Barton Smith PRS presentation

transcript

“WHAT’S NEXT FOR THE FLEDGLING

ECONOMIC RECOVERY?”

Presented by

Barton Smith

Economics Professor Emeritus

University of Houston

November 16, 2010

THE RECOVERY SEEMS

PAINFULLY SLOW

GROSS NATIONAL PRODUCTAre We Headed For Even Slower Growth?

Apr-07 Apr-08 Apr-09 Apr-10

Source: BEA

Forecast for 4th quarter 2010

Mostly an inventory adjustment

U.S. MONTHLY EMPLOYMENT GROWTHGains/Losses in Employment

Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

Monthly Change

12 Month Average

Source: BLS

Lost 2.1 million jobs

Lost 8.0 million jobs

NATIONAL EMPLOYMENT GROWTH3 Month Average Annualized Job Growth

Usually, when job growth starts, it comes back strong

Source: BLS

INITIAL CLAIMS FOR UNEMPLOYMENT3 Month Average of Weekly U.S. Claims

Initial Claims

30 Year Average

Weekly

New claims have been above 450,000 for 28 straight months

Source: Dept. of Labor

INDEX OF CONSUMER SENTIMENT30 YEAR AVERAGE = 87

ScandalsS&L

Crisis

Double Dip

Recession

Subprime

Meltdown

Source: University of Michigan

Consumer confidence still hovers at recessionary lows.

REAL DOLLAR RETAIL SALESPercent Year-Over-Year Growth

-12.0%

Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10

This is the largest contraction in retail sales since the Depression

and the consumer is in no position to come roaring back.

Source: St. Louis Fed

MOST RECOVERIES SEEM

PAINFULLY SLOW,

ESPECIALLY THE RETURN

TO JOB GROWTH

THE WORST RECESSIONS

OF THE PAST 50 YEARSDeviations from GDP Peak: 1st Qtr = Peak Level of GDP

1 2 3 4 5 6 7 8 9 10 11 12 13 14

1973-75 1980-82

2008-2010 Old Peak

Quarter From Peak Level of GDP

Source: BEA

80s trough

70s troughRecent trough

Return to Old High

Length and Severityof

Past Recessions

Recession GDP Jobs GDP

Trough

Recovery

1974 24 mos 20 mos -3.2% -2.8% 5 mos

1980 36 mos 42 mos -2.2% -2.5% 8 mos

1990 18 mos 32 mos -2.4% -2.5% 16 mos

2000 3 mos 45 mos -0.3% -2.0% 46 mos

2008* 40 mos 35 mos -3.5% -6.1% N/A

Duration in Months / Severity in Percent Decline

Source: BLS/BEA

* Neither GDP or Employment Have Yet Returned to Old Peak

EXAMPLES OF THE LAG

BETWEEN GDP GROWTH

EMPLOYMENT GROWTH

THE 1980-82 RECESSIONPercent Level In Comparison With

1st Qtr 1980 Peak

100.0%

102.5%

105.0%

1979 1980 1981 1982 1983 1984

Employment

Source: BLS/BEA

THE 1990-91 RECESSIONPercent Level In Comparison With

2nd Qtr 1990 Peak

100.0%

102.5%

105.0%

1990 1991 1992 1993

Employment

Source: BLS/BEA

THE 2008+ RECESSIONPercent Level In Comparison With

4th Qtr 2007 Peak

100.0%

102.0%

104.0%

2007 2008 2009 2010

Employment

Source: BLS/BEA

GDP hasn’t returned

to old peak

THE ALTERNATIVE SCENARIO:

JAPAN’S LOST DECADE

“THE LOST DECADE”From Boom to Gloom – Japan’s Real Growth

1975 1980 1985 1990 1995 2000 2005

Real GDP Growth

Avg Growth Rate in the 80sAvg Growth Rate in the 90s

Real G

Source: U.S. Census Bureau

“Every Recession Has Purposes

Which Must Be Fulfilled

Before Any Recovery is Sustainable”

