The Winding Road of Economic Recovery
Bank Capital Markets
and Tax Institute West
October 17, 2013

Rob Strand
Senior Econ...
Inflation-Adjusted GDP
$16

$Trillion

$15

Recession
$14

$13

2003

2005

2007

Source: U.S. Bureau of Economic Analysis...
State Indexes of Leading Indicators

Over 2
1—2
0—1
Decline
Source: Federal Reserve Bank of Philadelphia, August 2013
Business Confidence

Index Values (2005=100)

100

Small Business Optimism

90
80
70
60

Consumer Confidence
50

2005

200...
Bank Deposits and Loans
$12

$Trillions

Deposits

$8

Loans
$4

$0

2000

2004

Source: Federal Deposit Insurance Corpora...
Quarterly Inflation-Adjusted GDP Growth
6%

3%

0%

‐3%

‐6%
2009

2010

2011

Source: U.S. Dept. of Commerce, Bureau of E...
Consumer-Driven U.S. Economy
6%

Total GDP

Consumer Spending

3%

0%

‐3%

‐6%
2009

2010

2011

Source: U.S. Dept. of Co...
Business Firms are Wary
Total GDP

6%

Net Exports

Business Investment & Inventories

3%

0%

‐3%

‐6%
2009

2010

2011

...
Government Pullback
6%

Total GDP

Municipal Government

Federal Government

4%
2%
0%
‐2%
‐4%
‐6%
2009

2010

2011

Source...
Consumer Driven Recovery
Don't sit there
mumblin',
talkin' trash.
If you wanna
have a ball,
you gotta go
out and spend
som...
Housing Starts
Millions of Units

Recession

1959 ‐ 2010 Average

August
2013:
891K

2

1

0
1963

1970

1977

1984

Sourc...
Conventional 30-Year Mortgage Rate
9%

6%

4.2%
3%

0%
1993

1995

1997

Source: Federal Reserve

1999

2001

2003

2005

...
26 Million Millenial’s Live with Relatives
1968

36%

1981

35%

2007

2012

39%

Highest in Four Decades

Source: Pew Res...
Retail Sales
Inflation & Seasonally‐Adjusted Quarterly Growth Rate on Quarter Avg.
12%
6%
0%
‐6%
‐12%
‐18%
‐24%
1994

1998...
Automobile Sales
SAAR in Millions
15

10

5

0

2010

2011

Source: Autodata Corp.

2012

2013
Average Age of Vehicles
Passenger Cars

Years
12

Light Trucks

8

4

0

2002

Source: HIS/Polk

2004

2006

2008

2010

2...
Consumer Credit
Seasonally Adjusted Change Over the Last 6 Months

$75 Billion

($1 Billion)
Revolving
Source: Federal Res...
Student Loan Debt
$900

$ Billions

$106

60+

$154
$600

$307
$300

$292

Under 30
$0

2005

2006

2007

2008

Source: Fe...
Average Tuition, Fees, Room and Board
$40,000
2012 Dollars

$30,000

Private 4‐Year School
(2.3% 2003‐2013 annual growth r...
Proportion with Home-Secured Debt at 30
40%

Have Student Loans
No Student Loan

30%

20%

10%

0%

2003 2004 2005 2006 20...
Unemployment Rate
Underemployment

15%

13.7%

10%

7.3%
5%

Unemployment
0%
1994

1998

2002

2006

Source: U.S. Departme...
Labor Force Participation at 1979 Level
Men
75%

65%

Women

55%

45%
1976

1982

1988

1994

2000

Source: U.S. Departmen...
Unemployment Rate
3.0%
4.6%
9.5%

3.9%
4.2% 4.8%

4.6%
Under 5%
6%—7½%
8%—9%
Over 9%

Source: U.S. Dept. of Labor, Bureau ...
U.S. Payroll Growth
500,000

8.7 Million 
Jobs Lost

300,000

GDP
Broke Even

100,000
(100,000)

7.1 Million
Jobs Recovere...
Loss in Payrolls from Pre-Recession Peak
1948
1980

1953
1981

1957
1990

1960
2001

1969
2007

1973

0%

‐4%

‐8%

0

10
...
Unemployment Duration
20

Millions

27+ 
Wks

15

15–26 
Weeks

10

5

0
1971

5–14 Weeks
Less than 5 Weeks
1978

1985

19...
Personal Income
Seasonally‐Adjusted Quarterly Growth Rate on Quarterly Average
12%

