Transcript Northern Trust

NORTHERN TRUST GLOBAL ECONOMIC RESEARCH
The Shoals of Depression Have Been Avoided, but Strong
Headwinds Remain
October 2009
Paul L. Kasriel, Chief Economist
PH: 312.444.4145
[email protected]
© 2006 Northern Trust Corporation
northerntrust.com
We have just weathered the longest (19 months?) and deepest
recession in the post-WWII era.
Real Gross Domestic Product
% Change - Year to Year
SAAR, Bil. Chn. 2005$
16
16
12
12
8
8
4
4
0
0
-4
-4
50
55
60
65
70
75
80
85
Sour ce: Bur eau of Economic Analysis /Haver Analytics
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90
95
00
05
In August, the ISM-Mfg. Composite Index popped above 50 for the
first time since January 2008.
ISM Manufacturing: PMI Composite Index
SA, 50+=Incr easing
56
56
52
52
48
48
44
44
40
40
36
36
32
32
OCT
NOV
DEC
JAN
FEB
MAR
APR
MAY
Sour ce: Institute for Supply Management /Haver Analytics
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JUN
09
JUL
AUG
SEP
The behavior of the ISM-Mfg. Index suggests that the recession
ended in July 2009.
ISM Manufacturing: PMI Composite Index
SA, 50+=Incr easing
80
80
70
70
60
60
50
50
40
40
30
30
20
20
50
55
60
65
70
75
80
85
90
Sour ce: Institute for Supply Management /Haver Analytics
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95
00
05
It is not that any one sector is soaring …
…rather a number of sectors have either stopped
descending or are descending at a much slower
rate.
Thanks to the sharp decline in home prices and the low level of
mortgage rates, house purchases are now much more affordable.
Composite Housing Affordability Index
Median Inc=Qualifying Inc=100
180
180
160
160
140
140
120
120
100
100
80
80
60
60
75
80
85
90
95
Sour ce: National Association of Realtor s /Haver Analytics
6
Northern Trust Global Economic Research
00
05
High housing affordability and the $8K first-time-homebuyer tax credit have
resulted in increases in home sales in four of the past five months.
Home Sales: Sum of New and Existing
SAAR, Thous
9000
9000
8250
8250
7500
7500
6750
6750
6000
6000
5250
5250
4500
4500
02
03
Sour ce: Haver Analytics
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Northern Trust Global Economic Research
04
05
06
07
08
09
The sharp decline in the inventory of new homes has led to increases
in starts of new single-family homes in five of the past six months.
Housing Starts: 1 Unit
SAAR, Thous. Units
New 1-Family Houses For Sale: United States
SA, Thous
2000
600
1600
525
1200
450
800
375
400
300
0
225
02
03
04
05
Sour ce: Census Bur eau /Haver Analytics
8
Northern Trust Global Economic Research
06
07
08
09
The tax cuts of the fiscal stimulus program plus unemployment insurance have helped
stabilize disposable personal income, which, in turn, has helped stabilize consumer
spending.
Real Personal Consumption Expenditures ex Motor Vehicles
SAAR, Tr il. Chn. 2005$
Real Disposable Personal Income
SAAR, Bil. Chn. 2005$
9. 0
10500
10250
8. 8
10000
8. 6
9750
8. 4
9500
8. 2
9250
8. 0
9000
05
Sour ce: Haver Analytics
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Northern Trust Global Economic Research
06
07
08
09
Car and truck sales appeared to have bottomed even before “cash-forclunkers.” There is natural replacement demand given that some of us are
still driving 1995 Subarus!
Total Light Vehicle Retail Sales {Imported+Domestic}
