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  • 1. “WHAT’S NEXT FOR THE FLEDGLING ECONOMIC RECOVERY?” Presented by Barton Smith Economics Professor Emeritus University of Houston November 16, 2010 1
  • 2. THE RECOVERY SEEMS PAINFULLY SLOW 2
  • 3. GROSS NATIONAL PRODUCT Are We Headed For Even Slower Growth? 8% Mostly an inventory adjustment Annualized Percent Growth 4% 0% -4% -8% Apr-07 Apr-08 Apr-09 Apr-10 Forecast for 4th quarter 2010 Date Source: BEA 3
  • 4. U.S. MONTHLY EMPLOYMENT GROWTH Gains/Losses in Employment Absolute Level of Employment Growth 600 Monthly Change 400 12 Month Average 200 In Thousands 0 -200 -400 Lost 2.1 million jobs -600 Lost 8.0 million jobs -800 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Date Source: BLS 4
  • 5. NATIONAL EMPLOYMENT GROWTH 3 Month Average Annualized Job Growth Usually, when job growth starts, it comes back strong 7.0% Percent Annualized 3.5% Growth Rate 0.0% -3.5% -7.0% Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- 79 82 85 88 91 94 97 00 03 06 09 Date 5 Source: BLS
  • 6. INITIAL CLAIMS FOR UNEMPLOYMENT 3 Month Average of Weekly U.S. Claims New claims have been above 450,000 for 28 straight months 700 Weekly Unemployment Claims Initial Claims 600 30 Year Average (Thousands) 500 400 300 200 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- 79 82 85 88 91 94 97 00 03 06 09 Date 6 Source: Dept. of Labor
  • 7. INDEX OF CONSUMER SENTIMENT 30 YEAR AVERAGE = 87 Consumer confidence still hovers at recessionary lows. 120 Double Dip S&L 9/11; Subprime 110 Recession Crisis Scandals Meltdown 100 30 year average = 87 Index Value: 90 80 70 60 50 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- 79 82 85 88 91 94 97 00 03 06 09 Date 7 Source: University of Michigan
  • 8. REAL DOLLAR RETAIL SALES Percent Year-Over-Year Growth This is the largest contraction in retail sales since the Depression and the consumer is in no position to come roaring back. 8.0% Annual Year-Over-Year 4.0% Growth Rate 0.0% -4.0% -8.0% -12.0% Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Date 8 Source: St. Louis Fed
  • 9. MOST RECOVERIES SEEM PAINFULLY SLOW, ESPECIALLY THE RETURN TO JOB GROWTH 9
  • 10. THE WORST RECESSIONS OF THE PAST 50 YEARS Deviations from GDP Peak: 1st Qtr = Peak Level of GDP 108% 1973-75 1980-82 2008-2010 Old Peak 104% Percent of Peak Recent trough 70s trough 80s trough 100% 96% 92% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Return to Old High Quarter From Peak Level of GDP 10 Source: BEA
  • 11. Length and Severity of Past Recessions Duration in Months / Severity in Percent Decline Recession GDP Jobs GDP Jobs Jobs Trough Trough Recovery Lag 1974 24 mos 20 mos -3.2% -2.8% 5 mos 1980 36 mos 42 mos -2.2% -2.5% 8 mos 1990 18 mos 32 mos -2.4% -2.5% 16 mos 2000 3 mos 45 mos -0.3% -2.0% 46 mos 2008* 40 mos 35 mos -3.5% -6.1% N/A * Neither GDP or Employment Have Yet Returned to Old Peak 11 Source: BLS/BEA
  • 12. EXAMPLES OF THE LAG BETWEEN GDP GROWTH AND EMPLOYMENT GROWTH 12
  • 13. THE 1980-82 RECESSION Percent Level In Comparison With 1st Qtr 1980 Peak 105.0% Employment Year-to-Year % Change GDP 102.5% 100.0% Lag 97.5% 95.0% 1979 1980 1981 1982 1983 1984 Date 13 Source: BLS/BEA
  • 14. THE 1990-91 RECESSION Percent Level In Comparison With 2nd Qtr 1990 Peak 105.0% Employment Year-to-Year % Change GDP 102.5% Lag 100.0% 97.5% 95.0% 1990 1991 1992 1993 Date 14 Source: BLS/BEA
  • 15. THE 2008+ RECESSION Percent Level In Comparison With 4th Qtr 2007 Peak 104.0% Employment 102.0% GDP GDP hasn’t returned Percent Change Year-to-Year to old peak 100.0% 98.0% 96.0% 94.0% 92.0% 2007 2008 2009 2010 Date 15 Source: BLS/BEA
  • 16. THE ALTERNATIVE SCENARIO: JAPAN’S LOST DECADE 16
  • 17. “THE LOST DECADE” From Boom to Gloom – Japan’s Real Growth 8% Real GDP Growth Percent Gain in Real GDP 6% Avg Growth Rate in the 80s Avg Growth Rate in the 90s 4% 2% 0% -2% 1975 1980 1985 1990 1995 2000 2005 Year Source: U.S. Census Bureau 17
  • 18. “Every Recession Has Purposes Which Must Be Fulfilled Before Any Recovery is Sustainable” 18
  • 19. WHAT’S BEEN ACCOMPLISHED & WHAT HASN’T Home Price Correction Housing Mkt Stabilization TASKS TO BE COMPLETED Commerical RE Mkt Correction Banking Reform & Stabilization Private Sector Savings Public Sector Budget Control Labor Productivity Growth Rebalancing of Macro Economy 0% 20% 40% 60% 80% 100% 19 Source: B. Smith
  • 20. THE HOUSING MARKET 20
  • 21. Housing Must Remain Affordable National Median Home Price vs. Median Income Median home prices should not exceed 3X median incomes 4.25 Ratio: Price to Income 4.00 Price to Income Ratio 3.75 3.50 3.25 3.00 2.75 2.50 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Year Source: NAR / BEA 21