6%

0%

‐6%

‐12%

2001

2003

2005

2...
Median Family Income
$55,000

$50,000

$45,000

$40,000

1985

1989

1993

1997

2001

Sources: Census Department and Sent...
Rebuilding Wealth
$80

8%

Household Net Worth in $Trillions

$60

6%

$40

4%

Savings Rate

$20

2%

Household Wealth
$0...
Business is Growing

Source: Scott Adams, Dilbert, September 6, 2013
Business Indexes
Contraction          Expansion

ISM Manufacturing
100

60

50

ISM Non‐
Manufacturing

90

Industrial 
Pr...
U.S. Exports to China Slowing
Change from a year ago, $Billions
$4
$3
$2
$1
$0
($1)
($2)
2005

2007

2009

Source: Federal...
Corporate Profits
SAAR in $Billions
$1.5

$1.0

$0.5

$0.0
2001

2003

2005

2007

2009

Source: U.S. Dept. of Commerce: B...
S&P 500 Index
1600

1200

Up 123%

800

400

0
2005

2006

2007

Source: Standard & Poor’s

2008

2009

2010

2011

2012

...
VIX Index of S&P Volatility Futures
80

60

40

20

0
2004

2005

2006

2007

Source: Chicago Board of Exchange

2008

200...
Source: Clay Bennett, The Christian Science Monitor
Impact of No Federal Budget

• Furloughed workers will get back pay
• Contractors will not
• Sales lost due to furloughs
•...
Cash Crunch
$30 billion of U.S. Treasury cash left after today. Payments due:
$12B Social Security

$3B Supplementary Secu...
Maturing Debt

October 24
October 31
November 7
November 14
November 15

$58 billion
$115 billion
$54 billion
$79 billion
...
To Buy Time
• Prioritization of Federal payments
 3 million payments on 3 systems daily
• 14th Amendment to the Constitut...
Treasury Bill Interest Rates
0.35%

Twelve-Month

Six-Month

Three-Month

One-Month

0.30%
0.25%
0.20%
0.15%
0.10%
0.05%
0...
Impact of a Federal Default
• 20% cut in outlays in an average month
 Varies by month
 Economic slowing  Deeper cuts
• ...
Congressional Negotiations
• Republicans moved away from defunding or delaying
Obama Care (ACA)
• No Collins deal over the...
Federal Receipts, Outlays & Deficit to GDP
80%

60%

40%

Outlays
20%

Receipts
0%

1973

1978

1983

1988

1993

Source: ...
Hundreds

Entitlements Overwhelm Revenue
35%

% of GDP

Forecast
30%

Other

25%
20%

Interest

15%

Medicaid

10%

Medica...
European Debt-to-GDP is Rising Rapidly
2011

2012

2013* projected

100%
80%
60%
40%
20%
0%

U.S.

Germany

Source: Intern...
Developing Country Stock Markets
‐5.6%

 S. Korea

‐7.0%
‐7.1%

Market Returns
Over the Past Year

Columbia
Rusia

‐7.4%
‐...
Lots of Liquidity from the Fed
Fed’s Balance Sheet Growth
October 9: $3.7 Trillion

$Trillion

$1.4T
$3

MBS & Agency Debt

$2

$1

$0
2008

Treasuries

...
Federal Funds Rate Hikes in the Past

Fed Funds Target Rate

7%

2000
1994

6%

2004

5%
4%

Long Term Forecast

3%
2%
1%
...
Economic Uncertainties
• Federal budget, debt and taxes
• Interest rates
• Global demand
• Fannie, Freddie and QM standard...
U.S. Traditional Advantages Continue
• Strong global competitor
• Robust entrepreneurial culture
• Flexible capital and la...
For more, see our blogs:

Dodd-Frank Tracker
RegReformTracker.ABA.com

Banks and the Economy
www.BanksAndTheEconomy.blogsp...
Strengthening Household Balance Sheets
20%

15%

Debt/Assets at 2002 Level

10%

Financial Obligations Ratio at 1984 Level...
Congressional Banking Issues to End 2013
 Housing Issues
 Fannie Mae and Freddie Mac (Corker-Warner GSE Reform Bill)
 C...
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1 8 00am - the winding road of economic recovery

