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Welcome
Hampton Roads Business Brief:
State of the Economy
Presenting Sponsor:
Host Sponsor:
Program Sponsor:
Customer Magnetism
January 2010
US Economics
Gary Bigg +1 646 855 9880
US Economics
MLPF&S
[email protected]
Rescue, rehab and
recovery
Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making
their investment decision.
Refer to important disclosures on page 53 to 56.
2
Three themes
•Growth: Rescue, rehab, recovery
•Inflation: When the economy recovers, inflation falls
•Policy: Patience is a virtue
Source: BofA Merrill Lynch Global Research
3
Rescue: Whatever it takes
Pre-Lehman
Post-Lehman
•Small fiscal stimulus
•Huge fiscal stimulus
•No taxpayer support
•$700 billion TARP
•Bear vs. Lehman
•Failure is not an option
•Usually aggressive Fed policy
•Always aggressive Fed policy
Source: BofA Merrill Lynch Global Research
4
Rehab: Unclogging the arteries
Targeted sector
Banks
Money market
Policy
Expanded deposit issuance, capital injections,
guarantees on new senior debt
Commercial Paper Funding Facility
Consumer lending
Autos
GSE debt purchase, MBS purchase, Long-term Treasury
purchase
ABS buying program
$18 billion in TARP loans
Commercial real estate
Term Asset Backed Securities Loan Facility
Mortgage market
Source: Federal Reserve, BofA Merrill Lynch Global Research
5
Rehab: Fiscal stimulettes
•Cash for clunkers
•Unemployment benefits
•Tax credit for home owners
•1.4 million Census workers
6
Recovery: One step at a time
•Q3 2009: Cyclical bounce
•Q4 2009: Payroll payback
•Q2 2010: Foreclosure fade
•Q4 2010: Banking bottom
•Q1 2011: Commercial comeback
•Q1 2012: State and Local bottom
•Long drag: Consumer spending
7
Us and them
4Q 09 1Q 10 2Q 10 3Q 10 4Q 10
2009 2010 2011
Real GDP
BofAML
4.5
3.2
3.5
3.4
3.3
-2.5
3.2
3.4
Consensus
2.8
2.8
2.8
2.9
3.1
-2.5
2.7
3.0
BofAML
1.4
1.3
0.8
0.6
0.5
1.5
0.8
0.4
Consensus
1.4
1.4
1.2
1.2
n/a
1.5
1.3
1.6
BofAML
0.25
0.25
0.25
0.25
0.25
0.25
0.25 1.00
Consensus
0.25
0.25
0.25
0.75
1.00
0.25
1.00
Core PCE
Fed Funds Rate (eop)
n/a
Source: BlueChip, Bloomberg, BofA Merrill Lynch Global Research
8
Growth
US outlook table
Real Economic Activity, % SAAR
4Q 09
1Q 10
2Q 10
3Q 10
4Q 10
2009
2010
2011
Real GDP
% Change, Year Ago
Consumer Spending
Residential Investment
Nonresidential Investment
Structures
Equipment and Software
Government
Exports
Imports
Net Exports (Bil 05$)
Inventory Accumulation (Bil 05$)
4.5
-0.2
1.6
18.0
-3.4
-15.0
2.6
2.5
20.0
17.5
-364.0
-43.7
3.2
2.3
2.0
20.0
2.9
-12.0
10.5
1.5
10.0
8.0
-363.8
-19.9
3.5
3.4
2.0
18.0
5.2
-8.0
12.0
1.0
9.0
9.5
-374.0
22.5
3.4
3.6
2.2
15.0
6.6
-4.0
12.0
0.8
9.0
7.5
-375.1
45.3
3.3
3.3
2.1
12.5
7.9
-2.0
13.0
0.5
9.0
7.0
-373.7
66.1
-2.5
3.2
3.4
-0.6
-19.8
-18.2
-19.6
-17.4
2.1
-9.8
-13.8
-359.6
-114.3
1.9
14.8
0.9
-11.6
7.5
1.9
11.4
9.8
-371.6
28.5
2.4
12.0
10.2
1.0
14.8
-0.1
9.4
7.8
-375.0
83.9
7.0
-30.0
10.1
4.7
7.0
205.0
10.0
5.1
5.3
240.0
9.5
5.5
6.5
-95.0
9.8
5.0
5.0
160.0
9.8
5.0
-9.8
-340.0
9.3
4.6
5.2
128.0
9.8
5.1
5.5
218.0
9.4
5.8
3.4
0.8
1.5
0.8
2.4
0.7
1.0
0.7
0.6
0.9
0.5
0.9
2.5
1.2
0.6
1.2
2.1
1.2
1.0
1.2
-0.3
2.3
1.5
1.7
1.1
0.7
0.00-0.25
0.35
1.00
3.45
0.00-0.25
0.35
1.00
3.60
0.00-0.25
0.35
1.20
4.00
0.00-0.25
0.35
1.30
4.10
0.00-0.25
0.60
1.50
4.25
0.00-0.25
0.35
1.00
3.45
0.00-0.25
0.60
1.50
4.25
1.00
1.55
2.00
4.45
Key Indicators
Industrial Production (% SAAR)
Nonfarm Payrolls (Average MoM change, 000s)
Civilian Unemployment Rate (% )
Personal Savings Rate (% )
Inflation
CPI, Consumer Prices (% SAAR)
% Change, Year Ago
CPI ex Food & Energy ( % SAAR)
% Change, Year Ago
Rates
Fed Funds
3-Month LIBOR
2-Year T-Note
10-Year T-Note
Shaded areas represent BofA Merrill Lynch Global Research forecasts
Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research
10
Rescue, rehab, recovery
Billions 2005$
15500
