Th E i O l kThe Economic Outlook: An Imperfect ‘10€¦ · Th E i O l kThe Economic Outlook: An...
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Th E i O l kThe Economic Outlook: An Imperfect ‘10
David WyssChi f E iChief EconomistStandard & Poor’s
March 9, 2010Data as of February 23
Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.Copyright © 2010 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
1
The U.S. Hits Bottom
• The recession appears to have ended in the third quarterThe recession appears to have ended in the third quarter
• Housing had been in recession for three years, subtracting over a percentage point from GDP growth in both 2007 and 2008.
• But seems to be stabilizing.
• Overseas partners are recovering, helping exports
Th fi l i l h h l d b h i ll• The fiscal stimulus has helped boost the economy, especially consumer and government spending.
• The financial system appears to be stabilizing.
• But private nonresidential construction is still plunging.
• The recession has been the longest and deepest since the 1930s.
• But the recovery is likely to be slow and uneven.
• And an even deeper and longer recession is possible if the financial markets lock up again oil prices jump or consumers remain scared
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2
markets lock up again, oil prices jump, or consumers remain scared.
The Housing Market Cycle
(Housing starts (1000) and 12-month % change in home prices (S&P/Case-Shiller))
2,500 30
(Housing starts (1000) and 12 month % change in home prices (S&P/Case Shiller))
1 500
2,000
,
10
20
1,000
1,500
0
10
0
500
-20
-10
1990 1993 1996 1999 2002 2005 2008
Starts Home prices (%chya)
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Source: Standard & Poor’s and Census Bureau
Bubbles Were Almost Everywhere
(Percent increase in home prices, 1997-2005)( p )
NetherlandSwitzerland
GermanyCanada
US
FranceSweden
ItalyIrelandBritain
Netherland
NewZealanChina
AustraliaJapanSpain
France
-100 -50 0 50 100 150 200 250
Hong Kong
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4
Source: Mortgage Bankers’ Association and Standard & Poor’s
Those Who Bubbled Highest Burst Loudest
(Percent increase in S&P/Case-Shiller home price index, December 2009)
W hiLos Angeles
Miami
New YorkPhoenix
Las VegasTampa
San DiegoWashington
MinneapolisBoston
PortlandSeattle
San Fran.New York
D llDetroitAtlanta
CharlotteDenver
Chicago
-100 -50 0 50 100 150 200
ClevelandDallas
2000 k k t
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5
2000-peak peak-present
Source: Standard & Poor’s
Foreclosures Are Concentrated(Percentage of homes in foreclosure, 2009)
•
Under 1%
2% to 3%1% to 2%
Over 3%
Under 1%
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6
Source: RealtyTrac
(Percent)
The Fed Didn’t Stop At Nothing
10
6
8
10
2
4
6
0
2
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Federal Funds Rate 10-Yr Bond Yield Mortgage rate
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7
Source: Federal Reserve
Quality Spreads Are Narrowing From Record Highs
(Spread over Treasury yields, percentage points)
1618
121416
68
10
024
02000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Default rate (12-month) Credit spreadOld spread series
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8
Source: Standard & Poor’s Global Fixed Income Research
Credit Default Insurance Rates Are Coming Down(Counterparty Risk Index, basis points)
300
200
250
100
150
0
50
07 07 07 07 08 08 08 08 09 09 09 09Jan
-07Apr-0
7Jul-0
7Oct-
07Jan
-08Apr-0
8Jul-0
8Oct-
08Jan
-09Apr-0
9Jul-0
9Oct-
09
CRI S&P 100
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Source: Credit Default Research, Standard & Poor’s
US Debt Is Actually Moderate(Percent of GDP, 2008)
UK*
France
Germany
Japan
ce
0 100 200 300 400 500
U.S.
Financial Inst Households Nonfinancial inst Government
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Source: McKinsey Global Institute* Adjusted for international bank support
Synchronized Sinking
• Industrial countries went into recession in 2008
• Real GDP fell in the U.S., Japan, and Europe and softened in Asia
• Developing countries looked like they might escape
• Until commodity prices plunged in Q4
• We expect world GDP to recover, by 3.8% in 2010 from -0.9% in 2009
Th t h i d ld i i hi t• The most synchronized world recession in history
• Followed by a synchronized recovery
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11
All Fall Down
(Percent change in real GDP, quarterly rate)
1.52
( g , q y )
-0.50
0.51
-2.5-2
-1.5-1
4 5-4
-3.5-3
2.5
-4.52007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4
US Japan Eurozone UK
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Source: Global Insight
Synchronized Sinking(Real GDP, % change)
810
2
46
-4-2
0
-8-6
ed States
Canada
Eurozon
eU.K
.Japan
n Europe
Asia-Pac
America
&N Afri
ca
an Africa
UnitedC Eu
Eastern
Other As
Latin A
Mid East & N
Sub-Saharan
2006 2007 2008 2009 2010 2011
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13
Source: Global Insight and Standard & Poor’s
Fiscal Stimulus Packages Varied Widely
(Packages passed in Q4 2008 Q1 2009 percent of GDP)
0 2 4 6 8 10 12 14
(Packages passed in Q4 2008- Q1 2009, percent of GDP)
AustraliaCanada
ChinaFFrance
GermanyIndiaItalyItaly
JapanKoreaSpainSpain
UKUS
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14
Source: Standard & Poor’s CRISIL
Deficits Are Mostly Cyclical
(Government deficit as % of GDP, fiscal years)
4
02
-6-4-2
-10-8
-122000 2003 2006 2009 2012
ex stimulus stimulus
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Source: Standard & Poor’s.
