The Great Recession 1-2 Punch of Credit Crisis and Consumer Retrenchment

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Jeremy Copeland
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1 Economic Recovery: Wherefore Art Thou? Jon Haveman Chief Economist, BAC Economic Institute October, 211 The Great Recession 1-2 Punch of Credit Crisis and Consumer Retrenchment 6 GDP Growth (SAAR) and % of Peak GDP to Q2-211 % GDP Growth GDP as % of Peak (Q4-'7) GDP per Capita as % of Peak GDP Relative to Potential -12 Q1-6 Q3-6 Q1-7 Q3-7 Q1-8 Q3-8 Q1-9 Q3-9 Q1-1 Q3-1 Q1-11 Source: Bureau of Economic Analysis 1

Change in Payrolls (Thousands) 6 4 2-2 -4-6 -8-1 Jan-7 The Jobs Picture National Change in Payrolls to September Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Change in Payrolls by Sector

2 Change in Payrolls (Thousands) Jan-7 The Jobs Picture National Change in Payrolls to September Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Change in Payrolls by Sector Jan-3 to Dec- 7 Dec-7 to Dec-9 Dec-9 to Sep-11 Total Nonfarm 7,717-8,663 2,14 Education/Health 2, Admin Support 71-1,14 56 Leisure/Hospitality 1, Manufacturing -1,127-2, Retail Trade 626-1, Prof/Sci/Tech 1, Transport/Warehouse Fed Gov't Real Estate State Gov't Finance & Insurance Information Construction 783-1,84-96 Local Government Source: Bureau of Labor Statistics (%) Jan-7 Jun-7 Source: Bureau of Labor Statistics US Unemployment Unemployment Rate to September Nov-7 Apr-8 Sep-8 Feb-9 Jul-9 Dec-9 May-1 Oct-1 Mar-11 Aug-11 Millions Jan-7 Jun-7 Nov-7 Apr-8 Labor Force to September Sep-8 Feb-9 Jul-9 Dec-9 Source: Bureau of Labor Statistics May-1 Oct-1 Mar-11 Aug-11 2

3 California: A widespread hit Millions Jan-98 Aug-99 State Labor Markets to August Mar-1 Oct-2 May-4 Total NonFarm Dec-5 Jul-7 Feb-9 Sep-1 Unemp Rate (%) August 211 Peak to Current (%) Inland Empire 1, Orange County (MD) 1, Oakland (MD) Los Angeles 5, CALIFORNIA 14, San Francisco (MD) San Diego 1, San Jose Source: California Employment Development Department Source: California Employment Development Department Why did it happen? Housing Consumers Financial Markets 3

4 National Housing Markets Case-Shiller US National Values to Q Index = 1 in Q Q1-87 Q1-88 Q1-89 Q1-9 Q1-91 Q1-92 Q1-93 Q1-94 Q1-95 Q1-96 Q1-97 Q1-98 Q1-99 Q1- Q1-1 Q1-2 Q1-3 Q1-4 Q1-5 Q1-6 Q1-7 Q1-8 Q1-9 Q1-1 Q1-11 Source: Standard and Poor s Debt and Savings 12 Household Debt as % of GDP Through Q Savings as a % of Income to Q (%) (%) Q1-8 Q1-85 Q1-9 Q1-95 Q1- Q1-5 Q1-1 Q1-66 Q3-73 Q1-81 Q3-88 Q1-96 Q3-3 Q1-11 Source: Federal Reserve Board Source: Bureau of Economic Analysis 4

5 Where do we stand now? Signs of progress Consumers have been solid But showing signs of slowing Businesses are doing quite well Cash on hand is off the charts But demand is slowing Signs of woe Employment growth Trend is positive, but too slow Public sector offsetting private sector Not alleviating long term unemployment problem Housing? State How Many Underwater? as of Q2-11 # Mortgages Underwater Negative Equity Share Nevada 342, Arizona 638, Florida 1,97, Michigan 493, California 2,64, Georgia 489, United States Total 1,881, Local MSAs Oakland-Fremont-Hayward 16, San Jose-Sunnyvale-Santa Clara 61, San Francisco-San Mateo-Redwood City 32, Source: First American CoreLogic 5

