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The Economic Outlook:
Who’ll Stop The Rain

David Wyss
Chief Economist
Standard & Poor’s

January 7, 2010
Data as of Decem...
The U.S. Hits Bottom

      • The recession appears to be over

      • Housing had been in recession for three years, sub...
The Housing Bubble


      • Housing was too affordable, thanks to low mortgage rates

      • Ratio of home price to inco...
Home Prices Were Too High

     (Ratio of average home price to average household disposable income)



       4.5

      ...
Bubbles Were Almost Everywhere

     (Percent increase in home prices, 1997-2005)




              US
        Canada
    ...
Those Who Bubbled Highest Burst Loudest
      (Percent increase in S&P/Case-Shiller home price index, October 2009)


    ...
Home Price Declines
     (4-quarter change in home prices, third quarter 2009)




                                       ...
Foreclosures Are Concentrated
      (Percentage of homes in foreclosure, first half 2009)
           •




               ...
The Fed Didn’t Stop At Nothing

      (Percent)



            10
              8
              6
              4
        ...
Quality Spreads Are Narrowing From Record Highs

      (Spread over Treasury yields, percentage points)


                ...
Fiscal Costs of Post-War Banking Crises
      (Percent of nominal GDP)

          South Korea
            1997-2002
      ...
Synchronized Sinking


       • Industrial countries went into recession in 2008

       • Real GDP fell in the U.S., Japa...
All Fall Down

            (Percent change in real GDP, quarterly rate)
                1.5
                  1
          ...
Synchronized Sinking
        (Real GDP, % change)


              10
                8
                6
                4...
Trade Gap And Reserve Diversification Will Send Dollar Lower



      (Index)                                             ...
Fiscal Stimulus Packages Varied Widely

              (Packages passed in Q4 2008- Q1 2009, percent of GDP)

             ...
Deficits Are Mostly Cyclical
       (Government deficit as % of GDP, fiscal years)



                           4
       ...
The Future Looks Bleak
       (Government debt as % of GDP)



                      600                                  ...
Aging Populations Will Boost Government Spending
       (Ratio of over 65 population to labor force)



           60

   ...
State Budgets Sour
      (Percent of GDP)



       15%

       14%

       13%

       12%

       11%
                 1...
Weaker Employment Is Hurting Construction

      (4-quarter percent change)



        4%                                 ...
Can the Consumer Keep Spending?

      • Consumer spending led recent expansions
      • But wealth is down because home p...
No Savings, But Lots of Debt
      (Percent of after-tax income)




                      10                             ...
High Unemployment Scares Consumers
       (Percent)




                      130                                         ...
Wealth Slides With Home and Stock Prices
       (Percent of after-tax income)



        700%
        600%
        500%
  ...
Bigger Than The Average Bear


         • A great run from 1982 to 2000

         • But the secular bear began in 2000

  ...
Stock Market Looks High Relative To Bonds

       (Earnings yield on stocks vs 10-year Treasury)



         10
          ...
Everybody’s Down

      (Percent change in stock prices, November)


            120
            100
             80
     ...
Bottom Line: The Economy Will Recover Slowly

      • The recession is the longest and deepest since the 1930s

      • Fi...
Oil Prices Have Dropped
      ($/barrel, WTI and deflated by CPI; household energy purchases as percent of disposable inco...
Risks to the U.S. Economy
      The Unemployment Rate
       %
 13
 12
 11
 10
      9
      8
      7
      6
      5
   ...
State Ratings Remain Strong

                                                                                  (S&P rating...
Unemployment Rates Are High

                                                                            (November 2009)

...
And Far Above 2000 Lows

                (Change in unemployment rate, October 2000 to November 2009)




                ...
State Pension Underfunding

                                                    (Percent of gross state product, 2008)



...
S&P and/or its third party licensors have exclusive proprietary rights in the data or information provided herein. This da...
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2010 01 07 Utah Economic Forum David Wyss

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Dr. David Wyss, chief economist with Standard & Poor's spoke at the Utah Economic Forum.

