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From the Great Recession to the New Normal MARK ZANDI, CHIEF ECONOMIST FROM MOODY’S ECONOMY.COM The Great Recession Is Over Recessions since World War II Duration in Months Peak-to-Trough % Change Recession Expansion Peak to Trough Trough to Peak Real GDP Industrial Production Nonfarm Employment Jobless Rate Peak Trough 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% 10 57 -2.0% -8.3% -2.7% 4.4% 7.6% 3.2% Average Low High Change Sources: NBER, BEA, FRB, BLS, Moody’s Economy.com FROM MOODY’S ECONOMY.COM 2 Policymakers Stabilize the Banking System… Difference between 3-mo Libor and Treasury bill yields 5.0 TARP fails to pass Congress 4.5 4.0 3.5 3.0 Bear hedge funds liquidate 2.5 2.0 Bear Stearns collapse Lehman No asset purchases Stress tests failure 1.5 1.0 Bank funding problems 0.5 0.0 Jan-07 Jul-07 Jan-08 Fannie/Freddie takeover Jul-08 Jan-09 Jul-09 FROM MOODY’S ECONOMY.COM 3 …And the Stimulus Provides a Meaningful Boost Contribution to real GDP growth, ppt 4 3 2 1 0 (1) 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 Source: Moody’s Economy.com FROM MOODY’S ECONOMY.COM 4 U.S. Households Are Fixing Their Finances... Contribution to personal saving rate, 4-qtr MA 12 95%-100% 80%-95% 60%-80% 40%-60% 0%-40% 10 8 6 4 2 0 -2 -4 -6 90 92 94 96 98 00 02 04 06 08 Source: Moody’s Economy.com FROM MOODY’S ECONOMY.COM 5 …With Some Success Number of trades 30-90 days delinquent, mil 24 23 22 21 20 19 18 07 08 09 Sources: Equifax, Moody’s Economy.com FROM MOODY’S ECONOMY.COM 6 Layoffs Abate, but Hiring Remains Dormant… Ths, 3-mo MA 6,000 2,600 Hires Layoffs 5,500 2,400 5,000 2,200 4,500 2,000 4,000 1,800 3,500 1,600 04 05 06 07 08 09 Source: BLS FROM MOODY’S ECONOMY.COM 7 …Threatening to Undermine Compensation 1985Q1-2009Q2 Compensation growth 6 2009Q2 Unemployment rate=9.3% Natural rate=5.3% Compensation growth=1.5% 5 4 3 2 y = -0.48x + 3.40 R2 = 0.32 1 0 -3 -2 -1 0 1 2 3 4 Difference between actual and natural unemployment rate 5 Source: BLS FROM MOODY’S ECONOMY.COM 8 The Foreclosure Crisis Continues to Mount Ths of first mortgage loans 4,500 90 days and over delinquent Auction & REO Notice of default 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 05 06 07 08 09 Sources: Equifax, Moody’s Economy.com FROM MOODY’S ECONOMY.COM 9 Commercial Real Estate Boom and Bust Repeat-sales indices: 2000Q4=100 190 Commercial RE prices House prices 180 170 160 150 140 130 120 110 100 01 02 03 04 05 06 07 08 09 Sources: Moody’s Investors Service, REAL, Fiserv FROM MOODY’S ECONOMY.COM 10 State and Local Government Revenues Collapse State and local tax revenue, % change yr ago 20 15 10 5 0 -5 -10 50 55 60 65 70 75 80 85 90 95 00 05 Source: BEA FROM MOODY’S ECONOMY.COM 11 Credit Markets Remain Dysfunctional Bond issuance, $ bil, annualized 2,000 CDO ABS CMBS RMBS 1,500 1,000 500 0 00 01 02 03 04 05 06 07 08 09 ytd Source: Thomson Reuters FROM MOODY’S ECONOMY.COM 12 The Federal Reserve Will Remain Aggressive… Federal funds rate 7 Funds rate target 6 Moody's Economy.com Taylor rule 5 4 3 2 1 0 -1 00 01 02 03 04 05 06 07 08 09 Sources: Federal Reserve, Moody’s Economy.com FROM MOODY’S ECONOMY.COM 13 …Even Committing to More Credit Easing… 3.00 2.75 2.50 800 Difference between Freddie mortgage rate and 10-year Treasury yield (L) 600 2.25 400 2.00 1.75 1.50 1.25 Jan-09 Fed holdings of Fannie and Freddie MBS, $ bil (R) Apr-09 200 Jul-09 0 Oct-09 Sources: Freddie Mac, Federal Reserve FROM MOODY’S ECONOMY.COM 14 …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 firsttime 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 15 The Wrongs Will Be Slowly Righted Vacant homes for sale and rent, ths 6,500 6,000 5,500 5,000 4,500 Housing supply= Single-family= Multifamily= Manufactured= 600,000 450,000 100,000 50,000 Actual Housing demand= 1,300,000 HH formations= 750,000 Obsolescence= 350,000 Second homes= 200,000 Trend 4,000 3,500 90 92 94 96 98 00 02 04 06 08 FROM MOODY’S ECONOMY.COM 16 Confidence Will Be Restored Business confidence diffusion index 50 40 30 20 Lehman 10 0 Bear Stearns Iraq invasion -10 -20 -30 -40 03 04 05 06 07 08 09 Source: Moody’s Economy.com FROM MOODY’S ECONOMY.COM 17 An Inflection Point for U.S. Consumers… Saving vs. wealth, 1960-present Household saving rate (%) 25 20 15 10 5 0 07Q2 09Q2 -5 4.0 4.5 5.0 5.5 6.0 6.5 Household net worth-to-disposable income ratio FROM MOODY’S ECONOMY.COM 18 …But Global Customers Will Pick Up the Slack Expansion Recovering Moderating recession In recession Source: Moody’s Economy.com FROM MOODY’S ECONOMY.COM 19 Tough Job Market for Years to Come… 140 11 138 10 Jobless rate (R) 9 136 8 134 7 132 6 Jobs, mil (L) 130 5 128 4 07 08 09 10 11 12 Sources: BLS, Moody’s Economy.com FROM MOODY’S ECONOMY.COM 20 …But Businesses Will Eventually Need to Hire Trend labor productivity growth, % change yr ago 4.0 3.5 4% 3.0 2.5 0% 2.0 2% 1.5 1.0 90 95 00 05 10 FROM MOODY’S ECONOMY.COM 21 Fiscal Austerity Dead Ahead... Federal debt-to-GDP ratio under the president’s budget 85 75 65 55 45 35 08 09 10 11 12 13 14 15 16 17 18 19 Source: CBO FROM MOODY’S ECONOMY.COM 22 …But Progress Is Being Made Consumer price inflation, 12-mo MA, % change yr ago 10 Healthcare Total ex healthcare 8 6 4 2 0 90 92 94 96 98 00 02 04 06 08 FROM MOODY’S ECONOMY.COM 23 Economic Timeline Banking system stabilizes Economic downturn ends Foreclosures peak House prices Employment resume rising bottoms Stock market trough Housing starts bottom 09Q1 Home sales bottom Inflation accelerates Fiscal pressures intensify Fed raises rates 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 House prices bottom Retailing firms Securities markets up and running Jobless rate peaks 11Q2 11Q3 11Q4 Extraordinary bank failures end Self-sustaining expansion begins Source: Moody’s Economy.com FROM MOODY’S ECONOMY.COM 24 www.economy.com FROM MOODY’S ECONOMY.COM 25 © 2009 Moody’s Analytics, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). 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