Transitioning From the Great Recession to Recovery to Expansion AUGUSTINE FAUCHER, DIRECTOR OF MACROECONOMICS FROM MOODY S ECONOMY.COM
The Great Recession Is Over Recessions since World War II Peak Trough Duration in Months Peak-to-Trough % Change Jobless Rate Recession Peak to Trough Expansion Trough to Peak Real GDP Industrial Production Nonfarm Employment Low High Change Dec-07 Aug-09 20 73-3.9% -19.2% -6.1% 4.4% 10.5% 6.1% Mar-01 Nov-01 8 120-0.4% -6.3% -2.0% 3.8% 6.3% 2.5% Jul-90 Mar-91 8 92-1.3% -4.3% -1.5% 5.0% 7.8% 2.8% Jul-81 Nov-82 16 12-2.9% -9.5% -3.1% 7.2% 10.8% 3.6% Jan-80 Jul-80 6 58-2.2% -6.2% -1.3% 5.6% 7.8% 2.2% Nov-73 Mar-75 16 36-3.1% -14.8% -2.7% 4.6% 9.0% 4.4% Dec-69 Nov-70 11 106-1.0% -5.8% -1.4% 3.4% 6.1% 2.7% Apr-60 Feb-61 10 24-1.3% -6.2% -2.3% 4.8% 7.1% 2.3% Aug-57 Apr-58 8 39-3.8% -12.7% -4.4% 3.7% 7.5% 3.8% Jul-53 May-54 10 45-2.7% -9.0% -3.3% 2.5% 6.1% 3.6% Nov-48 Oct-49 11 37-1.7% -8.6% -5.1% 3.4% 7.9% 4.5% Average 10 57-2.0% -8.3% -2.7% 4.4% 7.6% 3.2% Sources: NBER, BEA, FRB, BLS, Moody s Economy.com FROM MOODY S ECONOMY.COM 2
As Some Regions Recover As of Dec-09 Expansion At risk Recovery In recession Moderating recession FROM MOODY S ECONOMY.COM 3
But California and Florida Lag As of Dec-09 Expansion At risk Recovery In recession Moderating recession FROM MOODY S ECONOMY.COM 4
Policymakers Stabilize the Banking System Difference between 3-mo Libor and Treasury bill yields 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Bear Stearns hedge funds liquidate Bank funding problems TARP fails to pass Congress Bear Stearns collapse Lehman failure Fannie/Freddie takeover No TARP asset purchases Bank stress tests 07 08 09 10 Sources: Federal Reserve Board, Moody s Economy.com FROM MOODY S ECONOMY.COM 5
And Fiscal Stimulus Provides a Vital Boost Contribution to real GDP growth, % 4 3 2 1 0 (1) (2) 09 10 11 Source: Moody s Economy.com FROM MOODY S ECONOMY.COM 6
A Powerful Inventory Swing Change in inventories, $ bil 20 15 10 5 0-5 -10-15 -20-25 07 08 09 Source: Census FROM MOODY S ECONOMY.COM 7
Layoffs Abate, but Hiring Is Dormant 11 10 9 8 7 6 5 4 3 2 Initial UI claims, ths (R) Continuing UI claims, mil (L) 07 08 09 10 700 650 600 550 500 450 400 350 300 250 Sources: BLS, Moody s Economy.com FROM MOODY S ECONOMY.COM 8
Threatening to Undermine Compensation 1985Q1-2009Q4 Compensation growth 6 5 4 3 2 1 0 y = -0.48x + 3.40 R2 = 0.38 2009Q4 Unemployment rate=10% Natural rate=5.3% Compensation growth=1.8% -3-2 -1 0 1 2 3 4 5 Difference between actual and natural unemployment rate Source: BLS FROM MOODY S ECONOMY.COM 9
The Foreclosure Crisis Continues to Mount First mortgage loans, ths 4,500 4,000 3,500 90 days and over delinquent In foreclosure 3,000 2,500 2,000 1,500 1,000 500 0 00 01 02 03 04 05 06 07 08 09 Sources: Equifax, Moody s Economy.com FROM MOODY S ECONOMY.COM 10
As Millions of Homeowners Fall Under Water Number of underwater homeowners, ths 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 06 07 08 09 Sources: Equifax, Moody s Economy.com FROM MOODY S ECONOMY.COM 11
Prompting Strategic Defaults 90 days and over delinquency rate, % of #, by CLTV, 30%-35% DTI > 120 115-120 110-115 105-110 100-105 95-100 90-95 85-90 80-85 75-80 70-75 65-70 60-65 < 60 2 3 4 5 6 7 8 9 10 Sources: Equifax, Moody s Economy.com FROM MOODY S ECONOMY.COM 12
Resulting in More Foreclosure Sales First mortgage loans, ths 4,000 3,500 Defaults Lost homes 3,000 2,500 2,000 1,500 1,000 500 0 05 06 07 08 09 10 11 12 Sources: Equifax, Moody s Economy.com FROM MOODY S ECONOMY.COM 13
