• Save
State of the Economy: What happened and when will it come to an end? Christopher Thornberg, Principal, Beacon Economics
Upcoming SlideShare
Loading in...5
×
 

Like this? Share it with your network

Share

State of the Economy: What happened and when will it come to an end? Christopher Thornberg, Principal, Beacon Economics

on

  • 1,620 views

Last year even as the US was already in a recession not only were forecasters saying we weren't in a downturn, they were predicting that the economy would be moving strongly forward by the beginning ...

Last year even as the US was already in a recession not only were forecasters saying we weren't in a downturn, they were predicting that the economy would be moving strongly forward by the beginning of 2009.

Statistics

Views

Total Views
1,620
Views on SlideShare
1,618
Embed Views
2

Actions

Likes
0
Downloads
16
Comments
0

1 Embed 2

http://www.lmodules.com 2

Accessibility

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

State of the Economy: What happened and when will it come to an end? Christopher Thornberg, Principal, Beacon Economics Document Transcript

  • 1. 4/27/2009 Recession Economics Christopher Thornberg Founding Principal, Beacon Economics NBER says U.S. recession began December 2007 Mon Dec 1, 12:20 pm ET WASHINGTON (Reuters) – The U.S. economy slipped into recession in December 2007, the National Bureau of Economic Research's business cycle dating committee announced on Monday. 1
  • 2. 4/27/2009 Reality Hysteria Denial Equity Hysteria US Indexes Foreign Markets 180 220 160 200 180 140 Indexed (Jan 04 = 100) Index (Jan 04 = 100) 160 120 140 100 120 80 100 80 60 60 40 40 Jun-00 Apr-01 Sep-01 Jul-02 Aug-04 Jan-00 Nov-00 Feb-02 Dec-02 May-03 Oct-03 Mar-04 Jan-05 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Dow Jones Industrial Average Nikkei Average Index NYSE Indexes DAX Index S&P 500 FTSE 100 2
  • 3. 4/27/2009 What is a Recession? GROWTH COMES IN TRENDS AND BENDS – The trend is long run growth driven by demographics, productivity, investment, public policy, etc. – Bends are short run fluctuations around the trend driven by some imbalances A RECESSION IS A NEGATIVE BEND RECESSION – “Two quarters negative growth” confuses symptoms with the disease – Caused by some shock to the economy that causes rapid changes in aggregate demand, factor markets can’t clear Two Parts to any downturn – Pain of initial shock – Unemployment rises, capacity utilization falls creating a negative feedback loop – Recovery is a given, but the process is painful • A fall to remember – Heard on the street “There are only two positions out there: cash, and fetal” • Its not ‘what Wall Street troubles mean to California’, its ‘what California troubles mean for Wall Street’ – Recession was already fully underway even if many economists and politicians remained in deep denial • What went wrong – The big three imbalances: housing, finance, and the consumer • Where from here? – Things are bad.. But not THAT bad! So far the numbers are in line (if a bit worse) than past recessions, and proportionate to the imbalances in the economy… – Recovery is a given, the big question is when 3
