Transcript Economic Outlook for 2010 - The Houston Economics Club

The Economic
Outlook for 2010
Presented to:
Houston Economics Club
February 18, 2010
Harvey Rosenblum
Executive Vice President &
Director of Research
Jessica Renier
Senior Economic Analyst
Federal Reserve Bank of Dallas
The views expressed in this presentation are strictly those of the authors and
do not necessarily reflect the positions of the Federal Reserve Bank of Dallas
or of the Federal Reserve System.
Economic Model: Recessions
Guitar-string theory:
Deeper recessions are followed by
stronger, more rapid recoveries.
- Milton Friedman
Economic Model: Financial Crises
“The aftermath of deep financial crises shows deep
and lasting effects on asset prices, output and
employment. Unemployment and house price
declines extend out for five and six years. Output
declines last two years on average. Even recessions
sparked by financial crises do eventually end, albeit
almost invariably accompanied by massive increases
in government debt.”
- Reinhart and Rogoff (Dec. ‘08)
Summary Forecasts for 2010
• GDP: 2-3%, more likely close to 3%
– Absent the financial crisis: 5-6%
• Headline inflation: 3.0%
• Core inflation: 1.5%
• Unemployment:
– 10.4% peak in 2010 Q2
– Sustained employment growth to begin Feb. 2010
But This Time is a Combination
This recession was…
• Most painful since the Depression
– Longest, Deep and Wide
• Followed 25 years of growth interrupted by
two short, mild recessions
Bottom Line:
• Relative to a generation of experience, this was
a truly traumatic event.
Behavior Modification
Only traumatic events,
not hiccups,
produce behavior modification.
Global Backdrop
IMF World Economic Outlook:
What a Difference a Year Makes
One Year Ago: 2009 Forecast
% annual rate
6
5
IMF
3.0
4
3
2
HR
0.2
1
0
-1
-2
2005 2006 2007 2008
2009
Source: IMF World Economic Outlook, Oct. ’08/’09
IMF World Economic Outlook:
What a Difference a Year Makes
One Year Ago: 2009 Forecast
Current: 2010 Forecast
% annual rate
% annual rate
6
6
5
5
IMF
3.0
4
3
4
3
2
2
HR
0.2
1
1
0
0
-1
-1
-2
-2
2005 2006 2007 2008
2009
Source: IMF World Economic Outlook, Oct. ’08/’09
-1.1
2005 2006 2007 2008 2009
2009
IMF World Economic Outlook:
What a Difference a Year Makes
One Year Ago: 2009 Forecast
Current: 2010 Forecast
% annual rate
% annual rate
6
6
5
5
IMF
3.0
4
3
IMF HR
3.1 3.0
4
3
2
2
HR
0.2
1
1
0
0
-1
-1
-2
-2
2005 2006 2007 2008
2009
Source: IMF World Economic Outlook, Oct. ’08/’09
-1.1
2005 2006 2007 2008 2009
2009
2010
Purchasing Managers’ Indexes of
Manufacturing Activity
Index
Jan ‘10
60
55
50
Dec ‘09
Nov ‘09
Expand
Contract
45
40
35
Mar ‘09
30
U.S.
U.K.
Germany Euro Zone
Source: Institute for Supply Management, Bloomberg
Japan
China
G10 Industrial Production
(excluding construction)
Index, 2000=100
115
110
105
100
U.S.
95
90
85
80
75
70
'00
Source: Federal Reserve Board
'01
'02
'03
'04
'05
'06
'07
'08
'09
G10 Industrial Production
(excluding construction)
Index, 2000=100
115
110
105
100
U.S.
95
E.U.
90
Japan
85
U.K.
80
75
70
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
Source: Federal Reserve Board, UK Office for National Statistics, Statistical Office of the European Communities, Japanese Ministry of Economy, Trade & Industry
U.S. Economy
Elements of Trauma
• High unemployment
• Actual deflation
• Negative wealth shock
– Bursting of multiple bubbles
• Synchronized global shocks
• Near-demise of banking/financial system
Going Forward…
Headwinds
• Credit to households and
small businesses
• Banking system – capital,
CRE losses
• Anticipated taxes
• Policy uncertainty
• Higher energy prices
Crosswinds
• Monetary policy
• Fiscal policy
• Regulatory policy
Tailwinds
•
•
•
•
•
Emerging Market economies
Inventories
Labor availability
Idle plants
Lagged impact of global
stimulus
• Equity market rebound and
anticipated profit growth
• Improving capital markets –
lower credit spreads, stronger
risk appetite
Positive Momentum
•
•
•
•
Growth in temp employment
Declining initial unemployment claims
Declining layoff announcements
Nearly 40% of industries adding workers, vs.
