Transcript Annual Review & Forecast - US & UK Markets

A New World
David Wyss
Chief Economist
SIOR
Boston
October 2001
1
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
The Economy is in Recession
 We were skirting very close to recession
 The disaster has pushed us over the edge
 The consumer is scared
 Layoffs are rising
 Air travel is dead, and orders are being canceled
 But:
 The Fed is shoving interest rates down
 Fiscal policy will be very expansionary
 And consumers are resilient
2
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Inflation Will Stay Low
 Unemployment is rising
 There will be no wage pressure
 Security costs will cut productivity and raise prices,
but impact will be borne mostly by government
 The dollar is remaining stable, but how much is it
central banks?
 Oil prices are the big risk, but so far they are down
3
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
(% ch from year earlier)
Core Inflation Is At A 30-Year Low
4
7
3
6
2
5
1
4
0
3
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Unemployment Rate (right)
Consumer Prices Ex. Food & Energy
Consumer Price Index
4
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Energy Costs Are Back to Normal
($/barrel, refiners acquisition price and deflated by CPI;
consumer energy as percent of disposable income)
80
70
60
50
40
30
20
10
0
9%
8%
7%
6%
5%
4%
3%
2%
1%
1970 1973 1976 1979 1983 1986 1989 1992 1996 1999 2002 2005
$/Barrel
2000 prices
Energy cost/disposable income
5
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
The Fed Is Loosening Aggressively
(Percent)
8
6
4
2
1993
1995
1997
1999
Federal Funds Rate
2001
2003
2005
10-Year Treasury Bond Yield
6
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Mortgage Rates Are Low
(Percent)
11
10
9
8
7
6
5
4
1990
1992
1994
1996
1998
2000
Conventional Mortgage Rate
2002
2004
10-year Treasury
7
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Heavy Government Spending
Will End the Surplus
 Tax cuts had already eliminated the on-budget
surplus
 The recession will hurt revenue further.
 Additional spending for defense, security, and
recovery will eliminate the off-budget as well
 The spending is needed.
 The tax cuts aren’t. We need money to wage a war.
 Result will be higher Treasury yields
8
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Inventories and Equipment Spending
Dominate the Slowdown
(Percentage point contribution to growth)
Real GDP
Consumption
Nonres. Const.
Prod. Equip.
Res. Const.
Inventories
Government
Net Exports
-4
-2
'2001:2
0
'2001:1
2
'2000:4
4
'2000:3
6
'2000:2
9
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Investment Was Already
Plunging
 Low capacity utilization makes new capacity
unnecessary.
 Interest rates won’t help much unless capacity is
needed
 Worst earnings drop in postwar period.
 Speculative grade yields are high.
 Rebuilding activity and enhanced security spending
will offset some of the decline
10
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Investment Follows GDP
(4-quarter percent change)
8%
20%
6%
15%
4%
10%
2%
5%
0%
0%
-2%
-5%
-4%
-10%
1990
1992
1994
Real GDP (right)
1996
1998
2000
2002
2004
Equipment spending (left)
11
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Manufacturing Will Lag
(4-quarter percent change)
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
1995
1997
1999
Mfg. Production
2001
2003
2005
Real GDP
12
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Weak Employment Hurts
Construction Spending
(4-quarter change)
30%
4%
20%
3%
10%
2%
0%
1%
-10%
0%
-20%
-1%
-30%
-2%
1990
1992
1994
1996
Nonresidential building
1998
2000
2002
2004
Employment
13
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Vacancy Rates Have Started to Rise
U.S. Office Vacancy Rates
CB Richard Ellis
25
20
Suburban
15
10
5
Downtown
0
84
86
88
90
92
94
96
98
00
02
14
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Public and Utility Construction is
Stronger
(4-quarter change)
30%
20%
10%
0%
-10%
-20%
1990
1992
1994
State & local
1996
1998
2000
2002
2004
Utilities
15
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Can the Consumer Keep Spending?
 Saving rate has dropped sharply
 Confidence will plunge after the attack
 The stock market has wiped out wealth
 Debts and defaults are already at record highs
 The tax cut will provide extra income
 And lower mortgage rates are freeing up funds
 Net result will be a slowdown, not a retreat
 But the saving rate will rise
16
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Saving Plunged As Wealth Hit A
Record High
6.5
(Percent of Income)
15
6
12
5.5
9
5
6
4.5
3
4
0
1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004
Wealth/income
Saving rate (right)
17
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Debt Is Hitting New Records,
Dominated By Mortgages
(Household debt as share of after-tax income)
120
100
80
60
40
20
0
1980
1983
1986
1989
1992
Total
1995
1998
2001
2004
Mortgages
18
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
College Unemployment Is Rising Most
(Unemployment rate, persons 25 & older)
10
8
6
4
2
0
HS
Dropout
Jan-97
High
School
Some
College
Oct-00
College
Grad
Sep-01
19
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
More Affordable Housing Allows More
Households To Own Their Home
1.40
68
1.20
66
1.00
64
0.80
62
0.60
60
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Homeownership Rate (Right scale)
Affordability (Left scale)
20
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
The Stock Market Will
Recover, But Slowly
 Market rose 21%/year from 1995 -99
 But has dropped since March 2000
 First consecutive down years since 1973-74
 Profits cannot continue to outpace GDP
 And share prices cannot continue to
outpace earnings
 Stocks will thus yield much less in the
future than in the recent past.
21
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Five Consecutive Years of 20%Plus Returns
(Percent)
50
40
30
20
10
0
-10
-20
1990
1992
1994
1996
1998
Stock Market Return
2000
2002
2004
Bond Yield
22
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Long Bull Markets Are Followed by
Periods of Weakness
(Percent return on S&P 500 and corrected by CPI)
20
15
10
5
0
-5
1946-66
1966-81
Nominal
1981-99
1999-2009
Real
23
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Does Stock Picking Work?
1600
1200
800
400
0
86
1 STAR
4 STAR
88
90
92
2 STAR
5 STAR
94
96
98
2000
3 STAR
S&P 500 INDEX
24
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Western And Southern States Have
The Strongest Employment Growth
(Annual percent change, 2000 to 2005)
1.5
. to 3.6
1.1 to 1.5
0.8to 1.1
0.4 to0.8
25
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
And Highest Unemployment Rates
(Percent of labor force, July 2001)
2.5 - 3.4
3.5 - 4.4
4.5 - 5.5
5.5 +
26
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved
Manufacturing States Suffer Most
(12-month percentage-point rise in unemployment, July 2001)
Decline
0 - 0.4
0.5 - 0.9
1.0 +
27
Copyright  2001 by The McGraw-Hill Companies, Inc. All rights reserved