the economy and financial markets: crawling out of recession - david wyss, brown university/standard...
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David Wyss, Brown University/Standard & Poor - Speaker at the 2012 IFG Wealth Management Forum, delivered his presentation entitled The Economy and Financial Markets: Crawling Out of RecessionTRANSCRIPT
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THE ECONOMIC OUTLOOK:
HALF-SPEED AHEADHALF-SPEED AHEAD
David Wyss
Brown University
April 24, 2012
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The Pace Of The Recovery Has Slowed
• A recovery is underway, but is likely to remain weak.
• Housing now appears to be stabilizing, although prices are still falling.
• Overseas partners are recovering, helping exports. The financial
problems add to risks and probably mean a recession in Europe.
• The fiscal stimulus helped boost the economy, but is being reversed.
The Washington gridlock makes any help from Washington unlikely, and
the government could cause a recession.
2.
the government could cause a recession.
• Private nonresidential construction remains weak, but equipment
spending has begun to recover
• Consumers aren’t bouncing back as quickly as usual, but are showing a
few more signs of life as they start replacement purchases.
• Another dip into recession is possible if the financial markets lock up
again or oil prices jump farther on Middle East turmoil.
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The Housing Bubble
• Housing was too affordable, thanks to low mortgage rates
• Ratio of home price to income hit a record high in 2007.
• We built too many houses at too high prices
• Starts and sales dropped sharply
• Defaults have soared, cutting back on willingness to lend
• Prices fell one-third from their peak, with the price/income ratio below
3.
• Prices fell one-third from their peak, with the price/income ratio below
its historical average
• Starts and sales are recovering
• But prices are likely to drop back through spring.
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Home Prices Were Too High
(Ratio of average home price to average household disposable income)
3.5
4
4.5
4.
Source: Bureau of Economic Analysis and Census Bureau
2
2.5
3
1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
Existing New Quality-adjusted
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Bubbles Were Almost Everywhere
SwedenItaly
IrelandBritain
NetherlandsSwitzerland
GermanyCanada
US
(Percent increase in home prices, 1997-2005)
5.
-100 -50 0 50 100 150 200 250
Hong KongNewZealand
ChinaAustralia
JapanSpain
FranceSweden
Source: Mortgage Bankers’ Association and Standard & Poor’s
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Those Who Bubbled Highest Burst Loudest
(Percent increase in S&P/Case-Shiller home price index, July 2011)
PortlandSeattle
New YorkSan Francisco
PhoenixLas Vegas
TampaSan Diego
WashingtonLos Angeles
Miami
6.
Source: Standard & Poor’s
-100 -50 0 50 100 150 200
ClevelandDallasDetroitAtlanta
CharlotteDenver
ChicagoMinneapolis
BostonPortland
peak-present 2000-peak
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(Percent)
The Fed Didn’t Stop At Nothing
6
8
10
7.
Source: Federal Reserve
0
2
4
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Federal Funds Rate 10-Yr Bond Yield Mortgage rate
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Synchronized Sinking
• Industrial countries went into recession in 2008, and into a plunge in the
fourth quarter of 2008
• Real GDP fell in the U.S., Japan, and Europe
• Developing countries looked like they might escape
• Until commodity prices plunged in Q4 2008
• World GDP is recovering, up 4.2% in 2010 from -2.1% in 2009
8.
• The most synchronized world recession in history is being followed by a
slow, less synchronized recovery
• Problems in Europe and Japan will further cut developed country
growth, with Japan back in recession.
• But Asia continues to grow strongly
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Synchronized Sinking
-2
0
2
4
6
8
10
(Real GDP, % change)
9.
-8
-6
-4
-2
2007 2008 2009 2010 2011 2012 2013
Source: Global Insight and Standard & Poor’s
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(Index)
Trade Gap And Reserve Diversification Will Send Dollar Lower
(Percent of GDP)
-4%
-3%
-2%
-1%
0%
1
1.1
1.2
1.3
1.4
10.
Source: Bureau of Economic Analysis and Federal Reserve, S&P projections
-7%
-6%
-5%
-4%
0.7
0.8
0.9
1
2000 2002 2004 2006 2008 2010 2012 2014
Net exports (right) Dollar index (major trading partners)
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Timeo Danaos Et Debitum Ferentes
(Central government debt as percent of GDP, 2010)
11.
