Copyright © 2008 Global Insight, Inc. The U.S. Economic Outlook Nigel Gault Chief U.S. Economist...

Copyright © 2008 Global Insight, Inc.

The U.S. Economic OutlookThe U.S. Economic Outlook

Nigel Gault

Chief U.S. Economist

Raleigh, North Carolina

October 15, 2008

Copyright © 2008 Global Insight, Inc. 2 09/2008

The Worst Is Yet to Come For The EconomyThe Worst Is Yet to Come For The Economy

Financial crisis has deepened, $ trillions in wealth obliterated

Credit markets frozen

Households, businesses, state and local governments all face tighter – or shut-off – credit

Rest-of-the-world is being dragged down too, undermining exports

Lower oil prices offer little comfort

Risks are rising of recession comparable to worst since WWII


Financial CrisisFinancial CrisisReaches A New LevelReaches A New Level


A Key Sign of Extreme Risk AversionA Key Sign of Extreme Risk Aversion

(3-month LIBOR less 3-month Treasury bill rate, % points)

0.00.51.01.52.02.53.03.54.04.55.0

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08


T-Bill Yield Near Zero as Investors Flee to SafetyT-Bill Yield Near Zero as Investors Flee to Safety

0

1

2

3

4

5

6

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

Federal Funds Target 3-Month LIBOR 3-Month T-Bill


Latest Steps: Good NewsLatest Steps: Good News

Direct capital injections into banks ($250 billion)

Guarantees on all non-interest-bearing bank deposits

Bank debt guarantees

Commercial paper lending facility soon in place

More fiscal stimulus coming?


0.0 2.5 5.0 7.5 10.0 12.5 15.0 17.5 20.0 22.5 25.0

(Percent of nominal GDP)

Sources: IMF, Global Insight

Fiscal Costs of Major Post-War Banking CrisesFiscal Costs of Major Post-War Banking Crises

U.S. Crisis2007-Present

U.S. S&L Crisis1984-91

Sweden1991

Norway1987-93

Finland1991-94

Spain1977-85

Japan1991-Present

The “Big Five”

Financial Crises

?


Stock Market Decline Comparable With The Stock Market Decline Comparable With The Worst Seen Since The DepressionWorst Seen Since The Depression

-100-90

-80-70

-60-50-40

-30-20

-100

1929-32 1973-74 1987 2000-2002 2007-2008

Peak-to-Trough Percent Change in Dow Jones Industrial Average

To Oct 10, 2008


GDP Declines in Post-War RecessionsGDP Declines in Post-War Recessions

-4

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0

1948 1953 1957 1960 1969 1973 1980 1981 1990 2001 2008

Peak-to-Trough Percent Change in Real GDP

Dated by Year of the Peak

Pessimistic

Baseline


Historical Comparisons of Outcomes of Historical Comparisons of Outcomes of Post-War Banking Crises in Industrial NationsPost-War Banking Crises in Industrial Nations

AVERAGE DROP IN REAL PER CAPITA GDP GROWTH

(peak growth year to trough growth year)

Past Crises: Actual Outcome

Eighteen Post-War Financial Crises over 2%

“Big Five” Financial Crises over 5%

Current Crisis: GI Projections

U.S. Baseline Scenario 3.5% (2004: 2.7%; 2009: -

0.8%)

U.S. Pessimistic Scenario5.6% (2004: 2.7%; 2009: -

2.9%)

Source for data on past crises: Reinhart and Rogoff (2008)


The Economy is Already in The Economy is Already in RecessionRecession


950

960

970

980

990

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

8,350

8,400

8,450

8,500

8,550


137.0137.2137.4137.6137.8138.0138.2


109

110

111

112

113


NBER’s Key Monthly Recession Indicators NBER’s Key Monthly Recession Indicators

*Billions of 2000 dollars, SAAR; **Billions of 2000 dollars, SAAR; ***Millions, SA; ****Index, 2002=100, SA

Real Manuf. & Trade Sales*Real Manuf. & Trade Sales* Real Pers. Income (ex transfers)**Real Pers. Income (ex transfers)**

Employment***Employment*** Industrial Production****Industrial Production****

Peak: Oct 07Peak: Oct 07 Peak: Oct 07Peak: Oct 07

Peak: Dec 07Peak: Dec 07 Peak: Jan 08Peak: Jan 08


40

45

50

55

60

65

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

ISM Manufacturing PMI now in the Recession ISM Manufacturing PMI now in the Recession ZoneZone

(PMI, Manufacturing, Diffusion index)


(Annualized rate of growth)

The Downside Risk to GDP GrowthThe Downside Risk to GDP Growth

-4

-2

0

2

4

6

2007 2008 2009 2010

Baseline Pessimistic


(Percent)