  • 4. 4/27/2009 6 GDP -6.2 4 Personal consumption -3.01 Durable goods -1.67 2 Nondurable goods -1.95 Services 0.61 0 Gross investment -3.11 Structures -0.24 -2 1980-II -7.8 Equipment software -2.24 1982-I -6.4 Worst Residential -0.78 -4 2008-IV -6.2 Change in inventories 0.16 Quarters 1981-IV -4.9 Net exports -0.46 -6 Exports -3.44 1975-I -4.7 Imports 2.99 -8 Government 0.32 Federal 0.50 State and local -0.18 Labor Markets Employment Losses from Peak Unemployment from Trough 100.5 4.0 3.5 100.0 3.0 99.5 2.5 99.0 2.0 98.5 1.5 98.0 1.0 97.5 0.5 97.0 0.0 96.5 -0.5 96.0 Peak M+2 M+4 M+6 M+8 M+10 M+12 M+14 M+16 M+18 M+20 Peak M+2 M+4 M+6 M+8 M+10 M+12 M+14 M+16 M+18 Jul-74 Jul-81 Dec-07 Jul-74 Jul-81 Dec-07 4
  • 5. Percent 65.0% 65.2% 65.4% 65.6% 65.8% 66.0% 66.2% 66.4% 66.6% -10 -5 0 5 10 15 Jan-04 Dec-69 Jul-04 Jan-74 Jan-05 Jan-78 Jul-05 Jan-06 Jan-82 Jul-06 Jan-86 Nominal Jan-07 Jan-90 Jul-07 US Participation Rate Jan-94 Retail Sales Y-O-Y Growth Jan-08 Jan-98 Jul-08 Jan-02 Jan-09 Millions 7 9 11 13 15 17 19 7800 8000 8200 8400 8600 8800 9000 9200 Dec-71 Jan-06 Sep-75 May-06 Jun-79 Sep-06 Mar-83 Jan-07 Jan-87 May-07 Oct-90 Consumer Spending Sep-07 Jul-94 Light Vehicle Sales (SAAR) Jan-08 Apr-98 Real Disposable Income May-08 Jan-02 Sep-08 Jan-09 5 4/27/2009
  • 6. 4/27/2009 Total Spending, Y-o-Y 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% Employment, Jan 2007 = 100 2008 2009 Ch % 102 Newspaper 100 publishers 337.9 299 -38.9 -11.5% 98 Periodical publishers 144.2 134.1 -10.1 -7.0% 96 Book publishers 80.3 76.5 -3.8 -4.7% 94 92 Directory and mailing list 90 publishers 46.5 37.8 -8.7 -18.7% Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Other publishers 25.9 24.4 -1.5 -5.8% US Publishing 6
  • 7. 4/27/2009 Retail Spending: Books, Music, Hobbies, Etc 7800 7600 7400 7200 7000 6800 6600 6400 6200 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 • Direct Sale – Steady source of revenue – Information too easily swapped electronically – Perhaps an Itunes type system? • Indirect Sales – Ad revenues – Subject to business cycle 7
  • 8. 4/27/2009 The 3 Imbalances 1. The Housing Imbalance The collapse of the pyramid 2. The Financial Imbalance The Credit Bubble 3. The Consumer Imbalance Too much spending Case Shiller (Real) 260 240 Los Angeles Home Prices 220 Median Annual 200 Median Owner Home Share of Price Income Cost Income 180 160 1999 140 $199 $62,118 $21,879 35.2% 120 100 2006 80 $577 $78,949 $55,847 70.7% Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 CS-10 City CS-US 8