Source: Standard & Poor’s from national sources
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Budget Deficits Depend On Economy
0 2 4 6 8 10 12
Australia
Canada
China
France
Germany
Greece
(Budget gap as percent of GDP, 2010)
12.
Greece
India
Italy
Japan
Korea
Spain
UK
US
Source: Standard & Poor’s CRISIL
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Deficits Are Mostly Cyclical
-4
-2
0
2
4
(Government deficit as % of GDP, fiscal years)
13.
-12
-10
-8
-6
2000 2003 2006 2009 2012
stimulus ex stimulus
Source: Standard & Poor’s
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The Future Looks Bleak
308
415
753
431404 400
400
500
600
700
800
(Government debt as % of GDP)
14.
69106
72 79 75
180
308
192 184155
0
100
200
300
US Japan UK France Germany
2010 2030 2050
Source: Standard & Poor’s, 2010
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Aging Populations Will Boost Government Spending
40
50
60
70
80
(Retirees as percentage of labor force)
15.
0
10
20
30
US Canada France Germany Italy UK Japan Australia China OECD
2010 2030
Source: Organization for Economic Cooperation and Development
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(4-quarter percent change)
Weaker Employment Is Hurting Construction
-2%
-1%
0%
1%
2%
3%
4%
-10%
0%
10%
20%
16.
Source: Bureau of Labor Statistics, Bureau of Economic Analysis, S&P projections
-6%
-5%
-4%
-3%
-2%
-40%
-30%
-20%
2005 2007 2009 2011 2013 2015
Nonresidential construction Nonfarm employment
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140
160
180
200
220
240
Commercial Real Estate Price Declines Are Bottoming
17.
60
80
100
120
140
Mar-84 Mar-88 Mar-92 Mar-96 Mar-00 Mar-04 Mar-08
Source: M.I.T. Center for Real Estate.
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(4-quarter percent change, and production as % of capacity)
Equipment Spending Follows Capacity Needs
(Percent)
75
80
85
0%
10%
20%
18.
Source: Federal Reserve, Bureau of Economic Analysis
60
65
70
-30%
-20%
-10%
2000 2002 2004 2006 2008 2010 2012 2014
Business equipment (real, left scale) Capacity Utilization, mfg (Right)
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Can the Consumer Keep Spending?
• Consumer spending led recent expansions
• But wealth is down because home prices have dropped and
• Stocks are still below their 2007 peak
• Borrowing is more difficult, and home equity loans much
less available
• Confidence has dropped and unemployment risen
19.
• Consumers are likely to continue to save more and
borrow less
• High oil prices hurt purchasing power and confidence
• Stimulus package provided some income boost
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Debt Is Dropping From Record Highs
(Percent of after-tax income)
1.1
1.2
1.3
1.4
1.5
3
4
5
6
7
20.
Source: Bureau of Economic Analysis and Federal Reserve
0.7
0.8
0.9
1.0
0
1
2
3
2000 2002 2004 2006 2008 2010 2012 2014
Saving rate Debt/income (right scale)
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Wealth Slides With Home and Stock Prices
(Percent of after-tax income)
400%
500%
600%
700%
21.
Source: Federal Reserve
0%
100%
200%
300%
1990 1993 1996 1999 2002 2005 2008 2011 2014
Net worth Financial assets
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4
5
6
7
8
9
(Percent)
Default Rates Begin To Drop
22.
0
1
2
3
4
2005 2005 2006 2007 2007 2008 2009 2009 2010 2011
Auto BankCard First Mtg Second Mtg
Auto BankCard First Mtg Second Mtg
Source: S&P/Experian
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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 2008 Q4 for first time in history
• We think the rally will continue
• But the long-term cycle probably has another bear in it.
23.
• World stock markets have generally become synchronized
• As money flows between markets in search of yield
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Bottom Line: The Economy Will Recover Slowly
• The recession is the longest and deepest since the 1930s
• Fiscal stimulus has supported the recovery
• But recovery is likely to be slow because of financial markets and
switch to higher savings
• If financial markets lock up again
• Fiscal stimulus ends abruptly
24.
• Home prices continue to fall
• 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
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Oil Prices Remain Down From Peak
($/barrel, WTI and deflated by CPI; household energy purchases as percent of disposable income)
6%
7%
8%
9%
80
100
120
140
25.
Source: Bureau of Economic Analysis
3%
4%
5%
0
20
40
60
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Oil Price (WTI) 2005 Dollars % of disp. income