Greater Uncertainty Threatens Expansion

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Greater Uncertainty Threatens Expansion

  1. 1. Greater Uncertainty Threatens ExpansionU.S. Economic Assessment &Interest Rate OutlookAugust 18, 2011GE Capital, AmericasRobert Podorefsky (617) 973-4091 1/ GE / August 17, 2011
  2. 2. U.S. economy weakens ……Amid uncertainty and more policy riskExtraordinary factors contributed•• Inflation hurt demand, shortages from Japan impactedmanufacturing, Q1 weather disrupted comps while unemploymentand Washington’’s messy budget handling weakened confidenceKey downside risk - financial market developments•• Market volatility –– raises business & consumer anxiety•• Unfavorable fiscal/geopolitical considerations –– Europe, Mid-EastKey to maintaining expansion•• Continued government backstop ideology, contained oil pricesKey challenges•• Housing sector and employment situation remain weak•• Federal budget ‘‘super committee’’ must find solutions to deficit 2/ GE / August 17, 2011
  3. 3. Watch the negative equity drivers …… Monthly Change in S&P 500 Equity Index U.S. household wealth fell $1.3 tn in Q2 10, then up $4.0 tn thru Q1 11 100 75 50 25 0 Australia -25 Up 30% thru Apr 30 began to China -50 after Bernanke tighten began to outlined "options for -75 tighten further easing" on-100 Fiscal & economic worries Aug 27, 10-125 Apr May Jun Jul Aug Sep Oct Nov Dec Jan 10 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 11 Feb Mar Apr May Jun Jul Aug so farData source: Bloomberg and Federal Reserve 3/ GE / August 17, 2011
  4. 4. Parallel crises dominate while impact varies …… Total Marketable Sovereign Debt in trillions of U.S. dollars10 % of total that comes due through 2013 $9.34 Ireland = 18% Portugal = 32% 8 Greece = 33% Spain = 41% Italy = 36% 6 United States = 46% 4 $2.28 2 $0.92 $0.13 $0.20 $0.42 0 Ireland Portugal Greece Spain Italy United StatesData source: Bloomberg 4/ GE / August 17, 2011
  5. 5. Messy deficit debate dispirits the nation …… U.S. Federal Budget Gap 3.9 Govt Spending in $Tns Govt Revenues in $Tns 3.3 Fiscal year 2010 2.8 Outlays = $3.45 tn Revenues = $2.16 tn Deficit = $1.29 tn 2.2 1.7 1.1 White House estimate 2011 0.6 Data source: Outlays = $3.82 tn U.S. Treasury Revenues = $2.17 tn 0.0 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 5/ GE / August 17, 2011
  6. 6. U.S. rate structure benefits significantly …… U.S. Treasury Yields Compared Aug 16, 2011 Dec 31, 2010 4.33% 4.5% 3.67% 3.29% 2.22% 3.0% 2.01% 0.93% 1.5% 0.59% 0.12% 0.18% 0.01% 0.0% 3-month 2-year 5-year 10-year 30-yearData source: Bloomberg 6/ GE / August 17, 2011
  7. 7. Public debt surged, will keep rising yet rates fell …… Marketable Treasury Debt Outstanding - $s Tns (left axis) 5-yr U.S. Treasury yield (right axis) Fed tightened9.4 Since Q4 07 6.5% The debts more Fed tightened than doubled 5.5%7.3 4.5%5.2 3.5% 2.5%3.2 1.5%1.1 0.5% Aug-98 Nov-01 Feb-05 May-08 Aug-11 Data sources: U.S. Treasury and Bloomberg 7/ GE / August 17, 2011
  8. 8. In ’’10, less inflation eased transition to lower rates …… Headline U.S. CPI yoy (left axis) Core U.S. CPI yoy (right axis) 5.6% (June 11) 2.5% Headline: 3.6% yoy 4.0% Core: 1.6% yoy - highest since Jan 10 1.9% 2.5% 1.0% 1.2%-0.6%-2.1% 0.6% Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Data source: Bureau of Labor Statistics 8/ GE / August 17, 2011