SAAR, Mil. Units
18
18
16
16
14
14
12
12
10
10
8
8
06
07
Sour ce: Autodata Cor por ation /Haver Analytics
10
Northern Trust Global Economic Research
08
09
Some of those drill presses, computers, and 737s need replacing, too.
Manufacturers' Shipments: Nondefense Capital Goods
3-month MovingAver age
SA, Mil. $
70000
70000
67500
67500
65000
65000
62500
62500
60000
60000
57500
57500
55000
55000
06
07
Sour ce: Census Bur eau /Haver Analytics
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Northern Trust Global Economic Research
08
09
Economic activity is improving in the developed economies …
Euro Area16: Gross Domestic Product
% Change - Annual Rate
SA/WDA, Mil. Chn. 00. Eur os
Japan: Gross Domestic Product
% Change - Annual Rate
SAAR, Bil. Chn. 2000. Yen
8
8
4
4
0
0
-4
-4
-8
-8
-12
-12
-16
-16
06
Sour ces: Eur ostat, CAO /Haver
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Northern Trust Global Economic Research
07
08
09
… as well as in China …
China: Real GDP: Year-to-Year Percent Change
%
12
12
11
11
10
10
9
9
8
8
7
7
6
6
06
07
08
Sour ce: China National Bur eau of Statistics /Haver Analytics
13
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09
… other developing economies.
Korea: Gross Domestic Product
% Change - Annual Rate
SA, Bil. Ch. 2005. Won
Singapore: GDP at 2000 Prices
SAAR, Q-Q % Change
22. 5
22. 5
15. 0
15. 0
7. 5
7. 5
0. 0
0. 0
-7. 5
-7. 5
-15. 0
-15. 0
-22. 5
-22. 5
06
07
08
Sour ces: Bank of Kor ea, Depar tment of Statistics/Haver Analytics
14
Northern Trust Global Economic Research
09
The economic recovery underway in the rest of the world is boosting
U.S. exports.
Exports, f. a. s.
SA, Mil. Chn. 2005$
105000
105000
100000
100000
95000
95000
90000
90000
85000
85000
80000
80000
75000
75000
07
Sour ce: Bur eau of the Census /Haver Analytics
15
Northern Trust Global Economic Research
08
09
State & local government infrastructure spending in Q2 grew at its fastest rate
since 2001 due to the “Build America Bonds” program authorized by the
fiscal stimulus program.
Real State & Local Govt Gross Investment
% Change - Annual Rate
SAAR, Bil. Chn. 2005$
30
30
20
20
10
10
0
0
-10
-10
-20
-20
-30
-30
01
02
03
04
05
06
Sour ce: Bur eau of Economic Analysis /Haver Analytics
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Northern Trust Global Economic Research
07
08
09
Speaking of the stimulus program, for the most part, the federal
spending portion of it has yet to kick in.
Real Federal Nondefense Gross Investment
% Change - Annual Rate
SAAR, Bil. Chn. 2005$
60
60
40
40
20
20
0
0
-20
-20
-40
-40
08
Sour ce: Bur eau of Economic Analysis /Haver Analytics
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Northern Trust Global Economic Research
09
After the largest inventory liquidation in the post-WWII era, some businesses
will have to begin restocking because their shelves are bare.
Change in Business Inventories as % of Final Sales of Domestic Product
SAAR, Chn. 2005$
2. 25
2. 25
1. 50
1. 50
0. 75
0. 75
0. 00
0. 00
-0. 75
-0. 75
-1. 50
-1. 50
50
55
60
65
Sour ce: Haver Analytics
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Northern Trust Global Economic Research
70
75
80
85
90
95
00
05
If there is one sector that is not improving, it is commercial real estate.
Private Construction: Nonresidential




