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


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SPG Trend Advisors is a boutique consultancy that provides global economic research for business and other decision makers. With fifty years combined experience between the principals, and through its website, SPG Trend Advisors provides insightful analysis and forecasting to prepare senior executives for tomorrows trends.

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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 Side May 1, 2009 Presented by: Morris Segall, President SPG Trend Advisors
  3. 3. Gross Domestic Product Q1 2001 – Q1 2009 Source: Bureau of Economic Analysis
  4. 4. Contributions to GDP Growth by Component Q4 2007 – Q1 2009 <ul><li>Source: Bureau of Economic Analysis </li></ul>
  5. 5. Historic and Projected World Output Growth, 2004 through 2010* Source: International Monetary Fund *2009-2010 data are projections This recession has spread worldwide with greater negative impact on export dependent overseas economies. Many overseas economies are now projected to contract this year led by severe recessions in Europe, Japan and Asia. These projections may still be too optimistic for 2009 and 2010.
  6. 6. Corporate Profits (before taxes on corporate income) Q1 2000 – Q4 2008 <ul><li>Source: Bureau of Economic Analysis </li></ul>Corporate profits are adjusted for inventory valuation and capital consumption. The measure includes both domestic and overseas operations.
  7. 7. Year-over-year Percentage Changes in Corporate Profit before Tax Q1 2001-Q4 2008 Source: Bureau of Economic Analysis
  8. 8. Industrial Production January, 2008 - March, 2009 <ul><li>Source: Federal Reserve Bank </li></ul>% decline Jan. 08- Feb. 09: 16%
  9. 9. Capacity Utilization by Status of Production January, 2008 - March, 2009 <ul><li>Source: Federal Reserve Bank </li></ul>
  10. 10. Net Change in U.S. Jobs (Total Non-farm) June, 2005 – March, 2009 <ul><li>Source: Bureau of Labor Statistics </li></ul>
  11. 11. National Nonfarm Employment by Industry Sector Groups January, 2008 – March, 2009 <ul><li>Source: Bureau of Labor Statistics </li></ul>
  12. 12. National Nonfarm Employment by Industry Sector Groups September, 2008 – March, 2009 <ul><li>Source: Bureau of Labor Statistics </li></ul>
  13. 13. Initial Unemployment Claims January, 2009 – April 25 th , 2009 <ul><li>Source: Department of Labor </li></ul>Reflecting the rise in unemployment, new job losses rose dramatically in the first quarter of this year. However, the trend of new job losses appears to have peaked at around 650,000 since the latter part of February. Normally we would be prepared to predict a peaking in unemployment is at hand based on this trend. However, we believe a new surge in job losses is coming over the summer as the auto industry downsizes.
  14. 14. Continued Unemployment Claims February, 2006 – April 18 th , 2009 <ul><li>Source: Department of Labor </li></ul>
  15. 15. Source: (Left) Census Bureau, (Right) Federal Reserve Bank <ul><li>Retail Sales Less Food and Fuel March, 2007 – March, 2009 </li></ul><ul><li>Consumer Credit Q4 2005 – February, 2009 </li></ul>Since the third quarter of 2008 consumer spending has been declining and the consumer is currently 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 is positive for the economy and the improved creditworthiness of the consumer longer term.
  16. 16. <ul><li>Existing Home Sales v. Length on Market March, 2006 -March, 2009 </li></ul>Source: (Left) National Association of Realtors, (Right) Census Bureau New Home Sales Units Sold v. Length on Market March, 2006- March, 2009 Housing remains weak but new home inventories may have peaked as new home construction , home prices and mortgage interest rates have declined. The latter will also help the existing home market. We expect the rate of decline in housing sales to diminish over the remainder of this year.