  9. 9. In ’’11, a complex path to lower rate expectations …… Expectation for 3m Libor - June 2013 3m U.S. Libor 3.0% Apr: Europes debt crisis worsens May & June: Weaker U.S. economic data 2.5% July: U.S. budget impasse Mar 11: Tsunami Apr 18: Jul 8: June U.S. 2.0% devastates S&P lowered employment data Japan its long-term May 2: disappoints U.S. ratings Oil falls Jul 29: 1.5% outlook to Q2 U.S. GDP after bin negative Ladens disappoints 1.0% death Aug 9: FOMC says conditions warrant an exceptionally low fed 0.5% funds rate through mid -2013 Data source: Bloomberg 0.0% Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 9/ GE / August 17, 2011
  10. 10. Disinflation ends. Commodity surge hits a wall …… CRB Commodty Price Index417 flat y-t-d- in 2011 as of Aug 17 up 17% in 2010 End May 10 - end up 23% in 2009 Apr 11, + 45% down 36% in 2008338 Since Apr 11 CRB - 10%259 Live cattle: + 29% - 1% Crude oil: + 54% - 23% Wheat: + 68% - 5% Corn: + 110% - 5% Cotton: + 123% - 39%180 Data source: Aug-08 Mar-09 Oct-09 May-10 Dec-10 Aug-11 Bloomberg 10 / GE / August 17, 2011
  11. 11. Watch gasoline, price direction reflects outlook …… Avg U.S. retail gasoline price per gallon (right axis) Wholesale gasoline - Nymex price (left axis) 3.50 4.10 3.00 3.60 2.50 3.10 2.00 2.60 1.50 2.10 1.00 0.50 1.60 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11Data source: Nymex and DOE 11 / GE / August 17, 2011
  12. 12. Extraordinary stimulus remains key policy stance …… FOMC Statement –– August 9th •• Inflation: ““Recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable”” •• Economic conditions: ““Somewhat slower pace of recovery”” is expected over coming quarters compared to previous (June) estimates. ““Downside risks to the economic outlook have increased”” •• Policy: Economic conditions are likely to warrant an ““exceptionally low”” fed funds rate ““at least through mid-2013”” 12 / GE / August 17, 2011
  13. 13. Expectations for Libor fall dramatically …… Expectation for 3m U.S. Libor implied yield per futures market 17-Aug-11 31-Mar-11 31-Dec-10 with December with December 5.17% implied yields implied yields 4.92% 5.0% 4.50% 3.85% 4.0% 3.61% 3.00% 3.18% 3.0% 2.53% 1.95% 2.0% 1.70% 0.61% 0.49% 0.85% 1.0% 0.46% 0.0% Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Dec 17Datasource:Bloomberg 13 / GE / August 17, 2011
  14. 14. Pass-through inflation pressures muted overall …… Consumer Price Index (yoy) 10.0% Producer Price Index (yoy) 7.0% 4.0% 1.0% -2.0% -5.0% Data source: -8.0% Bureau of Jun-91 Jun-95 Jun-99 Jun-03 Jun-07 Jun-11 Labor Statistics 14 / GE / August 17, 2011
  15. 15. Easing in gov’’t interest expense won’’t last …… U.S. Public Debt ($ Tns) - left axis Interest Expense ($ Bns) - right axis 15 Fiscal 2007 - 2010 460 Public debt: + 51% 13 Annual interest expense: - 4% 420 11 380 9 340 7 5 300 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (*) Data source: U.S. Treasury(*) Fiscal 2011: (based on Oct 10 - July 11 actual data plus estimate) 15 / GE / August 17, 2011
  16. 16. But interest burden is still very manageable …… U.S. Govt Interest Expense as a Percent of Nominal GDP Fiscal Year (Sept) Comparison 4.7% 4.2% (*) 2011 Estimate - End Sept 11: 3.6% Nominal GDP = $15.083 Tn Interest expense = $462.5 Bn 3.1% 2.5% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (*)Data sources: U.S. Treasury and Bureau of Economic Analysis 16 / GE / August 17, 2011
  17. 17. Fortunately, foreign demand for Treasurys holds up …… Foreign Holdings of U.S. Treasurys in trillions of dollars 4.52 Up 11% yoy Jun (*) vs Up 20% in 10 3.80 vs Up 20% in 09 3.08 2.36 1.64 Top 2 Foreign Holders as of June 11 1. China @ $1,166 bn, + 5% yoy - was + 71% yoy in Jul 09 2. Japan @ $911 bn, + 14% yoy - was + 22% yoy in Dec 09 0.92 Oct-01 Oct-03 Aug-05 Aug-07 Jul-09 Jun-11 Data source: U.S. Treasury 17 / GE / August 17, 2011
