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CRE 2010 Midyear Meetings
The Prospects for the U.S. Economic
Recovery in 2010 and Beyond
May 23, 2010
Presented by:
Asieh Mansour, Ph.D., Managing Director, Head of Americas Research, (415) 781-3300, [email protected]
Certain information in this research report constitutes forward-looking statements. Due to various risks, uncertainties and
assumptions made in our analysis, actual events or results or the actual performance of the markets covered by this
research report may differ materially from those described. The information herein reflect our current views only, are
subject to change, and are not intended to be promissory or relied upon by the reader. There can be no certainty that
events will turn out as we have opined herein. Reference to specific companies are being shown to related regional
employment to real estate prospects in the area and should not be considered a recommendation for such company.
Confidential – Not for Public Distribution
Overview
2

Global Outlook

The Outlook for the U.S. Economy

The U.S. Regions in Perspective
The Prospects for the U.S. Economic Recovery in 2010 and Beyond – May 23, 2010
Forecast Highlights: Economic Recovery is Broadening
3

The global economy is in recovery with key leading indicators signaling growth

Despite the sovereign debt crisis (concentrated in the “PIGS”), the risk of a double-dip are diminishing

The pace of recovery varies with Asia leading and Europe lagging

The U.S. recovery is on track with much of the strength focused on manufacturing

The risk of sovereign debt default casting a shadow on economic growth
The Prospects for the U.S. Economic Recovery in 2010 and Beyond – May 23, 2010
The Global Outlook
World Recovery Continues
Percent Change
10
8
6
4
2
0
-2
-4
-6
-8
-10
5
4
3
2
1
0
-1
-2
-3
-4
-5
2007
2008
2009
2010
2011
Industrial Production
2013
2014
2015
Real GDP

The global economic recovery appears sustainable and the risks of a double dip are low.

There is also increasing evidence that the recovery is becoming less dependent on fiscal stimulus
and driven more by private demand.

World trade is also rebounding strongly from the extremely low levels as reflected in the industrial
production numbers.
Source: Global Insight and RREEF Research. As of April 2010.
5
2012
World Real GDP
(Annual Percent Growth)
Industrial Production
(Annual Percent Change)
Forecast
The Prospects for the U.S. Economic Recovery in 2010 and Beyond – May 23, 2010
Still a Multi-Speed Recovery
Annual Percent Growth, 2010 - 2014
World
United States
European Union
Asia excl. Japan & China
Japan
China
0
2
6
8
10

Asia is in the fast lane, Europe in the slow lane, and the U.S. somewhere in between.

The inevitable fiscal consolidation in Europe will result in a period of sub-par growth.
Source: Global Insight and RREEF Research. As of April 2010.
6
4
The Prospects for the U.S. Economic Recovery in 2010 and Beyond – May 23, 2010
G7 Gross Government Debt: Danger Zone
G7 Gross Government Debt
Ratio of Elderly Population to Work Force
(Percent of GDP)
(Percent of Work Force)
Italy
Japan
Japan
Italy
South Korea
United States
Poland
United Kingdom
Germany
France
France
Germany
2009
United Kingdom
2014
Russia
United States
Canada
2000
China
0
50
100
150
200
250
2050
Mexico
Brazil


The ratio of government debt to GDP for many of
the G7 economies will approach or exceed 90%,
which is viewed as a “danger threshold”.
The debt dynamics of some Eurozone economies
are particularly precarious, including Greece, Spain,
and Portugal.
Source: OECD. As of April 2010.
7
The Prospects For the Economic U.S. Economy Recovery in 2010 and Beyond – May 23, 2010
India
0
20
40
60
80
100
The Outlook for the U.S. Economy
U.S. Forecast Highlights: Employment Turns the Corner
9

Businesses have regained confidence and have begun to rehire

The credit crunch is moderating; most lenders are no longer tightening standards for business and
consumer loans

