The Economy:
A Long Road Ahead
Presented by Terrin Griffiths
California and Nevada Credit Union Leagues
Santa Clara Chapter Meeting
January 13, 2009
2008: A “Historic” Year
• Prelude to the Crisis
– March: Bear Stearns collapses
– Spring & Summer: Financial firms hunt for new capital
– August: IndyMac seized by FDIC
• The Credit Crisis
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Fannie Mae and Freddie Mac in conservatorship
Lehman bankrupt
Merrill Lynch acquired by Bank of America
AIG nationalized
Goldman Sachs, Morgan Stanley, American Express, and GMAC
became bank holding companies
Washington Mutual merged into JPMorgan
Wachovia acquired by Wells Fargo
$700 billion Treasury bailout proposal (TARP) implemented
Governments resorted to nationalization, guarantees, bank bailouts,
and interest rate cuts
Fed lent directly to companies through purchase of commercial paper
Dow Jones Industrial Average traded at 7,449 on November 21st
Fed interest rate target officially cut to a range of 0% to 0.25%
$17.4 billion Treasury loan commitment secured by GM and Chrysler
And, at the start of 2009…
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Housing market deflation
Substantial job loss
Consumer distress
Financial market turbulence
Government bailouts and stimulus with
unknown consequences
• Inflationary pressures abating, but this isn’t
translating into increased spending
U.S. Economic Growth
On a downward trend
Source: Federal Reserve Bank of St. Louis, *Forecast
Sources of Growth
Source: Bureau of Economic Analysis
Personal Income Growth
*projected
Source: Bureau of Economic Analysis
Nonfarm Payrolls
Three month moving average
Source: Bureau of Labor Statistics
Why is the jobs report unsettling?
• 2.6 million jobs were lost in 2008
– Employment fell by 1.9 million over the last four
months of 2008
• Average workweek fell to 33.3 hours, indicating
more months of substantial payroll cuts.
• The number of involuntary part-time workers has
risen by 3.4 million over the past 12 months,
reaching a total of 8 million.
• While the official unemployment rate is 7.2%,
counting the marginally attached and
underemployed as unemployed results in a rate
of 13.5%.
In California, many sectors are
hemorrhaging
Source: Employment Development Department
While the growth sectors are showing
signs of weakness
Source: Employment Development Department
California’s unemployment rate
is on the rise.
Source: Bureau of Labor Statistics
San Jose MSA is sharing in the pain.
Seasonally Adjusted
Source: Beacon Economics
Many sectors are shedding jobs
Source: Employment Development Department
While a mighty few are growing…
Source: Employment Development Department
Consumer Confidence
160
140
120
100
80
60
December 2008 = 38
40
20
0
80
82
84
86
Source: Conference Board
88
90
92
94
96
98
00
'02
'04
'06
'08
Retail Sales downshift
Slowing since mid-2006
Source: Federal Reserve Bank of St. Louis
California New Vehicle Registrations
Year-to-Date % Change
2008 (as of Sept) vs. 2007
Year-to-Year % Change, by Quarter
2007
Q3
2008
Q4
Q1
Q2
Q3
Northern
California
-20.9%
-6%
California
-19.3%
-11.2%
-18.6%
-18%
-19.1%
Source: California New Car Dealers Association
-12.7%
U.S.
Consumer price pressures are easing
Source: Bureau of Labor Statistics
Crude oil prices have receded
*adjusted by CPI (1982-1984=100, SA)
Source: Bureau of Labor Statistics and Federal Reserve Bank of St. Louis
U.S. Households are more indebted
Household Debt Outstanding to Annual Disposable Income
140%
120%
100%
80%
60%
40%
Mortgage
20%
Consumer
0%
1959Q1 1965Q1 1971Q1 1977Q1 1983Q1 1989Q1 1995Q1 2001Q1 2007Q1
Source: Federal Reserve Flow of Funds, Bureau of Economic Analysis, CUNA
Personal saving as a percent of
disposable personal income
Source: Federal Reserve Bank of St. Louis
Housing Market
Housing Sales may have stabilized?
Source: California Association of Realtors
Local Market Variations
Region
Peak Month Peak Price Median
Nov 08
%∆ from
Peak
Northern California
Aug 05
$440,420
$306,940
-30.4%
Sacramento
Aug 05
$394,450
$184,760
-53.2%
Northern Wine Country
Jan 06
$645,080
$343,430
-46.8%
San Luis Obispo
Jun 06
$620,540
$344,230
-44.5%
San Francisco Bay
May 07
$853,910
$473,510
-44.5%
Santa Clara
Apr 07
$868,410
$515,000
-40.7%
Source: California Association of Realtors
Single-Family Home Prices Fall
in San Jose MSA
Based on transactions involving conforming, conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac.
Source: OFHEO
Are Homeowners Keeping Up?
Percentage of California home mortgages that are past due.
Source: Mortgage Bankers Association
Difficulties are Mounting
Percentage of California home mortgages that are in foreclosure.
Source: Mortgage Bankers Association
Source: May 2007 Housing Monthly, Ivy Zelman, Credit Suisse, data as of December 2006.
Where does this leave us?
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Housing will struggle.
Investment spending will continue to be cautious.
Consumers are in retreat.
This is a global recession, which is hurting exports.
But, it is encouraging a return to saving.
All of the above translate into more job loss! As fewer
jobs are created, spending power is drying up.
• Faced with declining business, employers are further
trimming payrolls…completing the cycle!
• The stimulus should help, but timing is critical.
Economic Outlook for 2009
• Economy should remain anemic given housing and the
credit markets.