  1. 1. The Winding Road of Economic Recovery Bank Capital Markets and Tax Institute West October 17, 2013 Rob Strand Senior Economist, ABA aba.com 1-800-BANKERS
  2. 2. Inflation-Adjusted GDP $16 $Trillion $15 Recession $14 $13 2003 2005 2007 Source: U.S. Bureau of Economic Analysis and NBER 2009 2011 2013
  3. 3. State Indexes of Leading Indicators Over 2 1—2 0—1 Decline Source: Federal Reserve Bank of Philadelphia, August 2013
  4. 4. Business Confidence Index Values (2005=100) 100 Small Business Optimism 90 80 70 60 Consumer Confidence 50 2005 2007 Source: NFIB, University of Michigan 2009 2011 2013
  5. 5. Bank Deposits and Loans $12 $Trillions Deposits $8 Loans $4 $0 2000 2004 Source: Federal Deposit Insurance Corporation 2008 2012
  6. 6. Quarterly Inflation-Adjusted GDP Growth 6% 3% 0% ‐3% ‐6% 2009 2010 2011 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis 2012 2013
  7. 7. Consumer-Driven U.S. Economy 6% Total GDP Consumer Spending 3% 0% ‐3% ‐6% 2009 2010 2011 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis 2012 2013
  8. 8. Business Firms are Wary Total GDP 6% Net Exports Business Investment & Inventories 3% 0% ‐3% ‐6% 2009 2010 2011 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis 2012 2013
  9. 9. Government Pullback 6% Total GDP Municipal Government Federal Government 4% 2% 0% ‐2% ‐4% ‐6% 2009 2010 2011 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis 2012 2013
  10. 10. Consumer Driven Recovery Don't sit there mumblin', talkin' trash. If you wanna have a ball, you gotta go out and spend some cash … Let the good times roll. — B.B. King
  11. 11. Housing Starts Millions of Units Recession 1959 ‐ 2010 Average August 2013: 891K 2 1 0 1963 1970 1977 1984 Source: U.S. Department of the Census 1991 1998 2005 2012
  12. 12. Conventional 30-Year Mortgage Rate 9% 6% 4.2% 3% 0% 1993 1995 1997 Source: Federal Reserve 1999 2001 2003 2005 2007 2009 2011 2013
  13. 13. 26 Million Millenial’s Live with Relatives 1968 36% 1981 35% 2007 2012 39% Highest in Four Decades Source: Pew Research Center on 18-31-year-olds 43%
  14. 14. Retail Sales Inflation & Seasonally‐Adjusted Quarterly Growth Rate on Quarter Avg. 12% 6% 0% ‐6% ‐12% ‐18% ‐24% 1994 1998 2002 2006 Source: U.S. Dept. of Commerce: Bureau of Economic Analysis 2010
  15. 15. Automobile Sales SAAR in Millions 15 10 5 0 2010 2011 Source: Autodata Corp. 2012 2013
  16. 16. Average Age of Vehicles Passenger Cars Years 12 Light Trucks 8 4 0 2002 Source: HIS/Polk 2004 2006 2008 2010 2012
  17. 17. Consumer Credit Seasonally Adjusted Change Over the Last 6 Months $75 Billion ($1 Billion) Revolving Source: Federal Reserve Non‐Revolving
  18. 18. Student Loan Debt $900 $ Billions $106 60+ $154 $600 $307 $300 $292 Under 30 $0 2005 2006 2007 2008 Source: Federal Reserve Bank of New York 2009 2010 2011 2012
  19. 19. Average Tuition, Fees, Room and Board $40,000 2012 Dollars $30,000 Private 4‐Year School (2.3% 2003‐2013 annual growth rate) $20,000 $10,000 Public 4‐Year School (3.8% 2003‐2013 annual growth rate) $0 1972‐1973 1980‐1981 1988‐1989 1996‐1997 2004‐2005 2012‐2013 Source: The College Board Annual Survey of Colleges
  20. 20. Proportion with Home-Secured Debt at 30 40% Have Student Loans No Student Loan 30% 20% 10% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Federal Reserve Bank of New York
  21. 21. Unemployment Rate Underemployment 15% 13.7% 10% 7.3% 5% Unemployment 0% 1994 1998 2002 2006 Source: U.S. Department of Labor, Bureau of Labor Statistics 2010