We have upgraded our outlook for U.S. economic growth in 2010

Steep recoveries usually follow steep recessions

But recoveries after financial crises are usually slow

Moderate recovery is still the most likely path

Major government budget adjustments must be made at some point
The Prospects for the U.S. Economic Recovery in 2010 and Beyond – May 23, 2010
The Current Recession in a Historical Context
Key Macro Performance Measures Across U.S. Recessions
Recession
Duration (months)
Real GDP:
Decline peak
to trough (%)
Unemployment:
Maximum value
during recession (%)
CPI:
Change peak
to trough (%)
1929-33
43
-36.21
25.36
-27.17
1937-38
13
-10.04
20.00
-2.08
1945-45
8
-14.48
3.40
1.69
1948-49
11
-1.58
7.90
-2.07
1953-54
10
-2.53
5.90
0.37
1957-58
8
-3.14
7.40
2.12
1960-61
10
-0.53
6.90
1.02
1969-70
11
-0.16
5.90
5.04
1973-75
16
-3.19
8.60
14.81
1980
6
-2.23
7.80
6.30
1981-82
16
-2.64
10.80
6.99
1990-91
8
-1.36
6.80
3.53
2001
8
0.73
5.50
0.68
2007-09
20*
-3.66
9.50
2.76
The current recession end date has not yet been determined by the NBER; data are through 2009:Q2. Source: The Federal Reserve of St. Louis Review, March/April
2010, Volume 92, Number 2, page 90.
10
The Prospects for the U.S. Economic Recovery in 2010 and Beyond – May 23, 2010
Cyclical Indicators Rising; Small Business Lagging
ISM Manufacturing
ISM Non-Manufacturing
NFIB Small-Business
60
100
98
55
96
94
50
92
45
90
88
40
86
84
35
82
30
2007
80
2008
2009
ISM Diffusion Indexes, 50 = breakeven
Source: Global Insight. As of May 2010.
11
The Prospects For the Economic U.S. Economy Recovery in 2010 and Beyond – May 23, 2010
2010
NFIB Index,1986=100
The Inventory Cycle Produced the Q4 Growth Spurt
(Annualized real rate of growth, Q/Q, percent)
GDP
Final Sales
6
4
2
0
-2
-4
-6
-8
2008
2009
2010
Source: Global Insight. As of May 2010.
12
The Prospects For the Economic U.S. Economy Recovery in 2010 and Beyond – May 23, 2010
2011
2012
Employment Is Turning
Unemployment Rate**
Payroll Employment*
12
400
200
10
0
8
-200
-400
6
-600
-800
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
4
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
100
80
60
40
20
0
-20
-40
-60
-80
-100
Jan-08
*Thousands, monthly change, SA; **Percent; ***Hours, SA. Source: Global Insight. As of May 2010.
13
Jan-09
Jul-09
Jan-10
Temporary Employment*
Length of Workweek***
33.9
33.8
33.7
33.6
33.5
33.4
33.3
33.2
33.1
33.0
Jan-08
Jul-08
The Prospects For the Economic U.S. Economy Recovery in 2010 and Beyond – May 23, 2010
Jul-08
Jan-09
Jul-09
Jan-10
Employment Growth Will Support Consumption
(Percent growth, real)
Real Consumption
Real Disposable Income
5
4
3
2
1
0
-1
2005
2006
2007
2008
2009
Source: Global Insight. As of May 2010.
14
The Prospects For the Economic U.S. Economy Recovery in 2010 and Beyond – May 23, 2010
2010
2011
2012
House Price Adjustment Has Gone a Long Way…
(FHFA house price index* divided by average labor compensation, 2000 = 1.0)
1.25
1.20
1.15
1.10
1.05
1.00
0.95
0.90
1975
1980
1985
1990
1995
* Purchase-only index from 1991 onwards. Source: Global Insight. As of May 2010
15
The Prospects For the Economic U.S. Economy Recovery in 2010 and Beyond – May 23, 2010
2000
2005
2010
Exports and Imports Both Bounce
(Percent change annualized rate, volumes)
Real U.S. Exports
Real U.S. Imports
30
20
10
0
-10
-20
-30
-40
2007
2008
2009
2010
Source: Global Insight. As of May 2010.
16
The Prospects For the Economic U.S. Economy Recovery in 2010 and Beyond – May 23, 2010
2011
2012
Financial Conditions Have Eased Substantially
TED spread – financial shocks
5.0
Peak
4.5
(percentage points)
4.0
3.5
3.0
2.5
Russian Financial Crisis/
LTCM
2.0
S&L Crisis
Subprime
1.5
Some
easing
1.0
0.5
Asian Financial Crisis
0.0
90
91
92
93
94
95
96
97
98
99
00
01
Source: Bloomberg and RREEF Research. As of May 2010.
17 The Prospects For the Economic U.S. Economy Recovery in 2010 and Beyond – May 23, 2010
02
03
04
05
06
07
08
09
10
The Federal Budget Deficit Continues to Soar
(Percent of GDP, fiscal years)
4
2
0
-2
-4
-6
-8
-10
-12
1980
1984
1988
1992
1996
2000
2004
Source: Global Insight. As of May 2010.
18
The Prospects For the Economic U.S. Economy Recovery in 2010 and Beyond – May 23, 2010
2008
2012
2016
2020
Federal Debt Burden Rising
(Debt in hands of the public, percent of GDP)
80
70
60
50
40
30
20
10
0
1980
1984
1988
1992
1996
2000
2004
Source: Global Insight. As of May 2010.
19
The Prospects For the Economic U.S. Economy Recovery in 2010 and Beyond – May 23, 2010
2008
2012
2016
2020
The Federal Budget Gap
(Percent of GDP)
Expenditures
Revenues
26
24
22
20
18
16
14
1980
1984
1988
1992
1996
2000
2004
Source: Global Insight. As of May 2010.
20
The Prospects For the Economic U.S. Economy Recovery in 2010 and Beyond – May 23, 2010
2008
2012
2016
2020
Interest Payments Will Mount
(Net interest payments, federal government, percent of GDP)
5
4
3
2
1
0
1980
1984
1988
1992
1996
2000
2004
Source: Global Insight. As of May 2010.
21
The Prospects For the Economic U.S. Economy Recovery in 2010 and Beyond – May 23, 2010
2008
2012
2016
2020
Key Interest Rate Outlook
Federal Funds Rate (%)
10-Year Treasury Note Yield (%)
Forecast
6
5
4
3
2
1
0
2001
2003
2005
2007
2009
2011
Source: Bloomberg. As of May 2010.
22
The Prospects For the Economic U.S. Economy Recovery in 2010 and Beyond – May 23, 2010
2013
2015
2017
2019
Consensus Economists Not Worried About Inflation
Deflation Camp:
Inflation Camp:

Philip Curve dynamics

The U.S. Fed can monetize debt

Believers of the output gap

Money supply growth drives inflation

Slack in economy

Increase in bank reserves

Weak labor markets

Economic recovery

Deleveraging process

Rising food and commodity prices
U.S. Inflation, 1950 - 2014
Annual
Percent
Change
Real GDP Growth
CPI (Inf lation)
Consensus Forecast
16
14
12
10
8
6
4
2
0
-2
-4
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
Source: Global Insight and RREEF Research. As of May 2010.
23
The Prospects For the Economic U.S. Economy Recovery in 2010 and Beyond – May 23, 2010
1990
1994
1998
2002
2006
2010
2014
The U.S. Regions in Perspective
Forecast Highlights: U.S. Regions

Not all U.S. regions are out of recession yet

Recovery is evident across the Midwest, Gulf Coast, and Southeast

Recovery is also extending to the Northeast, at least its small and midsize metropolitan areas

The West and Florida will be last region to recover given its exposure to the housing bust
Recovery is Expanding Across the East
Recovery
Moderating Recession
Source: Economy.com. As of April 2010.
25
The Prospects for the U.S. Economic Recovery in 2010 and Beyond – May 23, 2010
Regional Recovery Depends on Jobs
Where will Jobs Come From?
Potential Order of Industry Recovery
1.
Healthcare and education provide stability
2.
Manufacturing and construction level off
– Inventory restocking; capital goods
3.
Export Industries
4.
Professional Services
– Accounting, legal, engineering, advertising etc.
5.
26
Finance, retail, leisure & hospitality
The Prospects for the U.S. Economic Recovery in 2010 and Beyond – May 23, 2010
Concluding Remarks: U.S. Outlook
27

Growth initially driven by inventory cycle and stimulus

Exports, business spending moving higher

Construction, state and local spending declining

Consumer demand improving but not the same driving force as in previous recoveries

Debate surrounding the trajectory for inflation will continue

The federal government needs an “exit strategy” too!
The Prospects for the U.S. Economic Recovery in 2010 and Beyond – May 23, 2010
Important Notes
© 2010. All rights reserved. RREEF is the brand name of the real estate division for the asset management activities of Deutsche Bank AG. In the U.S. this relates to
the asset management activities of RREEF America L.L.C.; in Germany: RREEF Investment GmbH, RREEF Management GmbH, and RREEF Spezial Invest GmbH;
in Australia: Deutsche Asset Management (Australia) Limited (ABN 63 116 232 154) Australian financial services license holder; in Hong Kong: Deutsche Asset
Management (Hong Kong) Limited (“DeAMHK”); in Japan: Deutsche Securities Inc. (For DSI, financial advisory (not investment advisory) and distribution services
only.); in Singapore, Deutsche Asset Management (Asia) Limited (Company Reg. No. 198701485N) and in the United Kingdom, RREEF Limited, RREEF Global
Advisers Limited, and Deutsche Asset Management (UK) Limited; in addition to other regional entities in the Deutsche Bank Group.
Key RREEF research personnel, including Asieh Mansour, Head of Americas Research and Peter Hobbs, Head of EMEA Real Estate Research are voting members
of the investment committee of certain of the RREEF Alternative Investment Funds. Members of the investment committees vote with respect to underlying
investments and/or transactions and certain other matters subjected to a vote of such investment committee. Additionally, research personnel receive, and may in the
future receive incentive compensation based on the performance of a certain investment accounts and investment vehicles managed by RREEF and its affiliates.
This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It does not constitute investment
advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or for Deutsche Bank
AG and its affiliates to enter into or arrange any type of transaction as a consequence of any information contained herein. Neither Deutsche Bank AG nor any of its
affiliates, gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any
statute cannot be excluded, no member of the Deutsche Bank Group, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in
contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or
otherwise suffered by the recipient of this document or any other person.
The views expressed in this document constitute Deutsche Bank AG or its affiliates’ judgment at the time of issue and are subject to change. This document is only
for professional investors. This document was prepared without regard to the specific objectives, financial situation or needs of any particular person who may
receive it. No further distribution is allowed without prior written consent of the Issuer.
An investment in real estate involves a high degree of risk and is suitable only for sophisticated investors who can bear substantial investment losses. The value of
shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results.
The forecasts provided are based upon our opinion of the market as at this date and are subject to change, dependent on future changes in the market. Any
prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely
performance.
I-017516-1.0
28
The Prospects for the U.S. Economic Recovery in 2010 and Beyond – May 23, 2010