Transcript Dwight Johnson`s Economic Update

Economic Recovery At Risk?
August 10, 2010
Dwight Johnston
Agenda
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The financial landscape
Job outlook – “unusually uncertain”
Housing and mortgages
Second dip ahead
Scenarios
Risks
Financial Landscape Has Not Changed
• “Extend and pretend” – can banks continue
to out-earn future losses?
• Commercial R.E. still to come; Foreclosure
unknown
• Financial reform bill isn’t reforming
• “Too big too fail” problem even bigger
• Nothing fundamental has changed
• Stubborn Fed part of problem
• Risk appetite surged – spreads fell
Census Impact Fades –
Private Payroll Growth Weak
(Nonfarm Payrolls Change – Thousands)
Projected
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Oc 0
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Jobs Growth Too Weak to Support
Growth
Private payrolls 87k per mo. Half temps
Temp hiring not turning permanent
State & Local Govt jobs at risk – 1-2
million at stake
Job losses 8.5 million
Big picture – True UR 16.5%
Jobs Too Weak to Support Growth
• Manufacturing adds jobs 7 mos.=183k –
Vulnerable to inventory drawdown
• Manufacturing loses jobs 3 yrs.= 2.8mm
• Unemployment lingers – major issue
• Things are better – absolutely
• Always remember it’s income not GDP
California/Nevada – Share a Bond
Low UR
Nevada
4.2%
High UR Current
(14.2%) 14.2%
California
SF
San Jose
Central Cal
4.6%
3.1%
2.5%
5.8%
(12.6%) 12.2%
(11.1%) 9.3%
(12.4%) 11.4%
(19.5%) 17.0%
San Diego
LA/LB
San Bern/Riv
3.7%
4.0%
4.5%
(11.1%) 10.5%
(12.5%) 12.3%
(15.4%) 14.4%
California Not Likely to Lead
• Too much of California’s and Nevada’s growth was
construction based and r.e. profit-based
• Unemployment woes severe for some time
• Port business could be a plus but California not in
control
• Tech – good for now
• Budget woes not conducive to attracting new
businesses - California’s problem
• While not a leader, will make a great follower –
human resources, desirability, reputation for
innovation
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Housing Starts - Builders Need
Convincing
Units - Thousands
2200
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Home Sales – Tax Credit Spike Over
New Homes (thousands)
1300
Existing Homes (millions)
7.25
New
Existing
6.75
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6.25
900
5.75
700
5.25
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4.75
300
4.25
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Home Inventories – X Factor
New Homes (thousands)
Existing Homes (millions)
600
550
5.2
New
4.7
Existing
500
4.2
450
3.7
400
3.2
350
300
2.7
250
2.2
200
1.7
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Housing Fundamentals –
Good to Great
• Most statistics support a bottoming
process is occurring – Psychology boost
• First time buyers very active
• Investors active (record 28%)– good and
bad
• Affordability best in years!
• Mortgage rates best in years! (at risk)
Housing Fundamentals –
Bad to Terrible
• “Bottom” – depends on jobs
• More pain in higher end likely
• Foreclosures only delayed? –
Shadow inventory at record 5.3 mm
homes - 42% one-yr. or more behind
• Studies say 5-7 million at risk
• Modifications – 70% re-default rate
Strategic Default – Now Trendy
• 1,000,000 walk-aways in 2009
• Articles now balanced but more emphasis on
positive aspects of default
• Wider acceptance in polls – contract defense
• California most vulnerable due to prices
• Risks will grow the longer home prices
remain flat in depressed areas with high
prices
Underwater Homes –
Incentive to Walk Away
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California – 36%
Nevada – 70%
Florida – 48%
Arizona – 51%
Housing Outlook
• Easy part is done – Home tax credit
expires – Much pent-up demand met
• How long will “extend and pretend” last
• 5.3 million homes 60-days+ default
• Growth in strategic defaults
• Critical time ahead – July-Aug
• Talk to your realtor
Mortgage Spreads Defy Expectations
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Ten Year
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FNMA MTG
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Spread
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Mortgage Spread Outlook - Messy
• “New normal” in spreads?