  22. 22. Labor Force Participation at 1979 Level Men 75% 65% Women 55% 45% 1976 1982 1988 1994 2000 Source: U.S. Department of Labor, Bureau of Labor Statistics 2006 2012
  23. 23. Unemployment Rate 3.0% 4.6% 9.5% 3.9% 4.2% 4.8% 4.6% Under 5% 6%—7½% 8%—9% Over 9% Source: U.S. Dept. of Labor, Bureau of Labor Statistics, July 2013
  24. 24. U.S. Payroll Growth 500,000 8.7 Million  Jobs Lost 300,000 GDP Broke Even 100,000 (100,000) 7.1 Million Jobs Recovered (300,000) (500,000) (700,000) (900,000) 2005 2006 2007 2008 2009 2010 Source: U.S. Department of Labor, Bureau of Labor Statistics 2011 2012 2013
  25. 25. Loss in Payrolls from Pre-Recession Peak 1948 1980 1953 1981 1957 1990 1960 2001 1969 2007 1973 0% ‐4% ‐8% 0 10 20 30 40 Source: U.S. Department of Labor, Bureau of Labor Statistics 50 60
  26. 26. Unemployment Duration 20 Millions 27+  Wks 15 15–26  Weeks 10 5 0 1971 5–14 Weeks Less than 5 Weeks 1978 1985 1992 1999 Source: U.S. Department of Labor, Bureau of Labor Statistics 2006 2013
  27. 27. Personal Income Seasonally‐Adjusted Quarterly Growth Rate on Quarterly Average 12% 6% 0% ‐6% ‐12% 2001 2003 2005 2007 2009 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis 2011 2013
  28. 28. Median Family Income $55,000 $50,000 $45,000 $40,000 1985 1989 1993 1997 2001 Sources: Census Department and Sentier Research, LLC 2005 2009 2013
  29. 29. Rebuilding Wealth $80 8% Household Net Worth in $Trillions $60 6% $40 4% Savings Rate $20 2% Household Wealth $0 2004 2006 2008 Source: Bureau of Economic Analysis and Federal Reserve 2010 2013 0%
  30. 30. Business is Growing Source: Scott Adams, Dilbert, September 6, 2013
  31. 31. Business Indexes Contraction          Expansion ISM Manufacturing 100 60 50 ISM Non‐ Manufacturing 90 Industrial  Production 40 80 30 2006 2007 2008 2009 2010 2011 Sources: Federal Reserve, Institute for Supply Management 2012 20132013
  32. 32. U.S. Exports to China Slowing Change from a year ago, $Billions $4 $3 $2 $1 $0 ($1) ($2) 2005 2007 2009 Source: Federal Reserve Bank of St. Louis (FRED) 2011 2013
  33. 33. Corporate Profits SAAR in $Billions $1.5 $1.0 $0.5 $0.0 2001 2003 2005 2007 2009 Source: U.S. Dept. of Commerce: Bureau of Economic Analysis 2011 2013
  34. 34. S&P 500 Index 1600 1200 Up 123% 800 400 0 2005 2006 2007 Source: Standard & Poor’s 2008 2009 2010 2011 2012 2013
  35. 35. VIX Index of S&P Volatility Futures 80 60 40 20 0 2004 2005 2006 2007 Source: Chicago Board of Exchange 2008 2009 2010 2011 2012 2013
  36. 36. Source: Clay Bennett, The Christian Science Monitor
  37. 37. Impact of No Federal Budget • Furloughed workers will get back pay • Contractors will not • Sales lost due to furloughs • Falling consumer and business confidence
  38. 38. Cash Crunch $30 billion of U.S. Treasury cash left after today. Payments due: $12B Social Security $3B Supplementary Security Income benefits $12B Military pay $6B Interest on debt $18B Medicare $2B Medicaid $25B Social Security $3B Salaries $29B Interest on debt $12B Social Security Sources: Bipartisan Policy Center, U.S. Treasury, CBO, WSJ
  39. 39. Maturing Debt October 24 October 31 November 7 November 14 November 15 $58 billion $115 billion $54 billion $79 billion $63 billion Total $370 billion Source: Bipartisan Policy Center, TreasuryDirect
  40. 40. To Buy Time • Prioritization of Federal payments  3 million payments on 3 systems daily • 14th Amendment to the Constitution • “The validity of the public debt of the U.S. … shall not be questioned” • $1 Trillion platinum coin • Debt forgiveness by the Federal Reserve
