Transcript 2008 Economic Forecast

Christopher Thornberg
Principal
Beacon Economic
Housing and
the economy
GDP Growth
Gross domestic product
8
7
6
5
4
3
2
1
0
-1
-2
1.
The transaction cycle
The collapse of the pyramid
2.
The building cycle
The loss of jobs
3.
The price cycle
The impact on financial markets and
consumer spending
Resale houses
Los Angeles
Orange
Riverside
San Bernardino
San Diego
Ventura
6-Dec
7-Dec
6,013
1,787
2,222
2,172
1,847
562
2,853
972
1,238
936
1,074
290
-53%
-46%
-44%
-57%
-42%
-48%
Jan-92
May-93
Sep-94
Jan-96
May-97
Sep-98
Jan-00
May-01
Sep-02
Jan-04
May-05
Sep-06
30000
25000
20000
15000
10000
5000
0
Affordability based on FHA definition
Median Prices
Alameda
Contra Costa
Los Angeles
Orange
Riverside
San Bern.
San Diego
San Francisco
Santa Clara
Ventura
Q1 89
$179
$163
$185
$223
$106
$93
$160
$268
$231
$233
Q1 99
$228
$209
$177
$246
$117
$98
$200
$327
$334
$215
Owner Affordability
Q1 07
$618
$584
$553
$681
$409
$368
$546
$799
$738
$610
1989
1999
2007
83%
138%
66%
100%
153%
72%
79%
147%
61%
77%
125%
59%
112%
187%
76%
131%
223%
81%
86%
131%
67%
55%
100%
50%
78%
114%
66%
71%
139%
64%
300
280
260
240
220
200
180
160
140
120
100
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Case-Shiller Home Price Index
LA -9%
SD -13%
SF -7.5%
The Fed? Only Indirectly
 The Paulson plan? Useless
 Fannie and Freddie? Probably
not
 Congress? Yes, but at what cost


Can construction stop the economy?
• No- its not big enough

Does the credit crunch matter?
• Not as long as the Fed does its job as lender of
last resort

What does matter?
• The consumer
Consumer Spending and Net
Exports as share of GDP
72.0%
71.0%
70.0%
69.0%
68.0%
67.0%
66.0%
0.0%
-2.0%
-4.0%
-6.0%
1995-I
1995-IV
1996-III
1997-II
1998-I
1998-IV
1999-III
2000-II
2001-I
2001-IV
2002-III
2003-II
2004-I
2004-IV
2005-III
2006-II
2007-I
-8.0%
Consumer Spending
Net Exports
1989-I
1990-II
1991-III
1992-IV
1994-I
1995-II
1996-III
1997-IV
1999-I
2000-II
2001-III
2002-IV
2004-I
2005-II
2006-III
GDP vs NNI Growth
8%
6%
4%
2%
0%
-2%
-4%
Beacon Economics
5.10
5.00
4.90
4.80
4.70
4.60
4.50
4.40
4.30
4.20
4.10
Beacon Economics
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
US Unemployment
Rate
US New Payroll Jobs
350
300
250
200
150
100
50
0
Change November 06 to Nov 07
Illinois
Nevada
Florida
California
Connecticut
Hawaii
Montana
Oklahoma
Iowa
New York
1.2
1.1
1
0.9
0.8
0.8
0.5
0.4
0.4
0.4
Virginia
Utah
Vermont
Rhode Island
Ohio
Oregon
Arizona
Colorado
Delaware
Indiana
Beacon Economics
0.2
0.2
0.2
0.1
0.1
0.1
0
0
0
0
North Carolina
North Dakota
Washington
Wyoming
District of Columbia
South Dakota
Idaho
New Mexico
Pennsylvania
Texas
-0.2
-0.3
-0.3
-0.3
-0.4
-0.4
-0.5
-0.5
-0.5
-0.5
 Recession
US Unemployment
Forecast
is starting
now
8.0
depends on NBER
• Negative growth through
Q3 08
• Doldrums in 2009
• Recovery 2010
7.5
7.0
6.5
6.0
5.5
5.0
4.5
 Mild downturn
4.0
• Worse if financial losses add
up to more than expected 3.5
• Worse if inflation creeps in3.0
to the economy
Beacon Economics
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
• Q4 or Q1 academic-
Property Taxes by Age
of Purchase
The downside of Prop 13
Local
Government
Finance
CA
US
Support from
State
Property
Taxes
04-05 Surplus
47.0%
37.4%
33.2%
1.0%
47.7%
-0.8%
2004Now
36%
20002003
21%
Before
2000
43%
California Taxable Sales
Growth
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2004
2005
Beacon Economics
2006
2007
 Recession
VERY likely
• Consumer weakness coming to light
• Business weakness to start on profit issues
• Exports will not be able to carry the day
 Housing
to go into freefall in 08
• Price declines, bottom found in 09 to 10
 State
Local Budgets are a mess
• Actual deficit larger than $14 billion
• No quick recovery in revenues—this is structural / not
cyclical
• Impact as large on local governments as state gov.
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