  • 22. MORTGAGE DELINQUENCY RATES Percent 60 Days Delinquent The foreclosure problem will not be over until delinquencies fall 50% Alt A Percent Delinquent 40% Subprime FHA/VA 30% Conv. Prime 20% 10% 0% Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Date 22 Source: First American CoreLogic
  • 23. NEW HOME SALES Sales As A Percent of American Households Unfortunately, new home production must remain subdued for at least 2 more years. 1.40% Sales to Households Ratio of Sales to Households 1.20% 46-Year Average 1.00% 0.80% 0.60% 0.40% .8% is approximately equal to the growth in households qualified to own a home. 0.20% Jan-63 Jan-68 Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08 Date 23 Source: Bureau of Census
  • 24. COMMERCIAL REAL ESTATE 24
  • 25. COMMERCIAL PROPERTY National Price Index This is for properties sold. Most unsold properties haven’t been written down. 2.0 Commercial Property Price Index 1.8 Index: 100 = Jan 2001 1.6 1.4 1.2 Commercial property values 1.0 are 46% off their peak. 0.8 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year 25 Source: NCREIF, RCA, CBRE /B. Smith
  • 26. OVERALL REIT PERFORMANCE April 2004 to April 2009 2.5 Index: April 2004 = 1.00 2.0 1.5 1.0 On average commercial REITs lost 64% of their value, 0.5 but since March, 2009 they are now up 140%. That compares with a 70% rise in stock values. 0.0 2004 2005 2006 2007 2008 2009 2010 Year 26 Source: Dow Jones
  • 27. Commercial Property Cap Rates National Average of NOI to Transactions Price Composite Index for Apts., Retail, Office Today there is a dramatic difference between appraised and transaction cap rates 9.5% 8.5% Percent Cap Rate 7.5% 6.5% 5.5% 1996 1999 2002 2005 2008 2011 Date 27 Source: NCREIF, RCA, CBRE, M&M
  • 28. BANK STABILIZATION 28
  • 29. U.S. BANK CREDIT Commercial, Real Estate, and Consumer Credit 16% Annual Percent Growth 12% 8% 4% 0% -4% -8% Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Date Source: St. Louis Fed 29
  • 30. HOUSEHOLD SAVINGS RATE 30
  • 31. U. S. PERSONAL SAVINGS RATE 3 Month Moving Average The savings rate needs to rise further, which is not good news for U.S. retailing. 14% Disposable Income 12% Percent of 10% 8% 6% 4% 2% 0% Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- 59 64 69 74 79 84 89 94 99 04 09 Date 31 Source: St. Louis Fed
  • 32. FEDERAL GOVERNMENT DEBT CONTROL 32
  • 33. The Future Deficits Are Very Troublesome Deficits during periods of economic health are intolerable. (Note that all projected deficits are greater than any deficit during the Bush Administration.) $2,800 Annual Federal Deficit $2,400 Federal Deficit Additions to Debt $2,000 In Billions $1,600 $1,200 $800 $400 $0 2007 2009 2011 2013 2015 2017 2019 Year Source: OMB / CBO 33
  • 34. STATE BUDGET BALANCING 34
  • 35. CHANGE IN STATE REVENUES Percent Real Dollar Growth 10% 5% Annual Percent Growth 0% -5% Real Dollar Growth -10% -15% -20% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Estimate Year 35 Source: Bureau of Census
  • 36. LABOR PRODUCTIVITY 36
  • 37. LABOR PRODUCTIVITY Mid 70s Recession and Recovery Job Growth Never Begins Until Labor Productivity Reaches A New HIgh 66.0 Gross Labor Productivty GDP/Employment 65.0 64.0 63.0 62.0 61.0 1972 1973 1974 1975 1976 Year Source: NAR / BEA 37
  • 38. LABOR PRODUCTIVITY Early 80s Recession and Recovery The Infamous Double Dip Recession Job Growth Never Begins Until Labor Productivity Reaches A New HIgh 69.0 Gross Labor Productivty 68.0 GDP/Employment 67.0 66.0 65.0 64.0 63.0 1978 1979 1980 1981 1982 1983 Year Source: NAR / BEA 38
  • 39. LABOR PRODUCTIVITY Recent Recession and Recovery Productivity Levels are Consistent With The Start of Job Growth 102.00 Gross Labor Productivty 100.00 GDP/Employment 98.00 96.00 94.00 2008 2009 2010 Year Source: NAR / BEA 39
  • 40. THE TRANSFORMATION OF THE AMERICAN ECONOMY 40
  • 41. MOVING TOWARDS A SUSTAINABLE, BALANCED ECONOMY This will require reduced government; increased savings; expanded investment and less reliance on consumption. Historical Range of Component Shares of GDP Consumption Investment Government Net Exports Min 60.95% 10.35% 17.44% -5.86% Max 71.97% 18.16% 28.14% 1.10% Average 67.88% 14.63% 19.80% -2.31% 2009 70.63% 12.50% 19.67% - 2.53% Goal 65.00% 17.50% 17.50% 0.00% Note: Averages in first table are based upon period from 1954 to present Source: BEA / B. Smith 41
  • 42. HOUSTON’S FUTURE IS CONTINGENT ON THE NATIONAL RECOVERY 42
  • 43. Houston Forecast Last Five Years/Next Five Years 5% 4% Employment This growth requires the absence Annual Percent Gain Population of a double-dip recession 3% 2% 1% 0% -1% This implies continued weak growth through 2010 -2% -3% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Note: Yearly numbers are based on employment averages for the whole year. Year 43 Source: TWC / BLS/B. Smith