/1/9 Economic and Banking Outlook May 9 Major issues Consumer spending recovering? Investment t spending lagging? Housing inventories will take years to clear Bank credit losses will remain high through 11 1
/1/9 Real GDP growth sagging on all sides Private Fixed Investment % Change - Year to Year SAAR, Bil.$ 3 Personal Consumption Expenditures % Change - Year to Year SAAR, Bil. $ 3 1 1-1 -1-8 85 9 95 5 - Source: Bureau of Economic Analysis /Haver Analytics Consumption spending showing signs of life Real Personal Consumption Expenditures: Durable Goods % Change - Year to Year SAAR, Bil.Chn.$ 15 Real Personal Consumption Expenditures % Change - Year to Year SAAR, Bil.Chn.$ 1 5-5 -1-15 98 99 1 3 5 7 8 - Source: Bureau of Economic Analysis /Haver Analytics
/1/9 Consumption supported by increase in personal income - fall in taxes Personal Current Taxes Difference - Period to Period SAAR, Mil.$ Disposable Personal Income Difference - Period to Period SAAR, Mil.$ - - - 98 99 1 3 5 7 8 - Source: Bureau of Economic Analysis /Haver Analytics Consumers increase savings rate temporary or longer-term? 3
/1/9 Consumption [savings] tracks changes in wealth in this recession Households, Nonprofit Organizations: Change in Net Worth NSA, Bil.$ Real Personal Consumption Expenditures % Change - Year to Year SAAR, Bil.Chn.$ - - - 98 99 1 3 5 7 8 - Sources: FRB, BEA /Haver Sustained gains in stock market may recoup some wealth loss Households: Holding Gains on Corporate Equities [Mkt Value] NSA, Bil.$ Households/Nonprofit: Holding Gains on Real Estate [Mkt Value] NSA, Bil $ 1 1-1 -1-98 99 1 3 5 7 8 - Source: Federal Reserve Board /Haver Analytics
/1/9 Unemployment will remain a major concern through 1 Civilian Unemployment Rate: 1 yr + SA, % 1 1 1 1 8 8 5 55 5 7 75 8 85 9 95 5 Source: Bureau of Labor Statistics /Haver Analytics And average unemployment duration is high Average {Mean} Duration of Unemployment SA, Weeks 18 18 1 1 1 1 1 1 1 1 8 85 9 95 5 Source: Bureau of Labor Statistics /Haver Analytics 5
/1/9 Job market showing some improvement Unemployment Insurance: Monthly Total Initial Claims Applications NSA, Number 35 35 3 3 5 5 15 15 1 1 5 99 1 3 Source: Department of Labor /Haver Analytics 5 7 8 5 Manufacturing hit by many stresses Unemployment Rate: Wholesale and Retail Trade NSA, % 1.5 Unemployment Rate: Manufacturing NSA, % 1.5 1. 1. 7.5 7.5 5. 5..5 98 99 1 3 5 Source: Bureau of Labor Statistics /Haver Analytics 7 8.5
/1/9 Structural changes will dampen job market improvements for some Minimum Hourly Wage Rate: Nonfarm D ollars 8 8 5 5 55 5 7 75 Source: Department of Labor /Haver Analytics 8 85 9 95 5 US household debt levels declining but still relatively high Ratio: Consumer Installment Credit to Personal Income SA, %.5.5.. 17.5 17.5 15. 15. 1.5 8 85 9 95 Source: Federal Reserve Board/BEA/Haver Analytics 5 1.5 7
/1/9 Investment spending remains drag Real Private Residential Investment % Change - Year to Year SAAR, Bil.Chn.$ 15. Real Private Nonresidential Fixed Investment % Change - Year to Year SAAR, Bil.Chn.$ 15. 7.5 7.5.. -7.5-15. -7. 75 -.5-15. -3. 98 99 1 3 5 7 8 -.5 Source: Bureau of Economic Analysis /Haver Analytics Inventory levels in durables need high spending to run off Inventories/Sales Ratio: Mfg: Durable Goods Industries SA, Chained $ 1.9 Real Manufacturing & Trade: Inventories/Sales Ratio All Industries SA Chn$ 1.9 1.8 1.8 1.7 1.7 1. 1. 1.5 1.5 1. 1. 1.3 1.3 98 99 1 3 5 7 8 Source: Bureau of Economic Analysis /Haver Analytics 8