% Change - Year to Year
A lagging sector.
High and rising unemployment will
keep office vacancy rates rising.
Mall vacancy rates will remain high
as retailing is years away from
returning to its recent boom era.
Hotel vacancy rates will remain high
as discretionary travel will be slow to
strengthen.
40
40
30
30
20
20
10
10
0
0
-10
-10
-20
-20
65
70
75
80
85
Source: Census Bureau/Haver Analytics
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NSA, Mil. $
90
95
00
05
This is likely to be another jobless recovery.
All Employees: Total Nonfarm
Difference - Period to Period
 Growth
will be too slow to
quickly re-employ laid-off
workers let alone employ new
labor-market entrants.
near-record low workweek
means that production can be
increased by extending the
hours worked by current staff
rather than having to hire
additional employees.
SA, Thous
Civilian Unemployment Rate: 16 yr +
SA, %
750
10
500
8
 The
 There
is going to be structural
unemployment.
250
0
6
-250
4
-500
-750
2
90
95
00
Source: Bureau of Labor Statistics /Haver Analytics
20
Northern Trust Global Economic Research
05
Financial market conditions are improving
After Lehman collapsed, the interbank loan market froze up. This market now
is thawing as evidenced by the decline in Libor interest rates and the decline
in discount-window borrowing from the Fed.
Interest Rate Spread: 3-Month Libor minus Fed Discount Rate
per centage points
Reserve Bank Credit: Primary Credit to Depository Institutions
Avg, Mil. $
3. 00
120000
100000
2. 25
80000
1. 50
60000
0. 75
40000
0. 00
20000
-0. 75
0
08
Sour ce: Haver Analytics
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Northern Trust Global Economic Research
09
After Lehman failed, the bond market was pricing in a rerun of the early
1930s. Risk appetites have been whetted now that the worst case has not
occurred.
Interest Rate Spread: High Yield Corporate minus Treasury 10-Yr.
per centage points
Merrill Lynch High Yield Corporate Master II: Effective Yield
%
24
24
20
20
16
16
12
12
8
8
4
0
4
06
Sour ce: Haver Analytics
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Northern Trust Global Economic Research
07
08
09
The S&P 500 was up nearly 50% from its early March low by Labor Day.
Standard & Poor's 500 Stock Price Index
EOP, 1941-43=10
1600
1600
1400
1400
1200
1200
1000
1000
800
800
600
600
06
07
Sour ce: Wall Str eet Jour nal /Haver Analytics
24
Northern Trust Global Economic Research
08
09
The economy still faces strong headwinds
Commercial banks have experienced extremely high loan chargeoff and delinquency rates.
Loan Charge-Off Rate: All Insured Commercial Banks
SAAR,%
Loan Delinquency Rate: All Insured Commercial Banks
SA,%
8
8
6
6
4
4
2
2
0
0
85
90
95
Sour ce: Feder al Reser ve Boar d /Haver Analytics
26
Northern Trust Global Economic Research
00
05
As a result, there has been an unprecedented decline in net lending
by the private financial system.
Private Financial Sector Net Lending
SAAR, Bil. $
4000
4000
3000
3000
2000
2000
1000
1000
0
0
-1000
-1000
-2000
-2000
55
60
65
Sour ce: Haver Analytics
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Northern Trust Global Economic Research
70
75
80
85
90
95
00
05
Financial institutions have acquired muchneeded capital through the TARP program
and new equity issuance in the market. But
with a wave of commercial mortgage
defaults expected, some institutions could
become undercapitalized again.
Until financial institutions are confident of their
longer-run capital adequacy, they will be unable
and/or reluctant to create new credit, which will
restrain the pace of the economic recovery.
It will take households some time to recover
from their “overindulgence” in the past
expansion.
Total household expenditures reached record highs relative to aftertax income in the past ten years.
Sum of Consumer and Residential Investment Expenditures / HH After-Tax Income
%
105. 0
105. 0
102. 5
102. 5
100. 0
100. 0
97. 5
97. 5
95. 0
95. 0
92. 5
92. 5
90. 0
90. 0
50
55
60
65
Sour ce: Haver Analytics
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Northern Trust Global Economic Research
70
75
80
85
90
95
00
05
In order to fund their increased spending, households stepped up their
borrowing, largely against the equity in their houses, to record levels relative
to their after-tax incomes.
Households: Borrowing as a % of After-Tax Income
16
16
12
12
8
8
4
4
0
0
-4
-4
55
60
65
Sour ce: Haver Analytics
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Northern Trust Global Economic Research
70
75
80
85
90
95
00
05
The record increase in household debt in combination with massive declines
