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U.S. Macroeconomic Outlook 2009-10 & Beyond
Dr. Edward J. DeakProfessor of EconomicsFairfield University, and
ABA Graduate Banking SchoolEdwardjdeak.com
ABA’ Seminar For PresidentsMarch 2, 2009
U.S. Macro Overview
• Where we are today?• The forces that brought us to the brink• The issue of financial structural change• A look at the current-historical data• Federal fiscal actions – TARP + Obama• Monetary policy actions• The prospects for 2009-10• There is no Plan B• What about 2011-15?
Where Are We Today?
• Worst Economic Decline Since 1930’s
• Not a Traditional Downturn
• Structural Change in Financial Sector
• Massive in Size + Asset Value Loss
• Less Responsive to Traditional Monetary + Fiscal Policy Actions
• Global in Scope
The Forces that Brought US to the Brink of Economic Abyss
• The events of 9/11 -> Fed (i) – Too much, Too Long• Excessive stimulus to U.S. housing• BOP deficits - Excess global supply of $• Excessive Securitization - Housing assets + others• Rating agencies + Credit default swaps• Excessive Capital Leverage – Not 12:1 but 34:1• Unsound Lending Practices – Lax underwriting• Exotic Mtgages – NINJA, Exploding + Option ARMs• Lax Supervision - Allowed Wall St greed• Alphabet soup credit instruments – ABS, CDOs, etc• Phased collapse of housing 2006-09
Speculators, resets, under water, recession
Financial Structural Change
• The Pre-2008 Financial System is Gone– The death of traditional investment banking– The squeeze on insurance companies– The weakening of nationwide + regional commercial banks
• A list of likely survivors– Community banks– Boutique investment banks: ex: Raymond James– Private equity + hedge funds
• Intensified federal regulation– Likely to be excessively restrictive
• Rebirth of financial structure– Financing is a service – Channel $ to opportunity– Requires a new wave of real technological change
• Entrepreneurship financial intermediation
Current-Historical Data:Housing + Financial
• Existing Home Sales• Median Sale Price Existing Homes• Median Sale Price Case-Shiller Index• Housing Affordability Index• Loan Delinquency Rates• Loan Charge-off Rates• Consumer Credit Outstanding• Dow Industrial Average
Existing Home Sales:Single Family + Condo
7.1
4.91
0
1
2
3
4
5
6
7
8
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Mill. Units: NAR
Median Sale Price $:Existing Home
221198.6
0
50
100
150
200
250
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Nom$th: NAR
Median Existing Sale Price $:Constant Home – Case/Shiller
207
155
0
50
100
150
200
250
Ja00 Ja01 Ja02 Ja03 Ja04 Ja05 Ja06 Ja07 Ja08 No08
Nom$Th
Housing Affordability Index
0
20
40
60
80
100
120
140
160
2005 2006 2007 Ja-08 Ma-08 Ju-08 Se-08 No-08
Index Val: NAR
U.S. Housing Permits Th: Single family & Condos
2155.3
852.5
0
500
1000
1500
2000
2500
2000 2002 2004 2006 2008YTD
Delinquency Rates %:All Comm Bks (FR: sa)
0
1
2
3
4
5
6
3:04 1:05 3:05 1:06 3:06 1:07 3:07 1:08 3:08
Tot Loans/Leases
Residential RE
Commer RE
All Consumer
Charge-off Rates %:All Comm Bks (FR: sa)
0
0.5
1
1.5
2
2.5
3
3.5
4
3:04 1:05 3:05 1:06 3:06 1:07 3:07 1:08 3:08
Tot Loans/Leases
Residential RE
Commer RE
All Consumer
Consumer Credit:(% Chg - FR: sa)
-4
-2
0
2
4
6
8
2003 2004 2005 2006 2007 1:08 2:08 3:08 8-Oct 8-Nov
Revolving
Non-Revol
Dow Industrial Average:Monthly Range/Close 1/07-1/09
Current-Historical Data:Main St Economy
• Initial Claims Unemployment Insurance
• Net Change in Non-farm Payrolls
• Unemployment Rate
• Real Gross Domestic Product
• Consumer Price Index
Initial New Claims UE Insurance:U.S. DOL 1st Week of Month 08-09
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
Jan Mar May Jul Sept Nov Jan-09
Seas Adj
Not SA
U.S. Net Chg Total Nonfarm Employ:12:07-12:08 U.S. DOL
-600,000
-500,000
-400,000
-300,000
-200,000
-100,000
0
100,000
7:12 8:02 8:04 8:06 8:08 8:10 8:12
Net Job Chg
U.S. Unemployment Rate %:12/07-12/08 U.S. DOL
0
1
2
3
4
5
6
7
8
7:12 8:01 8:02 8:03 8:04 8:05 8:06 8:07 8:08 8:09 8:10 8:11 8:12
UE Rate
U.S. Real GDP:Quarterly % Chg (saar)
-4
-3
-2
-1
0
1
2
3
4
5
07-Q1 07-Q2 07-Q3 07-Q4 08-Q1 08-Q2 08-Q3 08-Q4
RGDP % Chg
Consumer Price Index:Quarterly % Chg (saar)
-4
-3
-2
-1
0
1
2
3
07-Q1 07-Q2 07-Q3 07-Q4 08-Q1 08-Q2 08-Q3 08-Q4
CPI % Chg
Federal Fiscal Action -1
• TARP - $700 Bil.– Original plan – Bank stabilization: Bad assets– Bank capital infusion - $350 Bil.– Housing stabilization - $350 Bil.?