Unemployment OutlookUnemployment Outlook

4

5

6

7

8

9

10

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010



(Loss of jobs from peak, millions)

Employment OutlookEmployment Outlook

-5.0-4.5-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.50.0

07Q4 08Q2 08Q4 09Q2 09Q4 10Q2 10Q4

Baseline Pessimistic 2001 Recession


(Percent change unless otherwise noted)

U.S. Economic Growth by Sector:U.S. Economic Growth by Sector:Baseline ScenarioBaseline Scenario

2007 2008 2009 2010

Real GDP 2.0 1.5 0.2 2.4

Domestic Demand 1.4 -0.1 -1.0 2.4

Consumption 2.8 0.6 0.4 2.1

Light Vehicle Sales (Millions) 16.1 13.6 13.4 14.5

Residential Investment -17.9 -21.2 -14.4 13.2

Housing Starts (Millions) 1.34 0.94 0.80 1.10

Business Fixed Investment 4.9 3.1 -6.1 1.4

Government 2.1 2.3 -0.3 -1.1

Exports 8.4 9.3 5.2 5.8

Imports 2.2 -2.1 -3.2 5.3


(Percent unless otherwise noted)

Other Key Indicators: Baseline ScenarioOther Key Indicators: Baseline Scenario

2007 2008 2009 2010

Industrial Production (% growth) 1.7 -0.7 -1.2 2.0

Employment (% growth) 1.1 -0.1 -1.0 0.8

Unemployment Rate 4.6 5.6 7.2 7.4

CPI Inflation 2.9 4.3 1.3 2.1

Oil Prices (WTI, US$/bbl) 72 108 90 92

Core PCE Price Inflation 2.2 2.3 1.9 1.7

Federal Funds Rate 5.02 2.21 1.25 2.95

10-year Government Bond Yield 4.63 3.78 3.68 4.61

Dollar (Major Currencies, 2000=1) 0.77 0.72 0.73 0.72


(Percent change unless otherwise noted)

U.S. Economic Growth by Sector: U.S. Economic Growth by Sector: Pessimistic ScenarioPessimistic Scenario

2007 2008 2009 2010

Real GDP 2.0 1.3 -2.0 0.8

Domestic Demand 1.4 -0.3 -3.3 0.8

Consumption 2.8 0.4 -1.1 0.9

Light Vehicle Sales (Millions) 16.1 13.4 11.4 13.1

Residential Investment -17.9 -21.8 -20.5 7.5

Housing Starts (Millions) 1.34 0.94 0.68 0.93

Business Fixed Investment 4.9 2.4 -12.4 -3.6

Government 2.1 2.3 -0.9 -2.0

Exports 8.4 9.2 1.9 3.0

Imports 2.2 -2.4 -7.3 2.7


(Percent unless otherwise noted)

Other Key Indicators: Pessimistic ScenarioOther Key Indicators: Pessimistic Scenario

2007 2008 2009 2010

Industrial Production (% growth) 1.7 -0.9 -3.8 -0.8

Employment (% growth) 1.1 -0.2 -2.1 -0.5

Unemployment Rate 4.6 5.7 8.0 8.9

CPI Inflation 2.9 4.2 0.3 2.1

Oil Prices (WTI, US$/bbl) 72 105 73 83

Core PCE Price Inflation 2.2 2.3 1.7 1.8

Federal Funds Rate 5.02 2.15 0.52 1.50

10-year Government Bond Yield 4.63 3.68 2.93 3.77

Dollar (Major Currencies, 2000=1) 0.77 0.72 0.73 0.69


The Housing DownturnThe Housing Downturn


House Prices: Overvaluations Becoming Less House Prices: Overvaluations Becoming Less ExtremeExtreme

Source: National City

UNDERVALUEDFAIRLY VALUEDOVERVALUEDEXTREMELY OVERVALUED

Q2 2008 Valuations


(OFHEO house price index divided by average labor compensation, 2000 = 1.0)

House Prices Will Probably Overshoot on The House Prices Will Probably Overshoot on The DownsideDownside

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1975 1980 1985 1990 1995 2000 2005 2010



0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


(Million units)

Housing Starts Dip FurtherHousing Starts Dip Further


A Severe Consumer A Severe Consumer RetrenchmentRetrenchment


Bad News Everywhere For Consumer FinancesBad News Everywhere For Consumer Finances

Positive Forces

Gasoline is below its peak

Negative Forces

Falling Employment

Falling Real Wages

Declining Housing Wealth

Declining Stock Market

Tightening Credit Conditions

Mounting Debt Burdens

Low Saving Rate


(Net percent tightening standards)

