Transcript Document

The Economic Outlook:
How Hard A Landing?
David Wyss
Chief Economist
Standard & Poor’s
NAHB Outlook Conference
Washington
October 18, 2006
CONFIDENTIAL AND PROPRIETARY.
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Copyright (c) 2006 Standard & Poor’s, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
The Recovery Is Slowing
• After a strong 2004 and 2005
• Growth has slowed to below trend.
• The economy is rotating from consumer- and housing-led growth to
investment-led growth.
• The Fed is through hiking interest rates, and will probably have to
reverse next year.
• The housing market peaked last summer, but is more stalling than
plunging. Starts are expected to drop 25%.
• Oil prices are coming down from record highs, restoring some
purchasing power.
• Katrina rebuilding has been slow.
• Stronger European growth and a weaker dollar should mean less drag
from the trade deficit.
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2.
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Another Soft Landing
Recession
1967q2 *
1970q4
1975q1
1980q3
1982q4
1987q1 *
1991q1
1995q4 *
2001q4
GDP Growth
(4 qtrs to
Unemployment
trough)
(trough)
Change
2.4%
3.9%
-0.2%
6.1%
-2.3%
9.0%
-1.6%
7.8%
-1.4%
10.8%
2.5%
6.9%
-1.0%
7.8%
2.0%
5.8%
0.2%
5.9%
0.3%
2.7%
4.4%
2.2%
3.6%
0.3%
2.6%
0.4%
2.1%
Fed Funds
Treasury
(peak)
Change
yield (peak) Change
5.76%
4.59%
5.22%
1.07%
9.19%
5.40%
7.91%
1.74%
12.92%
9.63%
7.40%
1.12%
17.61%
13.00%
12.75%
5.88%
19.10%
10.07%
15.32%
1.85%
11.64%
3.13%
13.56%
3.18%
8.29%
2.38%
9.85%
3.27%
6.05%
3.09%
7.96%
2.63%
6.54%
1.91%
6.66%
2.13%
* Soft Landing
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3.
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Housing
Starts
(trough)
Change
843
-461
1,085
-808
904
-1590
927
-1270
902
-645
1,271
329
798
-823
1,249
-315
1,540
-258
Oil Prices Hit New Highs
($/barrel, WTI and deflated by CPI;
household energy purchases as percent of disposable income)
90
80
70
60
50
40
30
20
10
0
1980
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1985
Oil price (WTI)
1990
1995
2005 dollars
2000
% of disp. income (right)
Source: BEA
CONFIDENTIAL AND PROPRIETARY.
4.
2005
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The World Is More Energy Efficient
(Tonnes of oil equivalent per $1000 dollars (2000 dollars) of real GDP)
1
0.8
0.6
0.4
0.2
0
US
France Germany UK
1971
1980
Japan
China
1995
Source: OECD
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5.
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India
World
2004
The Fed Is Moving Toward Neutral
(Percent)
10
8
6
4
2
0
1995
1997
1999
2001
Federal Funds Rate
2003
2005
2007
10-Yr Bond Yield
Source: Federal Reserve
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6.
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2009
Mortgage rate
Interest Rates Had Converged
(Long-term government bonds)
6
5
4
3
2
1
0
US
Canada Japan
Oct-04
Euro
Dec-05
UK
Oct-06
Source: Bloomberg
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7.
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Australia
Quality Spreads Grind Tighter
(Spread over Treasury yields, basis points)
900
800
700
600
500
400
300
200
100
0
2003
2004
Investment grade
2005
2006
Speculative grade
Source: S&P
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8.
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Financial Risk Is Greater
100%
80%
60%
40%
20%
0%
1980
1985
AAA
AA
1990
A
1995
BBB
2000
Junk
Source: S&P
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9.
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2004
But Corporate Debt Has Dropped
6
0.6
5
4
0.5
3
2
1
0
0.4
1993
1996
1999
Cash flow/debt service
2002
Debt/net worth (right)
Source: Federal Reserve Flow of Funds
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10.
2005
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World Growth Is Steady
(Real GDP, % change)
8
6
4
2
0
US
2003
Canada Eurozone
2004
2005
Japan
2006
Other
Asia
2007
Source: Global Insight and S&P
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11.
