Transcript The Economic Outlook: Fasten Your Seatbelts

The Economic Outlook:
Fasten Your Seatbelts
David Wyss
Chief Economist
Standard & Poor’s
March 27, 2008
CONFIDENTIAL AND PROPRIETARY.
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Copyright (c) 2008 Standard & Poor’s, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
The U.S. Is In Recession
• The economy has moved into recession.
• Housing has been in recession for two years, subtracting over a percentage point
from GDP growth in 2007.
• But that was offset by strength in nonresidential construction and the closing of
the trade gap, each of which added back over a half point.
• Weaker overseas growth will mean less benefit from the trade deficit, despite the
declining dollar.
• Nonresidential construction is beginning to decline
• The fiscal stimulus package will cause the fiscal 2008 deficit to more than double,
and could beat the 2004 record. But it should boost the economy in Q3.
• The Fed has cut rates sharply.
• Recession seems nearly certain.
• But it should be relatively short and mild because of the fiscal and monetary
stimulus.
CONFIDENTIAL AND PROPRIETARY.
2.
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Home Prices Were Too High
(Ratio of average home price to average household disposable income)
4.5
4
3.5
3
2.5
2
1975 1979 1983 1987 1991 1995 1999 2003 2007
Existing
New
Quality-adjusted
Source: BEA, Census
CONFIDENTIAL AND PROPRIETARY.
3.
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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 S&P
CONFIDENTIAL AND PROPRIETARY.
4.
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150
200
250
Most Weakness Is In The Bubble Cities
(S&P/Case-Shiller Home Price Indexes)
Top 5
Charlotte
Portland, OR
Seattle
Dallas
Atlanta
National average
Bottom 5
Miami
Phoenix
Las Vegas
San Diego
Detroit
2002-2005
Foreclosure
Dec-07
average
rate
(12-month percent change)
2.3
4.1
1.4
1.2
13.1
0.6
0.5
12.2
0.5
-2.4
2.7
1.7
-3.4
4.3
2.5
-9.1
14.3
1
-17.5
-15.3
-15.3
-15.0
-13.6
19.9
20.6
17.5
17.2
3.1
2.7
1.9
4.2
1.8
4.9
Source: Standard & Poor’s, RealtyTrac
CONFIDENTIAL AND PROPRIETARY.
5.
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The Fed Will Continue To Cut Rates
(Percent)
10
8
6
4
2
0
1995
1997
1999
2001
Federal Funds Rate
2003
2005
2007
10-Yr Bond Yield
Source: Federal Reserve
CONFIDENTIAL AND PROPRIETARY.
6.
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2009
2011
Mortgage rate
Foreign Money Is Coming Into Private Bonds
(Net inflows of long-term capital, Millions of dollars)
1400000
1200000
1000000
800000
600000
400000
200000
0
2001 2002 2003 2004 2005 2006 2007
Treasury
Agency
Private
Source: US Treasury.
CONFIDENTIAL AND PROPRIETARY.
7.
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Equity
Quality Spreads Are Widening From Record Lows
(Spread over Treasury yields, percentage points)
12
10
8
6
4
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Default rate (12-month)
Old spread series
Credit spread
Source: Standard & Poor’s Global Fixed Income Research
CONFIDENTIAL AND PROPRIETARY.
8.
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World Growth Remains Strong
(Real GDP, % change)
10
8
6
4
2
0
US
Canada Eurozone
2005
2006
Japan
2007
Other
Asia
2008
Source: Global Insight and S&P
CONFIDENTIAL AND PROPRIETARY.
9.
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Latin
America
2009
And Comes Mostly From Asia
(IMF purchasing power weights, 2006)
Other
20%
US
20%
Other
17%
US
12%
Eurozone
9%
East Eur
7%
Japan
3%
East Eur
11%
Eurozone
15%
India
6%
Japan
6%
China
15%
Other Adv
7%
India
11%
Other Adv
11%
Percent of World GDP
China
30%
Percent of World Growth
Source: IMF
CONFIDENTIAL AND PROPRIETARY.
10.
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Can the Consumer Keep Spending?
• Consumer spending has led the expansion
• But wealth is down because home prices declined and
• Stock are weak
• Borrowing is more difficult, and home equity loans much less
available
• Confidence has dropped
• Consumers are likely to save more
• But rebates will provide some quick cash
• Most of which will be spent
CONFIDENTIAL AND PROPRIETARY.
11.
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Oil Prices Hit New Records
($/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
Oil price (WTI)
1990
1995
2005 dollars
2000
2005
% of disp. income (right)
Source: BEA
CONFIDENTIAL AND PROPRIETARY.
12.
2010
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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
80%
1990 1993 1996 1999 2002 2005 2008 2011
Saving rate
Debt/income (right)
Source: BEA and Federal Reserve
CONFIDENTIAL AND PROPRIETARY.
13.
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Aging Populations Will Boost Government Spending
(Ratio of over 65 population to labor force)
60
50
40
30
20
10
0
US
Canada France Germany Italy
UK
Japan AustraliaMexico OECD
2000
Source: OECD
CONFIDENTIAL AND PROPRIETARY.
14.
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2020
Borrowing Against Your Home
$700.00
$600.00
$500.00
$400.00
$300.00
$200.00
$100.00
$0.00
1994
1996
1998
2000
Home equity cashed out
2002
2004
Home equity loans
Source: Freddie Mac
CONFIDENTIAL AND PROPRIETARY.
15.
2006
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2008
Advertising Helped By Olympics And Election
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
1995
1997
1999
2001
2003
2005
Source: Universal McCann, S&P projection
CONFIDENTIAL AND PROPRIETARY.
16.
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2007
Bottom Line: The Economy Will Recover Slowly
• The recession is expected to be short and mild
• But fiscal policy stimulus will end
• If financial markets remain locked up
• Home prices continue to fall
• And oil prices continue to rise
• This could turn into a “W”-shaped recession
• But could be better if productivity stays stronger
• Financial markets regain confidence
• And oil prices fall
CONFIDENTIAL AND PROPRIETARY.
17.
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Risks to the Economy
(Real GDP, percent change year ago)
6%
4%
2%
0%
-2%
-4%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Baseline
Pessim
Source: BEA, S&P projections
CONFIDENTIAL AND PROPRIETARY.
18.
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Optim