Transcript Gregory Miller Chief Economist SunTrust Banks, Inc. August

Look for Low and Away but Watch Out for In Your Ear
Economic Update
for
South Carolina International Trade Conference
Gregory Miller
Chief Economist
May 2007
Soft Landing: Deal or No Deal?
2
•
Soft Landing v Recession Watch 2007
– Risk tilting to latter
•
Consumer “Fundos” OK
– Household Resources Holding but “Reserves” Stretched Thin
– Oil Impact on the Way
– Labor Market Slowing
•
•
•
Cap Spending Slowing as Credit Tightens
•
Stock Follow Profits
– But risk sustainability
•
FOMC Holds at Neutral
– No more Preemptive Strikes
•
Baseline 2007: Soft Landing v Recession 50/50
Housing plummeting – Issue is SubPrime Infection
Inflation: Capacity Constraints
– The Fed’s playing field
– Wages and the Economics of new jobs
STI Recession Probability Matrix Reloaded
 Ver 3 predicted 10 of last 7 recessions
 Ver5: STI Recession Probability Index  “50/50”
 but lower confidence level
 half a dozen weak false signals since Oil spike began
 So, Recession Watch, not Recession Forecast
STI RECESSI ON PROBABI LI TY I NDEX
100
50%: Critical
75
55
Value
%
50
25
0
-25
89
92
95
98
Recession
3
01
RPM
04
07
US Consumer: Desperate Housewives
Income is OK, but “HH reserves” dissipating





HH Saving
Home-based Wealth
HE draw downs
And, total spending slows while gasoline share rises
11
11
9
7
9
10
7
5
7
9
5
3
5
8
3
1
3
7
1
-1
1
6
-1
-3
-1
5
92
95
98
2001
Disposable Personal Income (Lft)
4
2004
2007
Saving Rate (Rt)
Y/Y%
9
Saving % pYd
Y/Y%
11
92
95
98
Retail Sales Y/Y% (Lft)
2001
2004
2007
Gasoline % Retail (Rt)
Gasoline % Retail
Retail Slows While Gas Takes Share
Income Holding but Saving Dissipating
Oil: We’re Not in Kansas Anymore, Toto


So far, consumers impervious to high energy price, but
 Impact is cumulative
 Gas price – just hit new record
 US still lacks refinery capacity
 Auto sector lags supply of “cheap/efficient” and, from consumers, the cry
is far from overwhelming
And, the slowdown doesn’t hit until after oil peaks
75
14
65
55
12
10
45
35
8
6
25
15
4
2
5
-5
0
70
73
76
79
82
Oil (Lft)
5
85
88
91
94
97
00
03
Consumer Spending (Rt)
07
Consumer Spending (%Y/Y)
US$ per Barrel (WTI)
EVENTUALLY OIL BRAKES SPENDING
Labor Market: Imus, Trump, Wolfowitz, Street Sense:
Where Will It All End?



Full employment but new job increments are successively smaller
Layoffs are creeping higher, and
Unemployment trough is a “weak economy” signal
 Last 7recessions began with unemployment rate at (or real near) cycle low
Labor Market Slowdown
New
Payroll
Jobs(000)
1Q06
252
1Q07
143
Apr 07
88
New
Layoffs:
"Household" Challenger Layoffs:
Jobs (000)
(000)
BLS (000)
299
52.7
0.99
109
65.3
1.14
-468
70.7
1.17
Source: BLS, Challenger, Gray & Cristmas, STIEcon
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US: Cap Spending Catalyst; Excess Inventory; and Credit
Tightening
•
•
•
Equip Invest = -1.5% last two quarters; 1Q07; durable goods orders = -7.8%
– Affects both Goods and Services production
Inventory: we can’t measure “unplanned” but we can estimate “excess.”
– Excess Inventory = $53 Bill Last 4 quarters = $50 bill
– Primarily a “Goods sector” indicator
After years of Easy Credit, Banks Tightening
Bank Credit Tightening
INVENTORY: In Excess, But ...
Excess
Inventory
100
50
0
-50
-100
0
-5
-10
-15
-20
-25
66
71
76
81
Inventory
7
5
% Responding Positive
Real $ Bill
150
86
91
96
Series1
01
06
Recession
2004
2005
2006
Large/Medium Firms
2007
Small Firms
US Housing: See You Later, Decorator
•
Housing Contribution:
– 2003 – 2006.2 = 16% of GDP growth
– Last four quarters = -23% of GDP growth (most recent qtr = -60%)
•
•
So far, not as bad as early-80s or early-90s = -30%+
Rate of deterioration improving, but “plans” suggest overhang
Housing Reverses in Double Digits
Collapse: Sales, Production, and Plans
10
Y/Y%
0
-10
-20
Residential
Invest
Exist Home
New Home
30
20
10
0
-10
-20
-30
-40
2000
2003.2 - 2006.1 2006.2 - 2006.4
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2001
2002
Sales
2003
2004
GDP Resi Invest
2005
Starts
2006
2007
US Inflation: I Totally Don’t Know What That Means, But
I Wawnt It!