80% of industries cutting employment a year ago
• Synchronized global recovery
• Capex
– Rig count and Semi equipment orders
• Industrial production bounce-back
GDP and Inflation
Real GDP Growth
Low-to-Moderate Inflation
SAAR, % change
8
% Yr/yr
6
5.7%
6
Headline CPI
5
4
4
Trimmed
Mean PCE
3
2
2
0
Core CPI
1
-2
0
-4
-1
-6
-2
-8
-3
2007
2008
2009
2007
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Dallas Fed
2008
2009
Why were we so wrong about
year-end inflation?
• Given fears of deflation at year-end 2008, we
thought a 1% deflation over 2009 was the most
likely outcome.
• We averted that outcome, and that’s a prediction
we’re very happy to have been wrong about.
• Credit Chairman Bernanke and the FOMC
Job Market Simply Awful, But Poised
to Turn as Temp Leads Gains
Change, thousands
100
50
200
0
-50
400
0
Temp employment
-200
-100
-400
-150
-600
-200
-800
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10
Source: Bureau of Labor Statistics
Job Market Simply Awful, But Poised
to Turn as Temp Leads Gains
Change, thousands
100
Change, thousands
400
50
200
Payroll employment
0
-50
+64k
-20k
Temp employment
-150k
-100
-150
0
-200
-400
Benchmark added 930k losses
Total jobs lost: 8.4 million
-200
-600
-800
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10
Source: Bureau of Labor Statistics
Labor Market: A Mixed Bag,
But Fixin’ to Improve
• Level of employment is lowest since Sep. 1999
• Private sector job level similar to Nov. 1998
• Unemployment fell to 9.7%
– Likely to rise again once people re-enter labor force
• Initial jobless claims have declined, more needed
• Wages, hours worked and productivity increasing
Bottom Line: Existing workers being pushed harder
A Look At Housing
Contributions to Real GDP Growth
(Advance Release: Q4 2009)
Percentage Points
5.7
6
5
4
3.4
3
2
1.4
1
Ex. Equipment &
Software: -0.5
0.3
0.5
0.1
0
0.0
-1
GDP
Inventories
Source: Bureau of Economic Analysis
Consumption Nonres. Invest.
Res. Invest.
Net Exports
Government
Contributions to Real GDP Growth
(Advance Release: Q4 2009)
Percentage Points
5.7
6
5
4
3.4
3
2
1.4
Equipment &
Software
0.8
1
0.3
0.5
0.1
0
Commercial
Real Estate
-1
GDP
Inventories
Source: Bureau of Economic Analysis
0.0
-0.5
Consumption Nonres. Invest.
Res. Invest.
Net Exports
Government
U.S. House Price Index (Case-Shiller)
Percent change
2.0
1.5
1.0
Nov
0.2%
0.5
0.0
-0.5
-1.0
-1.5
-2.0
Jan
-2.1%
-2.5
-3.0
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: S&P, Fiserv, MacroMarkets LLC
Note: Composite 10-City Index
U.S. Housing Affordability Index
Index
180
160
Dec
164
140
120
100
80
60
'71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09
Source: National Association of Realtors
Mortgage Rates
Percent
8.0
7.5
7.0
6.5
Jumbo
6.1
6.0
30-year
5.3
5.5
5.0
4.8
4.5
4.0
Jan-07
15-year
Jul-07
Source: Bloomberg, Bankrate.com
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Home Sales Noisy
Thousands
6500
6000
5500
5000
4500
4000
3500
'06
Thousands
1200
1100
1000
Existing
1-family homes
900
800
700
600
500
400
New 1-family
300
homes
200
'07
'08
'09
Source: Census Bureau, National Association of Realtors
Permits & Starts Sideways
Thousands
2000
1800
1600
1400
1200
1000
800
1-Family
starts
600
1-Family
permits
400
200
'06
'07
'08
'09
Home Inventories Lower…
But Foreclosures Climbing.
