Q1 Economic Outlook Presented by: Craig Dismuke Chief Economic Strategist cdismuke@viningsparks.com 1/24/ Page 1
Q1 ECONOMIC OUTLOOK A. European Drama, Weak U.S. Growth, and Central Bank Intervention B. More of the Same 1. Private Investment 2. Personal Consumption 3. Europe C. D. Economic 1/24/ Page 2
BOND YIELDS DROPPED ACROSS THE CURVE IN 4.50 4.00 3.50 Treasury Yield Curve Source: Bloomberg, Vining Sparks 3.29 4.33 3.00 2.50 2.00 1.50 1.00 0.50 0.00 0.12 0.59 0.99 0.26 0.38 2.01 0.86 2.70 1.36 1.88 Year-End Year-End 2010 FF 3M 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 MATURITY IN YEARS 2.89 1/24/ Page 3
TIMELINE OF EVENTS 4.00 Timeline of Events and Treasury Yields - Sources: Bloomberg, Vining Sparks QE2 Operation Twist 3.50 3.00 2.50 Arab Spring Greece Decides to Vote 4 Days Later, Decides Not to Vote 5 Greek Debt Write-Off Increase EFSF to 1T Increase Bank Capital Coordinated Intervention from Central Banks for Currency Swaps 2.00 Tohoku Tsunami Portugal Asks for Bailout Debt Ceiling Debate 10Y 1.50 1.00 500B Bailout Fund for 2013 EU Summit Reveals Cracks Q2 GDP Revised from 1.9% to 0.4% U.S. Downgrade Mid-2013 Framework for Fiscal Union Agreed to by 26 Countries U.K. Opts Out 0.50 2Y 0.00 J F M A M J J A S O N D 103k 152k 36k 68k 192k 235k 216k 194k 244k 217k 54k 53k 18k 20k 117k 127k Non-Farm Payrolls based on Initial Release Date 0k 104k 103k 210k 80k 100k 120k Initial Revision 1/24/ Page 4
STOCK PRICES FELL GLOBALLY, FLAT IN U.S. 3 World Equity Markets - Sources: Bloomberg, Vining Sparks 3 2 2 1 1-1 -1-2 -3-4 -5-6 U.S. Japan Greece Germany France Spain U.K. Italy -51.8% J F M A M J J A S O N D -2-3 -4-5 -6 1/24/ Page 5
BANKING SECTOR STRUGGLED THROUGH 2 Bank of America Stock - Sources: Bloomberg, Vining Sparks 1-1 -2-3 -4-5 -6-7 Bank of America Stock Price -60.8% Dow Jones Industrial Average KBW Bank Index J F M A M J J A S O N D 1/24/ Page 6
UNEMPLOYMENT FELL, PRICES ROSE 9.1% 9. 8.9% Unemployment Rate - Sources: Bloomberg, Vining Sparks 9. 9. 9.1% 9.1% 9.1% 9. 8.9% 4.5% 4. 3.5% Inflation - Sources: Bloomberg, Vining Sparks 3. 8.7% 2.5% 2. J F M A M J J A S O N D 8.5% 1.5% 1. 0.5% 0. Headline Inflation (YoY) Core Inflation (YoY) J F M A M J J A S O N 1/24/ Page 7
GROSS DOMESTIC PRODUCT UP 1.7%(E) 5.00 4.00 3.00 2.00 3.80 3.90 3.80 GDP QoQ Change Attribution Sources: Bureau of Economic Analysis, Vining Sparks 2.50 2.30 Personal Consumption (L-Axis) Government Spending (L-Axis) Gross Private Investment (L-Axis) Net Exportation (L-Axis) Total QoQ Annualized (R-Axis) 1.30 1.80 1.00 0.40 0.00-1.00-2.00-3.00 12/31/2009 3/31/2010 6/30/2010 9/30/2010 12/31/2010 3/31/ 6/30/ 9/30/ 1/24/ Page 8
% of Chain-Weighted GDP at Peak of Cycle CHANGE IN GDP DURING BOTTOM OF ECONOMIC CYCLE 1 8% Personal Consumption Government Expenditures Change in GDP Component - 1981 Recession Sources: Bureau of Economic Analysis, Vining Sparks 6% Private Investment External Trade 4% 2% -2% -4% -6% Recession Begins -8-6 -4-2 0 2 4 6 8 10 12 14 16 Quarters from Beginning of Recession 1/24/ Page 9
