1 8 00am - the winding road of economic recovery
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The Winding Road of Economic Recovery
Bank Capital Markets and Tax Institute West
October 17, 2013
Rob StrandSenior Economist, ABA
aba.com 1-800-BANKERS
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Inflation-Adjusted GDP
Source: U.S. Bureau of Economic Analysis and NBER
$13
$14
$15
$16
2003 2005 2007 2009 2011 2013
$Trillion
Recession
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State Indexes of Leading Indicators
Over 2
1—2
0—1
Decline
Source: Federal Reserve Bank of Philadelphia, August 2013
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Business Confidence
Source: NFIB, University of Michigan
Index Values (2
005=10
0)
50
60
70
80
90
100
2005 2007 2009 2011 2013
Small Business Optimism
Consumer Confidence
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$0
$4
$8
$12
2000 2004 2008 2012
Bank Deposits and Loans
Deposits
Loans
$Trillions
Source: Federal Deposit Insurance Corporation
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Quarterly Inflation-Adjusted GDP Growth
‐6%
‐3%
0%
3%
6%
2009 2010 2011 2012 2013Source: U.S. Dept. of Commerce, Bureau of Economic Analysis
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Consumer-Driven U.S. Economy
‐6%
‐3%
0%
3%
6%
2009 2010 2011 2012 2013
Total GDP Consumer Spending
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis
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Business Firms are Wary
‐6%
‐3%
0%
3%
6%
2009 2010 2011 2012 2013
Total GDP Net Exports Business Investment & Inventories
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis
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Government Pullback
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis
‐6%
‐4%
‐2%
0%
2%
4%
6%
2009 2010 2011 2012 2013
Total GDP Municipal Government Federal Government
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Consumer Driven Recovery
Don't sit there mumblin', talkin' trash.
If you wannahave a ball,
you gotta go out and spend some cash …
Let the good times roll.
— B.B. King
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Housing Starts
Source: U.S. Department of the Census
0
1
2
1963 1970 1977 1984 1991 1998 2005 2012
Recession 1959 ‐ 2010 Average
August2013:891K
Millions of Units
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Conventional 30-Year Mortgage Rate
Source: Federal Reserve
0%
3%
6%
9%
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
4.2%
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26 Million Millenial’s Live with Relatives
43%
39%
35%
36%
2012
2007
1981
1968
Source: Pew Research Center on 18-31-year-olds
Highest in Four Decades
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Retail Sales
Inflation & Seasonally‐Adjusted Quarterly Growth Rate on Quarter Avg.
‐24%
‐18%
‐12%
‐6%
0%
6%
12%
1994 1998 2002 2006 2010Source: U.S. Dept. of Commerce: Bureau of Economic Analysis
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Automobile Sales
Source: Autodata Corp.
0
5
10
15
2010 2011 2012 2013
SAAR in Millions
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Average Age of Vehicles
Source: HIS/Polk
0
4
8
12
2002 2004 2006 2008 2010 2012
Passenger Cars Light TrucksYears
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Consumer Credit
Revolving Non‐Revolving
Seasonally Adjusted Change Over the Last 6 Months
$75 Billion
($1 Billion)
Source: Federal Reserve
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Student Loan Debt
Source: Federal Reserve Bank of New York
$0
$300
$600
$900
2005 2006 2007 2008 2009 2010 2011 2012
$292
$307
$154
$106
$ Billions
Under 30
60+
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Average Tuition, Fees, Room and Board
Source: The College Board Annual Survey of Colleges
$0
$10,000
$20,000
$30,000
$40,000
1972‐1973 1980‐1981 1988‐1989 1996‐1997 2004‐2005 2012‐2013
Public 4‐Year School(3.8% 2003‐2013 annual growth rate)
Private 4‐Year School(2.3% 2003‐2013 annual growth rate)
2012 Dollars
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Proportion with Home-Secured Debt at 30
0%
10%
20%
30%
40%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Have Student LoansNo Student Loan
Source: Federal Reserve Bank of New York