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Latin
America
2008
And Comes Mostly From Asia
(IMF purchasing power weights, 2005)
Other
19%
Other
19%
US
21%
US
15%
Eurozone
4%
East Eur
7%
Japan
4%
East Eur
9%
Other Adv
8%
Eurozone
15%
India
6%
India
10%
China
15%
Japan
6%
China
31%
Other Adv
11%
Percent of World GDP
Percent of World Growth
Source: IMF
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12.
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Fiscal Deficits Almost Everywhere
(Government balance as percent of GDP, 2004)
3
2
1
0
-1
-2
-3
-4
US
Canada France
Germ.
Italy
Source: IMF
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13.
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UK
The Future Looks Bleak
(Government debt as % of GDP)
600
530
500
350
400
300
200
100
113
173
101
49
223
182
38 62
57
86
220
59 71
0
US
Japan
2005
UK
France
2025
Source: S&P
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14.
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Germany
2050
Aging Populations Will Boost Government Spending
(Ratio of over 65 population to labor force)
60
50
40
30
20
10
0
US
Canada France Germany Italy
UK
Japan AustraliaMexico OECD
2000
Source: OECD
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15.
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2020
US Trade Deficit Balances Surpluses Overseas
(Trade balance as percent of GDP, 2005)
6
4
2
0
-2
-4
-6
-8
US
Canada Germany France
Italy
UK
Japan
Source: Global Insight
CONFIDENTIAL AND PROPRIETARY.
16.
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China
India
US Borrows From Abroad to Offset Weak Savings
(Percent of GDP)
22%
20%
18%
16%
14%
12%
10%
8%
1970
1975
1980
Gross saving
1985
1990
1995
Private saving
2000
Private investment
Source: BEA
CONFIDENTIAL AND PROPRIETARY.
17.
2005
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Can the Consumer Keep Spending?
• Consumer spending has led the expansion
• The tax cuts provided extra income
• Lower mortgage rates freed up funds
• Confidence is up
• But the saving rate is negative
• Tax cuts are over
• Interest rates are up
• Home prices are dropping
• Net result will be a slowdown, not a retreat
• Helped by lower energy prices
• The saving rate will remain low
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18.
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Household Debt Hits Record As Saving Goes Negative
(Percent of after-tax income)
10
1.4
8
1.3
6
1.2
4
1.1
2
1
0
0.9
-2
0.8
1990
1993
1996
1999
Saving rate
2002
2005
2008
Debt/income (right)
Source: BEA and Federal Reserve
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19.
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More Mortgages, Fewer Credit Cards And Other Loans
(Percent of household debt, 2004)
2004
2001
1998
1995
50
60
Primary residence
Credit Card
70
80
Other mortgage
Other
Source: Federal Reserve SCF
CONFIDENTIAL AND PROPRIETARY.
20.
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90
100
Installment
But Wealth Continues Strong, Helped By Housing Markets
(Percent of after-tax income)
700%
600%
500%
400%
300%
200%
100%
0%
1990 1993 1996 1999
Net worth
2002 2005 2008
Financial assets
Source; Federal Reserve
CONFIDENTIAL AND PROPRIETARY.
21.
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Higher Interest Rates Slow Car Sales And Housing Starts
(Millions of units)
2.5
20
2
18
1.5
16
1
14
0.5
12
0
10
1993
1996
1999
2002
Housing starts
2005
2008
Car sales (right)
Source: Census
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22.
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Debt Service Now Above 1986 Record
(Household obligations as percent of after-tax income)
22
20
18
16
14
12
10
8
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Financial Obligations
Source: Federal Reserve
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23.
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Debt
Debt Repayments Are Evenly Distributed
(Average debt repayment as percent of income by income percentile)
20
16
12
8
4
0
0-20
20-40
1995
40-60
60-80
80-90
2004
Source: SCF
CONFIDENTIAL AND PROPRIETARY.
24.
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90-100
The Rich Have Mortgages, The Poor Have Credit Cards
(Percentage of households with debt owed)
90
80
70
60
50
40
30
20
10
0
0-20
20-40
Mortgage
40-60
60-80
Installment
80-90
Credit card
Source: SCF
CONFIDENTIAL AND PROPRIETARY.
