Transcript Economic Review and Outlook

Economic Review and Outlook
University of Phoenix
January 23, 2008
David B. Johnson
ZHP Capital
The Fed’s Dilemma
What they say...
What they mean...
2007 Economic Review
and Outlook for 2008
2007
4th
Quarter
(or last
available)
WSJ
Forecast
Range
2.3%
4.9%
-0.4% - 5.0%
2.0%
1.8% - 2.5%
4.4%
5.0%
4.8%
4.3% - 6.0%
5.2%
4.8% - 4.9%
+2.3 million
+1.3 million
+292,000
-660,000 –
2,300,000
894,000
2.5%
4.1%
5.6%
0.6% - 3.5%
2.3%
Housing Starts
1,800,900
1,353,700
1,151,000
0.8 – 1.35 mm
1,100,000
Fed Funds
Target
10 year Tsy
Yield(Year-end)
Mortgage
Rates
avg:
4.96%
Y/E: 5.25%
5.02%
4.25%
4.50%
4.25%
2.0% - 5.5%
3.65%
4.79%
Y/E: 4.71%
4.63%
4.03%
4.26%
4.03%
3.5% - 5.5%
4.40%
6.41%
6.34%
6.23%
N/A
N/A
Index:1418.30
1468.36
+5.5%
1468.36
-3.8%
N/A
N/A
GDP (thru 3Q
2007)
Unemployment
Rate (Year-end)
Payrolls
CPI
S&P 500
2006
(or last 12
months
available)
2.9%
avg:
% Chg:
15.8%
WSJ
Federal
Forecast Reserve’s
Mean
FOMC
1.8% - 2.1%
Question #1
In 2007, single-family housing starts
fell 25%, and home prices are likely
to see their first national decline
since 1930’s.
In 2008, will this housing “pandemic”
give the rest of the economy the
“flu”, or just a “cold”?
Recession Probability
-0
N 5
ov
-0
Ja 5
n0
M 6
ar
M 06
ay
-0
6
Ju
lSe 06
p0
N 6
ov
-0
Ja 6
n0
M 7
ar
-0
M 7
ay
-0
7
Ju
lSe 07
p0
N 7
ov
-0
Ja 7
n08
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Se
p
Likelihood (%)
Odds of Recession in next 12 months
WSJ Survey of Economists
Survey Month
Business Cycle Expansions
and Contractions
Trough
Peak
Peak Previous
from
from
to
trough
Previous Previous
Trough to peak
Trough
Peak
Average, all cycles:
1854-2001 (32 cycles)
1854-1919 (16 cycles)
1919-1945 (6 cycles)
1945-2001 (10 cycles)
17
22
18
10
38
27
35
57
55
48
53
67
56*
49**
53
67
* 31 cycles
** 15 cycles
“A recession is a significant decline in economic activity spread across the
economy, lasting more than a few months, normally visible in real GDP, real
income, employment, industrial production, and wholesale-retail sales.”
Source: NBER
Subprime Mortgages
The subprime category of residential
mortgages typically includes loans made
to borrowers that displayed one or more
of the following characteristics at the time
of origination:
• weakened credit
• histories that include payment delinquencies,
chargeoffs, judgments, and/or bankruptcies;
• Reduced repayment capacity as measured by
credit scores or debt-to-income ratios;
• or incomplete credit histories.
Source: July 2007 Senior Loan Officer Opinion Survey on Bank Lending Practices
Housing Starts
Housing Price Changes
OFHEO Repeat Sales
S&P/Case-Schiller Existing Home
Prices
Job Creation
Jobs vs. Income
Non-farm
Payrolls (LH)
Personal
Income (RH)
Jobs vs. Spending
Non-farm
Payrolls (LH)
?
Personal
Consumption
(RH)
Business Capital Spending
Capital Goods
Orders
Industrial
Production
Purchasing Manager’s Index
Question #2
In 2007, the Federal Reserve lowered the
target Federal Funds rate by 100 basis
points, and instituted several
extraordinary programs to provide
liquidity and credit to the capital markets.
In 2008, will the Federal Reserve continue
to stoke the monetary fires, raising the
risk of a resurgence of inflation?
Federal Reserve Policy Tools
Recent Changes
8/17 Discount
Rate Cut
10/31 & 12/11
25 basis point Fed
Funds and Discount
Rate Cuts
9/18 - 50 basis
point Fed Funds
and Discount Rate
Cut
1/22 - 75 basis
point Fed Funds
and Discount Rate
Cut
FOMC Monetary Policy
Tight
Money
Easy
Money
Source: St. Louis Federal Reserve, Monetary Trends
Money Still Matters?
?
Inflation Expectations
Measures of Inflation Expectations
4.0
3.0
2.0
1.0
0.0
Ja
nAp 0 3
r- 0
Ju 3
lO 03
ct
Ja 03
nAp 0 4
r- 0
Ju 4
lO 04
ct
Ja 04
nAp 0 5
r- 0
Ju 5
lO 05
ct
Ja 05
nAp 0 6
r- 0
Ju 6
lO 06
ct
Ja 06
nAp 0 7
r- 0
Ju 7
lO 07
ct
Ja 07
n08
Percentage
Rate
5.0
SPF 1 Year ForwardDate
Univ of Michigan Consumer Survey
Yld Difference 10 Year Tsy Note and 10 Year TIPS
Question #3
In 2007, the exchange value of the US
dollar fell to 30 year lows against the
currencies of our major trading
partners.
In 2008, will strong foreign economies
and this weak dollar generate
enough exports to support the US
economy?
Exchange Rates
$1.46/euro
$0.90/euro
Outlook for Fiscal Stimulus
Bush has proposed $150 billion package
 Any fiscal stimulus could be counterproductive if not implemented in a timely or
efficient manner
• Must provide stimulus promptly in next 12
months
• Must maximize near-term stimulus per dollar of
increased budget expense
• Must be explicitly temporary to avoid
exacerbating the structural deficit.
Current Conditions

Fed’s Beige Book for Chicago District
• Economic Activity expanded at slow pace in December
and early January
• Consumer spending mixed, with vehicle inventories
declining to comfortable levels
• Business Spending little changed from previous
• Residential construction and home sales declined. Real
estate lending remains weak, but defaults were not
deteriorating.
• Manufacturing growth was stable, and manufacturers
remained upbeat about prospects for 2008. Strength in
demand for exports and falling dollar has allowed price
increases.
• Rising input costs for manufacturers, especially for those
affected by oil, with a general inability to pass on costs.
• Higher wholesale food prices were able to be passed on
to retail food consumers.
So what does this mean for
Business?



Prepare for a greater slowdown in
final sales in the coming months.
Pricing power will be limited
Borrowing rates should fall
dramatically, especially for prime
borrowers.
Economic Review and
Outlook
University of Phoenix
January 23, 2008
David B. Johnson
ZHP Capital