in the market value of their assets has resulted is a sharp loss in net worth, or
household wealth.
Households & Nonprofit Org: Net Worth as a % of Disposable Personal Income
%
640
640
600
600
560
560
520
520
480
480
440
440
400
400
55
32
60
65
Northern Trust Global Economic Research
70
75
80
85
90
95
00
05
Households are likely to rebuild their wealth through the purchases of stocks
and bonds rather than the purchases of McMansions, SUVs and plasma TVs.
All else the same, this would impart downward pressure on interest rates.
Households: Net Acquisition of Financial Assets
SAAR, Bil. $
Households & Nonprofit Orgs: Capital Expenditures
SAAR, Bil. $
2000
2000
1600
1600
1200
1200
800
800
400
400
0
0
55
60
65
70
75
80
85
Sour ce: Feder al Reser ve Boar d /Haver Analytics
33
Northern Trust Global Economic Research
90
95
00
05
Is the federal deficit a headwind?
Not right now. Although Treasury borrowing has soared in recent quarters,
there has been an unprecedented net paydown of nonfederal debt.
Federal Government: Liabilities: Credit Market Instruments
SAAR, Bil$
Nonfederal Sectors: Liabilities: Credit Market Instruments
SAAR, Bil. $
2500
2500
2000
2000
1500
1500
1000
1000
500
500
0
0
-500
-500
55
60
65
70
75
80
85
Sour ces: Feder al Reser ve Boar d, Haver Analytics
35
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90
95
00
05
Thus, the pace of total nonfinancial sector borrowing has slowed,
which has helped keep Treasury yields at relatively low levels.
Domestic Nonfinancial-Sector Borrowing as a % of GDP
4-qtr MovingAver age
Long-Term Treasury Composite, Over 10 Years
% p. a.
24
24
20
20
16
16
12
12
8
8
4
4
0
0
55
60
65
Sour ce: Haver Analytics
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Northern Trust Global Economic Research
70
75
80
85
90
95
00
05
But with federal budget deficits projected to run at rates near 4% of GDP well into the
economic recovery, federal spending could “crowd out” business investment, which
would lower future potential economic growth.
Federal Surplus/Deficit [-]: Percent of GDP
Fiscal Year , %
8
8
4
4
0
0
-4
-4
-8
-8
-12
-12
50
55
60
65
70
75
80
85
90
95
Sour ce: Office of Management and Budget /Haver Analytics
37
Northern Trust Global Economic Research
00
05
10
15
20
Will the headwinds prevail, pushing the
economy back into recession?
Not likely. Over 50 years of history suggests that the economy does
not enter a recession unless the Fed pushes it into one.
Federal Funds [effective] Rate
% p. a.
20
20
16
16
12
12
8
8
4
4
0
0
55
60
65
70
75
80
85
Sour ce: Feder al Reser ve Boar d /Haver Analytics
39
Northern Trust Global Economic Research
90
95
00
05
What about inflation? Won’t all the credit the
Fed has created in recent years guarantee
rapid inflation?
Fed credit has soared from $877 billion at the end of 2007 to over $2
trillion at the end of August 2009.
Reserve Bank Credit Outstanding
EOP, Mil. $
2400000
2400000
2000000
2000000
1600000
1600000
1200000
1200000
800000
800000
400000
400000
0
0
90
95
00
Sour ce: Feder al Reser ve Boar d /Haver Analytics
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Northern Trust Global Economic Research
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But the bulk of this Fed credit creation has ended up as currency sitting in
safe deposit boxes and excess, or idle, cash sitting on the books of banks.
Reserve Bank Credit Outstanding
EOP, Tr il. $
Sum of Excess Reserves and Currency in Circulation
Tr il. $
2. 4
2. 4
2. 0
2. 0
1. 6
1. 6
1. 2
1. 2
0. 8
0. 8
0. 4
0. 4
0. 0
0. 0
90
95
Sour ce: Haver Analytics
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Northern Trust Global Economic Research
00
05
Although growth in the broad measure of money supply skyrocketed right
after the Lehman failure, it has fallen back to Earth in recent months.
Money Stock: M2
6-month %Change-ann
SA, Bil. $
16
16
12
12
8
8
4
4
0
0
96
97
98
99
00
01
02
03
04
Sour ce: Feder al Reser ve Boar d /Haver Analytics
43
Northern Trust Global Economic Research
05
06
07
08
09
To summarize:
44

The recovery has commenced.

Balance sheet repair by financial institutions and households will restrain the
pace of the recovery through 2010.

Because the recovery will be muted initially, the unemployment rate is likely to
continue rising through the first half of 2010, perhaps peaking out at a level over
10-1/2%.

The sharp increase in Fed credit is not currently inflationary, but has the
potential to be if the Fed does not neutralize this credit at the appropriate time.

The earliest the Fed is likely to begin “neutralizing” the credit it has created is
midyear 2010 and then, only tentatively.
Northern Trust Global Economic Research