Transcript Harvey Rosenblum Presentation

“It is clear that the U.S. will leave no policy stone
unturned in the attempt to put the economic
show back on the road, so there should be no
Japanese-style lost decade in North America.
That is a very positive message for the global
economy.”
John Plender
Financial Times
Dec. 24, 2008, p.18
“The next few months are among the most important in
U.S. history. Because of the financial crisis, Barack
Obama has the bi-partisan support to spend $1 trillion
in stimulus. But we must make certain that every
bailout dollar, which we’re borrowing from our kids’
future, is spent wisely. …If we allow this money to be
spent on pork, it will be the end of us.”
Thomas L. Friedman
New York Times
Dec. 24, 2008, p.A21
The Economic Outlook for 2009
Presented to:
APICS: The Association for Operations Management,
Dallas Chapter
January 8, 2009
By:
Harvey Rosenblum
Executive Vice President & Director of Research
and Jessica Renier, Research Analyst
Federal Reserve Bank of Dallas
Overview
• Tough year ahead in 2009, noticeable
improvement in 2010
• Consumption to bear the brunt of the
adjustment
• Housing cycle will turn by year-end
• Mild deflation likely in 2009
• Monetary policy beginning to work
• Fiscal policy and lower energy costs will add to
stimulus
Themes for 2009
Most likely scenario
• Stuck in recession much of the year
• Inflation near, or below, zero
• Financial headwinds subside, but slowly
• Housing correction runs another year
• 40% probability
Themes for 2009 (cont.)
Two other plausible and equally-likely scenarios
• Recession ends in Spring 2009
– Credit flows resume
– Monetary and fiscal medicine impact quickly
– Year of weak growth, but unemployment rate peaks
around 8%
– 30% probability
Themes for 2009 (cont.)
• Recession grinds on until Spring 2010
– Banking, financial, and credit headwinds do not
subside
– Fiscal stimulus takes too long to come and
politics/ideology squander its impact
– Global economy suffers prolonged negative growth
– Monetary stimulus cannot offset a liquidity trap
– 30% probability
Global Growth Outlook
Source: IMF World Economic Outlook, October 2008
The U.S. Outlook: 2009-2010
Two-Year Growth Outlook
Source: Harvey Rosenblum
2009 Quarterly Growth Patterns
Source: Harvey Rosenblum
• Consumption grew from 62.4% of GDP in 1966
to 71.6% of GDP in 2007.
• Can this consumption binge be sustained?
• No!
Shop ‘Til You Drop: The Consumer
Has Dropped!
*Change from year-end 2007, based on the average of first three quarters of 2008
Increase in Unemployment Likely to
be Worst in the Post-War Era
Note: Stacked bar denotes GS forecast for the current business cycle.
Source: Department of Labor and Goldman Sachs
Anecdotes on Downward Wage
Pressures
• Pay freezes
– Dell: extended unpaid holiday
– Cisco: four-day year-end shutdown
– The Seattle Times: unpaid furloughs
• Pay cuts
– Brandeis suggests professors give up 1% of their pay
• No contributions to pensions
• Suspended employer match on 401(k) plans
• Bonus cuts
– Credit Suisse pays bonus in toxic securities
– BOA and Citigroup top executives forgo 2008 bonuses
Negative Fundamentals Will Weigh
on the Consumption Outlook in 2009
• Rising unemployment, job insecurity
• Tight credit conditions
• Loss of wealth, need to save
--------------------------------------------------------------Bottom line: Consumption will decline in 2009,
only the 8th time since 1930? (assuming no
decline in 2008??)
Time Magazine: June 13, 2005
Longest and Deepest Housing Bust
on Record
Duration, in months
Percent decline, peak to trough
0
2 4
6
8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38
0
'99:04-'00:09
-10
'84:06-'84:11
-20
-30
-40
-50
'89:02-'89:07
'87:05-'88:01
'94:04-'95:05
'68:12-'70:03
Average of 11 prior
episodes
'90:03-'91:03
'66:02-'66:12
'80:12-'82:02
'78:08-'80:06
'73:03-'75:03
-60
-70
Current downturn
'05:12-'08:11
-80
*Treats housing slowdowns of ’78:08-’80:06 and ’80:12-’82:02 as separate, and the
housing slowdowns of ’87:05-’88:01 and ’89:02-’89:07 and ’90:03-’91:03 as separate.
Potential Good News for Housing
• 30-year conventional mortgage rate hits 5.10 during
week of January 2, 2009, the lowest since 1972.
• Refinancing activity is up 136.7% from a year ago.
• Mortgage applications up 62% from a year ago.
• Home sales in California are up 83% from last year,
although prices have had to fall 42%.
• Housing affordability, due to mortgage rates, income
growth, and lower housing prices, has moved up
sharply and is not far from its early '70s high.
