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

Today’s Economic Landscape and What’s on the Other SideDecember, 2009
Presented by:
Morris Segall, President
SPG Trend Advisors

THE ECONOMY

Gross Domestic ProductQ1 2001 – Q3 2009
Source: Bureau of Economic Analysis

Contributions to GDP Growth by Component Q2 2008 – Q3 2009

Historic and Projected Real GDP Growth around the World 2007 – 2011*
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.
*2007/08 data are actual
Source: World Bank

Year-over-year Percentage Changes: S&P Reported Operating Earning for Listed CompaniesQ1 2001-Q3 2009
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.

Industrial Production January, 2008 - October, 2009
% decline Jan. 08- Oct. ’09: 12.4%
Source: Federal Reserve Bank

Capacity Utilization by Status of ProductionJanuary, 2008 - October, 2009

Manufacturers Orders & ShipmentsExcluding TransportationJanuary, 2008 – October 2009
Source: Census Bureau

Net Change in U.S. Jobs (Total Non-farm)November, 2005 – November, 2009
Source: Bureau of Labor Statistics

National Nonfarm Employment by Industry Sector GroupsDecember, 2007 – November, 2009
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.

Initial Unemployment Claims January, 2009 – November, 2009
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.
Source: Department of Labor

Continued Unemployment Claims November, 2006 – November, 2009

Number of Unemployed on Federal Extended Benefit ProgramsMay, 2008 – November, 2009

Retail Sales Less Food and Fuel October, 2007 – October, 2009
Consumer CreditQ2 2006 – October, 2009
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.
Source: (Left) Census Bureau, (Right) Federal Reserve Bank

National Saving Rateas Percentage of Personal Disposable IncomeQ1 2005 – Q3 2009

New Home Sales Units Sold
v. Length on Market
April, 2006 - October, 2009
Existing Home Sales v. Length on MarketApril, 2006 - October, 2009
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.
Source: (Left) National Association of Realtors, (Right) Census Bureau

S&P/Case-Shiller Home Price Index 2006 – September, 2009
Source: Standard and Poor's

Conference Board Consumer Confidence2005 – November, 2009
Source: Conference Board

Commercial Mortgage Backed Securities (CMBS): Delinquency Rates for All Private-labels*
Q2 2006 – Q2 2009
Source: Mortgage Banker’s Association
*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.

Real Estate & Consumer Loan Delinquency Rates: All Banks and Financial Institutions
Q2 2007 –Q3 2009

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.

Crude Oil Spot Prices in U.S. DollarsDecember, 2004– December, 2009
Source: Energy Information Administration

Nominal Broad Dollar Index* July, 2000 – November, 2009
* 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.
Source: Federal Reserve Board

THE GOVERNMENT’S RESPONSE

Money Supply (M2): January, 2007 – November, 2009

U.S. Federal Budget Deficit, 1995-2011*
*2010-2011 data are projections
Source: Congressional Budget Office

Federal Reserve Balance Sheet: Reserve Bank CreditJune, 2008 – December, 2009

Federal Fund Rates,
January, 2008 - December, 2009
3-month LIBOR rates lent in $US
January, 2008 - December, 2009
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.
Source: (Left) Federal Reserve Bank, (Right) British Banker’s Association

What’s on the other side?
2009 - Recession Bottoms in Q2 and GDP Grows in Second Half
Housing bottoms and improves in the second half
Unemployment slowly gets “less worse” in the second half of this year
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
Increased exports as overseas economies recover
Obama Administration
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

What’s on the other side? (cont.)
2009 – Business
Cost of goods have declined as interest rates, labor costs and commodity prices decline but business is facing weak consumer and business demand
Corporate profits overall stabilize in Q2 and improve in second half
Federal stimulus spurs increases in sales and production in second half
Weak consumer spending but pent-up demand building
2010 – Economy Makes Gradual Cyclical Recovery?
Increased employment = increased consumer spending
Increased Corporate Sales = increased corporate profits = increased capital spending
Increased interest rates and rising prices from higher demand and continuing federal budget deficits
All based on private sector demand filling void from expiration of Federal stimulus programs in 2009-2010

Where are the opportunities?
Healthcare
Education
Worker Retraining
Agriculture
Energy Conservation
Environmental Solutions
Electric Power
Transportation – Increase Mass Transit
Exports
Water Conservation – New Supplies and Recycling
U.S. Government Procurement and Outsourcing – Base Realignment Program (BRAC)
Real Estate – Recycle and Rehab Existing Commercial and Residential Property

Overview of Where the $787 Billion is Going: Break-down of the Stimulus Dollars by Sectors
Source: Recovery.gov

Conclusions
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.
Despite government stimulus the U.S. economy still faces near term economic pressures which include:
high cost and reduced availability of credit
Low level of corporate profits
Continuing unemployment
continued weak levels of corporate capital and consumer spending

Conclusions continued
Severe reductions in State and Local Government spending and eroded municipal financial strength
Continued credit pressures in residential housing and consumer lending extending to commercial real estate markets and corporate lending
Despite a second half economic improvement, GDP for 2009 is expected to show little if any growth

Conclusions continued
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
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
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

Thank You
You can always reach me at msegall@spgtrend.com
Also, if you need us in a hurry, we are at 410.522.7243
Please contact us when you require economic and capital markets research & policy analysis.
Further information available at www.spgtrend.com

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

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