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Transcript of "2010 01 07 Utah Economic Forum David Wyss"

  1. 1. The Economic Outlook: Who’ll Stop The Rain David Wyss Chief Economist Standard & Poor’s January 7, 2010 Data as of December 29 CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Copyright (c) 2009 Standard & Poor’s, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
  2. 2. The U.S. Hits Bottom • The recession appears to be over • Housing had been in recession for three years, subtracting over a percentage point from GDP growth in both 2007 and 2008. • But seems to be stabilizing. • Overseas partners are recovering, helping exports • The fiscal stimulus has helped boost the economy, especially consumer and government spending. • The financial system appears to be stabilizing. • But private nonresidential construction is plunging. • The recession has been the longest and deepest since the 1930s. • And an even deeper and longer recession is possible if the financial markets lock up again, oil prices jump, or consumers remain scared. CONFIDENTIAL AND PROPRIETARY. 2. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  3. 3. The Housing Bubble • Housing was too affordable, thanks to low mortgage rates • Ratio of home price to income hit a record high in 2006. • We built too many houses at too high prices • Starts and sales dropped sharply • Defaults have soared, cutting back on willingness to lend • Prices are down 29% from their peak, with the price/income ratio below its historical average • Starts and sales are recovering • But prices may drop back into early 2010. CONFIDENTIAL AND PROPRIETARY. 3. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  4. 4. Home Prices Were Too High (Ratio of average home price to average household disposable income) 4.5 4 3.5 3 2.5 2 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 Existing New Quality-adjusted Source: Bureau of Economic Analysis and Census Bureau CONFIDENTIAL AND PROPRIETARY. 4. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  5. 5. Bubbles Were Almost Everywhere (Percent increase in home prices, 1997-2005) US Canada Germany Switzerland Netherland Britain Ireland Italy Sweden France Spain Japan Australia China NewZealan Hong Kong -100 -50 0 50 100 150 200 250 Source: Mortgage Bankers’ Association and Standard & Poor’s CONFIDENTIAL AND PROPRIETARY. 5. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  6. 6. Those Who Bubbled Highest Burst Loudest (Percent increase in S&P/Case-Shiller home price index, October 2009) Miami Los Angeles Washington San Diego Tampa Las Vegas Phoenix New York San Fran. Seattle Portland Boston Minneapoli Chicago Denver Charlotte Atlanta Detroit Dallas Cleveland -100 -50 0 50 100 150 200 2000-peak peak-present Source: Standard & Poor’s CONFIDENTIAL AND PROPRIETARY. 6. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  7. 7. Home Price Declines (4-quarter change in home prices, third quarter 2009) 0% or better 0% to -3% -3% to -5% -5% or worse Source: Federal Housing Finance Agency CONFIDENTIAL AND PROPRIETARY. 7. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  8. 8. Foreclosures Are Concentrated (Percentage of homes in foreclosure, first half 2009) • Under 0.5% 0.5% to 1% 1% to 2% Over 2% Source: RealtyTrac CONFIDENTIAL AND PROPRIETARY. 8. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  9. 9. The Fed Didn’t Stop At Nothing (Percent) 10 8 6 4 2 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Federal Funds Rate 10-Yr Bond Yield Mortgage rate Source: Federal Reserve CONFIDENTIAL AND PROPRIETARY. 9. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  10. 10. Quality Spreads Are Narrowing From Record Highs (Spread over Treasury yields, percentage points) 18 16 14 12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Default rate (12-month) Credit spread Old spread series Source: Standard & Poor’s Global Fixed Income Research CONFIDENTIAL AND PROPRIETARY. 10. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  11. 11. Fiscal Costs of Post-War Banking Crises (Percent of nominal GDP) South Korea 1997-2002 Japan 1991-Present Spain 1977-85 Finland 1991-94 Norway The Big Financial 1987-93 Crises Since 1970 Sweden 1991 U.S. S&L Crisis 1984-91 U.S. Subprime Crisis 2007-Present 0 5 10 15 20 25 30 35 Source: Organization for Economic Cooperation and Development, International Monetary Fund, Global Insight CONFIDENTIAL AND PROPRIETARY. 11. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  12. 12. Synchronized Sinking • Industrial countries went into recession in 2008 • Real GDP fell in the U.S., Japan, and Europe and softened in Asia • Developing countries looked like they might escape • Until commodity prices plunged in Q4 • We expect a drop in world GDP, by negative 1.3% in 2009 from 3.8% in 2007 • But recovery now seems underway • The most synchronized world recession in history • Followed by a synchronized recovery CONFIDENTIAL AND PROPRIETARY. 12. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  13. 13. All Fall Down (Percent change in real GDP, quarterly rate) 1.5 1 0.5 0 -0.5 -1 -1.5 -2 -2.5 -3 -3.5 -4 -4.5 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 US Japan Eurozone UK Source: Global Insight CONFIDENTIAL AND PROPRIETARY. 13. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  14. 14. Synchronized Sinking (Real GDP, % change) 10 8 6 4 2 0 -2 -4 -6 -8 . pe ca tes da ne .K an ro ac i ca f ri ric a ta na zo U ap -P er Af S Ca ro J Eu si a Am A t ed Eu rn rA N an ni st e he t in t& ar U Ea Ot La E as Sa h id b- M Su 2006 2007 2008 2009 2010 2011 Source: Global Insight and Standard & Poor’s CONFIDENTIAL AND PROPRIETARY. 14. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  15. 15. Trade Gap And Reserve Diversification Will Send Dollar Lower (Index) (Percent of GDP) 1.4 0% 1.3 -1% 1.2 -2% 1.1 -3% 1.0 -4% 0.9 -5% 0.8 -6% 0.7 -7% 2000 2002 2004 2006 2008 2010 2012 Net exports (right) Dollar index (Major trading partners) Source: Bureau of Economic Analysis and Federal Reserve CONFIDENTIAL AND PROPRIETARY. 15. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  16. 16. Fiscal Stimulus Packages Varied Widely (Packages passed in Q4 2008- Q1 2009, percent of GDP) 0 2 4 6 8 10 12 14 Australia Canada China France Germany India Italy Japan Korea Spain UK US Source: Standard & Poor’s CRISIL CONFIDENTIAL AND PROPRIETARY. 16. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  17. 17. Deficits Are Mostly Cyclical (Government deficit as % of GDP, fiscal years) 4 2 0 -2 -4 -6 -8 -10 -12 2000 2003 2006 2009 2012 ex stimulus stimulus Source: Standard & Poor’s. CONFIDENTIAL AND PROPRIETARY. 17. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  18. 18. The Future Looks Bleak (Government debt as % of GDP) 600 530 500 400 350 300 223 220 173 182 200 113 101 86 59 71 100 49 38 62 57 0 US Japan UK France Germany 2005 2025 2050 Source: Standard & Poor’s, 2007 CONFIDENTIAL AND PROPRIETARY. 18. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  19. 19. Aging Populations Will Boost Government Spending (Ratio of over 65 population to labor force) 60 50 40 30 20 10 0 US Canada France Germany Italy UK Japan AustraliaMexico OECD 2000 2020 Source: Organization for Economic Cooperation and Development CONFIDENTIAL AND PROPRIETARY. 19. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  20. 20. State Budgets Sour (Percent of GDP) 15% 14% 13% 12% 11% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Receipts Expenditures Source: Bureau of Economic Analysis CONFIDENTIAL AND PROPRIETARY. 20. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  21. 21. Weaker Employment Is Hurting Construction (4-quarter percent change) 4% 40% 3% 30% 2% 20% 1% 10% 0% 0% -1% -10% -2% -20% -3% -30% -4% -40% -5% -50% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Employment Nonresidential construction (right) Source: Bureau of Labor Statistics, Bureau of Economic Analysis CONFIDENTIAL AND PROPRIETARY. 21. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  22. 22. Can the Consumer Keep Spending? • Consumer spending led recent expansions • But wealth is down because home prices have dropped and • Stocks are still down sharply from their peak • Borrowing is more difficult, and home equity loans much less available • Confidence has dropped and unemployment risen • Consumers are likely to continue to save more and borrow less • Falling oil prices gave back some purchasing power, but that is now reversing • Stimulus package provides some income boost CONFIDENTIAL AND PROPRIETARY. 22. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  23. 23. No Savings, But Lots of Debt (Percent of after-tax income) 10 140% 8 130% 6 120% 4 110% 2 100% 0 90% -2 80% 1990 1993 1996 1999 2002 2005 2008 2011 Saving rate Debt/income (right) Source: Bureau of Economic Analysis and Federal Reserve CONFIDENTIAL AND PROPRIETARY. 23. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  24. 24. High Unemployment Scares Consumers (Percent) 130 11 120 10 110 9 100 8 90 7 80 6 70 5 60 4 50 3 2000 2003 2006 2009 2012 Consumer sentiment Unemployment Rate (right) Source: Bureau of Labor Statistics and University of Michigan Survey Research Center CONFIDENTIAL AND PROPRIETARY. 24. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  25. 25. Wealth Slides With Home and Stock Prices (Percent of after-tax income) 700% 600% 500% 400% 300% 200% 100% 0% 1990 1993 1996 1999 2002 2005 2008 2011 Net worth Financial assets Source; Federal Reserve CONFIDENTIAL AND PROPRIETARY. 25. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  26. 26. Bigger Than The Average Bear • A great run from 1982 to 2000 • But the secular bear began in 2000 • Two largest bear markets since the depression • Earnings were negative in Q4 for first time in history • Stocks were overdue for a correction • We think the rally will continue • But a near-term correction is likely. • The long-term cycle probably has another bear in it. • World stock markets have become synchronized CONFIDENTIAL AND PROPRIETARY. 26. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  27. 27. Stock Market Looks High Relative To Bonds (Earnings yield on stocks vs 10-year Treasury) 10 8 6 4 2 0 -2 1990 1993 1996 1999 2002 2005 2008 2011 Earnings/price Bond yield Dividend yield Source: Standard & Poor’s and U.S. Bureau of the Census CONFIDENTIAL AND PROPRIETARY. 27. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  28. 28. Everybody’s Down (Percent change in stock prices, November) 120 100 80 60 40 20 0 -20 -40 -60 -80 World US Canada Lat Europe Japan Asia PacAustralia Amer Since March Oct 2007 to March 2009 Source: Standard & Poor’s CONFIDENTIAL AND PROPRIETARY. 28. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  29. 29. Bottom Line: The Economy Will Recover Slowly • The recession is the longest and deepest since the 1930s • Fiscal stimulus will support the recovery • But recovery is likely to be slow because of financial markets and switch to higher savings • If financial markets lock up again • Home prices continue to fall • And oil prices continue to rise • The recession could be longer and deeper • With the risk of a “lost decade” similar to Japan in the 1990s CONFIDENTIAL AND PROPRIETARY. 29. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  30. 30. Oil Prices Have Dropped ($/barrel, WTI and deflated by CPI; household energy purchases as percent of disposable income) 120 9% 100 8% 80 7% 60 6% 40 5% 20 4% 0 3% 1980 1985 1990 1995 2000 2005 2010 Oil price (WTI) 2005 dollars % of disp. income (right) Source: Bureau of Economic Analysis CONFIDENTIAL AND PROPRIETARY. 30. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  31. 31. Risks to the U.S. Economy The Unemployment Rate % 13 12 11 10 9 8 7 6 5 4 3 2000 2002 2004 2006 2008 2010 2012 Baseline Pessimism Optimism Source: U.S. Bureau of Labor Statistics (BLS), Standard & Poor’s projections. CONFIDENTIAL AND PROPRIETARY. 31. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  32. 32. State Ratings Remain Strong (S&P rating) A, A+ AA- AA, AA+ AAA Unrated CONFIDENTIAL AND PROPRIETARY. 32. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  33. 33. Unemployment Rates Are High (November 2009) Under 8% 8% to 9.5 9.5% to 11% 11% and over Source: BLS CONFIDENTIAL AND PROPRIETARY. 33. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  34. 34. And Far Above 2000 Lows (Change in unemployment rate, October 2000 to November 2009) Under 3% 3 to 5% 5% to 6% 6% or more Source: BLS CONFIDENTIAL AND PROPRIETARY. 34. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  35. 35. State Pension Underfunding (Percent of gross state product, 2008) Over 35% 25% to 35% 15% to 25% Under 15% Source; Robert Novy-Marx and Joshua Rauh, Journal of Economic Literature, Fall 2009 CONFIDENTIAL AND PROPRIETARY. 35. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
  36. 36. S&P and/or its third party licensors have exclusive proprietary rights in the data or information provided herein. This data/information may only be used internally for business purposes and shall not be used for any unlawful or unauthorized purposes. Dissemination, distribution or reproduction of this data/information in any form is strictly prohibited except with the prior written permission of S&P. Because of the possibility of human or mechanical error by S&P, its affiliates or its third party licensors, S&P, its affiliates and its third party licensors do not guarantee the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. S&P GIVES NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall S&P, its affiliates and its third party licensors be liable for any direct, indirect, special or consequential damages in connection with subscriber’s or others use of the data/information contained herein. Access to the data or information contained herein is subject to termination in the event any agreement with a third party provider of information or software is terminated. Analytic services provided by Standard & Poor's Ratings Services (Ratings Services) are the result of separate activities designed to preserve the independence and objectivity of ratings opinions. The credit ratings and observations contained herein are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. Accordingly, any user of the information contained herein should not rely on any credit rating or other opinion contained herein in making any investment decision. Ratings are based on information received by Ratings Services. Other divisions of S&P may have information that is not available to Ratings Services. S&P has established policies and procedures to maintain the confidentiality of non-public information received during the ratings process. Ratings Services receives compensation for its ratings. Such compensation is normally paid either by the issuers of such securities or third parties participating in marketing the securities. While S&P reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. STANDARD & POOR’S and S&P are registered trademarks of Standard & Poor’s Financial Services LLC. Copyright © by 2009 PROPRIETARY.Poor’s Financial Services LLC (S&P). All rights reserved. CONFIDENTIAL AND Standard & 36. Permission to reprint or distribute any photocopying in whole requires the prohibited without written permission. Redistribution, reproduction and/or content from this presentationor in part iswritten approval of Standard & Poor’s.
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