From the Great Recessionto the New NormalMARK ZANDI, CHIEF ECONOMIST

FROM MOODY’S ECONOMY.COM

FROM MOODY’S ECONOMY.COM 2

The Great Recession Is OverRecessions since World War II

Sources: NBER, BEA, FRB, BLS, Moody’s Economy.com

Duration in Months Peak-to-Trough % Change Jobless Rate

Peak TroughRecession

Peak to TroughExpansion

Trough to PeakReal GDP

Industrial Production

Nonfarm Employment Low High Change

Dec-07 Aug-09 20 73 -3.9% -19.2% -6.2% 4.4% 10.3% 5.9%

Mar-01 Nov-01 8 120 -0.4% -6.3% -2.0% 3.8% 6.3% 2.5%

Jul-90 Mar-91 8 92 -1.3% -4.3% -1.5% 5.0% 7.8% 2.8%

Jul-81 Nov-82 16 12 -2.9% -9.5% -3.1% 7.2% 10.8% 3.6%

Jan-80 Jul-80 6 58 -2.2% -6.2% -1.3% 5.6% 7.8% 2.2%

Nov-73 Mar-75 16 36 -3.1% -14.8% -2.7% 4.6% 9.0% 4.4%

Dec-69 Nov-70 11 106 -1.0% -5.8% -1.4% 3.4% 6.1% 2.7%

Apr-60 Feb-61 10 24 -1.3% -6.2% -2.3% 4.8% 7.1% 2.3%

Aug-57 Apr-58 8 39 -3.8% -12.7% -4.4% 3.7% 7.5% 3.8%

Jul-53 May-54 10 45 -2.7% -9.0% -3.3% 2.5% 6.1% 3.6%

Nov-48 Oct-49 11 37 -1.7% -8.6% -5.1% 3.4% 7.9% 4.5%

Average 10 57 -2.0% -8.3% -2.7% 4.4% 7.6% 3.2%

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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

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

Policymakers Stabilize the Banking System…

Bear hedgefunds liquidate

Bank fundingproblems

Difference between 3-mo Libor and Treasury bill yields

Bear Stearnscollapse Lehman

failure

Fannie/Freddietakeover

TARP fails topass Congress

No assetpurchases

Stresstests

FROM MOODY’S ECONOMY.COM 4

(1)

0

1

2

3

4

09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4

…And the Stimulus Provides a Meaningful Boost

Source: Moody’s Economy.com

Contribution to real GDP growth, ppt

FROM MOODY’S ECONOMY.COM 5

-6

-4

-2

0

2

4

6

8

10

12

90 92 94 96 98 00 02 04 06 08

95%-100%80%-95%60%-80%40%-60%0%-40%

U.S. Households Are Fixing Their Finances...Contribution to personal saving rate, 4-qtr MA