  41. 41. Treasury Bill Interest Rates 0.35% Twelve-Month Six-Month Three-Month One-Month 0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% Jan Feb Mar Source: Federal Reserve Apr May Jun Jul Aug Sep Oct
  42. 42. Impact of a Federal Default • 20% cut in outlays in an average month  Varies by month  Economic slowing  Deeper cuts • Higher interest rates?  Reduce investments, homebuying, etc.  Capital losses for financial institutions  Weaker dollar would stimulate exports • Falling consumer and business confidence
  43. 43. Congressional Negotiations • Republicans moved away from defunding or delaying Obama Care (ACA) • No Collins deal over the weekend • Democrats proffered a desire to replace sequestrations • Latest proposal:  Continuing Resolution to January 15  Raise the Debt Limit to carry to February 7  Bicameral “Super” committee – before December 13 • House contemplating adding measures
  44. 44. Federal Receipts, Outlays & Deficit to GDP 80% 60% 40% Outlays 20% Receipts 0% 1973 1978 1983 1988 1993 Source: U.S. Congressional Budget Office 1998 2003 2008 2013 2018 2023 ––– Forecast –––
  45. 45. Hundreds Entitlements Overwhelm Revenue 35% % of GDP Forecast 30% Other 25% 20% Interest 15% Medicaid 10% Medicare 5% 0% Social Security 2000 2010 2020 2030 2040 Source: U.S. Congressional Budget Office (September 2013) 2050 2060 2070
  46. 46. European Debt-to-GDP is Rising Rapidly 2011 2012 2013* projected 100% 80% 60% 40% 20% 0% U.S. Germany Source: International Monetary Fund U.K. Spain France
  47. 47. Developing Country Stock Markets ‐5.6%  S. Korea ‐7.0% ‐7.1% Market Returns Over the Past Year Columbia Rusia ‐7.4% ‐7.4% ‐9.0% ‐9.4% ‐16.3% ‐17.1% ‐17.4% Source: Bloomberg China India Czech Rep Mexico Turkey Chile Brazil
  48. 48. Lots of Liquidity from the Fed
  49. 49. Fed’s Balance Sheet Growth October 9: $3.7 Trillion $Trillion $1.4T $3 MBS & Agency Debt $2 $1 $0 2008 Treasuries 2009 Source: Federal Reserve 2010 2011 2012 2013 $2.1T
  50. 50. Federal Funds Rate Hikes in the Past Fed Funds Target Rate 7% 2000 1994 6% 2004 5% 4% Long Term Forecast 3% 2% 1% 0% Months Since Tightening Began ‐1 1 3 Source: Federal Reserve 5 7 9 11 13 15 17 19 21 23 25
  51. 51. Economic Uncertainties • Federal budget, debt and taxes • Interest rates • Global demand • Fannie, Freddie and QM standards • Student debt
  52. 52. U.S. Traditional Advantages Continue • Strong global competitor • Robust entrepreneurial culture • Flexible capital and labor markets • Technological leader • Highly diverse mix of industries
  53. 53. For more, see our blogs: Dodd-Frank Tracker RegReformTracker.ABA.com Banks and the Economy www.BanksAndTheEconomy.blogspot.com aba.com 1-800-BANKERS
  54. 54. Strengthening Household Balance Sheets 20% 15% Debt/Assets at 2002 Level 10% Financial Obligations Ratio at 1984 Level 5% 0% 1980 1990 Source: Federal Reserve Flow of Funds 2000 2010 2013
  55. 55. Congressional Banking Issues to End 2013  Housing Issues  Fannie Mae and Freddie Mac (Corker-Warner GSE Reform Bill)  CFPB Ability-to-Repay Standard in the Qualified Mortgage rule  Extension of the Mortgage Forgiveness Debt Relief Act  Five-Year Farm Bill  CFTC Reauthorization  Regulatory Relief for Banks  Dodd-Frank Act Oversight  Designation of SIFIs, resolution authority, derivatives  Brown-Vitter bill and the forthcoming GAO report  Janet Yellen + Replacing Betsy Duke and Sarah Bloom Raskin aba.com 1-800-BANKERS

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