% of Chain-Weighted GDP at Peak of Cycle % of Chain-Weighted GDP at Peak of Cycle % of Chain-Weighted GDP at Peak of Cycle % of Chain-Weighted GDP at Peak of Cycle CHANGE IN GDP DURING BOTTOM OF ECONOMIC CYCLE 1 8% 6% 4% 2% -2% -4% -6% 1 8% 6% 4% 2% -2% -4% -6% 1981 Recession Sources: Bureau of Economic Analysis, Vining Sparks Personal Consumption Government Expenditures Private Investment External Trade -8-6 -4-2 0 2 4 6 8 10 12 14 16 Quarters from Beginning of Recession 2001 Recession Sources: Bureau of Economic Analysis, Vining Sparks Personal Consumption Government Expenditures Private Investment External Trade -8-6 -4-2 0 2 4 6 8 10 12 14 16 Quarters from Beginning of Recession 1 8% 6% 4% 2% -2% -4% -6% 1 8% 6% 4% 2% -2% -4% -6% 1990 Recession Sources: Bureau of Economic Analysis, Vining Sparks Personal Consumption Government Expenditures Private Investment External Trade -8-6 -4-2 0 2 4 6 8 10 12 14 16 Quarters from Beginning of Recession 2007 Recession Sources: Bureau of Economic Analysis, Vining Sparks Personal Consumption Government Expenditures Private Investment External Trade -8-6 -4-2 0 2 4 6 8 10 12 14 16 Quarters from Beginning of Recession 1/24/ Page 10
Billions INVESTMENT STILL WEIGHED DOWN BY REAL ESTATE $1,400 Gross Private Fixed Investment (Chained SAAR) Sources: Bureau of Economic Analysis, Vining Sparks $1,200 $1,000 Recession Non-Residential Investment in Equipment Non-Residential Investment in Structures Residential Investment $800 $600 $400 $200 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 1/24/ Page 11
Average of Fed Indices Nonresidential Investment in Equipment and Structures CAPEX SHOULD SLOW AS TAX BENEFIT EXPIRES 40 Expectations for Capital Expenditures Sources: Philadelphia Fed, New York Fed, Bureau of Economic Analysis, Vining Sparks 3 35 2 30 25 20 1 15-1 10 5 0 Average of Philly and Empire Fed Capex Expectations (Adv. 3 Mos.) Nonresidential Fixed Investment (QoQ SAAR) -2-3 -5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-4 1/24/ Page 12
Housing Starts (Thousands SAAR) Residential Fixed Investment ($ Billions) HOUSING STARTS BACK UP TO FLAT 2 Housing Starts and Residential Fixed Investment Sources: Census Bureau, Bureau of Economic Analysis, Vining Sparks 3 1 2 1-1 -1-2 -2-3 Housing Starts (3M/3M) Residential Fixed Investment (QoQ SAAR) -3-4 -4 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-5 1/24/ Page 13
New Home Inventory (Thousands) New Home Inventory as % of U.S. Households INVENTORIES CONTINUE TO DROP 600 New Home Inventory Sources: Census Bureau, Vining Sparks 0.9% 500 0.8% 0.7% 400 0.6% 300 0.5% 0.4% 200 0.3% 100 New Home Inventory (NSA) New Home Inventory as % Total U.S. Households* 0.2% 0.1% 0 1971 1976 1981 1986 1991 1996 2001 2006 0. 1/24/ Page 14
Millions BACKLOG OF DISTRESSED PROPERTIES MUST CLEAR 10 Home Inventory by Type Sources: NAR, MBA, Vining Sparks 9 8 Shadow Home Inventory (MBA) Existing Home Inventory New Home Inventory 7 6 5 4.2 million units 4 3 2 1 0 2000 2002 2004 2006 2008 2010 1/24/ Page 15
Retail Sales Personal Consumption PERSONAL CONSUMPTION REMAINS REASONABLE 2 15% 1 Retail Sales and Personal Consumption Sources: Bureau of Economic Analysis, U.S. Census Bureau, Vining Sparks 6% 5% 4% 5% -5% -1-15% -2-25% Personal Consumption (3M/3M SAAR, GDP) Total Retail Sales (3M/3M SAAR) 3% 2% 1% -1% -2% -3% -4% -3 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-5% 1/24/ Page 16
3M/3M Annualized M/M INCOMES GROWING AT A VERY SLOW RATE 10. Real Disposable Income Growth Sources: Bureau of Economic Analysis, Vining Sparks 2. 8. 6. 4. 2. 0. 1.5% 1. 0.5% 0. -2. -4. -6. -8. -10. Real Personal Disposable Income (M/M) 2009 2010 Real Personal Disposable Income (3M/3M Ann.) -0.5% -1. -1.5% -2. 1/24/ Page 17