Months’ supply
13
Percent
5
New 1-family
homes
12
4.5
4
11
Foreclosure
inventory
10
3
9
8
Existing
1-family homes
7
2
6
Foreclosures
started
1.4
1
5
4
0
'06
'07
'08
'09
'06
'07
Source: Census Bureau, National Association of Realtors, Mortgage Bankers Association
'08
'09
The Consumer
The Credit Overshoot Has Not Been
Unwound
50 %
BANK LOANS AS % OF GDP
TREND LINE
50 %
40
40
30
30
1.4
HOUSEHOLD DEBT-TO-INCOME RATIO
TREND LINE
1.4
1.2
1.2
1.0
1.0
0.8
0.8
Source: BCA Research 2010, Martin Barnes
1980
1985
1990
1995
2000
2005
2010
Annual Consumption Growth Rate
Percent, yr/yr
15
10
2010
Forecast
5
2.2%
0
-5
Source: Bureau of Economic Analysis
2008
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
1957
1954
1951
1948
1945
1942
1939
1936
1933
-15
1930
-10
Household Wealth
Percent of disposable personal income
650
Peak-to-trough declines
Net worth: $17.5 trillion
Financials: $11.2 trillion
600
Household
net worth
550
500
486
450
404
400
Household
financial assets
350
300
'90
'92
'94
'96
'98
'00
'02
'04
'06
'08
Personal Saving Rate Climbing
Percent, 3MMA
10
9
8
7
6
5
4.6%
4
3
2
1
0
'90
'92
'94
Source: Bureau of Economic Analysis
'96
'98
'00
'02
'04
'06
'08
Investment Spending
Business Spending Recovers Slowly
Following Recessions
Yr/yr %, private fixed investment (nominal)
25
Housing
bubble
20
15
10
Sep. 11
5
0
-5
-10
-15
-20
-25
'81
'84
'87
'90
'93
Source: Bureau of Economic Analysis, Wall Street Journal
'96
'99
'02
'05
'08
U.S. Oil and Gas Rig Counts Rising
Rig Count
1600
1400
1200
Gas Rig Count
1000
800
600
Oil Rig Count
400
200
0
'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Source: Baker Hughes, Inc.
Capacity Utilization Still Very Low…
SA, Percent of Capacity
90
120
110
85
100
25yr average: 80.3%
80
Total Industry
Capacity Utilization
90
75
80
72.0%
70
70
65
60
'90
'92
'94
Source: Federal Reserve Board
'96
'98
'00
'02
'04
'06
'08
…But Industrial Production Improving
SA, Percent of Capacity
90
Index, 2002=100
120
Industrial Production
110
85
100.3
100
80
Total Industry
Capacity Utilization
90
75
80
72.0%
70
70
65
60
'90
'92
'94
Source: Federal Reserve Board
'96
'98
'00
'02
'04
'06
'08
Manufacturing Orders Up Sharply
50+ = Expanding
75
ISM New orders
70
65
60
55
50
45
40
35
30
25
20
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Institute for Supply Management
Manufacturing Exports Expanding
Reasonably Well
50+ = Expanding
75
70
65
ISM New export orders
60
55
50
45
40
35
30
25
20
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Institute for Supply Management
Financial Markets
Interbank Frictions Mostly Gone
Percent
4.0
3.5
3.0
2.5
2.0
1.5
3M LIBOR – Expected Fed Funds
1.0
0.5
0.12
0.0
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10
Source: Financial Times, Reuters
A Tale of Two Credit Markets
Junk Bond Spread
Percent
24
Junk-7yr Treasury
20
Interest rates
charged on credit
cards up to 29.99%
16
12
8
4
Junk-AA
0
2007
2008
2009
2010
Source: Merrill Lynch, Federal Reserve Board, Moody’s
The Wind Is Beginning
To Shift Direction
Banks Close to Beginning an Easing of
Credit Standards
Percent tightening standards
100
80
Commercial loans
60
(large and medium firms)
40
20
Consumer loans
0
-20
-40
'96
'97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
Source: Senior Loan Officer Opinion Survey on Bank Lending Practices (Federal Reserve Board)
'10
Long-Term Willingness of Banks to
Make Consumer Loans is Increasing
Percent
80
Net Percentage of Banks More Willing to
Make Consumer Installment Loans
60
40
more
willing
20
0
-20
less
willing
-40
-60
-80
Source: Senior Loan Officer Opinion Survey on Bank Lending Practices (Federal Reserve Board)
9.6%
The Number of “Problem”
Institutions on the FDIC’s List
Number of banks, or
$ Billions
600
552
500
Assets of
problem
banks
416
400
300
252
200
100
$346B
305
171
53
61
65
76
90
Q1
Q2
Q3
Q4
Q1
117
0
Source: FDIC
2007
Q2
Q3
2008
Q4
Q1
Q2
Q3
2009
Monetary Policy
Rosenblum’s First Law
For every Federal Reserve
policy action, there is an
equal and opposite criticism.