Consumer Loan Standards TighteningConsumer Loan Standards Tightening

Source: Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices

-20

0

20

40

60

80

100

1996 1998 2000 2002 2004 2006 2008

Credit Cards Other Consumer Loans


Household Net Worth Has Plunged Household Net Worth Has Plunged

End-Q3 2007 to end-Q3 2008: down $4.3 trillion*

End-Q3 2008 to October 10, 2008: down $2.8 trillion*

Total loss: $7.1 trillion* (down 12%)

If wealth effect on consumption is 5 cents on the dollar, that means a $350 billion hit to consumer spending

That’s 3.5% off consumer spending

* Wealth figures are Global Insight estimates


-4

-2

0

2

4

6

2003 2004 2005 2006 2007 2008 2009 2010


(Annualized rate of growth)

Consumer Spending: Turning NegativeConsumer Spending: Turning Negative


Business InvestmentBusiness InvestmentSofteningSoftening


Architecture Billings Lead Nonresidential Architecture Billings Lead Nonresidential ConstructionConstruction

40

44

48

52

56

60

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

-30

-20

-10

0

10

20

Architecture Billings Index* (Left scale)

Real Nonresidential Construction, ex. utilities (Right scale, % change y/y)

* Source: American Institute of Architects


(Percent change from a year earlier, real spending)

The Business Construction Spending CycleThe Business Construction Spending Cycle

-25

-20

-15

-10

-5

0

5

10

15

20

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010



(Percent change from a year earlier, real spending)

The Business Equipment Spending CycleThe Business Equipment Spending Cycle

-25

-20

-15

-10

-5

0

5

10

15

20

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010



Foreign Trade: Foreign Trade: Export-Led Growth At RiskExport-Led Growth At Risk


(Percent change from a year earlier, volumes)

Export Growth Is PeakingExport Growth Is Peaking

-15

-10

-5

0

5

10

15

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010



(2000=1.0, inflation-adjusted)

The U.S. Dollar: Has Hit Bottom Against Some The U.S. Dollar: Has Hit Bottom Against Some CurrenciesCurrencies

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

Major Currency Index Other Important Trading Partners Index


Inflation and Interest RatesInflation and Interest Rates


(Percent change from a year earlier)

Headline Inflation Will Fall SharplyHeadline Inflation Will Fall Sharply

-2

-1

0

1

2

3

4

5

6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010



(Percent)

Fed to Cut to 1% Or BelowFed to Cut to 1% Or Below

0

1

2

3

4

5

6

7

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010



State and Local Finances State and Local Finances In TroubleIn Trouble


-150

-125

-100

-75

-50

-25

0

25

50

75

2006 2007 2008 2009 2010


(NIPA Operating Deficit, Billions of dollars, annual rate)

State and Local Finances in Trouble State and Local Finances in Trouble


-2

0

2

4

6

8

10

2006 2007 2008 2009 2010


(Percent growth, current spending, nominal, year-on-year)

State and Local Spending Growth Must Slow State and Local Spending Growth Must Slow


The Economy and the The Economy and the Presidential Election OutcomePresidential Election Outcome


-2

0

2

4

6

8

48 52 56 60 64 68 72 76 80 84 88 92 96 00 04 08

Y/Y Growth in Real Disposable Income Per Capita in Q3 of Election Years

The Economy Is a Huge Negative for the The Economy Is a Huge Negative for the Republicans Republicans

(Percent growth year-on-year)

Q3 2008 calculation excludes economic stimulus payments. Including stimulus payments, real PDI growth per capita would be -0.3% in Q3 2008 instead of -0.9%.


40

45

50

55

60

65

48 52 56 60 64 68 72 76 80 84 88 92 96 00 04 08

Actual Predicted

GII Election Model Points to the Democrats GII Election Model Points to the Democrats

(Percentage of 2-party presidential vote for incumbent party)


Whoever Wins The Election Will Be Constrained Whoever Wins The Election Will Be Constrained by the Federal Deficit by the Federal Deficit

(Percent of GDP)

-8

-6

-4

-2

0

2

4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012



Bottom LineBottom Line

Economy tumbling into recession – severity uncertain but risks are rising that it will be deep

More fiscal action on the way – public capital injections into financial institutions, bank guarantees, and a stimulus package (states, localities need help)

Fed will cut rates further – may not help much, though

Upside Risk: Government intervention stabilizes credit markets

Downside Risk: Vicious spiral between economy and credit markets worsens

Election: Economy favors Obama; whoever wins will have trouble translating fiscal objectives into action


Thank You!

Visit our Web site at

www.globalinsight.com

Date post:	27-Mar-2015
Category:	Documents
Upload:	olivia-kelly
View:	212 times
Download:	0 times

Copyright © 2008 Global Insight, Inc. The U.S. Economic Outlook Nigel Gault Chief U.S. Economist...

Documents