• There is no sector positioned to provide a boost…the
hope is that none of the other sectors get worse and
housing finally finds its bottom.
• Unemployment will rise due to additional job cuts and a
lack of payroll growth.
• Consumer spending will contract further and will not be
the driver it once was as saving becomes a priority.
• Housing starts should bottom in 2009, but normalcy will
not return for some time due to the recession, financing,
and availability of foreclosure properties.
• Likely that the government will continue to expand its
efforts to help homeowners.
• Economic recovery possible in 2010, but it will be
accompanied by below-trend growth and elevated
unemployment rates.
National Economic Forecast
2007
2008
2009
Real GDP (% change, annual average)
2.2%
-0.5%
-0.3%
Mortgage - 30-year Fixed Rate (%)
6.3%
6.0%
5.6%
Unemployment Rate (%)
4.6%
5.8%
8.0%
CPI (% change)
2.9%
3.9%
0.6%
Interest Rate (Federal Funds Rate)(%)
5.0%
2.0%
0.5%
Housing Starts (thousands)
1,355
930
720
776
497
393
5,652
4,958
5,161
$218,900
$200,700
$196,900
16.1
13.3
12.0
New Single Family Home Sales (thousands)
Existing Home Sales (thousands)
Median Existing Home Price ($)
Light Vehicle Sales (millions)
Sources: Bureau of Economic Analysis; Bureau of Labor Statistics; CUEG; National Association of Realtors; Mortgage Bankers Association; National Association for
Business Economists; UCLA Anderson Forecast; U.S. Census Bureau.
And in California…
• Income and employment will further deteriorate as the
housing market bottoms.
• A stronger pullback in consumer spending will adversely
impact job growth within many regions of the state.
• Payroll employment growth will be relatively flat over the
next two years with the manufacturing, finance, retail, and
housing labor markets enduring the greatest blows.
• Unemployment will approach but not exceed 10% and will
remain elevated throughout 2010.
• Export activity will ease ahead as the global economy
softens; import volume could pick up in 2009.
• Home price declines will persist into 2009 as areas cope
with distressed sales and a hesitant marketplace.
• The state’s economy should begin to strengthen in 2010.
California Economic Forecast
2007
Nonfarm Employment (thousands)
2008
2009
15,163
15,110
14,866
Unemployment Rate (%)
5.4%
7.1%
9.1%
Personal Income (% change)
5.8%
3.0%
3.0%
CPI (% change)
3.3%
3.7%
0.8%
$562.6
$552.0
$538.3
110,073
65,400
61,600
$558,100
$381,000
$358,000
353,320
395,600
445,000
Taxable Sales (billions of $)
Housing Units Permitted
Median Existing Single-Family Home Price ($)
Existing Home Sales
Sources: Bureau of Economic Analysis; Bureau of Labor Statistics; California Association of Realtors; California Department of Finance; National Association of
Realtors; UCLA Anderson Forecast; University of the Pacific Forecast; U.S. Census Bureau.
And in the San Jose MSA…
• The labor market will contract in 2009 with
manufacturing, construction, and the
information sectors shedding jobs.
• Job growth will be absent in 2010.
• Unemployment will peak in late 2009 but
remain above 8% through 2010.
• Venture capital should continue to flow,
provided that financial markets stop imploding.
• Housing starts will be flat in 2009 with 2010
looking more promising.
Credit unions can expect…
• Tight margins, deteriorating credit quality, lower lending
volumes, and increased competition, particularly for
deposits, to be with us for some time.
• Loan growth to remain weak into 2009.
• Consumer loans and other real estate loans to be
dominant sources of delinquency and charge-offs.
• Mortgage demand to be steady as consumers re-enter the
marketplace into 2009 and turn to their credit unions.
• Automobile loan demand to remain weak into 2010.
• Delinquencies to accelerate in 2009 while charge-offs
level off.
• To have members with tarnished credit seeking products
to address and rebuild so develop these products now.
What are credit unions to do?
• Avoid raising fees and loan rates to generate net
income; shore up in other areas.
• Rising delinquency and loan losses do not
necessarily require adjusting lending policies.
• These are taxing times for members so let the
capital do its job.
• Continually communicate your commitment to
your members to them.
• Tremendous opportunity to gain market share,
but lack of earnings will make growth difficult.
Credit Union Forecast
December 2008
Actual Results
5Yr Avg 2007
Growth rates:
Savings growth
Loan growth
Asset growth
Membership growth
Quarterly Results/Forecasts
2008:1
2008:2
2008:3
2008:4
Annual Forecasts
2008
2009
5.1%
9.4%
7.1%
2.5%
5.1%
6.5%
6.0%
1.7%
5.0%
0.4%
4.5%
1.1%
1.3%
2.6%
1.3%
1.0%
-1.2%
3.7%
-0.1%
0.8%
0.5%
1.6%
0.5%
0.2%
6%
8%
6%
3%
10%
6%
10%
2%
Liquidity:
Loan-to-share ratio**
75.2%
83.4%
79.7%
80.8%
84.8%
85.7%
85.7%
82.6%
Asset quality:
Delinquency rate
Net chargeoff rate*
0.74%
0.52%
0.93%
0.48%
0.96%
0.66%
0.97%
0.74%
1.03%
0.75%
1.20%
0.75%
1.04%
0.73%
1.50%
1.00%
Earnings
Return on average assets (ROA)** 0.88%
0.65%
0.60%
0.43%
0.34%
0.35%
0.43%
0.50%
Capital adequacy:
Net worth ratio**
11.4%
11.0%
11.0%
11.1%
11.1%
11.1%
10.6%
* End of period annualized rate
**End of period ratio
11.2%
Questions?