• Fed’s program only part
• Huge buying by banks, bond funds, etc.
in search for yield
• Spreads will widen dramatically if
economy improves
• “New normal” mortgage rate 2%?
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Rates Can’t Go Lower?
Think Again
Japan 10yr
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Mortgage Wild Cards
• Fannie/Freddie 95% of market – some jumbo
activity coming back
• FNM/FRM years from resolution – little
private mkt until securitization market rebuilt
• Fannie/Freddie – still subject to politics
• Possible program to refi underwater
mortgages – good for economy, very bad for
premium buyers
• Most likely status quo for now with refi
business still good
Consumers Not So Happy
Retail Sales & Confidence –
Sales Recovery Off Low Base
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CONCCONF MOM Index
30
RSTA YOY
-4
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2.15
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Business Not as Usual for Consumer
• Strategic defaults/foreclosure delays
boosting spending and debt repayments
• Tax refunds double 2009
• Better now, worse later
• Most consumers are trying to pay back
debt
• Incomes lagging
Second Dip Ahead
• The stock market is not the economy
• Do not under-estimate the lack of stimulus –
fiscal and monetary; refund boost to fade
• At end of 80’s recession consumer debt 46%
of GDP – Today it’s 96%
• This was a monumental collapse of asset
prices – leaving behind a mountain of debt
• In the end, it’s income that matters
Range of Expectations for 06/30/2011
(July 2010 Bloomberg poll – 87 economists)
Low
Median
High
GDP
0.00%
2.85%
5.50%
UR
8.00%
9.00%
10.50%
CPI
1.00%
1.80%
4.80%
Fed
Funds
0-0.25%
0.75%
1.75%
2-Year
.60%
1.45%
3.50%
10-Year
2.35%
3.70%
5.75%
Three Scenarios – Crossroads?
• Long Flat Road Case – Bad assets drag on credit;
consumer shift intensifies; 2nd & 3rd dips –
Japanese scenario
50%
• Most Likely – Housing “process” continues; credit
market conditions stable; U.S. continues
recovery; true job growth still weak - Caution!
Long-term rates might rise
40%
• Disaster case – Monetarist case. Dollar will
weaken with Fed’s money binge. Rates and
inflation will surge.
10%
Fed Funds Scenarios
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2.5
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1.5
1
0.5
Rate Path # 1
Rate Path #2
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Rate Path #3
Ten-Year T-Notes
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Rate Path # 1
Rate Path #2
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Rate Path #3
Why I Changed
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Spread of debt crisis
Recent weak job signals
Weakening retail sales
Weakening shipping indicators
Weak post-tax credit home sales activity
Delays on working through foreclosure
pipeline pile-up
• Change in attitude in D.C.
My Very Long-term View
• Debt bubble will take years to unwind
• American consumer is undergoing secular
change from spend to save
• Retirement expectations lowered will continue
to impact spending
• Either deflation or no inflation with low rates
for years
• Economic growth will fall short but no disaster
Credit Union Outlook
• Expect no worse, no better on delinq. –
you already know who will pay
• Assume narrower interest margins
• Assume members will save more but
look for higher rates
• Focus on providing members alternative
investments
• Assume refi business good
Final Thoughts
• For planning purposes, assume 2011 will look like
2010
• Strategize about low rates for extended period
• Game changer – Financial Meltdown II
• Include planning for series of mini-recessions/minirecoveries
• With luck, economy can build on small gains;
corporations spend on jobs; foreclosures abate; real
optimism returns – not just “less bad”
• Lots of smart people (not on Wall Street) believe
economy will exceed expectations
Q and A
Dwight Johnston – [email protected]
Daily Market Comment & Longer-term Commentary available at
www.wescorp.org