The Economic Outlook for 2007

Transcription

1 The Economic Outlook for 7 Harvey Rosenblum Executive Vice President & Director of Research Federal Reserve Bank of Dallas Presented (with minor modifications) by: John V. Duca, Vice President and Senior Economist Themes Most Likely Scenario Growth likely to maintain a healthy pace Healthier labor market will underpin consumption Financial conditions remain generally conducive to continued expansion; but mortgage credit tightening Housing correction will continue throughout most of 7 Inflation will drift down towards % 1

2 Global GDP Growth To Remain Healthy % annual rate New Data (IMF/April ) 5 average =. % forecast Source: World Economic Outlook (IMF) World Development Indicators (World Bank); Forecast by H. Rosenblum U.S. GDP Growth On Healthy Trend Percent, annualized History Forecast average = H1 7 H 8 Forecast, Harvey Rosenblum

3 Job Growth To Continue At A Healthy Pace, Constrained By Availability Of Workers Thousands of Jobs Average Monthly Employment Gains Likely To Slow Payroll vs. Household Forecast

4 Unemployment Rate To Edge Down Percent, annualized 7 5 Forecast.3 (Dec 7) Adding Pressure To Wages Average Hourly Earnings (yr/yr)

5 But Slowing Benefit Gains Hold Down Compensation Growth ECI = Wages & Salaries + Benefits Percent, y/y Wages & Salaries '89 '9 '95 '98 '1 ' 5

6 ECI = Wages & Salaries + Benefits Percent, y/y Wages & Salaries '89 '9 '95 '98 Benefits '1 ' ECI = Wages & Salaries + Benefits Percent, y/y Wages & Salaries '89 '9 '95 Employment Cost Index '98 Benefits '1 '

7 NFIB: Changes In Labor Compensation Percent of Firms Inevitable product of a % unemployment rate Consistent with.5% unemp. rate 15 1 Unemployment rate close to % '8 '8 '88 '9 '9 '9 '9 '98 ' ' ' ' Financial Conditions Conducive To Continued Expansion 7

8 Selected Interest Rates Percent Fed Funds Selected Interest Rates Percent Fed Funds 1 yr T bill

9 Selected Interest Rates Percent AA Corp. Fed Funds 1 yr T bill Selected Interest Rates Percent 1 1 B & BB Avg. 8 AA Corp. Fed Funds 1 yr T bill

10 Junk Bond Credit Spreads Quite Low Percent B Avg. 7 Yr Junk Bond Credit Spreads Quite Low Percent B Avg. 7 Yr. 1. B Avg. AA Corporate

11 Junk Bond Financing Increases In Importance Percent of S&P-rated Corporate Bonds 198 Investment grade AAA, AA, A, BBB Below investment grade BB and below 8% 3% 9% 71% Firming Bank Credit Standards For Business Loans Percent Net Percentage of Domestic Banks Tightening Standards for C&I Loans 5 3 Large & medium firms Small firms -3 easier credit tighter credit '91 '9 '97 ' '3 ' 11

12 Firming Bank Credit Standards For Consumer Loans Percent Net Percentage of Domestic Banks Tightening Standards for Consumer Loans Consumer Credit Card Loans Other Consumer Loans easier credit Mortgage Loans tighter credit '9 '97 '98 '99 ' '1 ' '3 ' '5 ' Banking Industry In Top Shape Near-record profits Low loan delinquencies Credit losses declining, but noncurrent loans on the rise Few problem banks But some nonperforming securitized mortgages may come back and sap profits somewhat 1

13 Yield Curve Becomes Inverted Percent June 3m m 1yr yr 3yr 5yr 7yr 1yr yr Yield Curve Becomes Inverted Percent 5 January 3 1 June 3m m 1yr yr 3yr 5yr 7yr 1yr yr 13

14 Yield Curve Becomes Inverted Percent 5 January 7 January 3 1 June 3m m 1yr yr 3yr 5yr 7yr 1yr yr spread (1yr-1yr), bps Inverted Yield Curves Precede Recessions false signal

15 Inflation Uncertainty Premium Disappearing Percent. Premium on a 5-year Bond '7 '75 '8 '85 '9 '95 ' '5 Yield Curve Recession Forecast Inconsistent With Credit Spreads And Job Market Strength 15

