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

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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 July, 2009 Presented by: Morris Segall, President SPG Trend Advisors
  2. 2. THE ECONOMY
  3. 3. Gross Domestic Product Q1 2001 – Q1 2009 Source: Bureau of Economic Analysis
  4. 4. Contributions to GDP Growth by Component Q1 2008 – Q1 2009 Source: Bureau of Economic Analysis
  5. 5. Historic and Projected Real GDP Growth 2007 – 2011* World Bank’s GDP growth projection is more dire compared to the projection by the IMF. The recovery process is expected to take longer even with various policy efforts of governments partly because the crisis is so severe and has penetrated throughout the world. Economies are in worse conditions than expected. *2007/08 data are actual Source: World Bank
  6. 6. Year-over-year Percentage Changes in Corporate Profit before Tax Q1 2001-Q1 2009 Source: Bureau of Economic Analysis
  7. 7. Year-over-year Percentage Changes in Non-financial Sector Corporate Profit before Tax Q1 2001-Q1 2009 Source: Bureau of Economic Analysis
  8. 8. Industrial Production January, 2008 - May, 2009 % decline Jan. 08- May. 09: 15% Source: Federal Reserve Bank
  9. 9. Capacity Utilization by Status of Production January, 2008 - May, 2009 Source: Federal Reserve Bank
  10. 10. Manufacturers Durable Goods Orders & Shipments Excluding Transportation January, 2008 – May, 2009 Much has been made of the increase in orders since March. Note the absolute low levels and the shortfall versus shipments. Shipment levels will decline if orders do not pick up substantially from current levels. Source: Census Bureau
  11. 11. Net Change in U.S. Jobs (Total Non-farm) June, 2005 – June, 2009 Source: Bureau of Labor Statistics
  12. 12. National Nonfarm Employment by Industry Sector Groups January, 2008 – June, 2009 Source: Bureau of Labor Statistics
  13. 13. National Nonfarm Employment by Industry Sector Groups September, 2008 – June, 2009 Source: Bureau of Labor Statistics
  14. 14. Initial Unemployment Claims January, 2009 – June, 2009 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 660,000 since March. 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. Source: Department of Labor
  15. 15. Continued Unemployment Claims June, 2006 – June, 2009 Source: Department of Labor
  16. 16. Retail Sales Less Food and Fuel Consumer Credit May, 2007 – May, 2009 Q2 2006 – April, 2009 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. Source: (Left) Census Bureau, (Right) Federal Reserve Bank
  17. 17. National Saving Rate as Percentage of Personal Disposable Income Q1 2005 – Q1 2009 Source: Bureau of Economic Analysis
  18. 18. Existing Home Sales v. Length on Market New Home Sales Units Sold March, 2006 - May, 2009 v. Length on Market March, 2006 - May, 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. Source: (Left) National Association of Realtors, (Right) Census Bureau
  19. 19. S&P/Case-Shiller Home Price Index 2006 – April, 2009 Source: Standard and Poors
  20. 20. Conference Board Consumer Confidence 2005 – June, 2009 Source: Conference Board
  21. 21. Commercial Mortgage Backed Securities Delinquency Rates among Major Investor Groups January, 2008 - March, 2009 Source: Intex, Trepp (Deutsche Bank)
  22. 22. Real Estate Loan Delinquency Rates: All Banks Q1 2006 –Q1 2009 Source: Federal Reserve Bank
  23. 23. 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. Basic services, healthcare and education prices remain stubbornly high. 6 months Changes in Consumer Price 2006 v. 2007 v. 2008 v. ended in Index in Percentage Terms 2005 2006 2007 May 2009 All items 2.5% 4.1% 0.1% -0.4% Food at Home 1.4% 5.6% 6.6% -4.1% Food Away Home 3.2% 4.0% 5.0% 2.7% Rent of Primary Res 4.3% 4.0% 3.4% 2.2% Owners Equiv of Rent of Prim Res 4.3% 2.8% 2.1% 2.1% Household Energy 2.4% 5.3% 5.9% -13.7% Water/Sewer/Trash 4.8% 5.4% 6.5% 4.7% Houshold Ops 4.4% 2.2% 6.0% -0.7% Car Repair 3.8% 3.3% 5.9% 2.9% Pub. Transp 0.1% 7.2% 1.8% -14.5% Medical 3.6% 5.2% 2.6% 3.9% Education 6.3% 5.6% 5.6% 5.5% Energy 2.9% 17.4% -21.3% -18.1% Source: Bureau of Labor Statistics
  24. 24. Crude Oil Spot Prices in U.S. Dollars June, 2004– June, 2009 Source: Energy Information Administration
  25. 25. Nominal Broad Dollar Index* June, 2000 – June, 2009 * Broad Dollar Index: a weighted average of the foreign Source: Federal Reserve Board exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.
  26. 26. THE GOVERNMENT’S RESPONSE
  27. 27. Money Supply (M2): January, 2007 – June, 2009 Source: Federal Reserve Bank
  28. 28. Federal Budget Deficit (exclusive of Social Security Trust funds) FY 2006 – May, 2009 Source: FMS, U.S. Treasury Department
  29. 29. U.S. Federal Budget Deficit, 1995-2011* *2009-2011 data are projections Source: Congressional Budget Office
  30. 30. Federal Reserve Balance Sheet: Reserve Bank Credit June, 2008 – June, 2009 Source: Federal Reserve Bank
  31. 31. Federal Fund Rates, 3-month LIBOR rates lent in $US January, 2008 - June, 2009 January, 2008 - June, 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
  32. 32. What’s on the other side? 2009 - Recession Bottoms with Housing and Unemployment Housing bottoms late this year Bank loan losses start to peak at the end of this year Unemployment peaks at the end of this year Lower Energy Prices alleviate pressure on consumer spending – but virtually no economic growth or recovery Obama Administration Increased economic stimulus spending programs will begin to help economy in the second half of 2009 Increased spending on energy, healthcare and education will result in increased federal budget deficits and higher taxes and fees going forward
  33. 33. What’s on the other side? (cont.) 2009 – Business 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. Corporate profits in decline for most of this year. 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, less accommodative Fed policy and continuing federal budget deficits
  34. 34. Where are the opportunities? Healthcare – National Water Conservation – New Program Supplies and Recycling Education U.S. Government Agriculture Procurement and Energy Conservation Outsourcing – Base Realignment Program Environmental Solutions (BRAC) Electric Power Real Estate – Recycle and Transportation – Increase Rehab Existing Mass Transit Commercial and Exports Residential Property
  35. 35. Conclusions 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 but there will be no economic recovery this year. Continuing near term economic pressures include: high cost and reduced availability of credit lower corporate profits increased unemployment continued weak levels of corporate capital and consumer spending
  36. 36. Conclusions continued Severe reductions in State and Local Government spending and eroded municipal financial strength Weak exports as overseas economies continue in recession Continued credit pressures in residential housing and consumer lending spread to commercial real estate markets and corporate lending
  37. 37. Conclusions continued However, a bottoming of the housing cycle and a peaking 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 what we believe are market cycle lows in the first quarter. 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. The availability and cost of credit, particularly to consumers, will be more restricted and expensive in the future.
  38. 38. 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

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