Quality Spreads Are Narrowing From Record Highs

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The Economic Outlook:
A Half-Speed Recovery
Beth Ann Bovino
Senior Economist
Standard & Poor’s
September 16, 2010
Data as of August 18
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Copyright © 2010 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
The U.S. Hits Bottom
• The recession appears to have ended in the third quarter of 2009
• Housing had been in recession for three years,
• But seems to be stabilizing.
• Overseas partners are recovering, helping exports,
• But the dollar strength has hurt the trade deficit
• The fiscal stimulus has helped boost the economy, but will be
withdrawn in 2011
• The financial system appears to be stabilizing.
• But private nonresidential construction is still plunging.
• The recession has been the longest and deepest since the WW II.
• And the recovery is likely to be slow and uneven.
• Another dip into recession is possible if the financial markets lock up
again, oil prices jump, or consumers remain scared.
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2.
The Housing Market Cycle
(Housing starts (1000) and 12-month % change in home prices (S&P/Case-Shiller))
2,500
30
2,000
20
1,500
10
1,000
0
500
0
1990
-10
-20
1993
Starts
1996
1999
2002
2005
Home prices (%chya, right)
Source: Standard & Poor’s and Census Bureau
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3.
2008
Those Who Bubbled Highest Burst Loudest
(Percent increase in S&P/Case-Shiller home price index, May 2010)
20-city Average
Miami
Los Angeles
Washington
San Diego
Tampa
Las Vegas
Phoenix
New York
San Francisco
Seattle
Portland
Boston
Minneapolis
Chicago
Denver
Atlanta
Charlotte
Detroit
Dallas
Cleveland
-100
-50
0
2000-peak
50
100
peak-present
Source: Standard & Poor’s
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4.
150
200
The Fed Didn’t Stop At Nothing
(Percent)
10
8
6
4
2
0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Federal Funds Rate
10-Yr Bond Yield
Source: Federal Reserve
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5.
Mortgage rate
Quality Spreads Are Narrowing From Record Highs
(Spread over Treasury yields, percentage points)
Source: Standard & Poor’s Global Fixed Income Research
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6.
All Fall Down
(Percent change in real GDP, quarterly rate)
Source: Global Insight
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7.
Deficits Are Mostly Cyclical
(Government deficit as % of GDP, fiscal years)
Source: Standard & Poor’s.
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8.
Weaker Employment Is Hurting Construction
(4-quarter percent change)
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Employment
Nonresidential construction (right)
Source: Bureau of Labor Statistics, Bureau of Economic Analysis, S&P projections
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9.
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
Can the Consumer Keep Spending?
• Consumer spending led recent expansions
• But wealth is down because home prices have dropped and
• Stocks are still down from their 2007 peak
• Borrowing is more difficult, and home equity loans much
less available
• Confidence has dropped and unemployment risen
• Consumers are likely to continue to save more and
borrow less
• Falling oil prices gave back some purchasing power, but that is
now reversing
• Stimulus package provides some income boost
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10.
Debt Is Dropping From Record Highs
(Percent of after-tax income)
10
140%
8
130%
6
120%
4
110%
2
100%
0
90%
-2
1990 1993 1996 1999 2002 2005 2008 2011
Saving rate
Debt/income (right)
Source: Bureau of Economic Analysis and Federal Reserve
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11.
80%
High Unemployment Scares Consumers
(Percent)
130
120
110
100
90
80
70
60
50
2000
11
10
9
8
7
6
5
4
3
2003
2006
Consumer sentiment
2009
2012
Unemployment Rate (right)
Source: Bureau of Labor Statistics and University of Michigan Survey Research Center
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12.
Unemployment Rates Are High
(July 2010)
Under 8%
8% to 9%
9% to 10%
10% and over
Source: BLS
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13.
Wealth Slides With Home and Stock Prices
(Percent of after-tax income)
700%
600%
500%
400%
300%
200%
100%
0%
1990 1993 1996 1999 2002 2005 2008
Net worth
Financial assets
Source; Federal Reserve
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14.
2011
Car Sales And Housing Starts Hurt Most
(Millions of units)
3
20
2.5
18
2
16
1.5
14
1
12
0.5
10
0
1993 1996 1999 2002 2005 2008
Housing starts
8
2011
Car sales (right)
Source: Census Bureau, Global Insight
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15.
Bottom Line: The Economy Will Recover Slowly
• The recession is the longest and deepest since the 1930s
• Fiscal stimulus will support the recovery
• But recovery is likely to be slow because of financial markets
and switch to higher savings
• If financial markets lock up again
• Home prices continue to fall
• And oil prices continue to rise
• The recession could be longer and deeper
• With the risk of a “lost decade” similar to Japan in the 1990s
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16.
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