And Lower House Prices Case-Shiller Home Price Index, 2000Q1=100 200 180 160-34% 140 120 100 00 01 02 03 04 05 06 07 08 09 10 11 12 Sources: Fiserv, Moody s Economy.com FROM MOODY S ECONOMY.COM 14
Commercial Real Estate Boom and Bust Repeat-sales indices, 2000Q4=100 190 180 170 Commercial RE prices House prices 160 150 140 130 120 110 100 01 02 03 04 05 06 07 08 09 Sources: Moody s Investors Service, REAL, Fiserv FROM MOODY S ECONOMY.COM 15
State and Local Government Revenues Collapse State and local tax revenue, % change yr ago 20 15 10 5 0-5 -10 50 55 60 65 70 75 80 85 90 95 00 05 Source: BEA FROM MOODY S ECONOMY.COM 16
The Federal Reserve Will Remain Aggressive 7 6 5 4 3 2 1 0-1 -2 Funds rate target Moody's Economy.com Taylor rule 00 01 02 03 04 05 06 07 08 09 10 Sources: Federal Reserve, Moody s Economy.com FROM MOODY S ECONOMY.COM 17
And Fiscal Policymakers Are Not Finished» Recently passed: $45 billion in more aid to unemployed workers, extension and expansion of homebuyer tax credit, extended higher conforming loans limits, and NOL.» High odds of passage: $50 billion in aid for workers losing jobs in 2010.» Better than even odds of passage: $50 billion in more SBA lending, job tax credit, weatherization program.» Even odds of passage: $50 billion in another round of help to financially stressed state and local government for FMAP.» Less than even odds of passage: expansion of loan modification plan including incentives for principal writedown. FROM MOODY S ECONOMY.COM 18
Global Recovery Well Under Way In recession At risk Below trend Expanding FROM MOODY S ECONOMY.COM 19
Massive Global Monetary Stimulus Average central bank target rate, % 5 4 3 2 1 0 00 01 02 03 04 05 06 07 08 09 10 Source: Moody s Economy.com FROM MOODY S ECONOMY.COM 20
And Unprecedented Fiscal Stimulus Fiscal stimulus as a % of 2008 GDP China Russia Japan S. Arabia U.S. S. Korea Australia Germany Italy Canada Euro zone U.K. Indonesia France Turkey Brazil Argentina Mexico India Source: Moody s Economy.com 0 2 4 6 8 10 12 14 FROM MOODY S ECONOMY.COM 21
China Aiding the Recovery Exports to China, 3-mo MA, $ bil 16 14 ASEAN EU U.S. Japan S. Korea Brazil 12 10 8 6 4 2 0 06 07 08 09 Source: Census FROM MOODY S ECONOMY.COM 22
A Global Fiscal Crisis Is Brewing Government debt-to-gdp ratio, 2010, % Japan Iceland Greece Italy Belgium Portugal Ireland France United Kingdom Israel Hungary India Germany Austria Malta Spain Netherlands U.S. Source: Moody s Economy.com 0 50 100 150 200 250 FROM MOODY S ECONOMY.COM 23
Economic Timeline Banking system stabilizes Stock market trough Economic downturn ends Employment bottoms Housing starts bottom Foreclosures started peak House prices resume rising Fed raises rates Securities markets up and running Inflation bottoms out Fiscal pressures intensify 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 Home sales bottom Retailing revives Source: Moody s Economy.com House prices bottom Inventory Jobless rate liquidation abates peaks Extraordinary bank failures end Self-sustaining expansion begins FROM MOODY S ECONOMY.COM 24
www.economy.com FROM MOODY S ECONOMY.COM 25
2010 Moody s Analytics, Inc. and/or its licensors and affiliates (collectively, MOODY S ). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. Under no circumstances shall MOODY S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding, or selling. FROM MOODY S ECONOMY.COM 26