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Unemployment Rate
0%
5%
10%
15%
1994 1998 2002 2006 2010
7.3%
Source: U.S. Department of Labor, Bureau of Labor Statistics
13.7%
Unemployment
Underemployment
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Labor Force Participation at 1979 Level
Source: U.S. Department of Labor, Bureau of Labor Statistics
45%
55%
65%
75%
1976 1982 1988 1994 2000 2006 2012
Men
Women
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Under 5%
6%—7½%
8%—9%
Over 9%
Unemployment Rate
Source: U.S. Dept. of Labor, Bureau of Labor Statistics, July 2013
4.6%9.5% 4.2%
4.6%4.8%
3.9%3.0%
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U.S. Payroll Growth
Source: U.S. Department of Labor, Bureau of Labor Statistics
(900,000)
(700,000)
(500,000)
(300,000)
(100,000)
100,000
300,000
500,000
2005 2006 2007 2008 2009 2010 2011 2012 2013
8.7 Million Jobs Lost
7.1 MillionJobs Recovered
GDPBroke Even
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Loss in Payrolls from Pre-Recession Peak
‐8%
‐4%
0%
0 10 20 30 40 50 60
1948 1953 1957 1960 1969 19731980 1981 1990 2001 2007
Source: U.S. Department of Labor, Bureau of Labor Statistics
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Unemployment Duration
Source: U.S. Department of Labor, Bureau of Labor Statistics
0
5
10
15
20
1971 1978 1985 1992 1999 2006 2013
Less than 5 Weeks
5–14 Weeks
Millions
15–26 Weeks
27+ Wks
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Personal Income
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis
‐12%
‐6%
0%
6%
12%
2001 2003 2005 2007 2009 2011 2013
Seasonally‐Adjusted Quarterly Growth Rate on Quarterly Average
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Median Family Income
$40,000
$45,000
$50,000
$55,000
1985 1989 1993 1997 2001 2005 2009 2013
Sources: Census Department and Sentier Research, LLC
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Rebuilding Wealth
Source: Bureau of Economic Analysis and Federal Reserve
Household Wealth0%
2%
4%
6%
8%
$0
$20
$40
$60
$80
2004 2006 2008 2010
Savings Rate
Household Net Worth in $Trillions
2013
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Source: Scott Adams, Dilbert, September 6, 2013
Business is Growing
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Business Indexes
80
90
100
30
40
50
60
2006 2007 2008 2009 2010 2011 2012 2013
Industrial Production
ISM Non‐Manufacturing
Contraction Expa
nsion
ISM Manufacturing
Sources: Federal Reserve, Institute for Supply Management
2013
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U.S. Exports to China Slowing
($2)
($1)
$0
$1
$2
$3
$4
2005 2007 2009 2011 2013
Source: Federal Reserve Bank of St. Louis (FRED)
Change from a year ago, $Billions
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Corporate Profits
Source: U.S. Dept. of Commerce: Bureau of Economic Analysis
$0.0
$0.5
$1.0
$1.5
2001 2003 2005 2007 2009 2011 2013
SAAR in $Billions
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0
400
800
1200
1600
2005 2006 2007 2008 2009 2010 2011 2012 2013
S&P 500 Index
Source: Standard & Poor’s
Up 123%
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VIX Index of S&P Volatility Futures
0
20
40
60
80
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Chicago Board of Exchange
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Source: Clay Bennett, The Christian Science Monitor
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Impact of No Federal Budget
• Furloughed workers will get back pay
• Contractors will not
• Sales lost due to furloughs
• Falling consumer and business confidence
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Cash Crunch
$30 billion of U.S. Treasury cash left after today. Payments due:
$12B Social Security
$6B Interest on debt
$2B Medicaid
$3B Salaries
$3B Supplementary SecurityIncome benefits
$12B Military pay
$18B Medicare
$25B Social Security
$29B Interest on debt
$12B Social Security
Sources: Bipartisan Policy Center, U.S. Treasury, CBO, WSJ
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Maturing Debt
October 24 $58 billionOctober 31 $115 billionNovember 7 $54 billionNovember 14 $79 billionNovember 15 $63 billion
Total $370 billion
Source: Bipartisan Policy Center, TreasuryDirect
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To Buy Time
