Consumer/Banking Outlook

Transcription

1 Consumer/Banking Outlook Federal Reserve Bank of Chicago Economic Outlook Symposium December 2006 Carl Tannenbaum Chief Economist

2 Household Spending Year-Over-Year Percent Change in Nominal Total Retail Sales 12% 10% 8% 6% 4% 2% 0% -2% -4% Source: Department of Commerce

3 Personal Savings Rate as a Percent of Disposable Income 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% Sept. 11 Microsoft Dividend Hurricane Katrina Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Source: Bureau of Economic Analysis

4 Consumer Attitudes CB Consumer Confidence (left) UofM Consumer Sentiments (right) Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan Source: University of Michigan, Conference Board

5 Existing Home Prices Year-over-Year Increase in Existing Homes Median Price 21% 16% 11% 6% 1% -4% Jan- 00 Jul- 00 Jan- 01 Jul- 01 Jan- 02 Jul- 02 Jan- 03 Jul- 03 Jan- 04 Jul- 04 Jan- 05 Jul- 05 Jan- 06 Jul- 06 Source: Department of Commerce

6 Expected Drop In Home Prices Case-Shiller Home Price Index Futures, August 2007 Maturity -4% -5% -6% -7% -8% Denver Chicago Source: Bloomberg National San Francisco Boston New York Miami Washington DC

7 Share of non-conforming mortgage originations 25 IO ARM Option ARM Source: LoanPerformance

8 Reset Risk: Limited? At Risk Long Lockout Past Big First Reset Will Refi to Fixed Wealthy Households

9 Home Equity Withdrawal Difference Between Net Change in Home Mortgages and Residential Investment 600 Nominal $ Billion, SAAR Source: Federal Reserve, Flow of Funds

10 Home Equity Loans On Banks Balance Sheets Billions of $ Source: Federal Reserve

11 When Housing Will Bottom? NABE Outlook Survey, November 2006 It has already bottomed Early 2007 Midyear 2007 Year-End 2007 Later 0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

12 Employment Trends Change in Payrolls (Left Scale) Unemployment Rate (Right Scale) (Thousands) % 6.0% 5.5% 5.0% 4.5% 4.0% % Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Source: Bureau of Labor Statistics

13 Income and Hourly Earnings Year-Over-Year Percent Change Total Income (left) Hourly Earnings (right) 10.0% 8.0% 6.0% 4.0% Microsoft Dividend 5.0% 4.0% 3.0% 2.0% 2.0% 0.0% Katrina 1.0% 0.0% Jan- 02 Jul- 02 Jan- 03 Jul- 03 Jan- 04 Jul- 04 Jan- 05 Jul- 05 Jan- 06 Jul- 06 Source: Bureau of Labor Statistics, BEA

14 National Average: Regular Gasoline $3.25 $3.00 $2.75 Per Gallon $2.50 $2.25 $2.00 $1.75 $1.50 $1.25 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Source: Bloomberg

15 Stocks: A Nice Recovery Dow Jones Industrial Average Source: Bloomberg

16 Household Balance Sheets In Billions of Dollars Real Estate Stocks & Mutual Funds Others (*) Net Worth (Right Scale) $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $55,000 $50,000 $45,000 $40,000 $35,000 $ (2Q) (*) Includes other real (consumer durables) and financial assets (deposits, treasuries.) Source: Federal Reserve, Flow of Funds $30,000

17 Household Debt Service Household Debt Service As a Percent of Disposable Income, Including Mortgage Payments 20% 18% 16% 14% 12% 10% Source: Federal Reserve

18 Percentiles* of Income Distribution 2004 Dollars $140,000 $120, % $100,000 $80,000 $60,000 $40, % + 17% $20,000 $0 20% 40% 60% 80% 90% * Percent of population whose income is equal or lower a given amount Source: Federal Reserve, Survey of Consumer Finances

19 Percentiles* of Net Worth Distribution 2004 Dollars $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 + 8 % + 77% 25% 50% 75% 90% * Percent of population whose net worth is equal or lower a given amount Source: Federal Reserve, Survey of Consumer Finances

20 Consumption by Income Group, 2004 Average Annual Expenditures As Percent of Average Annual Income 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Lowest 20% Source: Bureau of Labor Statistics Second Third Fourth Highest 20%

21 Credit Card Delinquencies percentage of delinquent loans past due thirty days or more and still accruing interest as well as those in non-accrual status % Source: Federal Reserve & FFIEC

22 Ratio of Debt Payments to Household Income By Percentile of Income 20% 15% 10% 5% 0% Bottom 20% 20% % 40% % 60% % 80% % Top 10%

23 Percent of Debtors with Ratio of Debt Payments to Household Income greater than 40% By Percentile of Income 30% 25% 20% 15% 10% 5% 0% Bottom 20% 20% % 40% % 60% % 80% % Top 10% Source: Federal Reserve, Survey of Consumer Finances

24 Summary: Consumers Housing correction continues Consumers don t seem to be overly damaged, though Other consumer fundamentals are strong Second-best job market since 1970 Rewards to the investor class Credit readily available, and cheap Intriguing questions: How will income bifurcation affect aggregate spending and credit quality? Why hasn t spending responded more favorably to lower gas prices? What happens to household consumption when a child goes to college?

25 Commercial & Industrial Loans Billions of $ Source: Federal Reserve

26 C&I Loan Delinquencies percentage of delinquent loans past due thirty days or more and still accruing interest as well as those in non-accrual status % Source: Federal Reserve & FFIEC

27 Net Percentage of Respondents Tightening Standards for C&I Loans Large and medium firms Small firms Q Source: Federal Reserve

28 Credit Spreads Corporate Bonds vs. 10-yr Treasuries AAA Rated BAA Rated 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% Source: Bloomberg

29 Credit Default Swaps 125 company composite, five year maturity 50 (Basis Points) Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Source: Bloomberg

30 The Role of Private Equity It is currently estimated that private equity funds have in excess of $100 billion of committed capital available for investment Aggressive acquisition activity is also being driven by the looming expiration of the investment period of funds raised in 1999 and 2000 Historical Private Equity Activity $200.0 $183 $180.0 $160.0 $139 $140.0 $120.0 $100.0 $80.0 $63 $60.0 $37 $42 $40.0 $29 $24 $20.0 $0.0 Source: Buyouts YTD 9/30/2006 Private Equity Funds Raised ($ in blns)

31 Summary: Banking Credit quality is steady Some regional deterioration Earnings under modest pressure Competition pressures lending and borrowing spreads Flat yield curve Higher rates, strong equities market creates disintermediation Intriguing questions: Who sets credit standards: banks or investors? Is the new system more or less vulnerable to shocks? Does the presence of new players make it harder for the Fed to manage credit?

32 Consumer/Banking Outlook Federal Reserve Bank of Chicago Economic Outlook Symposium December 2006 Carl Tannenbaum Chief Economist