Today’s Economic Landscape and What’s on the Other Side

Today’s Economic Landscape and What’s on the Other Side

July, 2009

Presented by: Morris Segall, President SPG Trend Advisors

THE ECONOMY

Gross Domestic ProductQ1 2001 – Q1 2009

Source: Bureau of Economic Analysis

Contributions to GDP Growth by Component

Q1 2008 – Q1 2009


Historic and Projected Real GDP Growth 2007 – 2011*

Source: World Bank

World Bank’s GDP growth projection is more dire compared to the projection by the IMF. The recovery process is expected to take longer even with various policy efforts of governments partly because the crisis is so severe and has penetrated throughout the world. Economies are in worse conditions than expected.

*2007/08 data are actual

Year-over-year Percentage Changes in Corporate Profit before Tax

Q1 2001-Q1 2009


Year-over-year Percentage Changes in Non-financial Sector Corporate Profit before Tax

Q1 2001-Q1 2009


Industrial Production January, 2008 - May, 2009

Source: Federal Reserve Bank

% decline Jan. 08- May. 09: 15%

Capacity Utilization by Status of ProductionJanuary, 2008 - May, 2009


Manufacturers Durable Goods Orders & ShipmentsExcluding Transportation

January, 2008 – May, 2009

Source: Census Bureau

Much has been made of the increase in orders since March. Note the absolute low levels and the shortfall versus shipments. Shipment levels will decline if orders do not pick up substantially from current levels.

Net Change in U.S. Jobs (Total Non-farm)June, 2005 – June, 2009

Source: Bureau of Labor Statistics

National Nonfarm Employment by Industry Sector GroupsJanuary, 2008 – June, 2009


National Nonfarm Employment by Industry Sector GroupsSeptember, 2008 – June, 2009


Initial Unemployment Claims January, 2009 – June, 2009

Source: Department of Labor

Reflecting the rise in unemployment, new job losses rose dramatically in the first quarter of this year. However, the trend of new job losses appears to have peaked at around 660,000 since March. Normally we would be prepared to predict a peaking in unemployment is at hand based on this trend. However, we believe a new surge in job losses is coming over the summer as the auto industry downsizes.

Continued Unemployment Claims June, 2006 – June, 2009

Source: Department of Labor

Source: (Left) Census Bureau, (Right) Federal Reserve Bank

Retail Sales Less Food and Fuel May, 2007 – May, 2009

Consumer CreditQ2 2006 – April, 2009

Since the third quarter of 2008 consumer spending has been declining and the consumer is currently paying down outstanding debt. These trends have been negative for the economy in the short term but the reduction of consumer debt and an increase in consumer savings is positive for the economy and the improved creditworthiness of the consumer longer term.

National Saving Rateas Percentage of Personal Disposable Income

Q1 2005 – Q1 2009


Existing Home Sales v. Length on MarketMarch, 2006 - May, 2009

Source: (Left) National Association of Realtors, (Right) Census Bureau

New Home Sales Units Sold v. Length on Market

March, 2006 - May, 2009Housing remains weak but new home inventories may have peaked as new home construction , home prices and mortgage interest rates have declined. The latter will also help the existing home market. We expect the rate of decline in housing sales to diminish over the remainder of this year.

S&P/Case-Shiller Home Price Index 2006 – April, 2009

Source: Standard and Poors

Conference Board Consumer Confidence2005 – June, 2009

Source: Conference Board

Commercial Mortgage Backed Securities Delinquency Rates

among Major Investor GroupsJanuary, 2008 - March, 2009

Source: Intex, Trepp (Deutsche Bank)

Real Estate Loan Delinquency Rates: All BanksQ1 2006 –Q1 2009


Changes in Consumer Price Index in Percentage Terms

2006 v. 2005

2007 v. 2006

2008 v. 2007

6 months ended in

May 2009

All items 2.5% 4.1% 0.1% -0.4%Food at Home 1.4% 5.6% 6.6% -4.1%Food Away Home 3.2% 4.0% 5.0% 2.7%Rent of Primary Res 4.3% 4.0% 3.4% 2.2%Owners Equiv of Rent of Prim Res 4.3% 2.8% 2.1% 2.1%Household Energy 2.4% 5.3% 5.9% -13.7%Water/Sewer/Trash 4.8% 5.4% 6.5% 4.7%Houshold Ops 4.4% 2.2% 6.0% -0.7%Car Repair 3.8% 3.3% 5.9% 2.9%Pub. Transp 0.1% 7.2% 1.8% -14.5%Medical 3.6% 5.2% 2.6% 3.9%Education 6.3% 5.6% 5.6% 5.5%Energy 2.9% 17.4% -21.3% -18.1%Source: Bureau of Labor Statistics

While inflation has declined precipitously in the recession led by the collapse in energy and commodity prices, we are not in agreement with a fear of deflation hitting the U.S. economy. Basic services, healthcare and education prices remain stubbornly high.