6 Thousands 7,5 7, 6,5 6, 5,5 5, 4,5 4, 3,5 3, Jan- National Housing Markets Existing Home Sales SAAR To August Apr-1 Jul-2 Oct-3 Jan-5 Apr-6 Jul-7 Oct-8 Jan-1 Apr-11 Inventory to Sales Ratio Months Supply of Existing Single- Family Homes to August Oct-1 Nov-2 Dec-3 Jan-5 Feb-6 Mar-7 Apr-8 May-9 Jun-1 Jul-11 Source: National Association of Realtors Note: Includes single-family homes and condo coops Source: National Association of Realtors Res RE Lending Standards 6

7 Res RE Borrowing Demand Billions ($), SA Jan-7 US Consumer Markets Nominal Retail Sales to August Jun-7 Nov-7 Apr-8 Sep-8 Feb-9 Source: Census Bureau Jul-9 Dec-9 May-1 Oct-1 Mar-11 Millions Aug Jan-7 Auto and Light Truck Sales to August, SAAR Jun-7 Nov-7 Apr-8 Sep-8 Feb-9 Jul-9 Dec-9 Source: Bureau of Economic Analysis May-1 Oct-1 Mar-11 Aug-11 7

8 (%) Jan-7 US Production on the Rise Jun-7 Capacity Utilization to August Nov-7 Apr-8 Sep-8 Feb-9 Jul-9 Source: Federal Reserve Board Dec-9 May-1 Oct-1 Mar-11 Aug-11 Index = 1 in Jan-7 Jun-7 Industrial Production to August Nov-7 Apr-8 Sep-8 Feb-9 Jul-9 Source: Federal Reserve Board Dec-9 May-1 Oct-1 Mar-11 Aug-11 US Jobs, Jobs, Jobs Thousands Jan-1 Change in Private Nonfarm Payrolls to September Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 Source: Bureau of Labor Statistics May-11 Jul-11 Sep-11 Thousands Jan-1 Mar-1 Change in Government Employment to September May-1 Federal Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 Source: Bureau of Labor Statistics May-11 State and Local Jul-11 Sep-11 8

National Unemployment Number of Unemployed Persons by Duration of Unemployment (Thousands) Dec-7 Jul-9 Sept-11 Less than 5 weeks 2,716 3,15 2,76 5 to 14 weeks 2,385 3,587 2,726 15 to 26 weeks 1,181

9 National Unemployment Number of Unemployed Persons by Duration of Unemployment (Thousands) Dec-7 Jul-9 Sept-11 Less than 5 weeks 2,716 3,15 2,76 5 to 14 weeks 2,385 3,587 2, to 26 weeks 1,181 2,895 1, weeks and over 1,327 4,951 6,217 Total 1,116 22,429 21,553 Average Duration in Weeks Source: Bureau of Labor Statistics What comes next? More Slow Growth? Double-Dip? Accelerating Recovery? 9

10 What about a Double-Dip? Need a sustained shock to the system There is potential (worry scale: 1-1): Austerity/Deficit/Bond Markets (8) Europe (5) Housing (3) Consumers (3) Middle East (1) The cumulative impact is troubling But more likely to slow recovery than derail it Gross negligence on the part of Nat l policymakers can produce a double-dip Cut too fast, too soon Policy signals deficits over the long term The Fiscal Austerity Issue Austerity: US cutting spending EU raising interest rates, Greek prescription Now is the time for continued stimulus Plenty of time later for austerity Remember

Implications: Economic Scarring Human capital losses Existing and potential Opportunity Increased poverty, kids at risk

11 4, Recessions and Federal Revenues 3,5 Billions of Dollars 3, 2,5 2, 1,5 $1.5T $2.5T 1, Revenues: Actual Revenues: Trend Growth Estimate Long Term Implications: Economic Scarring Human capital losses Existing and potential Opportunity Increased poverty, kids at risk Private investment At 25 levels, permanently lower GDP Entrepreneurship and business formation Financing challenges, and economic uncertainty put a dent in activity levels 11

