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THE ECONOMIC OUTLOOK:  HALF-SPEED AHEAD            David Wyss         Brown University          April 24, 2012
The Pace Of The Recovery Has Slowed     • A recovery is underway, but is likely to remain weak.     • Housing now appears ...
The Housing Bubble     • Housing was too affordable, thanks to low mortgage rates     • Ratio of home price to income hit ...
Home Prices Were Too High     (Ratio of average home price to average household disposable income)        4.5          4  ...
Bubbles Were Almost Everywhere      (Percent increase in home prices, 1997-2005)               US         Canada       Ger...
Those Who Bubbled Highest Burst Loudest     (Percent increase in S&P/Case-Shiller home price index, July 2011)            ...
The Fed Didn’t Stop At Nothing     (Percent)     10      8      6      4      2      0       1995            1997       19...
Synchronized Sinking     • Industrial countries went into recession in 2008, and into a plunge in the       fourth quarter...
Synchronized Sinking     (Real GDP, % change)        10           8           6           4           2           0       ...
Trade Gap And Reserve Diversification Will Send Dollar Lower      (Index)                                                 ...
Timeo Danaos Et Debitum Ferentes      (Central government debt as percent of GDP, 2010)      Source: Standard & Poor’s fro...
Budget Deficits Depend On Economy        (Budget gap as percent of GDP, 2010)                              0          2   ...
Deficits Are Mostly Cyclical      (Government deficit as % of GDP, fiscal years)          4          2          0        -...
The Future Looks Bleak      (Government debt as % of GDP)         800                                               753   ...
Aging Populations Will Boost Government Spending      (Retirees as percentage of labor force)      80      70      60     ...
Weaker Employment Is Hurting Construction      (4-quarter percent change)            20%                                  ...
Commercial Real Estate Price Declines Are Bottoming      240      220      200      180      160      140      120      10...
Equipment Spending Follows Capacity Needs      (4-quarter percent change, and production as % of capacity)                ...
Can the Consumer Keep Spending?      • Consumer spending led recent expansions      • But wealth is down because home pric...
Debt Is Dropping From Record Highs       (Percent of after-tax income)               7                                    ...
Wealth Slides With Home and Stock Prices      (Percent of after-tax income)        700%        600%        500%        400...
Default Rates Begin To Drop      (Percent)              9              8              7              6              5     ...
Bigger Than The Average Bear      • A great run from 1982 to 2000      • But the secular bear began in 2000      • Two lar...
Bottom Line: The Economy Will Recover Slowly      • The recession is the longest and deepest since the 1930s      • Fiscal...
Oil Prices Remain Down From Peak      ($/barrel, WTI and deflated by CPI; household energy purchases as percent of      di...
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The Economy and Financial Markets: Crawling Out of Recession - David Wyss, Brown University/Standard & Poor

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David Wyss, Brown University/Standard & Poor - Speaker at the 2012 IFG Wealth Management Forum, delivered his presentation entitled The Economy and Financial Markets: Crawling Out of Recession

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The Economy and Financial Markets: Crawling Out of Recession - David Wyss, Brown University/Standard & Poor