Source: Moody’s Economy.com

FROM MOODY’S ECONOMY.COM 6

18

19

20

21

22

23

24

07 08 09

…With Some Success

Number of trades 30-90 days delinquent, mil

Sources: Equifax, Moody’s Economy.com

FROM MOODY’S ECONOMY.COM 7

3,500

4,000

4,500

5,000

5,500

6,000

04 05 06 07 08 09

1,600

1,800

2,000

2,200

2,400

2,600HiresLayoffs

Layoffs Abate, but Hiring Remains Dormant…

Source: BLS

Ths, 3-mo MA

FROM MOODY’S ECONOMY.COM 8

0

1

2

3

4

5

6

-3 -2 -1 0 1 2 3 4 5

Difference between actual and natural unemployment rate

Com

pens

atio

n gr

owth

Source: BLS

y = -0.48x + 3.40R2 = 0.32

2009Q2Unemployment rate=9.3%

Natural rate=5.3%Compensation growth=1.5%

…Threatening to Undermine Compensation1985Q1-2009Q2

FROM MOODY’S ECONOMY.COM 9

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

05 06 07 08 09

90 days and over delinquentAuction & REONotice of default

The Foreclosure Crisis Continues to MountThs of first mortgage loans

Sources: Equifax, Moody’s Economy.com

FROM MOODY’S ECONOMY.COM 10

100

110

120

130

140

150

160

170

180

190

01 02 03 04 05 06 07 08 09

Commercial RE pricesHouse prices

Commercial Real Estate Boom and Bust

Sources: Moody’s Investors Service, REAL, Fiserv

Repeat-sales indices: 2000Q4=100

FROM MOODY’S ECONOMY.COM 11

-10

-5

0

5

10

15

20

50 55 60 65 70 75 80 85 90 95 00 05

State and Local Government Revenues Collapse

Source: BEA

State and local tax revenue, % change yr ago

FROM MOODY’S ECONOMY.COM 12

0

500

1,000

1,500

2,000

00 01 02 03 04 05 06 07 08 09 ytd

CDOABSCMBSRMBS

Credit Markets Remain DysfunctionalBond issuance, $ bil, annualized

Source: Thomson Reuters

FROM MOODY’S ECONOMY.COM 13

-1

0

1

2

3

4

5

6

7

00 01 02 03 04 05 06 07 08 09

Funds rate target

Moody's Economy.com Taylor rule

The Federal Reserve Will Remain Aggressive…Federal funds rate

Sources: Federal Reserve, Moody’s Economy.com

FROM MOODY’S ECONOMY.COM 14

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

Jan-09 Apr-09 Jul-09 Oct-09

0

200

400

600

800

…Even Committing to More Credit Easing…

Sources: Freddie Mac, Federal Reserve

Fed holdings of Fannie and

Freddie MBS, $ bil (R)

Difference between Freddie mortgage rate and 10-year Treasury yield (L)

FROM MOODY’S ECONOMY.COM 15

…And Fiscal Policymakers Are Not Finished

» More aid to unemployed workers—extended benefits and COBRA payments.

» Another round of help to financially stressed state and local governments—FMAP and educational programs.

» Extend higher conforming loan limits and housing tax credit for first-time homebuyers. Mortgage modifications with principal write-down.

» Extend accelerated depreciation and NOL carryback for businesses. Direct lending to small businesses by the SBA.

FROM MOODY’S ECONOMY.COM 16

3,500

4,000

4,500

5,000

5,500

6,000

6,500

90 92 94 96 98 00 02 04 06 08

The Wrongs Will Be Slowly RightedVacant homes for sale and rent, ths

Housing supply= 600,000 Single-family= 450,000 Multifamily= 100,000 Manufactured= 50,000

Housing demand= 1,300,000 HH formations= 750,000 Obsolescence= 350,000 Second homes= 200,000

Trend

Actual

FROM MOODY’S ECONOMY.COM 17

-40

-30

-20

-10

0

10

20

30

40

50

03 04 05 06 07 08 09

Confidence Will Be Restored

Source: Moody’s Economy.com

Business confidence diffusion index

Lehman

Bear StearnsIraq invasion

FROM MOODY’S ECONOMY.COM 18

-5

0

5

10

15

20

25

4.0 4.5 5.0 5.5 6.0 6.5

Household net worth-to-disposable income ratio

Hou

seho

ld s

avin

g ra

te (

%)

An Inflection Point for U.S. Consumers…Saving vs. wealth, 1960-present

09Q2 07Q2

FROM MOODY’S ECONOMY.COM 19

…But Global Customers Will Pick Up the Slack

Source: Moody’s Economy.com

Expansion Recovering Moderating recession In recession

FROM MOODY’S ECONOMY.COM 20

128

130

132

134

136

138

140

07 08 09 10 11 12

4

5

6

7

8

9

10

11

Tough Job Market for Years to Come…

Sources: BLS, Moody’s Economy.com

Jobs, mil (L)

Jobless rate (R)

FROM MOODY’S ECONOMY.COM 21

1.0

1.5

2.0

2.5

3.0

3.5

4.0

90 95 00 05 10

…But Businesses Will Eventually Need to HireTrend labor productivity growth, % change yr ago

2%

4%

0%

FROM MOODY’S ECONOMY.COM 22

35

45

55

65

75

85

08 09 10 11 12 13 14 15 16 17 18 19

Fiscal Austerity Dead Ahead...Federal debt-to-GDP ratio under the president’s budget

Source: CBO

FROM MOODY’S ECONOMY.COM 23

0

2

4

6

8

10

90 92 94 96 98 00 02 04 06 08

Healthcare

Total ex healthcare

…But Progress Is Being MadeConsumer price inflation, 12-mo MA, % change yr ago

FROM MOODY’S ECONOMY.COM 24

Economic Timeline

Source: Moody’s Economy.com

09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q4 11Q1 11Q2 11Q3 11Q4

Stock markettrough

Extraordinarybank failures end

Home salesbottom

Housing startsbottom

Employmentbottoms

House pricesbottom

Foreclosurespeak

Jobless ratepeaks

House pricesresume rising

Economicdownturnends

Self-sustainingexpansion begins

Banking systemstabilizes

Retailingfirms

10Q3

Securities marketsup and running

Fed raisesrates

Inflationaccelerates

Fiscal pressuresintensify

FROM MOODY’S ECONOMY.COM 25

www.economy.com

FROM MOODY’S ECONOMY.COM 26

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