12 Employment-to-Population Ratio (%) Feb-6 Feb-64 Feb-68 Feb-72 Feb-76 Feb-8 Feb-84 Feb-88 Feb-92 Feb-96 Feb- Feb-4 Feb-8 Women's Labor Force Participation (left) Full-time Employment to Population Ratio (right) Full-time and Part-time Employment to Population Ratio (right) Summary Economy appears to be slowing Consumers have drawn back Businesses are waiting things out Housing markets are still in a state of shock Employment growth anemic Long term unemployment will be a problem for some time to come Household debt overhang is a continued drag on economy will be for some time 12

13 San Francisco (MD) Employment Forecast 1,15 1 Thousands of Jobs 1,1 1,5 1, Q1 -Q4 1-Q3 2-Q2 3-Q1 3-Q4 4-Q3 5-Q2 6-Q1 6-Q4 7-Q3 8-Q2 9-Q1 9-Q4 1-Q3 11-Q2 12-Q1 12-Q4 13-Q3 14-Q2 15-Q1 15-Q4 16-Q Percent NonFarm Emp Unemp Rate NF Forecast UR Forecast Source: Bureau of Economic Analysis Forecast by Beacon Economics Thousands of Dollars 1, Q1 199Q2 1991Q3 1992Q4 1994Q1 Source: DataQuick Median Home Prices Through Q2-211 Price Declines Peak to Current 1995Q2 1996Q3 1997Q4 1999Q1 2Q2 21Q3 22Q4 24Q1 25Q2 26Q3 27Q4 29Q1 21Q2 ALAMEDA CONTRA COSTA SANTA CLARA SAN FRANCISCO BAY AREA Bay Area: -38% Alameda: -36% Contra Costa: -47% Marin: -17% Napa: -4% Santa Clara: -25% San Francisco: -16% San Mateo: -21% Solano: -5% Sonoma: -32% 13

14 Foreclosures/1, Homes Q3 1995Q2 1996Q1 1996Q4 1997Q3 1998Q2 1999Q1 1999Q4 2Q3 21Q2 22Q1 22Q4 23Q3 24Q2 25Q1 25Q4 26Q3 27Q2 28Q1 28Q4 29Q3 21Q2 211Q1 Foreclosures Through Q2-211 Current Rates ALAMEDA CONTRA COSTA SOLANO BAY AREA Bay Area: 2.5 Alameda: 2.4 Contra Costa: 4.4 Marin:.9 Napa 4.1 Santa Clara: 1.3 San Francisco:.6 San Mateo: 1.2 Solano: 6.9 Sonoma: 2.8 Source: DataQuick Bay Area Recovery is starting to take hold Business investment is slowing, but still growing Housing markets still a drag Technology employment is picking up Should strengthen going into 212 East bay and Napa/Sonoma slower than other regions Recovery is 4+ years in the offing Fundamentals remain intact, but in jeopardy Educational opportunities Infrastructure Remains an attractive region for investment 14

15 Venture Capital (%) CA and Bay Shares of U.S. Venture Capital to Q Q2-211 Value of All Deals (Millions) % of Total US VC Bay Area 2,969 4 California 3,737 5 United States 7,516 Bay Area California Source: PriceWaterhouseCoopers MoneyTree Summary Recovery IS happening But is slow, uneven, and uncertain Bay Area future is, as usual, bright Innovation economies tend to be super-cyclical Budget decisions Are being made at all levels of government Starving the beast will jeopardize the future Sacrificing investments and the less well off The NO NEW TAXES fallacy 15

16 Bay Area Council Economic Institute Ø Regional Analysis Ø Business & Market Analysis Ø Ports & Infrastructure Analysis Ø Economic Impact Analysis Ø Public Policy Analysis

The Great Recession 1-2 Punch of Credit Crisis and Consumer Retrenchment

The Great Recession 1-2 Punch of Credit Crisis and Consumer Retrenchment Economic Recovery: Wherefore Art Thou? Jon Haveman Chief Economist, BAC Economic Institute November 8, 1 The Great Recession 1- Punch of Credit Crisis and Consumer Retrenchment 6 GDP Growth (SAAR) and