  17. 17. S&P/Case-Shiller Home Price Index 2006 – February, 2009 <ul><li>Source: Standard and Poors </li></ul>% decline 2006-Feb. 09: 30.1%
  18. 18. Conference Board Consumer Confidence 2005 - April, 2009 Source: Conference Board
  19. 19. Commercial Mortgage Backed Securities Delinquency Rates among Major Investor Groups January, 2008 - March, 2009 Source: Intex, Trepp (Deutsche Bank)
  20. 20. Source: Bureau of Labor Statistics While inflation has declined precipitously in the recession led by the collapse in energy and commodity prices, we are not in agreement with a fear of deflation hitting the U.S. economy. Food, basic services, healthcare and education prices are stubbornly high. Changes in Consumer Price Index in Percentage Terms 2006 v. 2005 2007 v. 2006 2008 v. 2007 6 months ended in Mar. 2009 All items 2.5% 4.1% 0.1% -5.4% Food at Home 1.4% 5.6% 6.6% -1.4% Food Away Home 3.2% 4.0% 5.0% 3.7% Rent of Primary Res 4.3% 4.0% 3.4% 2.8% Owners Equiv of Rent of Prim Res 4.3% 2.8% 2.1% 2.2% Household Energy 2.4% 5.3% 5.9% -11.4% Water/Sewer/Trash 4.8% 5.4% 6.5% 4.7% Houshold Ops 4.4% 2.2% 6.0% 1.0% Car Repair 3.8% 3.3% 5.9% 4.3 % Pub. Transp 0.1% 7.2% 1.8% -20.6% Medical 3.6% 5.2% 2.6% 3.3% Education 6.3% 5.6% 5.6% 5.2% Energy 2.9% 17.4% -21.3% -49.9%
  21. 21. <ul><li>Source: Energy Information Administration </li></ul>Crude Oil Spot Prices in U.S. Dollars October, 2003– April 21 st , 2009
  22. 22. <ul><li>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. </li></ul><ul><li>Source: Federal Reserve Board </li></ul>Nominal Broad Dollar Index April, 2000 – April 24 th , 2009
  24. 24. Money Supply (M2): January, 2007- April, 2009 <ul><li>Source: Federal Reserve Bank </li></ul>
  25. 25. Federal Budget Deficit (exclusive of Social Security Trust funds) FY 2006 – March, 2009 <ul><li>Source: FMS, U.S. Treasury Department </li></ul>
  26. 26. U.S. Federal Budget Deficit, 1995-2010* *2009-2010 data are projections Source: Congressional Budget Office
  27. 27. <ul><li>Source: Federal Reserve Bank </li></ul>Federal Reserve Balance Sheet: Reserve Bank Credit June, 2008 – April, 2009
  28. 28. Source: (Left) Federal Reserve Bank, (Right) British Banker’s Association <ul><li>Federal Fund Rates, </li></ul><ul><li>January 2008-April 22 nd , 2009 </li></ul><ul><li>3-month LIBOR rates lent in US $ </li></ul><ul><li>January 2008-April 21 st , 2009 </li></ul>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.
  29. 29. How do I get through it? <ul><li>Manage business on cash flow basis </li></ul><ul><li>Increase efficiency of asset turnover; increase liquidity </li></ul><ul><li>Intensify customer service initiatives </li></ul><ul><li>Become innovative in controlling costs </li></ul><ul><ul><li>Outsource where appropriate </li></ul></ul><ul><ul><li>Join Co-ops to spread costs over larger group </li></ul></ul><ul><li>Look for new ways to leverage existing employees and infrastructure by investigating new sources of revenue from new products and markets. BE A SOLUTIONS PROVIDER </li></ul><ul><li>Secure access to bank credit; firm up bank lines </li></ul>
  30. 30. How do I get through it? (cont.) <ul><li>Spend to increase productivity and market share </li></ul><ul><ul><li>Take advantage of accelerated equipment write offs as part of government’s economic stimulus package </li></ul></ul><ul><ul><li>Take advantage of soft demand in economy to build for future by aggressive bargain purchasing </li></ul></ul><ul><ul><li>If access to capital and liquidity are not detriments, look to acquire troubled companies and/or strategic assets of other companies </li></ul></ul><ul><ul><li>Train employees to be more productive and increase their value by enabling them to do more tasks </li></ul></ul><ul><li>Increase networking and take advantage of trade associations for additional contacts and leads </li></ul><ul><li>Partner with other firms </li></ul>