(4-quarter percent change)
Weaker Employment Is Hurting Construction
4% 40%
0%1%2%3%
0%10%20%30%
-3%-2%-1%0%
-30%-20%-10%0%
-5%-4%-3%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012-50%-40%-30%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Employment Nonresidential construction (right)
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Source: Bureau of Labor Statistics, Bureau of Economic Analysis, S&P projections
Oil Prices Have Dropped
($/barrel, WTI and deflated by CPI; household energy purchases as percent of disposable income)
120 9%
80
100
7%
8%
40
60
5%
6%
0
20
3%
4%
1980 1985 1990 1995 2000 2005 2010
Oil price (WTI) 2005 dollars % of disp. income (right)
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Source: Bureau of Economic Analysis
Equipment Spending Follows Capacity Needs
20% 85
(4-quarter percent change) (Percent)
0%
10%
75
80
-20%
-10%
65
70
-30%
20%
2000 2002 2004 2006 2008 2010 201260
65
Business equipment (real, left scale) Capacity Utilization, mfg (Right)
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Source: Federal Reserve, Bureau of Economic Analysis
Can the Consumer Keep Spending?
C di l d t i• Consumer spending led recent expansions
• But wealth is down because home prices have dropped and
Stocks are still do n sharpl from their 2007 peak• Stocks are still down sharply from their 2007 peak
• Borrowing is more difficult, and home equity loans much less availableless available
• Confidence has dropped and unemployment risen
• Consumers are likely to continue to save more andConsumers are likely to continue to save more and borrow less
• Falling oil prices gave back some purchasing power, but that is now reversing
• Stimulus package provides some income boost
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19
No Savings, But Lots of Debt(Percent of after-tax income)
10 140%
6
8
10
120%
130%
140%
2
4
6
100%
110%
120%
-2
0
2
80%
90%
100%
-21990 1993 1996 1999 2002 2005 2008 2011
80%
Saving rate Debt/income (right)
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20
g ( g )
Source: Bureau of Economic Analysis and Federal Reserve
High Unemployment Scares Consumers(Percent)
130 11
110120130
91011
8090
100
678
506070
345
502000 2003 2006 2009 2012
3
Consumer sentiment Unemployment Rate (right)
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21
p y g
Source: Bureau of Labor Statistics and University of Michigan Survey Research Center
Wealth Slides With Home and Stock Prices(Percent of after-tax income)
700%
500%
600%
200%
300%
400%
0%
100%
200%
1990 1993 1996 1999 2002 2005 2008 2011
Net worth Financial assets
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22
Source; Federal Reserve
Household Debt By Country
(Percent of income)
Canada
( )
Germany
France
UK
Japan
Italy
0% 25% 50% 75% 100% 125% 150% 175%
US
UK
0% 25% 50% 75% 100% 125% 150% 175%
2000 2008
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Source: McKinsey Global Institute
Bigger Than The Average Bear
• A great run from 1982 to 2000
• But the secular bear began in 2000
• Two largest bear markets since the depression
• Earnings were negative in Q4 for first time in history
• Stocks were overdue for a correction
• We think the rally will continue
• But a near-term correction is likely.
• The long-term cycle probably has another bear in it.
W ld t k k t h b h i d• World stock markets have become synchronized
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Everybody’s Down
100
(Percent change in stock prices, Feb. 10)
406080
-200
20
-80-60-40
World US Canada LatAmer
Europe Japan Asia PacAustralia
Since March Oct 2007 to March 2009
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25
Source: Standard & Poor’s
Stocks Cycle
25
(Annualized total return, S&P 500)
101520
05
10
10-50
-101929-1942 1942-1967 1967-1982 1982-2000 2000-2008
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26
Source: Standard & Poor’s Index of 500 Common Stocks
Bottom Line: The Economy Will Recover Slowly
• The recession is the longest and deepest since the 1930s
• Fiscal stimulus will support the recovery
• But recovery is likely to be slow because of financial markets and switch to higher savings
• If financial markets lock up again
• Home prices continue to fall
And oil prices continue to rise• And oil prices continue to rise
• The recession could be longer and deeper
• With the risk of a “lost decade” similar to Japan in the 1990s• With the risk of a lost decade similar to Japan in the 1990s
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The Unemployment RateRisks to the U.S. Economy
12
13%
9
10
11
12
6
7
8
9
3
4
5
6
32000 2002 2004 2006 2008 2010 2012
Baseline Pessimism Optimism
Source: U S Bureau of Labor Statistics (BLS) Standard & Poor’s projections
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Source: U.S. Bureau of Labor Statistics (BLS), Standard & Poor s projections.
Unemployment Rates Are High
(November 2009)(November 2009)
Under 8%
9.5% to 11%8% to 9.5
11% and over
Under 8%
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29
Source: BLS
Copyright © 2010 by Standard & Poor’s Financial Services LLC (S&P), a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. No content (including ratings, credit-related
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