/1/9 Source: Economy.com 9
/1/9 Some boost from construction spending Housing continues to plague NAR Median Sales Price: Existing 1-Family Homes, United States % Change - Year to Year $ Existing 1-Family Home Sales: United States SAAR, Thous 7 1 5 3-1 - 8 85 9 95 Source: National Association of Realtors /Haver Analytics 5 1 1
/1/9 Mortgage rates key ingredient to housing market recovery Contract Rates on Commitments: Conventional 3-Yr Mortgages, FHLMC % 9. 9. 8.5 8.5 7.5 7.5.75.75.. 5.5 5.5.5.5 99 1 3 Source: Federal Reserve Board /Haver Analytics 5 7 8 Affordability at all time high Composite Housing Affordability Index % Change - Year to Year Median Inc=Qualifying Inc=1 Existing 1-Family Home Sales: United States SAAR, Thous 7 5 3 - - 1 8 85 9 95 5 Source: National Association of Realtors /Haver Analytics 11
/1/9 Some signs of life in housing sales New 1-Family Houses Sold: West % Change - Year to Year SAAR, Thous New 1-Family Houses Sold: United States % Change - Year to Year SAAR, Thous - - - - - - 99 1 3 Source: Census Bureau /Haver Analytics 5 7 8 Loan demand up 1
/1/9 Low Rates, GSE Streamline Refis Result in Origination Rebound in 9 Total Single-Family Mortgage Originations (Billions of Dollars), 3,75 Refinance Originations 3,5 Home Purchase Originations 35 3,5 3,,75,5,5, 1,75 1,5 1,5 1 1, 75 5 5 '98 '99 ' '1 ' '3 ' '5 ' '7 '8 '9 Sources: Freddie Mac FHA Lending Is Up Sharply: Largest Share Since 19 Share of Single-Family Originations 5% Annual Quarterly 19: % FHA=9% 8Q: FHA=9% 3% % FHA & VA 1% FHA-Insured % 1993 1989 1985 1981 1977 1973 199 195 191 1957 1953 199 195 191 1937 Sources: HUD (1935-1997), Freddie Mac & Inside Mortgage Finance (1998 Present) 1997 1 1Q5 1Q 1Q7 1Q8 13
/1/9 But housing inventories are enormous New 1-Family Houses For Sale: Months Supply SA, Ratio New 1-Family Houses: Median No of Months for Sale Since Completion NSA, Months 1.5 1 1. 1 8 7.5 5..5 8 85 9 Source: Census Bureau /Haver Analytics 95 5 Housing starts will remain sluggish through 1 Housing Starts % Change - Year to Year SAAR, Thous.Units 1 1 8 8 - - -8-8 8 85 9 Source: Census Bureau /Haver Analytics 95 5 1
/1/9 Job Loss Main Hardship Reason Among Delinquent Prime Borrowers Hardship Reason 7 Unemployment or curtailment of income 3.% Illness or Death in the Family 5.5% Excessive obligation 1.% Marital difficulties.% Property problem or casualty loss.% Extreme hardship.% Inability to sell or rent property 1.7% Employment transfer or military service.9% All other reasons 3.7% Source: Freddie Mac; data exclude delinquent loans in Louisiana and Mississippi due to hurricane effects. Data cover only prime conventional conforming loans. GSE & GNMA Market Share Fell When Subprime Boomed; Today Main Source of Mortgage Funds MBS Share Issuance (Percent of MBS Issuance) Annual (1985 7) Quarterly (8) 9% 8% 7% % 5% % 3% % 1% % Conventional, Prime, Fixed-Rate Lending Is Mainstay of Market (1985-3) Subprime, th quarter 8: Non-Traditional Lending Boom (-7H1) FRE & FNM % Subprime Crisis, Private-label MBS Collapse (7H-8) Ginnie Mae 37% 1985 198 1987 1988 1989 199 1991 199 1993 199 1995 199 1997 1998 1999 1 3 5 7 8 Q1 8 Q 8 Q3 8 Q Ginnie Mae Private-Label Freddie Mac and Fannie Mae Source: Inside MBS & ABS (The 8 Mortgage Market Statistical Annual - Volume II), Inside MBS & ABS (April 5, 5, July 11, 8 issues, and January 9, 9). Private-Label 1% 15