  31. 31. What’s on the other side? <ul><li>2009 - Recession Bottoms with Housing and Unemployment </li></ul><ul><ul><li>Housing bottoms late this year </li></ul></ul><ul><ul><li>Bank loan losses abate in the second half of this year </li></ul></ul><ul><ul><li>Unemployment peaks in the second half of this year </li></ul></ul><ul><ul><li>Lower Energy Prices alleviate pressure on consumer spending – but virtually no economic growth or recovery </li></ul></ul><ul><li>Obama Administration </li></ul><ul><ul><li>Increased economic “bailout” and middle class spending programs Increased federal budget deficits and higher taxes </li></ul></ul>
  32. 32. What’s on the other side? (cont.) <ul><li>2009 – Business </li></ul><ul><ul><li>Cost of goods declines from current levels as interest rates, labor costs and commodity prices decline but business is facing zero consumer and business demand. </li></ul></ul><ul><ul><li>Corporate profits in decline for most of this year. </li></ul></ul><ul><ul><li>Weak consumer spending but pent-up demand building </li></ul></ul><ul><li>2010 – Economy Makes Gradual Cyclical Recovery </li></ul><ul><ul><li>Increased employment = increased consumer spending </li></ul></ul><ul><ul><li>Increased Corporate Sales = increased corporate profits = increased capital spending </li></ul></ul><ul><ul><li>Increased interest rates and rising prices from higher demand and continuing federal budget deficits </li></ul></ul>
  33. 33. Where are the opportunities? <ul><li>Healthcare – National Program </li></ul><ul><li>Education </li></ul><ul><li>Agriculture </li></ul><ul><li>Energy Conservation </li></ul><ul><li>Environmental Solutions </li></ul><ul><li>Electric Power </li></ul><ul><li>Transportation – Increase Mass Transit </li></ul><ul><li>Exports </li></ul><ul><li>Water Conservation – New Supplies and Recycling </li></ul><ul><li>U.S. Government Procurement and Outsourcing – Base Realignment Program (BRAC) </li></ul><ul><li>Real Estate – Recycle and Rehab Existing Commercial and Residential Property </li></ul>
  34. 34. Conclusions <ul><li>We have been in a deep and protracted recession that began in the fourth quarter of 2007. It began in housing and has spread through the entire U.S. and overseas economies. Economic weakness intensified through 2008 and has worsened through the first quarter of 2009. The first quarter should be the nadir of the economic contraction in the current recession cycle. </li></ul><ul><li>Increased near term economic pressures include: </li></ul><ul><ul><li>high cost and reduced availability of credit </li></ul></ul><ul><ul><li>lower corporate profits </li></ul></ul><ul><ul><li>increased unemployment </li></ul></ul><ul><ul><li>continued weak levels of corporate capital and consumer spending </li></ul></ul>
  35. 35. Conclusions continued <ul><ul><li>Severe reductions in State and Local Government spending and eroded municipal financial strength </li></ul></ul><ul><ul><li>Weak exports as overseas economies continue in recession </li></ul></ul><ul><ul><li>Continued credit pressures in residential housing and consumer lending spread to commercial real estate markets and corporate lending </li></ul></ul>
  36. 36. Conclusions continued <ul><li>However, a bottoming of the housing cycle and an abatement in bank credit losses 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 what we believe are market cycle lows in the first quarter. </li></ul><ul><li>After an expected cyclical recovery in 2010-2012, we believe the longer term socio-economic issues facing this country will result in slower future economic growth for the United States. </li></ul><ul><li>The availability and cost of credit, particularly to consumers, will be more restricted and expensive in the future. </li></ul>
  37. 37. Thank You <ul><li>You can always reach me at [email_address] </li></ul><ul><li>Also, if you need us in a hurry, we are at 410.522.7243 </li></ul><ul><li>Please contact us when you require economic and capital markets research & policy analysis. </li></ul><ul><li>Further information available at </li></ul>