WHAT’S BEEN ACCOMPLISHED&

WHAT HASN’T

0% 20% 40% 60% 80% 100%

Rebalancing of Macro Economy

Labor Productivity Growth

Public Sector Budget Control

Private Sector Savings

Banking Reform & Stabilization

Commerical RE Mkt Correction

Housing Mkt Stabilization

Home Price Correction

Source: B. Smith

THE HOUSING MARKET

Housing Must Remain AffordableNational Median Home Price vs. Median Income

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Price to Income Ratio

Source: NAR / BEA

Median home prices should not exceed 3X median incomes

MORTGAGE DELINQUENCY RATES

Percent 60 Days Delinquent

Subprime

FHA/VA

Conv. Prime

Source: First American CoreLogic

The foreclosure problem will not be over until delinquencies fall

NEW HOME SALESSales As A Percent of American Households

Jan-63 Jan-68 Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08

Sales to Households

46-Year Average

Source: Bureau of Census

.8% is approximately equal to

the growth in households qualified to own a home.

Unfortunately, new home production must remain subdued for at least 2 more years.

COMMERCIAL REAL ESTATE

COMMERCIAL PROPERTY

National Price Index

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Commercial Property Price Index

Source: NCREIF, RCA, CBRE /B. Smith

Commercial property values

are 46% off their peak.

This is for properties sold. Most unsold properties haven’t been written down.

OVERALL REIT PERFORMANCEApril 2004 to April 2009

2004 2005 2006 2007 2008 2009 2010

2004 =

Source: Dow Jones

On average commercial REITs lost 64% of their value,

but since March, 2009 they are now up 140%.

That compares with a 70% rise in stock values.

Commercial Property Cap RatesNational Average of NOI to Transactions Price

Composite Index for Apts., Retail, Office

1996 1999 2002 2005 2008 2011

Source: NCREIF, RCA, CBRE, M&M

Today there is a dramatic difference between appraised and transaction cap rates

BANK STABILIZATION

U.S. BANK CREDITCommercial, Real Estate, and Consumer Credit

HOUSEHOLD SAVINGS RATE

U. S. PERSONAL SAVINGS RATE3 Month Moving Average

The savings rate needs to rise further, which is not good news for U.S. retailing.

FEDERAL GOVERNMENT

DEBT CONTROL

The Future Deficits

Are Very Troublesome

$1,200

$1,600

$2,000

$2,400

$2,800

2007 2009 2011 2013 2015 2017 2019

Federal Deficit Additions to Debt

Source: OMB / CBO

(Note that all projected deficits are greater than any deficit during the Bush Administration.)

Deficits during periods of economic health are intolerable.

STATE BUDGET

BALANCING

CHANGE IN STATE REVENUESPercent Real Dollar Growth

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Real Dollar Growth

Source: Bureau of Census

Estimate

LABOR PRODUCTIVITY

LABOR PRODUCTIVITYMid 70s Recession and Recovery

1972 1973 1974 1975 1976

GDP/Employment

Source: NAR / BEA

Job Growth Never Begins Until Labor Productivity Reaches A New HIgh

LABOR PRODUCTIVITYEarly 80s Recession and Recovery

The Infamous Double Dip Recession

1978 1979 1980 1981 1982 1983

GDP/Employment

Source: NAR / BEA

Job Growth Never Begins Until Labor Productivity Reaches A New HIgh

LABOR PRODUCTIVITYRecent Recession and Recovery

100.00

102.00

2008 2009 2010

GDP/Employment

Source: NAR / BEA

Productivity Levels are Consistent With The Start of Job Growth

THE TRANSFORMATION

OF THE

AMERICAN ECONOMY

MOVING TOWARDS

A SUSTAINABLE, BALANCED ECONOMY

Historical Range of Component Shares of GDP

Consumption Investment Government Net Exports

Min 60.95% 10.35% 17.44% -5.86%

Max 71.97% 18.16% 28.14% 1.10%

Average 67.88% 14.63% 19.80% -2.31%

2009 70.63% 12.50% 19.67% - 2.53%

Goal 65.00% 17.50% 17.50% 0.00%

Source: BEA / B. Smith

Note: Averages in first table are based upon period from 1954 to present

This will require reduced government; increased savings;

expanded investment and less reliance on consumption.

HOUSTON’S FUTURE IS

CONTINGENT

ON THE NATIONAL RECOVERY

Houston ForecastLast Five Years/Next Five Years

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Employment

Population

Note: Yearly numbers are based on employment averages for the whole year.

Source: TWC / BLS/B. Smith

This implies continued weak growth through 2010

This growth requires the absence

of a double-dip recession