Fed Balance Sheet Outstanding:
Economy Still on Life Support
Billions $
2450
$2,426
TSLF
2200
$2,216
$2,144
Fed Agency
TSLF
Fed Agency
TSLF
Fed Agency
Treasurys
1950
MBS
1700
1450
1200
$2,247
$1,020
950
TSLF
Treasurys
Special
Credit
Facilities
$2,199
$2,051
Special
Credit
Facilities
Special
Credit
Facilities
700
450
MBS
Treasurys
$894
Treasurys
Special
Credit
Facilities
200
Week
ended:
Sep. 3, 2008
Dec. 31, 2008
Mar. 25, 2009
Jan. 6, 2010
Source: Federal Reserve Board
FOMC Central Tendency Projections
(average of tendency range)
2010
Percent
4.3
2011
2012
Percent
10
Percent
1.40
Percent
1.7
4.1
9
3.9
3.7
1.6
1.35
1.5
1.30
1.4
1.25
1.3
1.20
8
3.5
7
3.3
3.1
6
2.9
5
2.7
Real GDP
Source: Federal Reserve Board
Unemployment
PCE inflation
Core PCE
Inflation is Muted Due to Lots of
Excess Capacity
3.0 %
TRIMMED MEAN PERSONAL CONSUMPTION EXPENDITURES INFLATION RATE
3.0 %
2.5
2.5
2.0
2.0
1.5
1.5
NFIB PLANNED PRICE HIKES
30 %
30 %
20
20
10
10
0
0
Source: Dallas Fed, NFIB and BCA Research
2000
2002
2004
2006
2008
2010
Inflation Expectations Still Moving Up?
SA, Percent
3.5
10-year TIPS inflation expectations
3.0
2.5
2.4
2.1
2.0
5-year TIPS inflation expectations
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
2003
2004
Source: Federal Reserve Board
2005
2006
2007
2008
2009
2010
FOMC Exit from Extraordinary and
Massive Monetary Stimulus
• Drop phrase “likely warrant exceptionally low
rates for an extended period.”
• Allow special liquidity facilities to expire
– Most will expire Feb. 1, 2010
– TALF will expire a few months later
• End large-scale asset-purchase programs
– Scheduled to end by end of 2010 Q1 with slowing
pace of purchases announced
FOMC Exit from Extraordinary and
Massive Monetary Stimulus (Cont.)
• To reduce the credit-growth and money-growth
potential of the current $1.1 TRILLION of
excess reserves:
Use in
combo. to
increase
Fed funds
rate
–
–
–
–
Begin reverse repurchase agreement program
Raise interest rate on excess reserves
Establish a Fed term-deposit facility for banks
Outright sales of assets
Timing of Exit Strategies
Depends on:
• Long time lags for monetary policy to impact
economic growth and inflation
• Forecasts of when economy will return to more
normal patterns
– Cannot wait for return to actual high resource
utilization
Timing of Exit Strategies (Cont.)
• FOMC will focus particularly on anticipated
resource utilization, inflation and inflation
expectations in its decisions on exit timing
• Fed has no prior experience in creating or
removing monetary stimulus of this magnitude
and diversity
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
The circulation of confidence
is better than the
circulation of money.
- James Madison
Confidence Must be Restored in:
• Government leaders
• Business leaders
– Especially bankers whose reputations are tarnished
and diminished
• Workability and resilience of our institutions
– Security breaches (White House, TSA)
• Fed Independence
Economic Conclusions:
• The economy is on a steadier positive
trajectory.
• We have serious concerns about weaknesses
in the labor market.
Policy Messages:
• The recovery depends on more than fiscal and monetary
stimulus. They are necessary, but not sufficient for an
economic recovery.
• True improvement requires the will and ability to
overcome adversity, ending an attitude of complacency
and entitlement.
• The U.S. has demonstrated this ability in the past and will
continue to do so.
• The FOMC has already said, in essence: “We’ve done
enough.”
Back of Tray
Words and Phrases to Never Use:
• Never again
• Contained
• This time it’s different
Credit Suisse Global Risk Appetite
Index Moderating
10
Oil prices
plunge
8
’87 stock
run-up
6
Private Equity,
CDO, Lending
Boom
’94 Recovery,
EMG boom
Irrational
Exuberance
Nasdaq
Bubble
Euphoria
4
(1/12)
Dec.
Avg.
midpoint
2
0
-2
-4
Oct. 87
Crash
Secular Bear
Stock Mkt ends
-6
'81
'83
'85
'87
'89
Gulf ERM crisis,
Asian Russian
War I Nikkei low Mex. Crisis Default
Default
Nasdaq
Bust
'91
'93
'95
'97
'99
'01
'03
Gulf
War II
looms
'05
Panic
Subprime
Crisis
'07
'09
“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