  1. 1. THE ECONOMIC OUTLOOK: HALF-SPEED AHEAD David Wyss Brown University April 24, 2012
  2. 2. The Pace Of The Recovery Has Slowed • A recovery is underway, but is likely to remain weak. • Housing now appears to be stabilizing, although prices are still falling. • Overseas partners are recovering, helping exports. The financial problems add to risks and probably mean a recession in Europe. • The fiscal stimulus helped boost the economy, but is being reversed. The Washington gridlock makes any help from Washington unlikely, and the government could cause a recession. • Private nonresidential construction remains weak, but equipment spending has begun to recover • Consumers aren’t bouncing back as quickly as usual, but are showing a few more signs of life as they start replacement purchases. • Another dip into recession is possible if the financial markets lock up again or oil prices jump farther on Middle East turmoil.2.
  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 2007. • We built too many houses at too high prices • Starts and sales dropped sharply • Defaults have soared, cutting back on willingness to lend • Prices fell one-third from their peak, with the price/income ratio below its historical average • Starts and sales are recovering • But prices are likely to drop back through spring.3.
  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 2015 Existing New Quality-adjusted Source: Bureau of Economic Analysis and Census Bureau4.
  5. 5. Bubbles Were Almost Everywhere (Percent increase in home prices, 1997-2005) US Canada Germany Switzerland Netherlands Britain Ireland Italy Sweden France Spain Japan Australia China NewZealand Hong Kong -100 -50 0 50 100 150 200 250 Source: Mortgage Bankers’ Association and Standard & Poor’s5.
  6. 6. Those Who Bubbled Highest Burst Loudest (Percent increase in S&P/Case-Shiller home price index, July 2011) Miami Los Angeles Washington San Diego Tampa Las Vegas Phoenix San Francisco New York Seattle Portland Boston Minneapolis Chicago Denver Charlotte Atlanta Detroit Dallas Cleveland -100 -50 0 50 100 150 200 peak-present 2000-peak Source: Standard & Poor’s6.
  7. 7. 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 Reserve7.
  8. 8. Synchronized Sinking • Industrial countries went into recession in 2008, and into a plunge in the fourth quarter of 2008 • Real GDP fell in the U.S., Japan, and Europe • Developing countries looked like they might escape • Until commodity prices plunged in Q4 2008 • World GDP is recovering, up 4.2% in 2010 from -2.1% in 2009 • The most synchronized world recession in history is being followed by a slow, less synchronized recovery • Problems in Europe and Japan will further cut developed country growth, with Japan back in recession. • But Asia continues to grow strongly8.
  9. 9. Synchronized Sinking (Real GDP, % change) 10 8 6 4 2 0 -2 -4 -6 -8 2007 2008 2009 2010 2011 2012 2013 Source: Global Insight and Standard & Poor’s9.
  10. 10. 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 -4% 0.9 -5% 0.8 -6% 0.7 -7% 2000 2002 2004 2006 2008 2010 2012 2014 Net exports (right) Dollar index (major trading partners) Source: Bureau of Economic Analysis and Federal Reserve, S&P projections10.
  11. 11. Timeo Danaos Et Debitum Ferentes (Central government debt as percent of GDP, 2010) Source: Standard & Poor’s from national sources11.
  12. 12. Budget Deficits Depend On Economy (Budget gap as percent of GDP, 2010) 0 2 4 6 8 10 12 Australia Canada China France Germany Greece India Italy Japan Korea Spain UK US Source: Standard & Poor’s CRISIL12.
  13. 13. 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 stimulus ex stimulus Source: Standard & Poor’s13.
  14. 14. The Future Looks Bleak (Government debt as % of GDP) 800 753 700 600 500 415 431 404 400 400 308 300 180 192 184 200 155 106 100 69 72 79 75 0 US Japan UK France Germany 2010 2030 2050 Source: Standard & Poor’s, 201014.
  15. 15. Aging Populations Will Boost Government Spending (Retirees as percentage of labor force) 80 70 60 50 40 30 20 10 0 US Canada France Germany Italy UK Japan Australia China OECD 2010 2030 Source: Organization for Economic Cooperation and Development15.
  16. 16. Weaker Employment Is Hurting Construction (4-quarter percent change) 20% 4% 3% 10% 2% 1% 0% 0% -10% -1% -2% -20% -3% -4% -30% -5% -40% -6% 2005 2007 2009 2011 2013 2015 Nonresidential construction Nonfarm employment Source: Bureau of Labor Statistics, Bureau of Economic Analysis, S&P projections16.
  17. 17. Commercial Real Estate Price Declines Are Bottoming 240 220 200 180 160 140 120 100 80 60 Mar-84 Mar-88 Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Source: M.I.T. Center for Real Estate.17.
  18. 18. Equipment Spending Follows Capacity Needs (4-quarter percent change, and production as % of capacity) (Percent) 20% 85 10% 80 0% 75 -10% 70 -20% 65 -30% 60 2000 2002 2004 2006 2008 2010 2012 2014 Business equipment (real, left scale) Capacity Utilization, mfg (Right) Source: Federal Reserve, Bureau of Economic Analysis18.
  19. 19. Can the Consumer Keep Spending? • Consumer spending led recent expansions • But wealth is down because home prices have dropped and • Stocks are still below their 2007 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 • High oil prices hurt purchasing power and confidence • Stimulus package provided some income boost19.
  20. 20. Debt Is Dropping From Record Highs (Percent of after-tax income) 7 1.5 6 1.4 1.3 5 1.2 4 1.1 3 1.0 2 0.9 1 0.8 0 0.7 2000 2002 2004 2006 2008 2010 2012 2014 Saving rate Debt/income (right scale) Source: Bureau of Economic Analysis and Federal Reserve20.
  21. 21. 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 2014 Net worth Financial assets Source: Federal Reserve21.
  22. 22. Default Rates Begin To Drop (Percent) 9 8 7 6 5 4 3 2 1 0 2005 2005 2006 2007 2007 2008 2009 2009 2010 2011 Auto BankCard First Mtg Second Mtg Auto BankCard First Mtg Second Mtg Source: S&P/Experian22.
  23. 23. 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 2008 Q4 for first time in history • We think the rally will continue • But the long-term cycle probably has another bear in it. • World stock markets have generally become synchronized • As money flows between markets in search of yield23.
  24. 24. Bottom Line: The Economy Will Recover Slowly • The recession is the longest and deepest since the 1930s • Fiscal stimulus has supported the recovery • But recovery is likely to be slow because of financial markets and switch to higher savings • If financial markets lock up again • Fiscal stimulus ends abruptly • 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 1990s24.
  25. 25. Oil Prices Remain Down From Peak ($/barrel, WTI and deflated by CPI; household energy purchases as percent of disposable income) 140 9% 120 8% 100 7% 80 6% 60 5% 40 20 4% 0 3% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Oil Price (WTI) 2005 Dollars % of disp. income Source: Bureau of Economic Analysis25.

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