Outlays as % of Disposable Income Savings as % of Disposable Income CONSUMERS CUTTING INTO SAVINGS TO FUEL SPENDING 10 Outlays and Savings Sources: Bureau of Economic Analysis, Vining Sparks 9% 98% 8% 7% 96% 6% 94% 5% 4% 92% 3% 9 Outlays as % of Disposable Income Savings as % of Disposable Income 2% 1% 88% 2007 2008 2009 2010 1/24/ Page 18
Average Hourly Earnings (YoY) Unemployment Rate, Inverted EARNIGS BROADLY CORRELATED WITH LABOR MARKET 5% Unemployment Rate and Earnings Correlation Sources: Bureau of Labor Statistics, Bureau of Economic Analysis, Vining Sparks 3% 4% 4% 5% 6% 3% 7% 2% 8% 9% 1% Average Hourly Earnings Unemployment Rate (Inverted) Unemployment Rate Drops Earnings Increase 1 11% 1984 1987 1990 1993 1996 1999 2002 2005 2008 12% 1/24/ Page 19
SOFT LABOR MARKET STILL AFFECTING CONSUMPTION 12% Different Jobs Metrics Tell Different Stories on Labor Market Sources: Bureau of Labor Statistics, Vining Sparks 56% 1 8% 57.46% 8.5% 58% 6 6% 62% 4% 2% Unemployment Rate (L-Axis) Jobs/Population Ratio (Inverted, R-Axis) 64% 66% 1980 1985 1990 1995 2000 2005 2010 1/24/ Page 20
Thousands PAYROLLS GROWING, STILL HAVE A LONG WAY TO GO 300 Nonfarm Payrolls Report Source: Bureau of Labor Statistics, Vining Sparks Change in NonFarm Payrolls (200k) 250 Change in Private NonFarm Payrolls (212k) 200 150 138k 100 50 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1/24/ Page 21
FALLING HOME PRICES HURT CONSUMER SENTIMENT 2 Home Price Index Comparison (YoY) Source: NAR, FHFA, CaseShiller, CoreLogic, Vining Sparks 15% 1 5% -5% -1-15% -2 NAR (NSA) FHFA (SA) CaseShiller (SA) CoreLogic (SA) -25% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1/24/ Page 22
Trillions FALLING HOME PRICES AFFECTS $70 $60 Financial Assets Housing Assets Household Net Worth by Asset Type Sources: Federal Reserve, Vining Sparks $66.7 Trillion $57.4 Trillion $50 $40 $30 $20 $10 $13.5 Trillion $6.2 Trillion $0 1987 1990 1993 1996 1999 2002 2005 2008 1/24/ Page 23
Consumer Expectations Personal Consumption (YoY, Chained) HEADWINDS WEIGHING ON CONSUMER EXPECTATIONS 140 Consumer Confidence and Consumption Sources: Conference Board, Bureau of Economic Analysis, Vining Sparks 7. 120 100 80 60 40 20 Conference Board Expectations (Adv. 3 Mos.) Personal Consumption (YoY, Chained) 6. 5. 4. 3. 2. 1. 0. -1. -2. -3. 0 1992 1995 1998 2001 2004 2007 2010-4. 1/24/ Page 24
EUROPEAN DEBT CRISIS CONTINUES TO DRIVE SENTIMENT 2 18% 16% 14% 12% German 10-Year French 10-Year Italian 10-Year Spanish 10-Year Portuguese 10-Year Greek 10-Year Irish 10-Year European Debt Crisis - Sources: Bloomberg, Vining Sparks 1 8% 6% 4% 2% J F M A M J J A S O N D 1/24/ Page 25
U.S. EXPOSURE TO AFFECTED COUNTRIES IS MANAGEABLE U.S. Exposure to Eurozone Sources: Capital Economics, Vining Sparks Export Shares (% of Total) 59.9% Bank Exposure to Debt (% of Tier 1 Capital) 24.1% 30.1% 9.9% 6.3% 13.8% 2.6% 15.7% Mexico 1994 Asia 1997 Eurozone Portugal, Ireland, Italy, Greece, Spain 1/24/ Page 26
U.S. Exports to Eurozone (YoY) Eurozone GDP (YoY) EXPORTS TO EU WILL DECLINE ON WEAKENING ECONOMY 3 U.S. Exports to Eurozone Sources: Eurostats, European Commission, ECB, U.S. Census Bureau, Vining Sparks 5% 2 1-1 -2 U.S. Exports to Eurozone (YoY) Eurozone GDP (YoY) -3 European Commission GDP Forecast European Central Bank GDP Forecast -4 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 4% 3% 2% 1% -1% -2% -3% -4% -5% -6% -7% 1/24/ Page 27