• Obama Recovery Plan - $825 Bil.+?– Twin goals
• Macro stabilization• Self-sustaining recovery
– Social goals?– Plan structure
Federal Fiscal Action-2
• Critique: Recovery Plan Focus (Deak)– Quick aid to distressed households + bus– Short-run & intermediate stimulus - Infrastructure– Long-run support for self-sustaining growth
• Recovery Plan Problems (Deak)– Too small - $1.2Tril+ needed– Too little for housing market stabilization– Too short – Needed 4 year focus– Too much for tax cuts – Limited bang for buck– Too little for growth stimulus
Federal Fiscal Action -3Financial Market Action
• “Bad Bank” – Distressed asset aggregator– FDIC RTC model from 1980’s– Problem: Pricing of assets from banks
• Implicit taxpayer subsidy vs. Mark-to-market• Asset acquisition method
• Nationalization – Takeover failing banks– Problems: The $ size of the banks
• Interim management• Ultimate asset disposition
• Ring fencing bad assets – Federal insurance
Federal Reserve Policy Actions
• Traditional Monetary Policy– Federal funds rate – Cut to ZERO– OMO – Infuse reserves = money supply
• Non-traditional Monetary Actions– Direct loans to investment banks (IB)– Convert IB + insurance co to comm banks– Extend credit directly to bus + households– Purchase agency + mgt backed securities
• Result – Boost FR bal sheet +$1.25 Tril.
Economic Outlook 08:Q4-10:Q1• Real Gross Domestic Product• Change in Non-farm Payrolls• Unemployment Rate• Consumer Price Index• Average Oil Price (nymex)• Housing Starts, Existing home sales, Prices• Consumer Spending• Business Investment• Fed Funds Rate Target• 10-year T-Note
Real GDP % Change:Quarterly (saar)
-4
-3
-2
-1
0
1
2
3
08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:01
RGDP % Chg
Non-farm Payroll Jobs:Ave Monthly Chg (000’s) (sa)
-600,000
-500,000
-400,000
-300,000
-200,000
-100,000
0
100,000
8:04 9:01 9:02 9:03 9:04 10:01
Job Chg
U.S. Unemployment Rate %:Quarterly 08:4-10:1
7.2
8.8
0
1
2
3
4
5
6
7
8
9
8:04 9:01 9:02 9:03 9:04 10:01
UE Rate
Consumer Price Index:% Chg Quarterly 08:4-10:1
-1.5
-1
-0.5
0
0.5
1
1.5
2
08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1
CPI %Chg
Average Oil Price Per BL:08:Q1-10:Q1(nymex)
0
10
20
30
40
50
60
08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1
Bl price $
Housing Starts (saar)
876,000
650,000
791,000
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
08-Q3 08-Q4 09-Q1 09-Q2 09-Q3 09-Q4 10-Q1
Starts
Existing Home Sales (mil)
4.96
4.38
5.26
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012
Existing Sales
Existing Home Sale Price: Nominal $
199,000
169,000
191,000
150,000
155,000
160,000
165,000
170,000
175,000
180,000
185,000
190,000
195,000
200,000
2008 2009 2010 2011 2012
Median Price
Real Consumer Spending:% Chg (saar)
-3
-2
-1
0
1
2
3
08:Q4 09:Q! 09:Q2 09:Q3 09:Q4 10:Q1
Real Cons Spending
Real Business Investment:% Chg (saar)
-12
-10
-8
-6
-4
-2
0
2
4
08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1
% Chg
Fed Funds Rate Target %
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
08:Q$ 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1
FF Rate %
10-Year T-Note Yield %
0
0.5
1
1.5
2
2.5
3
3.5
08:Q4 09:Q1 09:Q2 09:Q3 09:Q$ 10:Q1
10-year yield
There is No Plan B
• The risk of fiscal + monetary failure– Short-run stimulus v. self-sustaining
recovery
• Plan needs domestic cooperation• Recovery needs global coordination
– Multi-national government action– Global business buy-in– Global financial buy-in
• There is no going back for round-2
What About 2011-2015?
• Real risk of massive global inflation
• Crush of medicare + social security
• Financing U.S. budget deficits
• Correcting U.S. Balance of Payments
• Constructing a U.S. energy policy
• Constructing a global environmental policy