Source: Energy Information Administration

Crude Oil Spot Prices in U.S. DollarsJune, 2004– June, 2009

Nominal Broad Dollar Index* June, 2000 – June, 2009

* Broad Dollar Index: a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.

Source: Federal Reserve Board

THE GOVERNMENT’S RESPONSE

Money Supply (M2): January, 2007 – June, 2009


Federal Budget Deficit (exclusive of Social Security Trust funds)

FY 2006 – May, 2009

Source: FMS, U.S. Treasury Department

U.S. Federal Budget Deficit, 1995-2011*

*2009-2011 data are projections

Source: Congressional Budget Office


Federal Reserve Balance Sheet: Reserve Bank Credit

June, 2008 – June, 2009

Source: (Left) Federal Reserve Bank, (Right) British Banker’s Association

Federal Fund Rates, January, 2008 - June, 2009

3-month LIBOR rates lent in $US January, 2008 - June, 2009

The Fed and European Central Bank have cut interest rates to the banking systems here and abroad thus driving down the cost of bank funds to facilitate bank lending.

What’s on the other side? 2009 - Recession Bottoms with Housing and Unemployment

Housing bottoms late this yearBank loan losses start to peak at the end of this yearUnemployment peaks at the end of this yearLower Energy Prices alleviate pressure on consumer spending – but virtually no economic growth or recovery

Obama Administration Increased economic stimulus spending programs will begin to help economy in the second half of 2009 Increased spending on energy, healthcare and education will result in increased federal budget deficits and higher taxes and fees going forward

What’s on the other side? (cont.)2009 – Business

Cost of goods declines from current levels as interest rates, labor costs and commodity prices decline but business is facing zero consumer and business demand. Corporate profits in decline for most of this year.Weak consumer spending but pent-up demand building

2010 – Economy Makes Gradual Cyclical Recovery

Increased employment = increased consumer spendingIncreased Corporate Sales = increased corporate profits = increased capital spendingIncreased interest rates and rising prices from higher demand, less accommodative Fed policy and continuing federal budget deficits

Where are the opportunities?Healthcare – National ProgramEducationAgricultureEnergy ConservationEnvironmental Solutions Electric PowerTransportation – Increase Mass TransitExports

Water Conservation – New Supplies and RecyclingU.S. Government Procurement and Outsourcing – Base Realignment Program (BRAC)Real Estate – Recycle and Rehab Existing Commercial and Residential Property

ConclusionsWe have been in a deep and protracted recession that began in the fourth quarter of 2007. It began in housing and has spread through the entire U.S. and overseas economies. Economic weakness intensified through 2008 and has worsened through the first quarter of 2009. The first quarter should be the nadir of the economic contraction in the current recession cycle but there will be no economic recovery this year. Continuing near term economic pressures include:

high cost and reduced availability of creditlower corporate profitsincreased unemploymentcontinued weak levels of corporate capital and consumer spending

Conclusions continued

Severe reductions in State and Local Government spending and eroded municipal financial strength Weak exports as overseas economies continue in recessionContinued credit pressures in residential housing and consumer lending spread to commercial real estate markets and corporate lending

Conclusions continuedHowever, a bottoming of the housing cycle and a peaking in unemployment late this year, aided importantly by increased federal stimulus spending in the second half of this year, should set the stage for cyclical capital markets and economic improvements in 2009 and 2010. Indeed, capital markets in the U.S. and abroad have already staged a large recovery off what we believe are market cycle lows in the first quarter.After an expected cyclical recovery in 2010-2012, we believe the longer term socio-economic issues facing this country will result in slower future economic growth for the United States. The availability and cost of credit, particularly to consumers, will be more restricted and expensive in the future.

Thank You

You can always reach me at [email protected], if you need us in a hurry, we are at 410.522.7243 Please contact us when you require economic and capital markets research & policy analysis.Further information available at www.spgtrend.com

Today’s Economic Landscape and What’s on the Other Side

Economy & Finance

Transcript of Today’s Economic Landscape and What’s on the Other Side