Today’s Economic Landscape and What’s on the Other Side


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Today’s Economic Landscape and What’s on the Other Side

  1. 1. Today’s Economic Landscape and What’s on the Other SideDecember, 2009 <br />Presented by: <br />Morris Segall, President <br />SPG Trend Advisors<br />
  2. 2. THE ECONOMY<br />
  3. 3. Gross Domestic ProductQ1 2001 – Q3 2009<br />Source: Bureau of Economic Analysis<br />
  4. 4. Contributions to GDP Growth by Component Q2 2008 – Q3 2009<br />Source: Bureau of Economic Analysis<br />
  5. 5. Historic and Projected Real GDP Growth around the World 2007 – 2011*<br />The world-wide recession is over with emerging market economies led by China, India and Brazil leading the overseas recovery. For the first time in post WWII history, the U.S. and Europe are not the locomotives of worldwide economic growth. However both the U.S. and Europe are recovering in the second half of 2009 led by government stimulus programs. Barring a “double dip “ recession next year on the expiration of government stimulus programs, the estimates below of worldwide economic growth in 2010 and 2011 are likely to be exceeded, particularly in developing countries. <br />*2007/08 data are actual <br />Source: World Bank<br />
  6. 6. Year-over-year Percentage Changes: S&P Reported Operating Earning for Listed CompaniesQ1 2001-Q3 2009<br />Operating earnings reported by corporations included in the S&P 500 index. The data comes from company financial accounts and is not distorted by inventory, “write-off”, tax and depreciation adjustments. It is a truer measure of corporate profitability. Corporate earnings have fallen dramatically since the third quarter of 2007, falling 100% year/year in Q4 of 2008. Operating earnings are showing better year/year comparisons and are stabilizing but are still at depressed levels through Q2 of this year. Further improvement is expected in 2H of this year and 2010.<br />Source: Bureau of Economic Analysis<br />
  7. 7. Industrial Production January, 2008 - October, 2009<br />% decline Jan. 08- Oct. ’09: 12.4%<br />Source: Federal Reserve Bank<br />
  8. 8. Capacity Utilization by Status of ProductionJanuary, 2008 - October, 2009<br />Source: Federal Reserve Bank<br />
  9. 9. Manufacturers Orders & ShipmentsExcluding TransportationJanuary, 2008 – October 2009<br />Source: Census Bureau<br />
  10. 10. Net Change in U.S. Jobs (Total Non-farm)November, 2005 – November, 2009<br />Source: Bureau of Labor Statistics<br />
  11. 11. National Nonfarm Employment by Industry Sector GroupsDecember, 2007 – November, 2009<br />The loss of jobs is pervasive throughout the entire economy and has not spared previously immune professional , executive and managerial positions. This has been as much, if not more, a white collar, middle class recession.<br />Source: Bureau of Labor Statistics<br />
  12. 12. Initial Unemployment Claims January, 2009 – November, 2009<br />Reflecting the rise in unemployment, new job losses rose dramatically in the first quarter of this year. Since then the trend of new job losses has been declining. However the absolute level of new job loss remains high. <br />Source: Department of Labor<br />
  13. 13. Continued Unemployment Claims November, 2006 – November, 2009<br />Source: Department of Labor<br />
  14. 14. Number of Unemployed on Federal Extended Benefit ProgramsMay, 2008 – November, 2009<br />Source: Department of Labor<br />
  15. 15. Retail Sales Less Food and Fuel October, 2007 – October, 2009<br />Consumer CreditQ2 2006 – October, 2009<br />Consumer spending stabilized in the second quarter and improved in the third. Since the third quarter of 2008 consumer spending has been declining and the consumer has been paying down outstanding debt. These trends have been negative for the economy in the short term but the reduction of consumer debt and an increase in consumer savings are positive for the economy and the improved creditworthiness of the consumer longer term.<br />Source: (Left) Census Bureau, (Right) Federal Reserve Bank<br />
  16. 16. National Saving Rateas Percentage of Personal Disposable IncomeQ1 2005 – Q3 2009<br />Source: Bureau of Economic Analysis<br />
  17. 17. New Home Sales Units Sold <br />v. Length on Market <br />April, 2006 - October, 2009<br />Existing Home Sales v. Length on MarketApril, 2006 - October, 2009<br />Housing sales have improved since March and inventories have declined, particularly in new home construction. The improvement in housing reflects the government’s buyer tax credit, the cutback in new home construction, much reduced home prices and lower mortgage interest rates. <br />Source: (Left) National Association of Realtors, (Right) Census Bureau <br />
  18. 18. S&P/Case-Shiller Home Price Index 2006 – September, 2009<br />Source: Standard and Poor&apos;s<br />
  19. 19. Conference Board Consumer Confidence2005 – November, 2009<br />Source: Conference Board<br />
  20. 20. Commercial Mortgage Backed Securities (CMBS): Delinquency Rates for All Private-labels*<br />Q2 2006 – Q2 2009<br />Source: Mortgage Banker’s Association<br />*CMBS issued by private entities (i.e. other than Fannie Mae, Ginnie Mae, or Freddie Mac). The percentage of loans that are 30-days delinquent. The delinquency includes foreclosed estates.<br />
  21. 21. Real Estate & Consumer Loan Delinquency Rates: All Banks and Financial Institutions<br />Q2 2007 –Q3 2009<br />Source: Federal Reserve Bank<br />
  22. 22. While inflation has declined precipitously in the recession led by the collapse in energy and commodity prices. After bottoming in July, prices are moving up, driven by the reversal in energy prices. In addition, basic services, healthcare and education prices remain stubbornly high.<br />Source: Bureau of Labor Statistics<br />