  18. 18. Economic composition –– U.S. GDP …… Govt Q2 2011 U.S. spending, Real GDP 18.9% vs 18.4% Breakout Q4 07 Net exports, -3.1% vs -4.2% Q4 07 Private investment,13.4% vs 15.9% Q4 07 Personal consumption, 70.7% vs 70% Data source: BEA Q4 07 18 / GE / August 17, 2011
  19. 19. Consumption trend has stalled …… U.S. Real Personal Consumption Expenditures yoy change 3-month change - annualized 4.3% 3.3% 2.3% 1.3% 0.3%-0.7%-1.7%-2.7% Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11Data source: Bureau of Economic Analysis 19 / GE / August 17, 2011
  20. 20. Amid unimpressive payroll gains …… Monthly Change in Private Payrolls Monthly Change in Nonfarm Payrolls in 000s460 Past 12 months242 23-195-413 Private: + 1.8 mn Headline: + 1.3 mn-632 Data source: Bureau of Labor Statistics-850 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 20 / GE / August 17, 2011
  21. 21. While income improved, inflation saps wages …… U.S. Personal Income (yoy) Real Personal Income Less Transfer Payments (yoy) Real Wages (yoy)7.0%5.0%3.0%1.0%-1.0%-3.0%-5.0%-7.0% Data source: Bureau of Economic Analysis-9.0% Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 21 / GE / August 17, 2011
  22. 22. Watch import prices from China …… U.S. Import Prices from China 6% y-o-y change July 11 4% +3.5% yoy 2% Through early 07, the U.S. imported deflation from China 0% -2% -4% Aug-05 Feb-07 Aug-08 Jan-10 Jul-11Data source: Bureau of Labor Statistics 22 / GE / August 17, 2011
  23. 23. Consumers take on some more borrowing …… U.S. Consumer Credit, Ex-Real Estate ($ Bns) 20 3-Month Average Largest increase Monthly Change in 4 years 10 0-10-20 Data source: Federal Reserve Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 23 / GE / August 17, 2011
  24. 24. Investment growth trend is moderating …… Change in Real Private Business Investment Quarterly outcome - annualized Half year outcome - annualized 18% 8% -2% -12% -22% -32% -42% Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Data source: Bureau of Economic Analysis 24 / GE / August 17, 2011
  25. 25. Key ‘‘services’’ sector gauge signals modest growth …… ISM non-manufacturing index (left axis) Non-manufact employment sub-index (right axis)60 5654 above 50 (left axis index) signals 49 service sector expansion48 4342 3636 30 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Data source: Bloomberg 25 / GE / August 17, 2011
  26. 26. While manufacturing sector expansion slows …… ISM manufacturing index (left axis) Prices paid for purchases (right axis)62 92 July 50.9 above 50 signals55 expansion 6747 414032 16 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11Data source: Bloomberg 26 / GE / August 17, 2011
  27. 27. Amid auto production adjustment …… US Capacity Utilization - left axis Cap U for Motor Vehicles - right axis79% 68%73% 49%67% 30% Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11Data source: Federal Reserve 27 / GE / August 17, 2011
  28. 28. Overall business inventory backdrop is favorable …… U.S. Inventory-to-Sales Ratio1.72 number of months1.59 Q1 091.461.33 = Worst of U.S. recession Q1 111.20 May-82 Aug-89 Nov-96 Feb-04 Jun-11 Data source: U.S. Commerce Dept 28 / GE / August 17, 2011
  29. 29. As is backdrop for private credit expansion …… Commercial and Industrial Loans at U.S. Commercial Banks1.7 in trillions of dollars1.5 - Oct 08 peak: $1.62 tn - Most recent: $1.28 tn1.3 Decrease: $340 bn1.1 Since post crisis low in0.9 Sep 10, Fed tightening cycle began up $70 bn0.7 Fed tightening cycle began0.5 Dec-90 Jan-95 Mar-99 Apr-03 Jun-07 Aug-11 Data source: Federal Reserve 29 / GE / August 17, 2011