16 Stock Market Gains Add To Financial Wealth Gains (%) Dow S & P 5 Wilshire But Housing Wealth Which Impacts A Wider Range Of Households Could Decline 1

17 Housing: Improving News Housing starts ticked up in December by.5% New 1-family houses sold grew by.8% in December 9% of U. Michigan survey participants responded that it was a good time to buy a house, up 7.8% from last month Median sale price of existing single family homes rose.3% in December Housing: Worsening News Weather temporarily boosted housing in December Homeowner vacancy rate reaches.7%, a new record high; condo vacancy rate about 11% Supply overhang of 1.5 million units should reduce housing starts further and take 3 years to absorb Home prices flat in, after double-digit gains in 5 U.S. foreclosures up % in (15% in California) $1.5 trillion in mortgages will reset in and 7 Subprime mortgage delinquencies are starting to rise 17

18 Why 7 Should Differ From Early 8s And Early 9s Higher home ownership rates Wealthier society Lower interest rates Better job market Increased access to housing finance Homeowners use homes like ATMs Riskier mortgage practices Housing s Impact on the Economy Construction correction (half way done?) Added 1.1 points to GDP growth in 5:q, but subtracted 1. in last half Home building jobs more losses to come (1/ done?) Consumption wealth effects (just starting): Added.5 to.5 percentage points to GDP growth in Home price appreciation drove borrowing and spending, end of appreciation could slow GDP don t need price declines Mortgage distress could add further effects Rise of exotic and riskier mortgage practices Signs of sub-prime distress 18

19 Significant Housing Correction Behind Us, But More Remains Private Residential Investment as % of GDP Rising Inventory Of New And Used Homes Months Supply of Homes New 1-Family Houses For Sale

20 Rising Inventory Of New And Used Homes Months Supply of Homes Existing Homes New 1-Family Houses For Sale Good Time To Buy A House Survey Percent Surveyed '88 '89 '9 '91 '9 '93 '9 '95 '9 '97 '98 '99 ' '1 ' '3 ' '5 ' Source: University of Michigan

21 Index: Median Inc = 1 15 Housing Affordability On Declining Trend 1 Composite Housing Affordability Index '95 '9 '97 '98 '99 ' '1 ' '3 ' '5 ' Percent Of Families That Can Afford Median Priced Homes Los Angeles Miami Chicago Dallas 1999:q 3% 59% 1% % :q % 1% % 59% Source: National Association of Home Builders and Wachovia Bank Housing Opportunity Index. 1

22 Changes In The Housing Market Housing Permits Housing Starts Housing Sales 1-Month Change % Month Change % Latest 1-Month Change % (Dec) 7 5 Thousands of permits Falling Permits Point To Slowing Home Construction Real single-family construction Single-family building permits Billions of dollars 5 '7 '7 '7 '7 '78 '8 '8 '8 '8 '88 '9 '9 '9 '9 '98 ' ' ' ' NOTES: Data are seasonally adjusted, annualized rates; contract values are chained,. Shaded areas denote recessions. SOURCES: Census Bureau; Bureau of Economic Analysis

23 Household Wealth Sum in Trillions Real estate net of mortgages Financial assets Housing Wealth Extraction Has Just Started Reacting to Home Appreciation % labor/transfer income, qtr. avg Home price appreciation Housing Wealth Extraction Percent, year/year 1 '91 '9 '93 '9 '95 '9 '97 '98 '99 ' '1 ' '3 ' '5 '

24 Home-Price Appreciation Slowing Sharply Percent (year-over-year) Median existing single-family home prices Repeat home sales prices -5 '9 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '1 '3 '5 NOTE: Shaded areas denote recessions. SOURCES: National Association of Realtors; Office of Federal Housing Enterprise Oversight. Rise of New Mortgage Practices Percent 35 Interest-only mortgages Negative amortization mortgages 1 5 Home buyers with multiple mortgages '85 '87 '89 '91 '93 '95 '97 '99 '1 '3 '5

25 Mortgage Foreclosure Rates Rising Percent..5. All mortgages in foreclosure All conventional mortgages in foreclosure '81 '8 '87 '9 '93 '9 '99 ' '5 Late Mortgages More Prevalent, But It Has Been Worse SA, percent 3. Share of conventional subprime mortgages.8 that are past due... Share of conventional prime mortgages that are past due SA, percent '98 '99 ' '1 ' '3 ' '5 ' 9 5