  • 9. 50 100 150 200 250 300 -30% -20% -10% 0% 10% 20% 30% 40% 1987Q1 Sep-94 1989Q2 Feb-96 1991Q3 1993Q4 Jul-97 High 1996Q1 Jan-99 1998Q2 Jun-00 2000Q3 Low Nov-01 2002Q4 California Prices Apr-03 2005Q1 Indexes (to Q4 08) 2007Q2 Sep-04 Mid 2009Q3 San Francisco Case Shiller Feb-06 2011Q4 Jul-07 -40% -30% -20% -10% 0% 10% 20% 30% 40% 40000 60000 80000 100000 120000 140000 160000 Jan-94 1988Q1 Jan-95 1990Q1 Jan-96 Low 1992Q1 Jan-97 Jan-98 1994Q1 Jan-99 18 1996Q1 Jan-00 1998Q1 Jan-01 Middle 2000Q1 Jan-02 Jan-03 2002Q1 Changes by Tier California Home Sales Jan-04 2004Q1 Jan-05 High Los Angeles: Year on Year 2006Q1 Jan-06 Jan-07 2008Q1 Jan-08 9 4/27/2009
  • 10. 4/27/2009 Foreclosed homes: mounting REO Total % HH REO Total % HH Nevada 27804 65905 6.0% Tennessee 15722 20864 0.8% Arizona 44058 96525 3.6% New Hampshire 2558 4531 0.8% Florida 60855 273695 3.1% Rhode Island 2109 3252 0.7% California 193311 395809 3.0% Washington 8404 19229 0.7% Michigan 61173 87565 1.9% Texas 45354 65569 0.7% Illinois 27333 101307 1.9% Wisconsin 7732 17413 0.7% Ohio 43561 88010 1.7% New York 7021 53823 0.7% Colorado 17035 35444 1.7% Minnesota 11984 15583 0.7% Georgia 34971 61281 1.5% Massachusetts 8799 17667 0.6% New Jersey 7287 52887 1.5% South Carolina 7334 13000 0.6% Utah 4295 11116 1.2% Arkansas 2986 7924 0.6% Indiana 13961 31504 1.1% Missouri 11793 16030 0.6% Idaho 612 6613 1.0% Connecticut 2137 8481 0.6% Oregon 4519 16271 1.0% DC 912 1673 0.6% Virginia 15430 27032 0.8% Maryland 5201 13374 0.6% MBA Numbers: SA to Q4 4.5 4 3.5 3 2.5 60 to 90 Days Behind 2 1.5 1 New Foreclosures 0.5 0 1979Q1 1980Q2 1981Q3 1982Q4 1984Q1 1985Q2 1986Q3 1987Q4 1989Q1 1990Q2 1991Q3 1992Q4 1994Q1 1995Q2 1996Q3 1997Q4 1999Q1 2000Q2 2001Q3 2002Q4 2004Q1 2005Q2 2006Q3 2007Q4 20 10
  • 11. 4/27/2009 • New Bill – Loosen Fannie Freddie Rules – Incentivize workouts – Try to reduce mortgage rates • Will it work? – Doesn’t deal with seriously under-water folks – Won’t turn around banks or markets – Why does it matter anyways? Cap Rates Orange County Cap Rates San Francisco 9.5% 10.0% 9.5% 9.0% 9.0% 8.5% 8.5% 8.0% 8.0% 7.5% 7.5% 7.0% 7.0% 6.5% 6.5% 6.0% 6.0% 5.5% 5.5% 5.0% 5.0% 1982Q1 1984Q1 1986Q1 1988Q1 1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 1982Q1 1984Q2 1986Q3 1988Q4 1991Q1 1993Q2 1995Q3 1997Q4 2000Q1 2002Q2 2004Q3 2006Q4 Office Retail Industrial Office Retail Industrial 22 11
  • 12. 4/27/2009 Cap Rates Vacancy Office Avg Min Q4 08 Q4 06 Q4 08 East Bay 7.9% 6.9% 7.5% 16.9% 18.5% Inland Empire 7.6% 6.6% 7.7% 9.3% 24.6% Los Angeles 7.4% 5.7% 6.5% 11.7% 14.1% Orange County 7.8% 6.0% 7.0% 11.4% 19.2% Sacramento 8.6% 6.9% 7.8% 12.5% 16.1% San Diego 8.4% 5.8% 6.9% 10.6% 17.1% San Francisco 7.7% 5.7% 6.6% 14.0% 15.6% San Jose 9.4% 6.5% 7.3% 14.4% 17.7% Warehouse Avg Min Q4 08 Q4 06 Q4 08 East Bay 8.4% 6.2% 6.7% 6.2% 8.2% Inland Empire 7.8% 5.1% 6.2% 3.3% 8.8% Los