R cession Economics NBER says U.S. recession began December 2007

Transcription

1 Recession Economics Christopher Thornberg Founding Principal, Beacon Economics NBER says U.S. recession began December 2007 MonDec1, 12:20pmET WASHINGTON (Reuters) The U.S. economy slipped into recession in December 2007, the National Bureau of Economic Research's business cycle dating committee announced on Monday. 1

2 Reality Denial Hysteria US Indexes Foreign Markets Dec03 1May04 1Oct04 1Mar05 1Aug05 1Jan06 1Jun06 1Nov06 1Apr07 1Sep07 Dow Jones Industrial Average 1Feb08 1Jul Dec03 1Jun04 1Dec04 1Jun05 1Dec05 1Jun06 1Dec06 1Jun07 1Dec07 1Jun08 NYSE Indexes S&P 500 Nikkei Average Index FTSE 100 DAX Index 2

3 What is a Recession? GROWTH COMES IN TRENDS AND BENDS The trend is long run growth driven by demographics, productivity, investment, public policy, etc. Bends are short run fluctuations around the trend driven by some imbalances A RECESSION IS A NEGATIVE BEND Two quarters negative growth confuses symptoms with the disease Caused by some shock to the economy that causes rapid changes in aggregate demand, factor markets can t clear Two Parts to any downturn Pain of initial shock Unemployment rises, capacity utilization falls creating a negative feedback loop Recovery is a given, but the process is painful A fall to remember Heard on the street There are only two positions out there: cash, and fetal Its not what Wall Street troubles mean to California, its what California troubles mean for Wall Street Recession was already fully underway even if many economists and politicians remained in deep denial What went wrong The big three imbalances: housing, finance, and the consumer Where from here? Things are bad.. But not THAT bad! So far the numbers are normal bad Recovery is a given, the timing of it is not 3

4 6 GDP Worst Quarters 1980-II I IV IV I -4.7 Personal consumption Durable goods Nondurable goods Services 0.61 Gross investment Structures Equipment software Residential Change in inventories 0.16 Net exports Exports Imports 2.99 Government 0.32 Federal 0.50 State and local Losses from Peak Unemployment from Trough Peak M+2 M+4 M+6 M+8 M+10 M+12 M+14 M+16 M+18 Peak M+2 M+4 M+6 M+8 M+10 M+12 M+14 M+16 M+18 M+20 Dec-07 Jul-81 Jul-74 Dec-07 Jul-81 Jul

5 Jan-76 Jan-79 Dec to Dec CA Unemployment Los Angeles Yuba City Modesto Redding Merced Riverside Stockton Fresno Santa Cruz Sacramento Salinas San Jose Vallejo Bakersfield San Diego San Francisco San Luis Obispo Napa Oxnard Santa Rosa Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Santa Barbara % 10% 5% 0% -5% -10% Jan-72 Retail Sales Y-O-Y Growth Nominal Jun-75 Nov-78 Apr-82 Sep-85 Feb-89 Jul-92 Jan-96 Jun-99 Nov-02 Apr-06 Auto Sales SA Dec-75 Sep-79 Jun-83 Mar-87 Jan-91 Oct-94 Jul-98 Apr-02 Jan

6 8.0% Total Spending, Y-o-Y 6.0% 4.0% 2.0% 0.0% -2.0% The 3 Imbalances 1. The Housing Imbalance The collapse of the pyramid 2. The Financial Imbalance The Credit Bubble 3. The Consumer Imbalance Too much spending 6

7 Case Shiller(Real) Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Median Price Los Angeles Home Prices Median Annual Owner Home Income Cost 1999 $199 $62,118 $21, % 2006 Share of Income $577 $78,949 $55, % CS-10 City CS-US 40% 30% 20% 10% 0% -10% -20% -30% San Francisco Case Shiller Indexes (to Q4 08) Sep-94 Feb-96 Jul-97 Jan-99 Jun-00 Nov-01 Apr-03 Sep-04 High Low Mid Feb-06 Jul-07 40% 30% 20% 10% 0% -10% -20% -30% -40% Los Angeles: Year on Year Changes by Tier Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Low Middle High 7

