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The Economic Outlook: Who’ll Stop The Rain David Wyss Chief Economist Standard & Poor’s September 10, 2009 Data as of September 9 CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Copyright (c) 2009 Standard & Poor’s, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. The U.S. Hits Bottom • The economy is nearing the bottom • Housing has been in recession for three years, subtracting over a percentage point from GDP growth in both 2007 and 2008. • But that was offset by strength in nonresidential construction and the closing of the trade gap. • Weaker overseas growth meant less benefit from the trade deficit. • Nonresidential construction is plunging. • The fiscal 2008 deficit beat the 2004 record; 2009 may triple 2008. • The Fed cut rates sharply. • The recession has been the longest and deepest since the 1930s. • And an even deeper and longer recession is possible if the financial markets lock up again, oil prices continue to climb, and home prices continue to drop. CONFIDENTIAL AND PROPRIETARY. 2. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. 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 -10 0 -20 1990 1993 1996 1999 Starts 2002 2005 Home prices (%chya) Source: Standard & Poor’s and Census Bureau CONFIDENTIAL AND PROPRIETARY. 3. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. 2008 Bubbles Were Almost Everywhere (Percent increase in home prices, 1997-2005) US Canada Germany Switzerland Netherland Britain Ireland Italy Sweden France Spain Japan Australia China NewZealan Hong Kong -100 -50 0 50 100 Source: Mortgage Bankers’ Association and Standard & Poor’s CONFIDENTIAL AND PROPRIETARY. 4. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. 150 200 250 Those Who Bubbled Highest Burst Loudest (Percent increase in Case-Shiller home prices, June 2009) Miami Los Angeles Washington San Diego Tampa Las Vegas Phoenix New York San Fran. Seattle Portland Boston Minneapoli Chicago Denver Charlotte Atlanta Detroit Dallas Cleveland -100 -50 0 2000-peak 50 100 peak-present Source: Standard & Poor’s CONFIDENTIAL AND PROPRIETARY. 5. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. 150 200 Foreclosures Are Concentrated (Percentage of homes in foreclosure, first half 2009) Under 0.5% 0.5% to 1% 1% to 2% Over 2% Source: RealtyTrac CONFIDENTIAL AND PROPRIETARY. 6. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. The Fed Is Still Easing (Percent) 10 8 6 4 2 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 Federal Funds Rate 10-Yr Bond Yield Source: Federal Reserve CONFIDENTIAL AND PROPRIETARY. 7. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Mortgage rate Quality Spreads Widened From Record Lows (Spread over Treasury yields, percentage points) 18 16 14 12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Default rate (12-month) Old spread series Credit spread Source: Standard & Poor’s Global Fixed Income Research CONFIDENTIAL AND PROPRIETARY. 8. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Fiscal Costs of Post-War Banking Crises (Percent of nominal GDP) South Korea 1997-2002 Japan 1991-Present Spain 1977-85 Finland 1991-94 Norway 1987-93 Sweden 1991 U.S. S&L Crisis 1984-91 U.S. Subprime Crisis 2007-Present The Big Financial Crises Since 1970 0 5 10 15 20 Source: Organization for Economic Cooperation and Development, International Monetary Fund, Global Insight CONFIDENTIAL AND PROPRIETARY. 9. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. 25 30 35 Synchronized Sinking • Industrial countries are in recession • Declines in real GDP in the U.S., Japan, and Europe and weakness in Asia • Developing countries looked like they might escape • Until commodity prices plunged in Q4 • We expect a drop in world GDP, to negative 1.3% in 2009 from 3.8% in 2007 • But recovery now seems underway • The most synchronized world recession in history CONFIDENTIAL AND PROPRIETARY. 10. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. All Fall Down (Percent change in real GDP, quarterly rate) 1.5 1 0.5 0 -0.5 -1 -1.5 -2 -2.5 -3 -3.5 -4 -4.5 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 US Japan Eurozone Source: Global Insight CONFIDENTIAL AND PROPRIETARY. 11. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. UK Synchronized Sinking (Real GDP, % change) 10 8 6 4 2 0 -2 -4 -6 -8 d it e n U es at t S a ad n Ca 2006 e on z ro Eu 2007 K. . U n pa a J n t er s Ea 2008 e op r Eu A er h Ot a -P a i s 2009 c t in La Am i ca er id M E t& as n ra a ah -S b Su 2010 Source: Global Insight and Standard & Poor’s CONFIDENTIAL AND PROPRIETARY. 12. N Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. a ric f A ric Af a 2011 Deficits Are Mostly Cyclical (Government deficit as % of GDP, fiscal years) 4 2 0 -2 -4 -6 -8 -10 -12 2000 2003 ex stimulus 2006 2009 stimulus Source: Standard & Poor’s. CONFIDENTIAL AND PROPRIETARY. 13. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. 2012 Can the Consumer Keep Spending? • Consumer spending has led the expansion • But wealth is down because home prices are dropping and • Stocks are weak • 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 CONFIDENTIAL AND PROPRIETARY. 14. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Oil Prices Have Dropped ($/barrel, WTI and deflated by CPI; household energy purchases as percent of disposable income) 120 9% 100 8% 80 7% 60 6% 40 5% 20 4% 0 1980 3% 1985 1990 Oil price (WTI) 1995 2005 dollars 2000 2005 % of disp. income (right) Source: Bureau of Economic Analysis CONFIDENTIAL AND PROPRIETARY. 15. 2010 Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. High Unemployment Scares Consumers (Percent) 130 120 110 100 11 10 9 8 90 80 70 60 50 2000 7 6 5 4 3 2003 Consumer sentiment 2006 2009 2012 Unemployment Rate (right) Source: Bureau of Labor Statistics and University of Michigan Survey Research Center CONFIDENTIAL AND PROPRIETARY. 16. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. 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 2011 Net worth Financial assets Source; Federal Reserve CONFIDENTIAL AND PROPRIETARY. 17. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. No Savings, But Lots of Debt (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 CONFIDENTIAL AND PROPRIETARY. 18. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. 80% Bigger Than The Average Bear • A great run from 1982 to 2000 • But the secular bear began in 2000 • Two largest bear markets since the depression • Earnings were negative in Q4 for first time in history • Stocks were overdue for a correction • We think the rally will continue • But a near-term correction is likely. • The long-term cycle probably has another bear in it. • World stock markets have become synchronized CONFIDENTIAL AND PROPRIETARY. 19. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Everybody’s Down (Percent change in stock prices) 100 80 60 40 20 0 -20 -40 -60 -80 World US Since March Canada Lat Europe Japan Asia PacAustralia Amer Mar 2009 (y/y) Jan 2008 (y/y) Source: Standard & Poor’s CONFIDENTIAL AND PROPRIETARY. 20. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Risks to the U.S. Economy The Unemployment Rate % 15 13 11 9 7 5 3 2000 2001 2002 2003 2004 2005 Baseline 2006 2007 Pessimism 2008 2009 Optimism Source: U.S. Bureau of Labor Statistics (BLS), Standard & Poor’s projections. CONFIDENTIAL AND PROPRIETARY. 21. 2010 Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. 2011 2012 S&P and/or its third party licensors have exclusive proprietary rights in the data or information provided herein. This data/information may only be used internally for business purposes and shall not be used for any unlawful or unauthorized purposes. Dissemination, distribution or reproduction of this data/information in any form is strictly prohibited except with the prior written permission of S&P. 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