Download Economic Outlook

Making the Transition From
Recovery to Expansion
AUGUSTINE FAUCHER, DIRECTOR OF MACROECONOMICS
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% 10.6%
6.2%
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
…With Some Areas Expanding
As of October 2009
Expansion
At Risk
Recovery
In Recession
Moderating
Recession
FROM MOODY’S ECONOMY.COM
3
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
Fannie/Freddie
takeover
0.0
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
FROM MOODY’S ECONOMY.COM
4
…And Fiscal Stimulus Provides a Vital Boost
Contribution to real GDP growth, %
4
3
2
1
0
(1)
09Q1
09Q2
09Q3
09Q4
10Q1
10Q2
10Q3
10Q4
Source: Moody’s Economy.com
FROM MOODY’S ECONOMY.COM
5
Job Creation Craters…
Rate of job creation and destruction, %
9
8
Job Destruction
7
6
Job Creation
5
92
94
96
98
00
02
04
06
08
Source: BLS
FROM MOODY’S ECONOMY.COM
6
…Threatening to Undermine Compensation…
1985Q1-2009Q3
Compensation growth
6
2009Q3
Unemployment rate=9.6%
Natural rate=5.4%
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
7
…But Fiscal Policymakers Are Responding
» Recently passed: $45 billion in more aid to unemployed workers,
extension and expansion of homebuyer tax credit, extended higher
conforming loans limits, and NOL.
» High odds of passage: $100 billion in aid for workers losing jobs in
2010.
» Better than even odds of passage: $50 billion in more SBA lending, job
tax credit, weatherization program.
» Even odds of passage: $50 billion in another round of help to
financially stressed state and local government for FMAP.
FROM MOODY’S ECONOMY.COM
8
More House Price Declines Are Coming…
Case Shiller® Home Price Index: 2000Q1 = 100
200
Vermont
180
160
-38%
140
120
U.S.
100
00
01
02
03
04
05
06
07
08
09
10
11
12
Sources: Equifax, Moody’s Economy.com
FROM MOODY’S ECONOMY.COM
9
…In Much of the Country
Projected home price correction from current (2009Q2) to trough, %
U.S. = -11%
> 0%
0% to -10%
-10% to -15%
< -15%
Sources: Fiserv, FHFA, Moody’s Economy.com
FROM MOODY’S ECONOMY.COM
10
Foreclosures Are Key to Pricing…
50
25
House price growth,
% change (R)
45
40
Foreclosure share
of sales, % (L)
20
15
35
10
30
5
25
0
20
-5
15
-10
10
-15
5
-20
0
-25
05
06
07
08
09
Sources: Fiserv, Equifax, Moody’s Economy.com
FROM MOODY’S ECONOMY.COM
11
…And Foreclosures Continues to Mount…
Ths of loans
4,500
90 days and over delinquent
4,000
Auction & REO
Notice of default
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
12
...Especially on the Coasts
First mortgage delinquency rate, change 2006Q3 to 2009Q3, ppt
<2.00
2.00 to 3.25
3.25 to 7.00
>7.00
Sources: Equifax, Moody’s Economy.com
FROM MOODY’S ECONOMY.COM
13
Millions of Homeowners Sink Underwater…
Number of underwater homeowners, ths
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
06
07
08
09
Sources: Equifax, Moody’s Economy.com
FROM MOODY’S ECONOMY.COM
14
…And Strategic Defaults Are on the Rise
90 Days and Over Delinquency Rate, % of #, by CLTV, 30-35% DTI
> 120
115-120
110-115
105-110
100-105
95-100
90-95
85-90
80-85
75-80
70-75
65-70
60-65
< 60
2
3
4
5
6
7
8
9
10
Sources: Equifax, Moody’s Economy.com
FROM MOODY’S ECONOMY.COM
15
The Modification Plan May Need Modification
Total First Mortgage Loans
HAMP Eligible Loans
(Owner-occupied, non jumbo, immenent default)
Less: Insufficient income even at 2% rate (25%)
Less: Too far underwater (30% with CLTV>100)
Less: Default probability too high or too low (25%)
Loans That are NPV Positive
Less: Servicers don't participate in HAMP (15%)
Trial Modifications
Less: Failure to make 3 payments or paperwork (60%)
Permanent Modifications
Less: Redefaults (30%)
Foreclosures Avoided
55,237,580
8,188,770
2,000,000
2,500,000
2,000,000
1,688,770
253,316
1,435,455
861,273
574,182
172,255
401,927
Assumptions:
Based on historical data through 2009q3
Peak-to-trough house price decline 38% based on Case Shiller national house price index; trough in 1010q3
10.7% peak unemployment rate in 2010q3
Federal funds rate 0% at year-end 2009, 1% year-end 2010, 3.25% year-end 2011, 4.5% by year-end 2012
10-year Treasury yield of less than 5.5% through 2012
30% redefault rate
40% pass-through from trial to permanent HAMP modification
Source: Equifax, Moody's Economy.com
FROM MOODY’S ECONOMY.COM
16
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
17
…But the Fed Will Remain Aggressive…
7
6
5
4
3
2
1
Funds rate target
Moody's Economy.com Taylor rule
0
-1
00
01
02
03
04
05
06
07
08
09
Sources: Federal Reserve, Moody’s Economy.com
FROM MOODY’S ECONOMY.COM
18
…Even Committing to More Credit Easing
3.00
2.75
800
Difference between Freddie
mortgage rate and 10-year
Treasury yield (L)
600
2.50
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
19
Can We Change This Forecast?
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
20
Vermont Is Outperforming U.S. and Northeast…
One-year vs. 3-month performance
Northeast States
Improving
Expanding
Middle Atlantic
New England
2
South Atlantic
District Of Columbia
Annualized 3 mo. % change on 3 mo. MA
1
Vermont
0
-5
-4
Massachusetts
-3 New Jersey
-2
-1
0
1
New York
Maryland
-1
Delaware
Pennsylvania
U.S.
-2
New Hampshire
-3
Maine
Connecticut
-4
Rhode Island
-5
Contracting
% change year ago, October 2009, 3 mo. MA
Slipping
NOTE: Size reflects relative employment
…But Will Lag In The Recovery
Employment, % change year ago
4
3
U.S.
2
1
0
Vermont
-1
-2
-3
-4
-5
08
09
10
11
12
Sources: BLS, Moody’s Economy.com
FROM MOODY’S ECONOMY.COM
22
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
23
www.economy.com
FROM MOODY’S ECONOMY.COM
24
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