/1/9 National bank profitability near its 1987 low point National banking company ROE Total Assets less than $1B Percent 18 1. -1.1* Recessions 7 7 7 78 8 8 8 8 88 9 9 9 9 98 8 1 1 1 1 8 - *Excludes effects of purchase accounting at Wachovia and National City Source: Integrated Banking Information System (OCC) Data for all bank and thrift charters in companies where national bank assets represent at least 5% of total assets. Data are merger-adjusted and held constant on a 1-year rolling basis. Data include Citibank Q:8 goodwill restatement. 31 Reserves continue to decline as a share of noncurrents National banking companies Reserves / noncurrent loans percent 5 175 15 15 1 75 5 8 8 88 9 9 9 9 98 8 5 Source: Integrated Banking Information System (OCC) Data for all bank and thrift charters in companies where national bank assets represent at least 5% of total assets. 3 1
/1/9 Loans declined and core deposit growth accelerated in 8 National banking companies Q:7 Q:8 Year-year percent change 1 1 8 - - Total Assets Loans Securities Domestic deposits Source: Integrated Banking Information System (OCC) Core deposits Data for all bank and thrift charters in companies where national bank assets represent at least 5% of total assets. Data are merger-adjusted and held constant on a 1-year rolling basis. Data include purchase accounting effects. - 33 Record consumer charge-offs drive total charge-off rate to new highs National banks* Q:91 Previous post-199 cycle peak 3Q:9 3Q:1 Q:93 Q: Q:7 Q:8 3Q:9 Q:1 Q: Net charge-offs percent 1 1Q: 9 8 7 5 3 1 Total Construction 1- family HELOC Nonres C & I Installment Credit mortg card Source: Integrated Banking Information System (OCC) *WAMU not included prior to 3Q:8. Rates skewed by purchase accounting issues, however total charge-off rate not materially affected (data do not allow restatement of detailed charge-off rates). Net charge-offs as a percent of loans in respective category. Charge-off rates are annualized. 3 17
/1/9 Recession everywhere but in Caribouland District charge-offs rising sharply, especially in the West National non-specialty community banks Q: Q:7 Q:8 Net charge-off rate percent 1.8 1. 1. 1. 1..8 Construction Residential mortgage Consumer C&I Other Q:8 net charge-off rate percent 1.8 1. 1. 1. 1..8 NE CE SO WE Source: Integrated Banking Information System (OCC)........ NE CE SO WE National non-specialty community banks have assets less than $1 billion and exclude credit card and trust banks. Data are merger-adjusted and held constant for banks in constant operation from 1Q:5 to Q:8. 3 18
/1/9 5 Increasing Delinquencies, Especially Subprime Loans 9 Days or More Delinquent or in Foreclosure (percent of number) All Loans Prime Loans Subprime Loans 3.1 15 1 5.3 3.7 1998 1999 1 3 5 7 8 Source: Mortgage Bankers Association; Prime Loans includes Alt-A (Quarterly data not seasonally adjusted;1998q1-8q). Stress testing loss rates 19
/1/9 Comparison to 3s Asset growth fell off more sharply outside the banking system last year U.S. credit market assets held, year-year change $ billions 3,,5, Non-banks and foreign banks operating in U.S. Domestic banks & thrifts 1,5 1, 5-78 8 8 8 8 88 9 9 9 9 98 8 (5) Source: Federal Reserve Calculations exclude Federal Reserve assets.