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This Time is Different
MARK ZANDI, CHIEF ECONOMIST
FROM MOODY’S ECONOMY.COM
Fiscal Headwinds Are Blowing Hard…
Real GDP growth impact of fiscal austerity, percentage points
0.0
-0.5
-1.0
Other Tax and Spending
Payroll Tax
Sequester
-1.5
-2.0
'12q4 '13q1 '13q2 '13q3 '13q4 '14q1 '14q2 '14q3 '14q4
Source: Moody’s Analytics
…But Will Fade Next Year…
Contribution to real GDP growth, %
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
Private Economy
Federal Fiscal Policy
Total
'05
'06
'07
Source: Moody’s Analytics
'08
'09
'10
'11
'12
'13F '14F '15F
…Leaving a High, But Stable Debt Load
Debt held by the public, % GDP
90%
85%
80%
75%
70%
65%
60%
55%
No Tax Increase/Sequester
Current Policy
Simpson-Bowles
50%
'10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22
Sources: CBO, Moody’s Analytics
Businesses Have Never Been as Profitable…
After-tax corporate profit margin, %
18
16
14
12
10
8
6
'45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
Sources: BEA, Moody’s Analytics
…And Their Balance Sheets Are Strong
Nonfinancial corporate businesses
60
Interest coverage ratio
50
Quick ratio
40
30
20
10
0
80
85
90
95
Sources: Federal Reserve, Moody’s Analytics
00
05
10
Households Rapidly Deleverage…
% of disposable income
14.5
19.0
14.0
Debt service (L)
13.5
Financial obligations (R)
13.0
18.5
18.0
17.5
12.5
17.0
12.0
16.5
11.5
11.0
16.0
10.5
15.5
10.0
15.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Sources: Federal Reserve, BEA, Moody’s Analytics
…And Right the Wrongs
30-90 Day Delinquency Rate, % of $, SA
5.5
Non First Mortgage
5.0
First Mortgage
4.5
4.0
3.5
3.0
2.5
2.0
1.5
'06
07
'08
Sources: Equifax, Moody’s Analytics
'09
'10
'11
'12
'13
Banks are Well Capitalized and More Profitable…
Commercial banks
9.25
1.6
1.4
8.75
1.2
8.25
1.0
7.75
0.8
0.6
7.25
6.75
Core Capital Ratio (L)
0.4
Return on Assets (R )
0.2
6.25
0.0
'90
'92
Source: FDIC
'94
'96
'98
'00
'02
'04
'06
'08
'10
'12
…And Opening the Credit Spigot
Net % of senior loan officers…
50
40
30
20
10
0
-10
-20
-30
-40
-50
80
Willing to make a
consumer loan (L)
60
40
20
0
-20
-40
Tightening standards for C&I
loans to small businesses (R)
-60
-80
90
92
94
96
98
00
02
04
Source: Federal Reserve Senior Loan Officer Survey
06
08
10
12
Housing Is Fairly Valued…
% over- or undervalued
60
50
40
30
20
10
Fairly valued
0
-10
-20
90
92
94
96
98
00
02
04
06
Sources: PPR, BEA, Census Bureau, Fiserv, Moody’s Analytics
08
10
12
…And Will Soon Be Undersupplied…
Vacant homes for sale, for rent and held off market, ths
11,500
Housing Supply
Single-family
Multifamily
Manufactured Housing
10,500
9,500
Housing Demand
8,500
Household Formations
Obsolescence
Second Homes
7,500
950,000
600,000
300,000
50,000
1,800,000
1,250,000
350,000
200,000
Trend
Vacancy
6,500
5,500
90
92
94
96
Sources: Census, Moody’s Analytics
98
00
02
04
06
08
10
12
…Fueling a Big Turn in Housing’s Contribution…
Contribution to real GDP growth, %
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
Housing wealth effect
Residential investment
Total
-2.5
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: Moody’s Analytics
…And More Job Growth
Millions of jobs
9,500
130,000
9,000
128,000
8,500
8,000
126,000
7,500
7,000
124,000
Housing-Related (L)
6,500
Non Housing-Related (R )
6,000
122,000
'05
'06
'07
'08
'09
Source: Wall Street Journal, Moody’s Analytics
'10
'11
'12
'13
Pent-Up Demand Mounts
Light vehicle sales, mil
20
12
10
18
Trend sales
16
8
6
4
14
2
12
0
-2
Units (L)
10
-4
Spent-up/pent-up demand (R)
8
-6
'96
'98
'00
'02
Sources: BEA, Moody’s Analytics
'04
'06
'08
'10
'12
Euro Zone Struggles To Hang Together
Spanish 10-yr sovereign yields
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
ECB Extraordinary Actions:
OTM
SMP = Securities market program
LTRO = Long-term refinancing operation
OTM = Outright monetary transaction
LTRO
LTRO
SMP
08
09
10
Sources: Bloomberg, Moody’s Analytics
11
12
13
Fed Will Have a Tricky Exit…
Composition of Federal Reserve’s balance sheet, $ bil
3,500
Short-term lending to financial firms and markets
Operations focused on longer term credit conditions
Rescue operations
Traditional portfolio
3,000
2,500
2,000
1,500
1,000
500
0
Jan-08
Jan-09
Sources: Fed, Moody’s Analytics
Jan-10
Jan-11
Jan-12
Jan-13
…Given the Overvalued Bond Market…
Difference between 10-yr Treasury yield and potential GDP growth
4
Undervalued
3
2
1
0
-1
-2
Overvalued
-3
'60
'65
'70
'75
'80
Source: Treasury, BEA, Moody’s Analytics
'85
'90
'95
'00
'05
'10
…As Higher Rates Exposses Excesses…
Federal funds rate
10
S&L Crisis
8
Orange County
Mexican Peso
Tech Bust
6
Housing Bubble Busts
4
2
0
'85
'90
'95
Sources: Treasury, BEA, Moody’s Analytics
'00
'05
'10
…But Businesses and Households Lock In
% of liabilities that adjust within 1 year
50
Corporations
45
Households
40
35
30
25
20
15
'85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11
Sources: Federal Reserve, BEA, Moody’s Analytics
Energy Independence is a Real Possibility…
U.S. crude oil, millions of barrels per day
16
14
12
Consumption
Production
10
8
6
4
00
02
04
06
Sources: EIA, Moody’s Analytics
08
10
12
14
16
18
20
22
24
…Making the U.S. Less Recession Prone
West Texas Intermediate crude oil price, % change year ago
210
180
150
120
90
60
30
0
-30
-60
47 51 55 59 63 67 71 75 79 83 87 91 95 99 03 07 11
Source: Federal Reserve Bank of St. Louis, Moody’s Analytics
121 North Walnut Street
Suite 500
West Chester, PA 19380
610.235.5299
www.economy.com
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