25.
90-100
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A Housing Bubble?
• Housing remains affordable
• Thanks to low mortgage rates
• But what happens when rates go up?
• Home prices have outpaced incomes
• Ratio of home price to income is at a record high
• There are big local bubbles
– E.g., New York, California, Boston, Florida
• And higher mortgage rates will cause starts and sales to drop
• Housing looks less overvalued than other assets
CONFIDENTIAL AND PROPRIETARY.
26.
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More Affordable Housing Allows Households To Own Homes
1.60
70
1.40
68
1.20
66
1.00
64
0.80
62
0.60
60
1980 1983 1986 1989 1992 1995 1998 2001 2004
Homeownership Rate (Right scale)
Affordability (Left scale)
Source: Census Bureau
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27.
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Home Prices Are High Relative to Household Income
(Ratio of average home price to average household disposable income)
4.5
4
3.5
3
2.5
2
1975
1979
1983
Existing
1987 1991
New
1995
1999
2007
Quality-adjusted
Source: BEA
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28.
2003
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Bubbles Are Everywhere
(Percent increase in home prices, 1997-2005)
US
Canada
Germany
Switzerland
Netherland
Britain
Ireland
Italy
Sweden
France
Spain
Japan
Australia
China*
NewZealan
Hong Kong
-100
-50
0
50
100
(* Based on 2 years’ of data)
Source: The Economist
CONFIDENTIAL AND PROPRIETARY.
29.
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150
200
250
The Most Expensive Cities
Median
Median House
Household
Price
Income
($ thousand)
San Diego-Carlsbad-San
Marcos, CA
Los Angeles-Long Beach-Santa
Ana, CA
San Francisco-OaklandFremont, CA
San Jose-Sunnyvale-Santa
Clara, CA
Honolulu, HI
Miami-Fort Lauderdale-Miami
Beach, FL
New York-Northern New JerseyLong Island, NY-NJ-PA
Riverside-San BernardinoOntario, CA
Reno-Sparks, NV
Seattle-Tacoma-Bellevue, WA
604.3
43.3
14.0
691.9
51.8
13.4
715.7
56.3
12.7
744.5
590.0
65.4
60.5
11.4
9.8
371.1
43.1
8.6
446.5
56.1
8.0
374.2
349.9
316.8
50.8
49.0
44.5
7.4
7.1
7.1
Source: Census; 2005 data
CONFIDENTIAL AND PROPRIETARY.
30.
Price/Income
Ratio
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The Stock Market Will Recover, But Slowly
• Market rose over 20%/year from 1995 -99
• But dropped from March 2000 through June 2003
• Biggest drop since 1929-32
• Double-digit earning gains for a record 17 quarters; profits are a
record high relative to GDP
• Earnings must slow
• Share prices cannot continue to outpace earnings
• As interest rates rise
• Stocks will thus yield less in the future than in the recent past.
• But the current rally is being spurred by strong earnings and dividend
tax cuts
CONFIDENTIAL AND PROPRIETARY.
31.
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Most US Sectors Have Recovered From The Bear Market
(Change in S&P 500 sectors since March 24, 2000 peak)
Utilities
Telecomm
Materials
Technology
Industrials
Health Care
Financials
Energy
Cons Staples
Cons Discr
S&P 500
-100 -75
-50
Oct-02
-25
0
25
50
Sep-06
Source: S&P
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32.
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75
100
Bottom Line: The Economy Recovers, But Slowly
• Consumers are spending their max
• Businesses are taking over the lead
• But fiscal policy stimulus is over
• Interest rates are up
• Weak recovery for stock market
• Risk of recession remains if:
– Further terror attacks damage confidence, while oil prices soar
– Problems in financing deficits push investment down and savings up
• But could be better if productivity stays stronger
CONFIDENTIAL AND PROPRIETARY.
33.
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Risks to the Economy
(Real GDP, percent change year ago)
6%
4%
2%
0%
-2%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Baseline
Pessim
Source: BEA, S&P projections
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34.
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Optim
Economic Updates
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during each analytic process.
36.
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