26 Why Mortgage Quality in 7 Could Differ From Early Early s Better job market But borrowers not aided by lower mortgage rates or fast home price appreciation Low credit quality homeowners more prevalent Mortgage originations to sub-prime borrowers rise from 8.5% in 1 to % in 5 Mortgage originations to sub-prime, FHA, & VA borrowers rise from 1% in 1 to 3% in 5 Inflation Has Peaked

27 Consumer Price Index 3-1-month change, percent annualized 5.. CPI Jan '3 Jul '3 Jan ' Jul ' Jan '5 Jul '5 Jan ' Jul ' Jan '7 Percent change, SAAR. 3.5 Twelve-month Core Inflation No Longer Edging Up, As Trimmed Mean PCE Core PCE Core CPI.5. 7

28 Percent change, SAAR. Three-month Core Inflation Has Rolled Over Trimmed Mean PCE Core CPI Core PCE Jan '3 Jan ' Jan '5 Jan ' Jan ' Pricing Power Has Ebbed Somewhat Percent of Firms 35 3 Planned Price Hikes Source: NFIB 8

29 Summary The housing market notwithstanding, growth should improve in 7 and 8 Full employment and ebbing inflation should continue in 7 Key risk is a weaker than anticipated housing market with a spillover to other spending and to financial market psychology Constellation and Convergence of Favorable Conditions Too Much to Continue to be True Three years of strong stock market returns Fourteen consecutive quarters of double-digit profit growth Moderate wage pressures in a full-employment economy Abundant liquidity worldwide Strong global growth with subdued inflation outside commodity sectors 9

30 Downside Risks To The Outlook Very weak housing sector with spillover to Consumption and investment Investor psychology Bank capital losses and reduced appetite for risk Tight labor markets constrain growth, add to inflation pressures, and weigh on financial market psychology Politics, protectionism, nationalization and kleptocracy Yield curve signal turns out to be correct Back Of Tray 3

31 U.S. Unemployment Rates Percent 1 9 High School Dropout Overall High School Graduate 3 Bachelors Degree or Higher Commodity Prices Index July = Copper, US Oil, US Gold, US Steel, US 5. Lumber

32 ISM Prices Paid ISM Prices Index 5+ = Increasing Percent 1 1 B & BB Avg. 1 AA Corp. 8 Fed Funds 1 yr T bill

33 Composite Housing Affordability Index Index=1 when median family income qualifies for an 8% mortgage on a median priced existing single-family home. A rising index indicates more buyers can afford to enter market. Median-priced Home Ownership Plunges On Coasts Percent of Homes Affordable to Median-Income Residents Los Angeles San Francisco Seattle New York Boston Washington Miami Jacksonville 1999:q 3% 11% 9% 55% 5% 77% 59% 7% :q % 8% % % % 1% 1% 53% Source: National Association of Home Builders and Wachovia Bank Housing Opportunity Index. 33

34 Median-priced Home Ownership More Stable Inland Percent of Homes Affordable to Median-Income Residents Chicago Dallas Denver Houston Minneapolis Phoenix Las Vegas 1999:q 1% % 58% % 78% 9% 7% :q % 59% 59% 5% % 7% 1% Source: National Association of Home Builders and Wachovia Bank Housing Opportunity Index. 5+ = Increasing 7. Purchasing Managers Indicate Weak Manufacturing But Stronger Services 5.. ISM Services ISM Manufacturing

35 A Forward-looking Taylor Rule Fed Funds-Rate Response to a 1-percentage Point Increase In Each of Three Determinants Fed Funds-Rate Response Determinant Expected Inflation Unemployment Rate Expected GDP Growth Initial (percentage points) Eventual (percentage points) Source: E. Koenig, Southwest Economy, May/June Housing Wealth Extraction Has Just Started Reacting to Home Appreciation % labor/transfer income, qtr. avg Home price appreciation (repeat sales) Net MEW Active MEW Percent, year/year 1 '91 '9 '93 '9 '95 '9 '97 '98 '99 ' '1 ' '3 ' '5 '

36 Fewer Economic Downturns Black bars are months of contraction Household Wealth As Percent of GDP Ratio