Economic Outlook
Dr. Don SchunkResearch EconomistBB&T Center for Economic & Community DevelopmentCoastal Carolina University
Presented to the Government Finance Officers Association of South Carolina
October 13, 2008
Overview of Economic Conditions
• The current financial crisis:– How did we get here, and where are we?
• Thoughts on the ‘Bailout’
• Recent and Projected U.S. Conditions
• Recent and Projected S.C. Conditions
U.S. New Home Sales – The Double Correction1970Q1 – 2008Q3
200
400
600
800
1000
1200
1400
1970 1975 1980 1985 1990 1995 2000 2005
10
00
s, a
nn
ua
lize
d
Key Housing Indicators
2.5
3.0
3.5
4.0
4.5
5.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06
Ratio of Median Home Price to Median Income
20
30
40
50
60
70
80
2001 2002 2003 2004 2005 2006 2007
Prime MortgagesNon-Prime Mortgages
Percent of Mortgage Loans by Product Type
pe
rce
nt
The Storm Surge: 2000 - 2006
• The push for ever-increasing homeownership rates
• Ongoing financial innovation
• Record low interest rates
• NINJA loans
• The spread of mortgage-backed assets and mortgage derivatives
The Surge Recedes: 2006 - ?
• Homeowners default
• Mortgage-backed assets lose value
• Balance sheets weaken
• Abrupt shift in the appetite for risk
• Mark-to-market accounting without a market
• Credit market stops functioning
• Stock markets slide
Savers Borrowers
The Financial Infrastructure
Financial Markets
The TED Spread
Sept 17
Where are we now?
• Banks are unwilling to lend
• Households and businesses are shifting out of deposits
• These decisions are causing the money multiplier to move in the wrong direction – we are witnessing deposit contraction rather than deposit creation
The impacts
• The credit freeze is preventing individuals and businesses from borrowing to finance productive economic activities
• The economy was already precarious – frozen credit markets have made a recession unavoidable
The intentions of the “bailout”
• Remove uncertain assets from the banking system – increase the willingness to lend to households and businesses by increasing the willingness of banks to lend to each other
• Keep more funds in the form of bank deposits
-30
-20
-10
0
10
20
30
00 01 02 03 04 05 06 07 08 09
ConsumptionBusiness InvestmentResidential Investment
an
nu
aliz
ed
% c
ha
ng
e
Recent U.S. Trends2000Q1 – 2009Q4
U.S. Net Exports1970Q1 – 2009Q4
-700
-600
-500
-400
-300
-200
-100
0
100
1970 1975 1980 1985 1990 1995 2000 2005
$ b
illio
ns
U.S. Real GDP Growth2000Q1 – 2009Q4
2000 3.7%2001 0.8%2002 1.6%2003 2.5%2004 3.6%2005 2.9%2006 2.8%2007 2.0%2008 1.4%2009 0.4%2010 2.0%-2
0
2
4
6
8
00 01 02 03 04 05 06 07 08 09
an
nu
aliz
ed
% c
ha
ng
e
Job Growth: SC and US1991Q1 – 2008Q3
-3
-2
-1
0
1
2
3
4
2000 2001 2002 2003 2004 2005 2006 2007 2008
South Carolina United States
an
nu
al %
ch
an
ge
Employment: Total and Selected Sectors2000Q1 – 2008Q3
-4
-2
0
2
4
6
8
2000 2001 2002 2003 2004 2005 2006 2007 2008
Total EmploymentRestaurantsHealth Care
an
nu
al %
ch
an
ge
S.C. Employment Growth2000Q1 – 2009Q4
2000 1.6%2001 -1.9%2002 -1.0%2003 0.2%2004 1.4%2005 1.8%2006 2.2%2007 2.3%2008 0.3%2009 -0.3%2010 0.8%
-3
-2
-1
0
1
2
3
4
00 01 02 03 04 05 06 07 08 09
an
nu
al %
ch
an
ge
Unemployment: S.C. and U.S.1976Q1 – 2009Q4
3
4
5
6
7
8
9
10
11
12
1980 1985 1990 1995 2000 2005
S.C. U.S.
pe
rce
nt
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