8 300 California Q1 1988Q3 1990Q1 1991Q3 1993Q1 1994Q3 1996Q1 1997Q3 1999Q1 2000Q3 2002Q1 2003Q3 2005Q1 2006Q3 2008Q1 2009Q3 2011Q1 2012Q3 15 Foreclosed homes: mounting % Homes Share REO NV 5.0% 50.4% CA 3.4% 52.7% AZ 2.8% 49.8% FL 2.7% 23.9% MI 2.1% 75.3% OH 2.1% 56.8% CO 2.0% 57.9% IL 1.8% 28.1% GA 1.4% 65.2% NJ 1.4% 15.2% IN 1.3% 51.0% UT 1.0% 32.2% TN 1.0% 66.0% MO 1.0% 65.0% VA 0.8% 52.7% DC 0.8% 38.9% TX 0.8% 69.4% REO Total % HH Los Angeles % Riverside % San Bern % San Diego % Sacramento % Orange % San Joaquin % Contra C % Alameda % Kern % Stanislaus % Santa Clara % Fresno % Solano % Merced % Ventura % Monterey % 8

9 4.5 MBA Numbers: SA to Q to 90 Days Behind New Foreclosures Q1 1980Q2 1981Q3 1982Q4 1984Q1 1985Q2 1986Q3 1987Q4 1989Q1 1990Q2 1991Q3 1992Q4 1994Q1 1995Q2 1996Q3 1997Q4 1999Q1 2000Q2 2001Q3 2002Q4 2004Q1 2005Q2 2006Q3 2007Q4 17 New Bill Loosen Fannie Freddie Rules Incentivize workouts Try to reduce mortgage rates Will it work? Doesn t deal with seriously under-water folks Won t turn around banks or markets Why does it matter anyways? 9

10 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% Cap Rates Orange County 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% Cap Rates San Francisco 1982Q1 1984Q1 1986Q1 1988Q1 1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 1982Q1 1984Q2 1986Q3 1988Q4 1991Q1 1993Q2 1995Q3 1997Q4 2000Q1 2002Q2 2004Q3 2006Q4 Office Retail Industrial Office Retail Industrial 19 10

11 Ah- those mortgage markets The Mortgage Markets Greenspan June 2005: Although a "bubble" in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels. [Home price declines] were they to occur, likely would not have substantial macroeconomic implications. Nationwide banking and widespread securitization of mortgages make it less likely that financial intermediation would be impaired than was the case in prior episodes of regional house price corrections. The Financial Imbalance The CDO Revolution Risky Revenue Stream AAA AA A BBB 11

12 Rating Agencies Investment Managers Investment Bankers Asset Markets Investors Asset Market Brokers National P/E Ratio Non-Federal Credit / GDP 1988Q1 1989Q4 1991Q3 1993Q2 1995Q1 1996Q4 1998Q3 2000Q2 2002Q1 2003Q4 2005Q3 2007Q2 12

13 Loan-Loss Reserves to Delinquent Loans 03/01/96 01/01/97 11/01/97 09/01/98 07/01/99 05/01/00 03/01/01 01/01/02 11/01/02 09/01/03 07/01/04 05/01/05 03/01/06 01/01/07 11/01/07 Assets between $300M and $1B Assets between $1B and $15B Assets greater than $15B 25 New Corporate Issuances 200, , , , , ,000 80,000 60,000 40,000 20, Interest Rates Short Run Paper AAA Bonds BAA Bonds 13

14 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% M1 M2 Dec-97 May-98 Oct-98 Mar-99 Aug-99 Jan-00 Jun-00 Nov-00 Apr-01 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Oct-03 Mar-04 Aug-04 14

