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2010 National Outlook Phoenix Chamber of Commerce 2010 Economic Outlook September 30, 2009 Beckie Holmes Director of Market Intelligence, Cox Communications Arizona 2010 Outlook • • • • Is the recession over? Have consumers changed? When will companies start hiring again? Did monetary and fiscal policy work? 5/23/2017 Is the Recession Over? Probably…Broad Based Improvement in Key Areas Conference Board Leading Index: Recession Over Above 50= Expanding, Below 50=Contracting 10.0% Year-over-Year Growth Purchasing Managers: 7.5% 5.0% 2.5% 0.0% -2.5% 65 60 55 50 45 August '09: Manufacturing; 52.9 Non-Manufucaturing: 51.3 40 35 30 -5.0% '00 '01 '02 '03 '04 '05 '06 '07 '08 '00 '09 US Initial Jobless Claims Peaked 8.0% 650 600 6.0% Hundreds 700 550 500 450 400 350 '01 '02 '03 '04 '05 '06 '07 '08 '09 US Real GDP Growth Initial Jobless Claims, Seas. Adj Thousands Business Conditions Improving 70 Positive 2H'09 Expected 4.0% 2.0% 0.0% -2.0% -4.0% 300 250 -6.0% 200 -8.0% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '00Q1 '01Q2 '02Q3 '03Q4 '05Q1 '06Q2 '07Q3 '08Q4 '05 Sources: Conference Board, US Department of Commerce, US Department of Labor, Institute for Supply Management, Blue Chip Economic Indicators 5/23/2017 Have Consumers Changed? Real Consumer Spending 10% Year-over-Year Growth 8% 6% 4% 2% 0% -2% Consumption falling for the first time since 1970s; a permanent shift towards thrift? -4% '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 Source: US Bureau of Economic Research 5/23/2017 Retail Sales Recovering …thanks to government support… Real Retail Sales Growth Food, Health, Rest. & Bars 5% Clothing & General Merch. Year-Over-Year Growth 0% -5% Total ex. Gas -10% Furniture, Electronics, Building Materials -15% -20% Motor Vehicles -25% -30% Jan07 Apr07 Jul07 Oct07 Jan08 Apr08 Source: US Census Bureau, Bureau of Labor Statistics 5/23/2017 Jul08 Oct08 Jan09 Apr09 Jul09 …But Spending Still Below 2007 Peak Real Retail Sales Inflation-Adjusted Retail Sales Relative to Nov '07 5% Relative to November 2007 Peak Food, Health, Restaurants & Bars +2% 0% Clothing & Gen. Merch. -4% Total -5% ex. Gas -7% -10% Furniture, Electronics, Building Mat'ls -19% -15% -20% Motor Vehicles -17% -25% -30% Nov-07 Feb-08 May-08 Source: US Bureau of Economic Analysis 5/23/2017 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Saving More…For Now Savings behavior driven by changes in net worth Household Savings & Net Worth Billion Dollars, 12 Month Moving Average $12,500 $250 $7,500 $150 $2,500 $50 ($2,500) ($50) ($7,500) ($150) Change in Net Worth -$8.9T, -14% (2Q09) ($12,500) '90 '92 '94 Source: US Bureau of Economic Analysis 5/23/2017 '96 '98 '00 '02 '04 ($250) '06 '08 Changes In Savings Changes in Net Worth Change in Savings +$192B, +94% (2Q09) Businesses • • • • Sharp pullback in response to the crisis Job growth falls to 30-40 year lows Aggressive cost cutting keeps profits healthy As demand comes back, hiring should pick up quickly 5/23/2017 A Construction and Manufacturing Bust 96% of Losses, 50% of Jobs Lost in Four Sectors Job Losses Since Dec 2007 Peak 40% Percent of Jobs Lost Percent of US Employment 29% 30% 24% 23% 22% 21% 20% 10% 3% 2% 5% 9% 8% 6% 10% 13% 17% 15% 6% 0% -2% -10% Source: US Bureau of Labor Statistics 5/23/2017 Trade, Transportation, Utilities Government Edu & Health Srvc Prof & Business Srvc Manufacturing