  30. 30. Still dealing with residential mortgage burden …… U.S. Residential Mortgages Outstanding in trillions of dollars Peak: 10.6 tn 10.7 Q1 08 10.0 tn 8.0 8.0 tn 6.0 tn 5.3 Q3 01 Q4 98 2.7 0.0 Mar-80 Dec-87 Sep-95 Jun-03 Mar-11 Data source: Federal Reserve 30 / GE / August 17, 2011
  31. 31. And too many homes …… Ratio of U.S. Existing Housing Units to Number of U.S. Households1.1101.1051.1001.0951.0901.0851.0801.0751.070 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (*) 2011 (*)(*) 2010 & 2011 estimatedData source: U.S. Census Bureau. Estimates based on Census Bureau and nielsenw ire 31 / GE / August 17, 2011
  32. 32. Causing home prices to fall …… U.S. Home Prices are 3% Below the 5-Year Average and 20% Below July 06 Peak231 Single Family Home Prices in $000s - Past 30 years, prices averaged 8% above the 5-year average154 - In June 2005, prices exceeded the 5- year average by 33% 77 Median Home Prices Data source: Natl Association of Realtors 5 year moving average 0 Jul-69 Jan-80 Jul-90 Dec-00 Jun-11 32 / GE / August 17, 2011
  33. 33. In all, some moderate growth still expected …… U.S. Real GDP (*) Bloomberg 1 year average consensus forecasts 4.0% 1.3% (Aug 12 survey) in Q2 % % % % 2.2 2.5 2.5 2.1 0.8%-2.5%-5.8%-9.0% Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 * Q4 11 * Q1 12 * Q2 12 *Data source: Bureau of Economic Analysis 33 / GE / August 17, 2011
  34. 34. In summaryNear-term - 2011 & 2012•• Policymakers focus on boosting near-term dynamics•• U.S. real GDP subject to energy and equity prices•• Equities vulnerable to extraordinary uncertainties•• Fed’’s key focus is jobs - watch employment dataBeyond the moment•• Budget deficit will force tough decisions on spending and taxes•• Deeper fiscal erosion has risky inflation consequences•• Less stimulus does not have to derail growth 34 / GE / August 17, 2011
  35. 35. AppendixAnswers to some recently asked questions 35 / GE / August 17, 2011
  36. 36. Magnitude of U.S. fiscal deterioration post crisis …… Fiscal 10 Fiscal 08 PeakKey budget receipts:Individual Income Tax * $ 899 bn $ 1,146 bn $ 1,163 bn 07Corporate Income Tax $ 191 bn $ 304 bn $ 370 bn 07Key budget outlays:Defense-Military $ 667 bn $ 595 bn Fiscal 10Health & Human Services $ 854 bn $ 701 bn Fiscal 10Interest on Treas Debt $ 414 bn $ 451 bn $ 451 bn 08Dept of Labor $ 173 bn $ 59 bn Fiscal 10Social Security $ 754 bn $ 658 bn Fiscal 10Data source: www.fms.treas.gov 36 / GE / August 17, 2011
  37. 37. How fiscal 2011 is shaping up for the US …… Individual income tax receipts up, corporate tax receipts near flat and total outlays higherFirst 10 months of Fiscal ’’10 & ’’11 compared –– through July Fiscal 2011 Fiscal 2010 Total receipts (*): $1.893 Tn $1.753 Tn Total outlays: $2.993 Tn $2.922 Tn Deficit: $1.100 Tn $1.169 Tn (*) includes: Indiv. income tax receipts: $0.891 Tn $0.719 Tn Corp. income tax receipts: $0.141 Tn $0.140 Tn Data source: www.fms.treas.gov 37 / GE / August 17, 2011
  38. 38. Average maturities for Treasury debt are rising …… Average Maturity of Total Outstanding Marketable U.S. Treasury Debt - in months past 10 years 72 Recent Comparison Jun 08: 56 months Jun 09: 51 months 64 Jun 10: 58 months Jun 11: 62 months 56 Data source: U.S. Treasury 48 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 38 / GE / August 17, 2011