Angeles 7.0% 5.3% 6.2% 3.6% 6.0% Orange County 8.1% 5.3% 6.4% 5.9% 8.2% Sacramento 7.4% 6.7% 7.3% 8.0% 8.8% San Diego 7.3% 5.6% 6.7% 7.3% 7.9% San Francisco 7.7% 5.9% 6.4% 5.8% 6.8% San Jose 7.1% 6.1% 6.8% 5.0% 5.6% Cap Rates Vacancy Apartment Avg Min Q4 08 Q4 06 Q4 08 East Bay 7.8% 5.0% 5.8% 4.8% 6.2% Inland Empire 7.8% 4.8% 6.3% 4.3% 6.8% Los Angeles 7.7% 4.8% 5.5% 4.3% 6.8% Orange County 7.7% 5.0% 5.9% 3.3% 6.2% Sacramento 7.8% 5.7% 6.4% 4.8% 6.4% San Diego 7.8% 4.7% 5.9% 2.8% 5.0% San Francisco 7.7% 4.8% 5.4% 4.4% 4.6% San Jose 7.7% 5.0% 5.5% 5.0% 5.9% Retail Avg Min Q4 08 Q4 06 Q4 08 East Bay 8.7% 5.7% 6.7% 3.4% 6.6% Inland Empire 8.4% 6.0% 7.4% 9.2% 19.1% Los Angeles 7.5% 5.7% 6.3% 7.9% 10.4% Orange County 7.5% 5.7% 6.6% 2.4% 6.7% Sacramento 7.7% 6.5% 7.6% 7.3% 16.1% San Diego 8.0% 5.5% 6.6% 1.9% 5.9% San Francisco 9.0% 5.7% 6.4% 4.6% 6.6% San Jose 8.5% 5.7% 6.4% 10.9% 16.5% 12
  • 13. 4/27/2009 • High prices paid? Yes – Financial issues for some who bought in late • Cash Flows – Best in commercial space, but still wobbly – Negatives: less buying, people in financial problems, fewer people moving – Positives: People moving to smaller places, lots of translocation in coming years 13
  • 14. 4/27/2009 The Financial Imbalance The CDO “Revolution” Risky Revenue AAA Stream AA A BBB Rating Agencies Investment Investment Managers Bankers Asset Markets Asset Market Investors Brokers 14
  • 15. 3 4 5 6 3.5 4.5 5.5 195201 195601 196001 196401 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 196801 03/01/96 197201 01/01/97 197601 11/01/97 198001 198401 09/01/98 198801 National P/E Ratio 07/01/99 199201 05/01/00 199601 03/01/01 200001 01/01/02 200401 200801 11/01/02 09/01/03 Assets greater than $15B 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 07/01/04 Assets between $1B and $15B 1988Q1 Assets between $300M and $1B 05/01/05 1989Q4 03/01/06 1991Q3 Loan-Loss Reserves to Delinquent Loans 1993Q2 01/01/07 1995Q1 30 11/01/07 1996Q4 1998Q3 2000Q2 2002Q1 2003Q4 Non-Federal Credit / GDP 2005Q3 2007Q2 15 4/27/2009
  • 16. 4/27/2009 New Corporate Issuances Interest Rates 200,000 10 180,000 9 8 160,000 7 140,000 6 120,000 5 4 100,000 3 80,000 2 1 60,000 0 40,000 20,000 0 Short Run Paper AAA Bonds BAA Bonds 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% M1 4.0% M2 2.0% 0.0% -2.0% -4.0% May-98 Oct-98 May-03 Oct-03 Dec-97 Mar-99 Aug-99 Jan-00 Jun-00 Nov-00 Apr-01 Feb-02 Jul-02 Dec-02 Mar-04 Aug-04 Sep-01 16
  • 17. 4/27/2009 The consumer imbalance… imbalance… Consumer Spending and Net Savings Rate as % of DPI Exports as share of GDP 12 72.0% 0.0% -1.0% 71.0% -2.0% 8 70.0% -3.0% 69.0% -4.0% 68.0% -5.0% 4 67.0% -6.0% 66.0% -7.0% 1995-I 1998-III 2000-II 2002-I 2005-III 2007-II 1996-IV 2003-IV 0 1975-I 1978-I 1981-I 1984-I 1987-I 1990-I 1993-I 1996-I 1999-I 2002-I 2005-I Consumer Spending Net Exports 17