Financial Construction Information -20% Leisure & Hospitality -11% Steep Job Cuts Support Productivity Productivity Growth Leads Job Growth Productivity and Job Growth Year-over-Year Growth 6% Output per Employee 4% 2% 0% -2% Job Growth -4% -6% '73 '76 '79 Source: US Departmemt of Labor 5/23/2017 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 Profits Relatively Healthy Cost-Cutting Pays off Corporate Profits as a Share of GDP 13% Profits/GDP 12% 11% 10% 9% '70-'09 Average: 8.7% 8% 7% 6% '70 '73 '76 '79 '82 '85 '88 Source: US Department of Commerce, Bureau of Economic Analysis. Corporate profits with inventory valuation & capital consumption adjustments 5/23/2017 '91 '94 '97 '00 '03 '06 Did Monetary and Fiscal Policy work? • Monetary Policy – What happened and why? – Exit strategy/consequences? • Fiscal Policy – What happened and why? – Exit strategy/consequences? 5/23/2017 The Fed’s Balance Sheet Explodes…. Better, but still propping up the financial sector Fed Assets: Up 121% over 2007, $1.2T* $2,500 Billion Dollars $2,000 Other Gov Bonds Other Loans & Swaps Financial Sector Rescue +$722B 63% of Increase $1,500 Housing Rescue +$559B 48% of Increase $1,000 Discount Window Lending $500 Treasury Securities & Miscellaneous Assets -$126M, -11% of Increase $0 2006 2007 '08Q1 *Increases relative to 2007. Source: Federal Reserve 5/23/2017 '08Q2 '08Q3 '08Q4 '09Q1 '09Q2 …And Bank Excess Reserves Soar Is Future Inflation Inevitable? Components of the Monetary Base $2,000 $1,800 Billion Dollars $1,600 Excess Reserves $766B Required Reserves $63B $1,400 $1,200 $1,000 $800 $600 Currency in Circulation $899B $400 $200 $0 Jan '07 5/23/2017 May '07 Sep '07 Jan '08 May '08 Sep '08 Jan '09 May '09 Inflationary Pressure Contained For Now Can the Fed Unwind In Time? Inflation and Money Growth 10% 5-Year Moving Average Growth Core Inflation (Excludes Food & Energy) 8% Money Growth in Excess of Real GDP Growth: 6% Aug '09: 4.4% 4% 4% Avg Inflation 1960-2009 2% 0% '65 '68 '71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 -2% Source: Federal Reserve Bank, Bureau of Labor Statistics 5/23/2017 Massive Fiscal Stimulus Falling Tax Revenues, Rising Expenditures Federal Government State & Local Government 15% 26% 14% 24% Percent of GDP Receipts 14% 13% Spending 13% Percent of GDP Spending 22% 20% 18% 12% 16% 12% Receipts 14% 11% '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 Source: Bureau of Economic Analysis 5/23/2017 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 Massive Fiscal Stimulus: Deficits Rising State & Local is Cyclical, Federal is Structural Government Deficit/Surplus as a Share of GDP 6% State & Local Balance Percent of GDP -0.1% 2Q09 Percent of GDP 4% 2% 0% -2% -4% Federal Balance Percent of GDP -9% 2Q09 -6% -8% -10% '47 '51 '55 '59 '63 '67 '71 '75 '79 '83 '87 '91 '95 '99 '03 '07 Source: Bureau of Economic Analysis 5/23/2017 Outlook and Summary • Deepest recession since the Depression ending – 2010 will be better than 2009, but still below average • Consumers are repairing balance sheets; – Savings rates to stay elevated until net worth improves • Businesses are relatively healthy but are cautious • Government support will play a crucial role in 2010 – Need continued stimulus until recovery is self-sustaining • Inflation not a threat in short run – Unwinding deficits and monetary stimulus critical to controlling long term inflation 5/23/2017