  39. 39. FOMC’’s views on a normalization policy …… Per Minutes of the June 21-22 FOMC Meeting 1st step –– FOMC would likely first cease reinvesting some or all payments of maturing principal on its securities holdings 2nd step –– At the same time or thereafter, the FOMC will modify its forward guidance on the path of the federal funds rate and will initiate temporary reserve-draining operations. 3rd step –– When economic conditions warrant, the FOMC will begin raising its target fed funds rate, and from that point on, changing the target rate will be the primary means of adjusting monetary policy. During the normalization process, adjustments to interest rates on excess reserves and to the level of reserves will be used 4th step –– Sales of agency securities from the Fed’’s balance sheet will likely begin sometime after the 1st fed funds rate increase 39 / GE / August 17, 2011
  40. 40. After QE2, no buying & run-off would look like this …… Feds Balance Sheet - U.S. Treasury Holdings (*) Maturing Treasury Debt ($ Bns) - left axis$s Bn Potential Treasury Balance ($ Tns) - right axis $s Tn 180 1.65 1.45 150 Feds Treasury balance Now: $1.63 Tn 1.25 120 1.05 With run-off & no adds End 2018: $460 Bn .85 90 (*) Includes Bills, Notes, .65 Bonds and TIPS 60 .45 .25 30 .05 0 -.15 mid-2011 2011 2012 2013 2014 2015 2016 2017 2018Data source:Federal Reserve& N.Y.Fed 40 / GE / August 17, 2011
  41. 41. State & local government tax receipts edge higher …… State & Local Tax Revenues Total: 4-qtr avg, annualized in Tns (left axis) Individual income tax: 4-qtr avg, annualized in Bns (right axis) $1.32 $310 $1.27 $295 $1.22 $280 $1.17 $265 $1.12 $250 $1.07 $1.02 $235 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11Data source: U.S. Census Bureau 41 / GE / August 17, 2011
  42. 42. DisclaimerDisclaimer: This report is for information purposes only and is not intended as an offer, solicitation, or recommendation for the purchase or sale of afinancial instrument or to effect a transaction. The information contained within this report has been obtained from and is based upon sources believedto be reliable. General Electric Capital Corporation and any of its affiliates (collectively ““GECC””) do not guarantee the accuracy or completeness of theinformation and make no express or implied representations, but reasonable steps have been taken to determine the accuracy and completeness of theinformation. All opinions, projections and estimates constitute the judgment of the author as of the date of the report and are subject to change withoutnotice. Market rates, valuations and availability of financial instruments also are subject to change without notice. Nothing contained within the materialsconstitutes financial, legal, tax, accounting or other advice, nor should any investment or any other decisions be made solely based on this report. Youshould obtain advice from qualified experts before making any investment decision. The GECC Interest Rate Management Team (““IRM””) acts solely in therole of an arranger for interest rate management transactions, and is not and makes no representations to being an agent for or advisor to any partyinvolved, nor does IRM have any reporting, fiduciary or financial obligations to the parties.This research report is produced separately from any other activity of GECC and was completed without access to non-public information that may havebeen received by other units of GECC. This report may not be reproduced or redistributed in any form without prior written permission from GECC. The useof this report in connection with the writing, marketing or promotion of any financial instruments, services or products is prohibited. 42 / GE / August 17, 2011

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