SUMMARY A. Private Investment Will Continue to Be Weaker than Needed 1. Capital expenditures will slow 2. Excess housing inventory will continue to weigh on residential investment B. Consumption Will Slow in the First Half of the Year 1. Earnings growth remains weak with so much slack in the labor market 2. Re-leveraging will not contribute to consumption growth C. Europe Will Continue to Seek Half-Step Solutions 1. Uncertainty will dominate investor sentiment 2. Will continue to support U.S. yields D. U.S. Elections Will Have a Big Impact on Direction 1. Will Washington have a pro-business bias? 2. Will fiscal austerity gain political traction? 1/24/ Page 28
MONETARY POLICY A. Operation Twist B. New Communication Initiative A. Add Fed Funds target rate to SEP B. Project date of first rate increase C. Provide accompanying narrative D. Effects A. Longer-term projections B. Affects more parts of the yield curve C. Housing D. Possibility of QE3 1/24/ Page 29
MONETARY POLICY 1/24/ Page 30
MONETARY POLICY - HOUSING A. Letter to Congress from Chairman Bernanke Continue weakness in the housing market poses a significant barrier to a more vigorous economic recovery. 1. May require greater losses by GSEs 2. Streamline refinance process 3. Broad menu of modification options 4. Ease conversion of foreclosed properties to rentals 5. Ease borrowing requirements 6. Lower Fannie and Freddie loan fees 7. Relieve lenders of obligation to buy back bad loans 1/24/ Page 31
Percent FED POLICIES HAVE DROPPED MORTGAGE RATES 8 7 Fed Policies - Mortgage Rates and Spreads Sources: Bloomberg, Vining Sparks QE1 QE1+ QE2 Operation Twist 6 5 4 3 30-Year CC MBS Spread 30-Year Mortage Rate 2 1 0 2007 2008 2009 2010 1/24/ Page 32
New Home Sales (Thousands) Mortgage Rate (Inversted, Percent) New Home Sales (Thousands) Mortgage Rate (Inversted, Percent) New Home Sales (Thousands) Mortgage Rate (Inversted, Percent) THE ISSUE IS NOT THE COST OF CREDIT 1000 900 800 700 600 500 400 1992 1994 1996 1998 New Home Sales New Home Sales and Mortgage Rates Sources: Census Bureau, Freddie Mac, Vining Sparks Mortgage Rates Down New Home Sales Up 30YR Mort. Rate (Adv. 1M) 1100 1000 900 800 700 600 500 400 300 1992-1998 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 1400 1300 1200 1100 1000 900 800 New Home Sales and Mortgage Rates Sources: Census Bureau, Freddie Mac, Vining Sparks Mortgage Rates Down New Home Sales Up 200 2006 2008 2010 New Home Sales and Mortgage Rates Sources: Census Bureau, Freddie Mac, Vining Sparks Mortgage Rates Down New Home Sales Up 700 1999 2001 2003 2005 2006-Current 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 1999-2006 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 1/24/ Page 33
FED POLICIES HAVE NOT RESULTED IN HOME PURCHASES 8,000 7,000 6,000 5,000 4,000 3,000 Mortgage Applications - 4-Week Average Sources: Mortgage Banker's Association, Vining Sparks QE1 QE1+ QE2 Operation Twist 500 450 400 350 300 250 200 2,000 1,000 Refinance Index (4W Average) L-Axis Purchase Index (4W Average) R-Axis 150 100 50 0 2007 2008 2009 2010 0 1/24/ Page 34
ECONOMIC PROJECTIONS FOR 1/24/ Page 35
ECONOMIC PROJECTIONS FOR 1/24/ Page 36
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