15000
New normal
14500
14000
Potential GDP
Recovery
13500
Real GDP
Recession
13000
Rehab
12500
2007
2008
2009
2010
2011
2012
2013
2014
Source: CBO, Bureau of Economic Analysis, BofA Merrill Lynch Global Research
11
Real GDP Growth
percent
8
Forecast
6
4
percent
2
0
-2
-4
-6
-8
00
01
02
03
04
Qtr-Qtr
Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research
05
06
07
08
09
10
yr-yr
12
Real Consumption Growth
percent
8
Forecast
percent
6
4
2
0
-2
-4
-6
00
01
02
03
04
Qtr-Qtr
Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research
05
06
07
08
09
10
yr-yr
13
The Rise in Indebtedness
Percent of GDP
250
240
230
220
210
200
190
180
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: Federal Reserve Board, Bureau of Economic Analysis, BofA Merrill Lynch Global Research
14
Components of Debt Rise
Percent of GDP
80
70
60
50
40
30
20
10
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Government
Nonfinancial Business
Consumer Credit Card & Other Non-mortgage Debt
Consumer Mortgage Debt
Source: Federal Reserve Board, Bureau of Economic Analysis, BofA Merrill Lynch Global Research
15
Weekly Initial & Continuing Claims
thousands
680
660
640
620
600
580
560
540
520
500
480
460
440
420
400
380
360
340
320
300
280
7000
5825
4650
3475
2300
05
06
07
Initial Claims (left)
Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research
08
09
Continuing Claims
16
Real Household Net Worth
Trillions of chain 2005$
67.5
60.0
52.5
45.0
37.5
30.0
22.5
15.0
7.5
59
64
69
74
79
84
Source: Federal Reserve Board, Bureau of Economic Analysis, BofA Merrill Lynch Global Research
89
94
99
04
09
17
Income Increase Expectations for Six
Months Hence
percent
36
32
28
24
20
16
12
8
4
78
82
86
Source: Conference Board, BofA Merrill Lynch Global Research
90
94
98
02
06
18
Senior Officer Loan Survey: Net Pct
of Banks Tightening Standards
percent
80
70
60
50
percent
40
30
20
10
0
-10
-20
96
98
00
Consumer Credit Cards
Source: Federal Reserve Board, BofA Merrill Lynch Global Research
02
04
06
08
Other Consumer Loans
19
Trends in Capital Spending
Billion 2005$
1200
Forecast
1100
1000
900
800
700
600
500
400
300
200
95
96
97
98
99
00
Structures
Source: Federal Reserve Board, BofA Merrill Lynch Global Research
01
02
03
04
05
06
07
08
09
10
Equipment & software
20
Net Percentage of Banks Tightening
Standards for Commercial Real Estate
percent
100
75
50
25
0
-25
90
92
94
96
Source: Federal Reserve Board, BofA Merrill Lynch Global Research
98
00
02
04
06
08
21
Manufacturing Capacity Utilization
Percent of Utilization
95
90
85
80
75
70
65
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Source: Federal Reserve Board, BofA Merrill Lynch Global Research
22
Exchange Rate Trends
Index: January 2003=1.0
1.5
1.4
* Lehman
collapse
1.3
1.2
1.1
1
0.9
0.8
0.7
03
04
05
06
07
Nominal Trade-Weighted Value of $
Source: Federal Reserve Board, BofA Merrill Lynch Global Research
08
09
$/Euro
23
Trends in Home Ownership
percent
70
69
68
67
66
65
64
63
80
82
84
86
88
Source: Census Bureau, BofA Merrill Lynch Global Research
90
92
94
96
98
00
02
04
06
08
24
Single-Family Housing Sales & Starts
thousands
2000
1800
1600
1400
1200
1000
800
600
400
200
90
92
94
96
98
00
Single family starts
Source: Census Bureau, BofA Merrill Lynch Global Research
02
04
06
08
Single family new home sales
25
Inventory of Unsold New Homes
575
550
525
500
475
450
425
400
375
350
325
300
275
250
225
200
12
SA, Ratio
10
8
6
4
2
90
92
94
96
98
00
Months Supply (left)
Source: Census Bureau, BofA Merrill Lynch Global Research
02
04
06
Thous
14
08
Total for Sale
26
Recovery: Foreclosures
Mortgages in foreclosure or arrears
(percent)
16
14
12
10
8
6
4
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
Source: Mortgage Bankers Association, BofA Merrill Lynch Global Research
27
Trends in Home Prices
Index: 2000Q1=100