• Prioritization of Federal payments
3 million payments on 3 systems daily
• 14th Amendment to the Constitution
• “The validity of the public debt of the U.S. … shall not be questioned”
• $1 Trillion platinum coin
• Debt forgiveness by the Federal Reserve
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Treasury Bill Interest Rates
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Source: Federal Reserve
Twelve-Month Three-MonthSix-Month One-Month
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Impact of a Federal Default
• 20% cut in outlays in an average month Varies by month Economic slowing Deeper cuts
• Higher interest rates? Reduce investments, homebuying, etc. Capital losses for financial institutions Weaker dollar would stimulate exports
• Falling consumer and business confidence
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Congressional Negotiations
• Republicans moved away from defunding or delaying Obama Care (ACA)
• No Collins deal over the weekend
• Democrats proffered a desire to replace sequestrations
• Latest proposal: Continuing Resolution to January 15 Raise the Debt Limit to carry to February 7 Bicameral “Super” committee – before December 13
• House contemplating adding measures
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Federal Receipts, Outlays & Deficit to GDP
0%
20%
40%
60%
80%
1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023
Source: U.S. Congressional Budget Office
Receipts
Outlays
––– Forecast –––
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Entitlements Overwhelm Revenue
Source: U.S. Congressional Budget Office (September 2013)
0%
5%
10%
15%
20%
25%
30%
35%
2000 2010 2020 2030 2040 2050 2060 2070
Hun
dred
s
Social Security
Medicare
Medicaid
OtherForecast
Interest
% of GDP
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European Debt-to-GDP is Rising Rapidly
0%
20%
40%
60%
80%
100%
U.S. Germany U.K. Spain France
2011 2012 2013* projected
Source: International Monetary Fund
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Developing Country Stock Markets
‐17.4%
‐17.1%
‐16.3%
‐9.4%
‐9.0%
‐7.4%
‐7.4%
‐7.1%
‐7.0%
‐5.6%
BrazilChileTurkeyMexicoCzech RepIndiaChinaRusiaColumbia S. Korea
Market ReturnsOver the Past Year
Source: Bloomberg
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Lots of Liquidity from the Fed
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Fed’s Balance Sheet Growth
Source: Federal Reserve
$0
$1
$2
$3
2008 2009 2010 2011 2012 2013
$Trillion
MBS & Agency Debt
Treasuries
October 9: $3.7 Trillion$1.4T
$2.1T
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Federal Funds Rate Hikes in the Past
Source: Federal Reserve
0%
1%
2%
3%
4%
5%
6%
7%
‐1 1 3 5 7 9 11 13 15 17 19 21 23 25
Fed
Fund
s Ta
rget
Rat
e
Months Since Tightening Began
19942004
2000
Long Term Forecast
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Economic Uncertainties
• Federal budget, debt and taxes
• Interest rates
• Global demand
• Fannie, Freddie and QM standards
• Student debt
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U.S. Traditional Advantages Continue
• Strong global competitor
• Robust entrepreneurial culture
• Flexible capital and labor markets
• Technological leader
• Highly diverse mix of industries
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For more, see our blogs:
Dodd-Frank TrackerRegReformTracker.ABA.com
Banks and the Economywww.BanksAndTheEconomy.blogspot.com
aba.com 1-800-BANKERS
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0%
5%
10%
15%
20%
1980 1990 2000 2010
Strengthening Household Balance Sheets
Source: Federal Reserve Flow of Funds
2013
Debt/Assets at 2002 Level
Financial Obligations Ratio at 1984 Level
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Congressional Banking Issues to End 2013
Housing Issues
Fannie Mae and Freddie Mac (Corker-Warner GSE Reform Bill)
CFPB Ability-to-Repay Standard in the Qualified Mortgage rule
Extension of the Mortgage Forgiveness Debt Relief Act
Five-Year Farm Bill
CFTC Reauthorization
Regulatory Relief for Banks
Dodd-Frank Act Oversight
Designation of SIFIs, resolution authority, derivatives
Brown-Vitter bill and the forthcoming GAO report
Janet Yellen + Replacing Betsy Duke and Sarah Bloom Raskin
aba.com 1-800-BANKERS