Transcript David Wyss

The Economic Outlook:
Who’ll Stop The Rain
David Wyss
Chief Economist
Standard & Poor’s
September 10, 2009
Data as of September 9
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The U.S. Hits Bottom
• The economy is nearing the bottom
• Housing has been in recession for three years, subtracting over a
percentage point from GDP growth in both 2007 and 2008.
• But that was offset by strength in nonresidential construction and the
closing of the trade gap.
• Weaker overseas growth meant less benefit from the trade deficit.
• Nonresidential construction is plunging.
• The fiscal 2008 deficit beat the 2004 record; 2009 may triple 2008.
• The Fed cut rates sharply.
• The recession has been the longest and deepest since the 1930s.
• And an even deeper and longer recession is possible if the financial
markets lock up again, oil prices continue to climb, and home prices
continue to drop.
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2.
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The Housing Market Cycle
(Housing starts (1000) and 12-month % change in home prices (S&P/Case-Shiller))
2,500
30
2,000
20
1,500
10
1,000
0
500
-10
0
-20
1990
1993
1996
1999
Starts
2002
2005
Home prices (%chya)
Source: Standard & Poor’s and Census Bureau
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3.
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2008
Bubbles Were Almost 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
Source: Mortgage Bankers’ Association and Standard & Poor’s
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150
200
250
Those Who Bubbled Highest Burst Loudest
(Percent increase in Case-Shiller home prices, June 2009)
Miami
Los Angeles
Washington
San Diego
Tampa
Las Vegas
Phoenix
New York
San Fran.
Seattle
Portland
Boston
Minneapoli
Chicago
Denver
Charlotte
Atlanta
Detroit
Dallas
Cleveland
-100
-50
0
2000-peak
50
100
peak-present
Source: Standard & Poor’s
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150
200
Foreclosures Are Concentrated
(Percentage of homes in foreclosure, first half 2009)
Under 0.5%
0.5% to 1%
1% to 2%
Over 2%
Source: RealtyTrac
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6.
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The Fed Is Still Easing
(Percent)
10
8
6
4
2
0
1995 1997 1999 2001 2003 2005 2007 2009 2011
Federal Funds Rate
10-Yr Bond Yield
Source: Federal Reserve
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7.
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Mortgage rate
Quality Spreads Widened From Record Lows
(Spread over Treasury yields, percentage points)
18
16
14
12
10
8
6
4
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Default rate (12-month)
Old spread series
Credit spread
Source: Standard & Poor’s Global Fixed Income Research
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Fiscal Costs of Post-War Banking Crises
(Percent of nominal GDP)
South Korea
1997-2002
Japan
1991-Present
Spain
1977-85
Finland
1991-94
Norway
1987-93
Sweden
1991
U.S. S&L Crisis
1984-91
U.S. Subprime Crisis
2007-Present
The Big Financial
Crises Since 1970
0
5
10
15
20
Source: Organization for Economic Cooperation and Development, International
Monetary Fund, Global Insight
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25
30
35
Synchronized Sinking
• Industrial countries are in recession
• Declines in real GDP in the U.S., Japan, and Europe and
weakness in Asia
• Developing countries looked like they might escape
• Until commodity prices plunged in Q4
• We expect a drop in world GDP, to negative 1.3% in 2009 from
3.8% in 2007
• But recovery now seems underway
• The most synchronized world recession in history
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All Fall Down
(Percent change in real GDP, quarterly rate)
1.5
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
-3
-3.5
-4
-4.5
2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2
US
Japan
Eurozone
Source: Global Insight
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UK
Synchronized Sinking
(Real GDP, % change)
10
8
6
4
2
0
-2
-4
-6
-8
d
it e
n
U
es
at
t
S
a
ad
n
Ca
2006
e
on
z
ro
Eu
2007
K.
.
U
n
pa
a
J
n
t er
s
Ea
2008
e
op
r
Eu
A
er
h
Ot
a
-P
a
i
s
2009
c
t in
La
Am
i ca
er
id
M
E
t&
as
n
ra
a
ah
-S
b
Su
2010
Source: Global Insight and Standard & Poor’s
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12.
N
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a
ric
f
A
ric
Af
a
2011
Deficits Are Mostly Cyclical
(Government deficit as % of GDP, fiscal years)
4
2
0
-2
-4
-6
-8
-10
-12
2000
2003
ex stimulus
2006
2009
stimulus
Source: Standard & Poor’s.
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2012
Can the Consumer Keep Spending?
• Consumer spending has led the expansion
• But wealth is down because home prices are dropping and
• Stocks are weak
• Borrowing is more difficult, and home equity loans much less
available
• Confidence has dropped and unemployment risen
• Consumers are likely to continue to save more and borrow less
• Falling oil prices gave back some purchasing power, but that is
now reversing
• Stimulus package provides some income boost
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Oil Prices Have Dropped
($/barrel, WTI and deflated by CPI; household energy purchases as percent of disposable income)
120
9%
100
8%
80
7%
60
6%
40
5%
20
4%
0
1980
3%
1985
1990
Oil price (WTI)
1995
2005 dollars
2000
2005
% of disp. income (right)
Source: Bureau of Economic Analysis
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15.
2010
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High Unemployment Scares Consumers
(Percent)
130
120
110
100
11
10
9
8
90
80
70
60
50
2000
7
6
5
4
3
2003
Consumer sentiment
2006
2009
2012
Unemployment Rate (right)
Source: Bureau of Labor Statistics and University of Michigan Survey Research Center
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Wealth Slides With Home and Stock Prices
(Percent of after-tax income)
700%
600%
500%
400%
300%
200%
100%
0%
1990 1993 1996 1999 2002 2005 2008 2011
Net worth
Financial assets
Source; Federal Reserve
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No Savings, But Lots of Debt
(Percent of after-tax income)
10
140%
8
130%
6
120%
4
110%
2
100%
0
90%
-2
1990 1993 1996 1999 2002 2005 2008 2011
Saving rate
Debt/income (right)
Source: Bureau of Economic Analysis and Federal Reserve
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80%
Bigger Than The Average Bear
• A great run from 1982 to 2000
• But the secular bear began in 2000
• Two largest bear markets since the depression
• Earnings were negative in Q4 for first time in history
• Stocks were overdue for a correction
• We think the rally will continue
• But a near-term correction is likely.
• The long-term cycle probably has another bear in it.
• World stock markets have become synchronized
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Everybody’s Down
(Percent change in stock prices)
100
80
60
40
20
0
-20
-40
-60
-80
World
US
Since March
Canada
Lat Europe Japan Asia PacAustralia
Amer
Mar 2009 (y/y)
Jan 2008 (y/y)
Source: Standard & Poor’s
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Risks to the U.S. Economy
The Unemployment Rate
%
15
13
11
9
7
5
3
2000
2001
2002
2003
2004
2005
Baseline
2006
2007
Pessimism
2008
2009
Optimism
Source: U.S. Bureau of Labor Statistics (BLS), Standard & Poor’s projections.
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21.
2010
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2011
2012
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