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Case Shiller Index
Source: Haver Analytics, BofA Merrill Lynch Global Research
CPI-Owners' Equivalent Rent
28
Housing Starts vs. Construction
Employment
thousands
2100
2000
1900
1800
1700
1600
1500
1400
1300
1200
1100
1000
900
800
700
600
500
1050
950
850
750
650
550
85
87
89
91
93
95
97
Housing Starts (left)
Source: Census Bureau, Bureau of Labor Statistics, BofA Merrill Lynch Global Research
99
01
03
05
07
09
Residential construction employment
29
Inflation
Inflation: Slack trumps liquidity
When the economy recovers, inflation falls
•Massive slack=disinflation
•Misleading monetarism
Source: BofA Merrill Lynch Global Research
31
Rehab: Lots of fluids
(billions $)
Federal Reserve Assets
Federal Reserve Liabilities
All other
2400
2400
2200
2200
2000
2000
1800
1800
1600
1600
Other*
1400
1200
Treasury deposits
1400
Discount window & related
1000
1000
800
400
600
Repo
Bank notes in circulation
400
Unencumbered Treasuries
200
Dec-07
Reverse repo
800
TAF
600
Bank reserves
1200
200
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
*Other includes Maiden Lane Holdings, Commercial Paper Funding Facility, Money Market Investor Funding Facility, Central Bank Swaps
Source: Federal Reserve, BofA Merrill Lynch Global Research
32
Inflation: Misleading monetarism
Excess
Reserves
1
Credit
Growth
2
Tight
Capacity
3
Inflation
1) A slow revival in credit and supply demand
2) A long boom needed to restore pricing power
3) Very low starting point
Source: BofA Merrill Lynch Global Research
33
Inflation: slacking off
(percent)
11
Forecast
Unemployment rate
10
9
8
7
NAIRU*
6
5
4
3
2
49
52
55
58
61
64
67
70
73
76
79
82
85
88
91
94
97
00
03
06
09
*CBO estimate of NAIRU assuming linear rise to 6% by the end of 2011
Shaded regions represent periods of US recession
Source: Bureau of Labor Statistics, Congressional Budge Office, BofA Merrill Lynch Global Research
34
The Fed
Fed: An extended period
“The Committee will maintain the target range for the federal funds
rate at 0 to 1/4 percent and continues to anticipate that economic
conditions, including
(1) low rates of resource utilization,
(2) subdued inflation trends, and
(3) stable inflation expectations,
are likely to warrant exceptionally low levels of the federal funds
rate for an extended period.”
4 November 2009, FOMC Press Statement
Source: BofA Merrill Lynch Global Research
36
Fed: Subdued inflation trends
(year-over-year percent change)
5.0%
Headline PCE
4.0%
3.0%
2.0%
target
Core PCE
1.0%
0.0%
-1.0%
-2.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research
37
Fed: Stable inflation expectations
(percent)
Consumer inflation expectations
Inflation Breakeven Rates (5y5y fwd)
6.0
3.0
5.0
2.5
1-year ahead
4.0
2.0
5-10 years ahead
3.0
1.5
2.0
1.0
1.0
0.5
0.0
0.0
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
2002
2003
2004
2005
2006
2007
2008
2009
Source: University of Michigan, Bloomberg, BofA Merrill Lynch Global Research
38
Fed: Bank credit still contracting
Commercial bank loans and leases
(three-month percent change, annualized)
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
Shaded regions represent periods of US recession
Source: Federal Reserve Bank, BofA Merrill Lynch Global Research
39
Fed: Patience is a virtue
(percent)
Peak in Fed’s balance sheet
(March 2010)
10.5
First rate hike
(March 2011)
10.0
9.5
9.0
8.5
Final rate cut
(Sept 1992)
8.0
First rate hike
(Feb 1994)
7.5
7.0
Final rate cut
(June 2003)
6.5
6.0
First rate hike
(June 2004)
Unemployment rate
5.5
5.0
NAIRU*
4.5
4.0
3.5
3.0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
*We assume that NAIRU is on linear path to end at 6% by 2011; Shaded regions represent periods of US recession
Source: Bureau of Labor Statistics, Federal Reserve Board, Haver Analytics, BofA Merrill Lynch Global Research
40
Rates: 10-year yields going higher