  23. 23. Crude Oil Spot Prices in U.S. DollarsDecember, 2004– December, 2009<br />Source: Energy Information Administration<br />
  24. 24. Nominal Broad Dollar Index* July, 2000 – November, 2009<br /> * Broad Dollar Index: a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.<br />Source: Federal Reserve Board<br />
  26. 26. Money Supply (M2): January, 2007 – November, 2009<br />Source: Federal Reserve Bank<br />
  27. 27. U.S. Federal Budget Deficit, 1995-2011*<br />*2010-2011 data are projections<br />Source: Congressional Budget Office<br />
  28. 28. Federal Reserve Balance Sheet: Reserve Bank CreditJune, 2008 – December, 2009<br />Source: Federal Reserve Bank<br />
  29. 29. Federal Fund Rates, <br />January, 2008 - December, 2009<br />3-month LIBOR rates lent in $US <br />January, 2008 - December, 2009<br />The Fed and European Central Bank have cut interest rates to the banking systems here and abroad thus driving down the cost of bank funds to facilitate bank lending. <br />Source: (Left) Federal Reserve Bank, (Right) British Banker’s Association<br />
  30. 30. What’s on the other side? <br />2009 - Recession Bottoms in Q2 and GDP Grows in Second Half<br />Housing bottoms and improves in the second half <br />Unemployment slowly gets “less worse” in the second half of this year<br />Lower wholesale and retail prices help consumer incomes and spending but are offset by rising energy prices, excess capacity in business and consumer efforts to reduce debt and raise savings<br />Increased exports as overseas economies recover<br />Obama Administration <br />Increased economic “bailout” and stimulus programs have temporarily stimulated the economy towards recovery in the second half but at the expense of large increases in federal budget deficits and national debt<br />
  31. 31. What’s on the other side? (cont.)<br />2009 – Business<br />Cost of goods have declined as interest rates, labor costs and commodity prices decline but business is facing weak consumer and business demand <br />Corporate profits overall stabilize in Q2 and improve in second half<br />Federal stimulus spurs increases in sales and production in second half<br />Weak consumer spending but pent-up demand building<br />2010 – Economy Makes Gradual Cyclical Recovery?<br />Increased employment = increased consumer spending<br />Increased Corporate Sales = increased corporate profits = increased capital spending<br />Increased interest rates and rising prices from higher demand and continuing federal budget deficits<br />All based on private sector demand filling void from expiration of Federal stimulus programs in 2009-2010<br />
  32. 32. Where are the opportunities?<br />Healthcare <br />Education<br />Worker Retraining<br />Agriculture<br />Energy Conservation<br />Environmental Solutions <br />Electric Power<br />Transportation – Increase Mass Transit<br />Exports<br />Water Conservation – New Supplies and Recycling<br />U.S. Government Procurement and Outsourcing – Base Realignment Program (BRAC)<br />Real Estate – Recycle and Rehab Existing Commercial and Residential Property<br />
  33. 33. Overview of Where the $787 Billion is Going: Break-down of the Stimulus Dollars by Sectors<br />Source:<br />
  34. 34. Conclusions <br />The deep and protracted recession that began in the fourth quarter of 2007 ended in the third quarter of 2009 thanks to federal stimulus and subsidy programs. The artificial stimulus led to positive GDP growth in the third quarter. The continuation of government stimulus is expected to lead to positive GDP growth in the fourth quarter of 2009 and the first half of 2010. The rest of the world, led by accelerated growth in China, is outpacing the U.S. in economic recovery and is poised to grow faster than the U.S. in 2010.<br />Despite government stimulus the U.S. economy still faces near term economic pressures which include: <br />high cost and reduced availability of credit<br />Low level of corporate profits<br />Continuing unemployment<br />continued weak levels of corporate capital and consumer spending<br />
  35. 35. Conclusions continued<br />Severe reductions in State and Local Government spending and eroded municipal financial strength <br />Continued credit pressures in residential housing and consumer lending extending to commercial real estate markets and corporate lending<br />Despite a second half economic improvement, GDP for 2009 is expected to show little if any growth<br />
  36. 36. Conclusions continued<br />However, a bottoming of the housing cycle and an improvement in unemployment late this year, aided importantly by increased federal stimulus spending in the second half of this year, should set the stage for cyclical capital markets and economic improvements in 2009 and 2010. Indeed, capital markets in the U.S. and abroad have already staged a large recovery off market cycle lows in the first quarter<br />After an expected cyclical recovery in 2010-2012, we believe longer term socio-economic issues facing this country will result in slower future economic growth for the United States featuring reduced rate of consumer spending growth, high levels of national debt and entitlement spending<br />In addition, the availability and cost of credit, particularly to consumers, will be more restricted and expensive in the future, further curtailing private sector spending<br />
  37. 37. Thank You<br />You can always reach me at<br />Also, if you need us in a hurry, we are at 410.522.7243 <br />Please contact us when you require economic and capital markets research & policy analysis.<br />Further information available at<br />