  • 18. 4/27/2009 US ‘P/E’ Ratio to Q4 Avg. Wealth Per Household 6 $700,000 $650,000 5.5 $600,000 $550,000 5 $500,000 $450,000 4.5 $400,000 $350,000 4 $300,000 $250,000 3.5 $200,000 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 3 1952Q1 1956Q1 1960Q1 1964Q1 1968Q1 1972Q1 1976Q1 1980Q1 1984Q1 1988Q1 1992Q1 1996Q1 2000Q1 2004Q1 2008Q1 Total Net 35 5 4.5 4 Changes in Income 3.5 Aug to Jan 3 $Bill, SAAR 2.5 Income -23.3 2 1.5 Taxes Paid -178.1 Spending -285.0 1 Int + Trans -15.5 0.5 Savings 455.4 0 Jan-06 May-06 Jan-07 May-07 Jan-08 May-08 Jan-09 Sep-06 Sep-07 Sep-08 36 18
  • 19. 4/27/2009 Retail Sales Auto Sales 400000 18000 380000 16000 360000 14000 All 340000 320000 12000 300000 10000 280000 w/o Auto 8000 260000 240000 6000 Sep-06 Sep-07 Sep-08 Jan-06 May-06 Jan-07 May-07 Jan-08 May-08 Jan-09 Apr-07 Jul-07 Apr-08 Jul-08 Jan-07 Oct-07 Jan-08 Oct-08 Jan-09 37 Trade Industrial Production to Jan $240,000 2.0% $220,000 1.0% $200,000 0.0% $180,000 -1.0% $160,000 $140,000 -2.0% $120,000 -3.0% $100,000 Jan-06 Jan-07 Jan-08 Apr-06 Jul-06 Oct-06 Apr-07 Jul-07 Oct-07 Apr-08 Jul-08 Oct-08 -4.0% Jan-06 Apr-06 Jul-06 Jan-07 Apr-07 Jul-07 Jan-08 Apr-08 Jul-08 Jan-09 Oct-06 Oct-07 Oct-08 Exports Imports 38 19
  • 20. 4/27/2009 Personal Taxes Mortgage Obligation To Q3 2008, Share of Income % of Owner DPI, Fed Res, to Q3 16% 13 15% 12 14% 11 13% 12% 10 11% 9 10% 8 9% 1958-III 1971-III 1984-III 1997-III 1961-IV 1974-IV 1987-IV 2000-IV 1952-I 1955-II 1965-I 1968-II 1978-I 1981-II 1991-I 1994-II 2004-I 2007-II 80q1 82q1 84q1 86q1 88q1 90q1 92q1 94q1 96q1 98q1 00q1 02q1 04q1 06q1 08q1 Personal Tax Cut Q: How much will 4.5% conforming mortgage rates and Income $ 12,250 Taxes (No SI) $ 1,550 foreclosures help? Tax Cut $ 250 New Savings 2.80% 40 20
  • 21. 4/27/2009 Summary RECESSION IS HERE… Consumer weakness will continue , but not forever Business weakness to get worse on profit issues Exports are a big negative, but will be solid in the longer run Housing close to bottom, but no bounce State budget issues to get worse WHAT KIND OF RECESSION? RECESSION? Bad, but not a depression, decline followed by period of doldrums Recover in economy early to mid 2010 Recovery in housing 2012 Unemployment GDP Growth 14 6% 12 4% State 10 2% 8 0% 6 -2% US 4 -4% -6% 2 -8% 0 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 21
  • 22. 4/27/2009 1. Recovery is inevitable if delayed 2. Fire Sales will create opportunities— opportunities—but wait for it 3. Low Home Prices are good in the long run 4. California is going to have good times ahead as exports boom 5. Keep to your fundamentals 6. In desperate times comes real change To view or download this presentation please visit: www.BeaconEcon.com Beacon Economics is an independent research and consulting firm with offices in both Northern and Southern California. Contact us at 415-457-6030 415-457- 22