•Shortage of high quality assets has put downward pressure on yields
•Yields will rise as …
•Economy continues to recover
•Fed’s Agency and MBS purchase programs end
•China allows Renminbi to rise, slowing Treasury buying
•Long-term Treasury coupon supply continues to grow
Source: BofA Merrill Lynch Global Research
41
Risks
Oil dot com: risk of a 2008 replay
•Fed on hold with other central banks tightening
•Weak dollar exchange rate
•Financial press preaching inflation fear
•Strong Asian demand
Source: BofA Merrill Lynch Global Research
43
Risks: Fiscal shock
$ billions
Repeal All Bush Tax Cuts
as a % of GDP
Increase top tax to 39.6% from 35%
as a % of GDP
Repeal Capital Gains and Dividend Cuts
as a % of GDP
2010
2011
2012
2013
2014
6.7
167.5
235.6
250.1
264.6
0.0%
1.1%
1.4%
1.5%
1.5%
14.7
24.4
28.1
31.3
34.0
0.1%
0.2%
0.2%
0.2%
0.2%
1.8
14.2
20.3
37.9
40.8
0.0%
0.1%
0.1%
0.2%
0.2%
Source: Congressional Budget Office, BofA Merrill Lynch Global Research
44
Risks: Long-run deficit disaster
Budget Balance
(as a percentage of GDP)
4
2
0
-2
-4
-6
-8
-10
-12
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Unshaded bars represent OMB projections
Source: Office of Management and Budget, BofA Merrill Lynch Global Research
45
Thoughts on Virginia
Distribution of Employment
Mining & Lodging
Construction
Manufacturing
Service-Providing
TTU
Retail
Trans & Warehousing
Information
Financial Activities
Professional/Business Activities
Education & Health
Leisure & Hospitality
Other Services
Government
Federal
State
Local
United States
0.533
4.550
8.892
86.026
19.081
11.167
3.178
2.145
5.865
12.799
14.831
10.022
4.105
17.177
2.172
3.961
11.044
Source: Bureau of Labor Statistics, BofA Merrill Lynch Global Research
Virginia
0.304
5.331
6.469
87.841
17.249
Norfolk, VA Beach, Newport News
5.597
2.161
5.123
17.411
12.382
9.365
4.838
19.312
4.646
4.270
10.396
1.765
5.139
14.019
12.253
10.945
4.198
21.041
6.473
2.942
11.625
7.049
87.355
17.994
47
U.S. & Virginia CPI Shares
Expenditure Group
All Items
Food & Beverage
Housing
Apparel
Transportation
Medical Care
Recreation
Education & Communication
Other goods & Services
Energy Commodities
Source: Bureau of Labor Statistics, BofA Merrill Lynch Global Research
U.S CPIU
Relative
Importance
100.000
15.757
43.421
3.691
15.314
6.390
5.741
6.301
3.386
3.465
Washington-Baltimore
D.C., Va, W. Va CMSA
Relative
Importance
100.000
14.284
48.599
3.878
12.569
5.015
5.194
7.465
2.996
8.042
48
Virginia: Initial & Continuing Claims
16000
105000
95000
14000
85000
12000
75000
10000
65000
55000
8000
45000
6000
35000
4000
25000
04
05
06
Initial Claims (left)
Source: Bureau of Labor Statistics, BofA Merrill Lynch Global Research
07
08
09
Continuing Claims
49
National, State & Local
Unemployment Rates
12
10
8
6
4
2
0
80
82
84
86
United States
88
90
92
Virginia
Source: Bureau of Labor Statistics, BofA Merrill Lynch Global Research
94
96
98
00
02
04
06
08
Norfolk, Va Beach, Newport News (NSA)
50
Virginia: FHFA Home Price Index
1980Q1=100
480
420
360
300
240
180
120
60
75
78
81
84
Source: FHFA, BofA Merrill Lynch Global Research
87
90
93
96
99
02
05
08
51
Virginia: Housing Permits
10900
9900
8900
7900
6900
5900
4900
3900
2900
1900
900
81
84
87
90
93
Building Permits
Source: Census Bureau, BofA Merrill Lynch Global Research
96
99
02
05
08
twelve-month average
52
Norfolk Va. Customs District: Exports
& Imports
Million $
4000
3500
3000
2500
2000
1500
1000
500
0
97
98
99
00
01
02
Export Value
Source: Census Bureau, BofA Merrill Lynch Global Research
03
04
05
06
07
08
09
Import Value
53
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54
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55
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56
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57
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