
8
Deep recessions have V-shaped jobs recoveries
(as long as GDP recovers, of course…)
GDP = 100 at cycle peak
Jobs = 100 at cycle peak
101
112
1981-82
1990-91
2001
2008-09
110
1981-82
1990-91
2001
2008-09
100
108
99
106
98
104
97
102
96
100
95
98
94
96
93
94
0
1
2
3
4
5
6
7
8
0
9 10 11 12 13 14 15 16
9
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16
Still Waiting for Employment Turn…
400k
200k
0k
-200k
-400k
-600k
-800k
-1,000k
2007
2008
2009
10
2010
…but the emp. diffusion index is stronger than
2-years after the 2001 recession…
71.35
61.35
51.35
41.35
31.35
21.35
11.35
Recession
Diffusion index
1.35
2000
2001
2002
2003
2004
2005
11
2006
2007
2008
2009
2010
…manufacturing payrolls are growing…
50.00
0.00
-50.00
-100.00
-150.00
-200.00
-250.00
Recession
Diffusion index
-300.00
2000
2001
2002
2003
2004
2005
2006
12
2007
2008
2009
2010
…and the Workweek is rising
34.5
Average Workweek
34.3
34.1
33.9
33.7
33.5
33.3
33.1
32.9
32.7
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2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
32.5
Key Sectors
Consumers
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Step 1: Savings rate Rose to 4.3%
5.0%
Recession
Saving rate (4 qtr avg)
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2000
2001
2002
2003
2004
2005
15
2006
2007
2008
2009
Step 2: borrowing transitions to saving
$1,500bn
Recession
Change, household debt, SAAR
$1,250bn
$1,000bn
$750bn
$500bn
$250bn
$0bn
-$250bn
-$500bn
2000
2003
2006
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2009
Step 3: spending falls below trend,
but is growing again
$9,500bn
Recession
Real consumption
$9,000bn
Housing-boom era
above-trend growth
has given way to belowtrend growth now.
$8,500bn
$8,000bn
$7,500bn
$7,000bn
2000
2002
2004
2006
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2008
2010
Key Sectors
Business
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Step 1: Inventories were overbuilt,
then worked off
1.65
1.60
1.55
1.50
1.45
1.40
Recession
Retail I/S ratio
1.35
2000
2001
2002
2003
2004
2005
19
2006
2007
2008
2009
2010
Step 2: Orders tanked, then recovered
80.0
Recession
ISM mfg orders
Non-mfg orders
70.0
60.0
50.0
40.0
30.0
20.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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Step 3: Inventory cycle shifts into up phase
5.00%
Inventory contrib. to GDP
Forecast
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
-3.00%
Recession
-4.00%
2000
2002
2004
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2006
2008
2010
Key Sectors
Housing
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Step 1: Sales bottom in Feb 2009
7.5m
Existing home sales
7.0m
6.5m
6.0m
5.5m
5.0m
4.5m
4.0m
2000
2001
2002
2003
2004
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2005
2006
2007
2008
2009
2010
Step 2: Inventories peak in July 2009
5.0m
Existing home inventories
4.5m
4.0m
3.5m
3.0m
2.5m
2.0m
1.5m
2000
2001
2002
2003
2004
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2005
2006
2007
2008
2009
2010
Step 3: Prices should bottom this spring
$240k
$220k
Median existing home price
12-mo average
$200k
$180k
$160k
$140k
$120k
$100k
2000
2001
2002
2003
2004
2005
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2006
2007
2008
2009
2010
Housing Pitfalls
• End of Fed mortgage purchases.
• End of 1st time homebuyer tax credit version 2.0.
• Looming foreclosures.
Reasons for Housing Optimism
• 1st time homebuyer tax credit version 3.0 will follow if
sales falter in an election year.
• GSEs renting homes to foreclosed families, which will
keep foreclosed homes off the market.
Reason not to worry
Housing doesn’t matter like it did in the boom, because no one
subsidizes spending with home equity debt anymore.
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Keys to inflation
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Market expectations for CPI inflation
Big jump next year.
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2010
2011
2012
2013
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2014
2015
2016
2017
2018
Cyclical components are deeply deflationary
3%
5%
6.0%
Recessions
CPI
Augmented Unemployment Rate
5.0%
7%
4.0%
9%
3.0%
2.0%
11%
1.0%
13%
0.0%
15%
-1.0%
17%
-2.0%
19%
-3.0%
2000
2001
2002
2003
2004
2005
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2006
2007
2008
2009
2010
The dollar will drive inflation
when unemployment is low again
120
250
Broad trade weighted dollar, left
115
300
CRB raw indust. index, right
350
110
400
105
450
100
500
95
550
90
2006
600
2007
2008
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2009
2010
The $ view is not all bad
The bear case for the dollar:
• The 2nd lowest short-term interest rates in the industrialized world.
• The deficit is huge and Congress is threatening the autonomy of the Fed.
•The Treasury’s strong dollar policy is all talk.
The bull case for the dollar:
• Europe and the UK face a tougher banking cleanup than we do.
• The dollar appears to be correctly valued from a balance-of-trade perspective,
even with China.
• Debt-to-GDP % US = 84.9% (IMF), right in the middle of the G-7 pack.
The Balance:
Dollar is already strengthening as it becomes clear US will raise rates
before Europe, the UK or the BoJ.
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Risks: It could take years for household delevering to end
$18tn
$16tn
$14tn
$12tn
$10tn
$8tn
$6tn
$4tn
$2tn
$0tn
-$2tn
Home equity
Mortgage Debt
Peak housing
Now
Healthy again
Assumes there are mortgages on 70% of the housing stock.
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Risks: State Budgets are Busted
Pew center for the states: http://downloads.pewcenteronthestates.org/BeyondCalifornia.pdf
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Change in State & Local Payrolls (2-mo avg)
80k
60k
40k
20k
0k
-20k
-40k
-60k
-80k
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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Risks: Washington
• New taxes will be part of FY 2011 budget
• Cap and trade (or EPA carbon restrictions)
• Healthcare reform will cost more than benefit in first years
• Finance reform (increased regulation = less credit)
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Fed can wait for clear falling
unemployment rate before tightening
Recession
Unemployment rate
Fed funds target
19 months
11%
10%
9%
13 months
8%
7%
6%
5%
4%
3%
2%
1%
0%
1990
1992
1994
1996
1998
2000
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2002
2004
2006
2008
2010
10-yr TIPS yields in 100bp range for 2 years
10-yr UST should stay below 4.5% as long as inflation is low
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Inflation outlook
In the short and medium term, inflation will trend downward due to lack of
pricing power and pursuit/protection of market share. Longer-term (beyond
the next three years) the dollar will move into the driver’s seat. By then, we
expect the Fed will be tightening and therefore the dollar will have
stabilized.
Growth outlook
After a quarter or two of robust, stimulus-fueled growth, GDP will settle onto
a slowly rising path. The result is likely to be reminiscent of the early 1990s:
• below trend GDP growth
• lingering fear of a double dip
• slower than usual drop in unemployment rate
• little private-sector debt growth
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