15 The consumer imbalance 72.0% 71.0% 70.0% 69.0% 68.0% 67.0% 66.0% Consumer Spending and Net Exports as share of GDP 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0% Savings Rate as % of DPI 1995-I 1996-IV 1998-III 2000-II 2002-I 2003-IV 2005-III 2007-II Consumer Spending Net Exports I 1978-I 1981-I 1984-I 1987-I 1990-I 1993-I 1996-I 1999-I 2002-I 2005-I Installment Credit / DPI Feb-67 Apr-71 Jun-75 Aug-79 Oct-83 Jan-88 Mar-92 May-96 Jul-00 Sep Debt Servicing (% DPI) 1980Q1 1982Q4 1985Q3 1988Q2 1991Q1 1993Q4 1996Q3 1999Q2 2002Q1 2004Q4 2007Q3 15

16 US P/E Ratio to Q4 1952Q1 1956Q1 1960Q1 1964Q1 1968Q1 1972Q1 1976Q1 1980Q1 1984Q1 1988Q1 1992Q1 1996Q1 2000Q1 2004Q1 2008Q1 $700,000 $650,000 $600,000 $550,000 $500,000 $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 Avg. Wealth Per Household 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 Total 31 Net Savings Rates Changes in Income Aug to Jan $Bill, SAAR Income Taxes Paid Spending Int + Trans Savings Jan 2005-May 2005-Sep 2006-Jan 2006-May 2006-Sep 2007-Jan 2007-May 2007-Sep 2008-Jan 2008-May 2008-Sep 2009-Jan 32 16

17 Index Values % 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Q Growth (SAAR) 2004-Jan 2004-Apr 2004-Jul 2004-Oct 2005-Jan 2005-Apr 2005-Jul 2005-Oct 2006-Jan 2006-Apr 2006-Jul 2006-Oct 2007-Jan 2007-Apr 2007-Jul 2007-Oct 2008-Jan 2008-Apr 2008-Jul 2008-Oct 2009-Jan 33 Auto Sales (SA) to Feb Nominal Retail Sales to Feb I 2006-III 2007-I 2007-III Sales 2008-I 2008-III Growth 2009-I Est. 10% 5% 0% -5% -10% -15% -20% -25% All w/o Auto Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan

18 2.0% Industrial Production to Jan 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan

19 16% 15% 14% 13% 12% 11% 10% 9% Personal Taxes To Q3 2008, Share of Income Mortgage Obligation % of Owner DPI, Fed Res, to Q I 1955-II 1958-III 1961-IV 1965-I 1968-II 1971-III 1974-IV 1978-I 1981-II 1984-III 1987-IV 1991-I 1994-II 1997-III 2000-IV 2004-I 2007-II Personal Tax Cut Income $ 12,250 Taxes (No SI) $ 1,550 Tax Cut $ 250 New Savings 2.80% 80q1 82q1 84q1 86q1 88q1 90q1 92q1 94q1 96q1 98q1 00q1 02q1 04q1 06q1 08q1 Q: How much will 4.5% conforming mortgage rates and foreclosures help? 37 RECESSION IS HERE Summary Consumer weakness will continue, but not forever Business weakness to get worse on profit issues Exports are a big negative for the economy, but will be solid in the longer run Housing close to bottom, but no bounce WHAT KIND OF RECESSION? Bad, but nota depression, decline followed by period of doldrums Recover in economy early to mid 2010 Recovery in housing

20 1. Recovery is inevitable if delayed 2.Fire Sales will create opportunities but wait for it 3.Low Home Prices are good in the long run 4.In desperate times comes real change An independent consulting firm providing a variety of economic support services to clients across the Western US. Our Services Include Custom Presentations for Public and Private Events Litigation Support and Damage Estimation Regional Economic Outlooks and Conferences Market Analysis and Forecasts Cost-Benefit Analyses Public Policy and Development Studies For more information Go to: Chris@BeaconEcon.com Call: Jon Haveman and Chris Thornberg 20