Nondefense Capital Goods Orders
Source: Census Bureau
Net Exports Growth Contribution to
Real GDP
Inflation/Deflation Risks
CPI Rollercoaster
Headline CPI
Forecast: Harvey Rosenblum
Pricing: From a Seller’s to a Buyer’s
Market
Manufacturing Prices Paid
Source: Institute of Supply Management
Pricing: From a Seller’s to a Buyer’s
Market
Manufacturing Prices Paid
Nonmanufacturing Prices Paid
Source: Institute of Supply Management
ISM Manufacturing Prices Paid
Index
Prices paid index at lowest level since 1949:
• From 29-year high (91.5) to 59-year low (18.0)
in just six months
• 14.0 points below previous multi-decade low
• Inflation fell about 2-3 percentage points during
the 1990-91 and 2000-2001 recessions
• During the current recession, inflation has
already fallen about 4 percentage points from its
peak
S&P GSCI Commodity Price Index
S&P GSCI Commodities Indices
S&P GSCI Commodities Indices
Bottom line:
Perhaps a full year of mild deflation.
From Financial Tailwinds (2005)
…to Headwinds (2007)
…to Gale-Force Headwinds (Sept. 2008).
“First, we need to stabilize his spine!”
Source: The New Yorker
What’s Working
• Global banking recap plans have reduced Libor
spreads
• Fed’s purchase program for GSE mortgage-backed
securities has reduced fixed-rate mortgages by 75
b.p.
• Fed commercial paper and money market fund
facilities show signs of reviving commercial paper
market
• Low short-term interest rates spurring investors to
go to investment-grade corporate bonds
Since Oct. 1:
• 90-day commercial paper rate down 3.5
percentage points
• 3-month Libor rate down 2.7 percentage points
Mortgage Rates Came Down
Source: Bloomberg
Corporate Bond Spreads Hit Historic
Highs
Source: Federal Reserve Board, Merrill Lynch and Moody’s
Fed Easing
Federal Reserve’s Growing
Balance Sheet (Assets)
Securities lent to
dealers, including TSLF
(off-balance sheet)
Week ended:
Source: Federal Reserve Board, H.4.1 Release.
Money Growth Rates,
Last Six Months Annualized
• Monetary Base 308%
• M1
33%
• M2
12.6%
Fed Easing
A Humble Note
“The way events have unfolded over the past few
months simply has no precedent… No one
knows the outcomes of an unprecedented event.
No one.”
Zachary Karabell
“The Economic News Isn’t All Bleak”
Wall Street Journal
Dec. 26, 2008, p.A13
Fiscal Stimulus
• Federal budget deficit expected to exceed
$1 trillion this year before special stimulus
package
• Obama likely to get additional fiscal stimulus of
$800 billion spread over ‘09/’10
Oil Prices Acting as Tax & Stimulus
(based on average annual price, difference from prior yr)
2008 Estimated Losses
• to economy: $170 billion
• to consumers: $86 billion
2009 Projected Gains
• to economy: $355 billion
• to consumers: $250 billion
Murphy’s Law/Casey’s Law
• Murphy’s Law:
– If anything can go wrong, it will.
• Casey’s Law:
– If something can go right, it should.
Conclusions
• Tough year ahead in 2009, noticeable
improvement in 2010
• Consumption to bear the brunt of the
adjustment
• Housing cycle will turn by year-end
• Mild deflation likely in 2009
• Monetary policy beginning to work
• Fiscal policy and lower energy costs will add to
stimulus
Back of Tray
This Could Be the Longest
Recession Since 1933
Manufacturing and Services in a
Steep Decline
Source: Institute for Supply Management
Manufacturing and Services in a
Steep Decline
Source: Institute for Supply Management
Manufacturing and Services New
Orders
Source: Institute for Supply Management
Manufacturing and Services New
Orders
Source: Institute for Supply Management
Despite continuing declines in starts
and permits…
Source: Census Bureau
…months’ supply of new homes
remains near record highs.
Nov.
11.5
Source: Census Bureau
Home Prices Still Falling
Median existing singlefamily home sales price
S&P/Case-Shiller 20-city
home price index
Source: The National Association of Realtors, S&P, Fiserv and MacroMarkets LLC
Housing as Percentage of GDP
Source: Bureau of Economic Analysis
Leading Economic Indicators
Advanced Economies Officially in
Recession
•
•
•
•
United States
United Kingdom
Euro Area
Japan
December 19 Global Policy Actions
• U.S.
– Obama stimulus package my hit $850 billion
• Japan
– Government to buy up to $223 billion bank shares
– Bank of Japan cut rate 0.1%, increased purchases of
government debt, plans to buy commercial paper
• ECB
– Cut interest rate paid to overnight deposits and raised
emerging lending rate
• Danish
– Cut rate by 50 bp to 3.75%
December 19 Global Policy Actions
(cont.)
• Turkey
– Cut rate by 125 bp to 15%
• Vietnam
– Cut rate by 150 bp to 15%
• France
– Sarkozy may add to December’s $37 billion stimulus package
• U.K.
– Government tax cuts
• India
– Considering fiscal stimulus plan
Silver linings
•
•
•
•
Deflation raises standard of living in short-run
Oil price decline “stimulus”
Monetary policy beginning to take hold
Some thaw in short-term borrowing
Stealth Smoot-Hawley
•
•
•
•
•
Credit
Monetary policy
Basel
Auto company lifelines
Bank Holding Company status
• Baltic Dry Index down 93% from peak in May,
near its lowest in 22 years (Dec. 5)
• Smoot-Hawley Tariff Act of June 17, 1930