Economics of job creation reverses
 Wages = 2% and productivity = 4%, job creation makes business sense
 Wages = 4% and productivity = 1%, new jobs don’t pay for themselves

Trade-off: Pass-through (inflation) or profits (decline)
Wage Rise Undermines Production Value of New Jobs
Average
Hourly
Earnings Productivity
2003 - 2005 2.1
3.9
1Q06
3.0
1.1
1Q07
4.1
1.2*
March 2007
4.1
na
Source: BLS; STIEcon
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Average
Education
Weekly
Prof/Business
and
Earnings Construction Manufacturing Services
Health
2.4
1.6
2.7
2.5
3.2
1.8
2.7
2.8
3.7
2.9
4.2
4.8
1.9
5.9
3.7
4.4
5.2
2.2
5.7
3.4
US Inflation: The Tribe Has Spoken
 Bernanke: Inflation Bias Remains


Fed Inflation Band = 1.0% - 2.0%; Core sticks just above
Inflation Moving Target
 Oil
 Wages
 Ag (corn)
CORE I NFLATI ON
Y/Y % Chg.
3
2
Bernanke Band
1
0
-1
2001
2002
2003
2004
Core PCE
10
2005
2006
Core CPI
2007
Stock Market: Sounds a Little Pitchy to Me, Dawg
•
Stocks respond to Profits
– To which my teenage daughter responds: “Duh!”
• But, profits (consistently) report two tricky components
– Cost Cutting (each round makes next round more difficult)
– Revenue from Foreign Sources
• 20% S&P  50% sales from foreign source
• 5%
 75%!
S&P 500
Stocks Rebound w/ Profits
2000
2000
1500
1500
1000
1000
500
500
0
0
82
87
92
S&P 500
11
97
2002
Corp Profits
2007
Monetary Policy: The Procedure Could Kill the Patient, but If We
Do Nothing, She Dies Anyway. – Gregory House
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Fed “Neutral” = 4.75% - 5.25%
•
Foreign investors eliminate market rates risk premium
•
Market rates stuck in a trend-less 50 BP range
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Mortgage Rates: Fixed = -60 BP; ARM = -40 BP
•
Leaves Inverted Yield Curve  Risks Credit Crunch
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Fed will not ease for Asset Bubbles
•
Alternative sources: Internal cash, Equity capital
 Bernanke Fed wants to see data
• No more Greenspan Preemptive Strikes
•
•
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Waiting for data puts Fed behind the curve
By then it may be too late, because …
“Round Up the Usual Suspects!” -- Captain Renault

The list of traditional recession predictors is falling into alarming territory
The Usual Suspects: Common Recession Predictors
US Leading
New
Economic
Oil
Home
Cap
Indicators Price ( Sales Spending Inventory
(%)
*)
(Y/Y%) (% 3mma)
($ bill)
Going into
Last 5 Recessions
-0.4
276.3
-10.5
-0.7
26.5
Trend ("past year")
-0.1
384.9
-11.4
-1.2
44.0
Current Reading
-0.5
313.3
-13.6
-4.4
41.8
* Oil Price measure is "trough-to-peak" %-change during pre-recession period
Source: Conference Board, EIA, NAR, BEA, STIEcon
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Conclusions: Save the Cheerleader – Save the World
• Soft Landing and Recession now 50/50
• Expect GDP = 1% to 2%
– Risk = negatives
• Expect Inflation to moderate, but maybe not fast enough
• Oil prices and wages threaten corporate profits
• Expect interest rates range bound with downward tilt, but
– No relief from inverted yield curve until Fed eases
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Inverted yield curve threatens bank profits and credit
So, sustainability hostage to Fed Easing
The Fed is hostage to price indexes that are slow to improve, so
The longer they wait, the greater the risk that RPI is right again
SunTrust Economics – Your Resource
Gregory Miller
Chief Economist
404.588.7918
[email protected]
Material we present here is based upon information available on the date of publication. We believe that our data is
reliable. However, we do not represent that it is accurate or complete. We solicit no action based upon this material.
Opinions we express are our judgment as of this date and may change. (5/07)
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