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Comptroller of the Currency Administrator of National Banks The Economic Outlook Community Development Forum Salt Lake City July 19, 2012 Ray Squitieri Economic and Policy Analysis, OCC Summary—US economy • Slow growth to persist, but US likely to avoid recession • Slow growth means slow improvement in unemployment • Housing has yet to turn around • Europe now a big risk to US economy • Positives: lower energy prices, continued low interest rates 1 Recovery plods along Real GDP, % change annual rate Quarterly average unemployment rate, % 4.0 11.0 3.0 10.0 2.0 9.0 1.0 8.0 0.0 Consensus Forecast 08 09 -1.0 10 11 12F 13F Sources: BEA, BLS, Blue Chip Indicators (June 2012) 7.0 -2.0 6.0 -3.0 5.0 -4.0 Recession 07 Consensus Forecast Recession 07 08 09 10 4.0 11 12F 13F 2 Weekly leading index has waffled since end of recession, unlike steady gains in past expansions Weekly leading index 1992 = 100 150 140 130 120 110 100 90 80 70 Recessions 60 80 84 88 92 96 00 04 08 12 Source: Economic Cycle Research Institute (ECRI) 3 After rising above 200K per month, job growth faltered over the last 4 months Change in nonfarm employment, thousands 300 100 07 08 09 10 11 12 3.8 million jobs added since 2/10; 548 thousand in 2012 -100 -300 -500 Recession -700 -900 8.8 million jobs lost in total through 2/10 Sources: BLS, E&PA calculations (data through May 2012) 4 Much of the improvement in unemployment rate Civilian Unemployment Rate: 16 yr + SA, % due to drop in labor force participation rate Civilian Participation Rate: 16 yr + SA, % 10 Unemployment rate % SA RHS 67 9 66 8 65 7 64 6 5 Labor Force Participation rate % SA LHS 63 Note: if participation rate had remained at 2010 average, latest UE rate would be 9.5% not 8.2% 4 62 61 07 08 09 10 Sources: Bureau of Labor Statistics /Haver Analytics Source: Bureau of Labor Statistics / Haver Analytics 11 5 If labor force exits had remained unemployed, the statistics would look a lot worse today Unemployment rate share of labor force Labor force participation rate % of civilian population 14% 68 Unemployment rate assuming all labor force exits remained unemployed 66 12% 10% 64 Unprecedented drop in LF participation in recent years Recessions 52 62 72 82 92 02 As published 62 12 8% 60 6% 58 4% 56 2% 54 0% 05 06 07 08 09 10 11 12 Source: BLS 6 For most states, employment likely to remain below pre-recession levels through 2013 U.S. =-2.3% Source: Moody’s Analytics; Federal Reserve Board Supervisory Stress-Test Baseline 7 Consumer confidence remains historically low Consumer Confidence 1985 = 100 160 140 120 100 80 60 40 20 Recessions 0 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Source: Conference Board 8 … though shoppers are gradually returning to the stores Retail sales (ex. auto) Yr-yr % change 10% 5% 0% -5% forecast -10% 06 07 Source: Census Bureau, Moody’s Analytics 08 09 10 11 12 13 9 Inventory of distressed properties still weighing on housing market “For-sale” and shadow inventory millions Single-family home sales millions New 6 6 5 5 Shadow inventory of distressed existing homes 4 3 3 Distressed existing (estimated) 07 08 “For-sale” inventory of all existing homes 2 Non-distressed existing 09 10 Sources: CoreLogic; NAR; S&P; Fiserv; E&PA calculations 11 12* 4 2 1 1 0 0 06 07 08 09 10 11 12* *2012 sales data are first quarter at annualized rate. 2012 inventory data are through January. Distressed existing home sales estimates include short-sales and sales from REO inventory; latter is two-thirds of volume. Shadow inventory includes all properties in serious 10 Inventory of distressed properties still weighing on house prices First mortgage loans (number) Case-Shiller 20-Metro Home Price Index, SA, 2006Q2=100 5,000 100 90+days delinquent In foreclosure 4,000 90 - 33% 3,000 80 2,000 70 1,000 - 36% 0 06 07 08 09 10 11 12 60 50 00 01 02 03 04 05 06 07 08 09 10 11 12F13F Sources: Equifax/Moody’s Analytics , Fiserv/Moody’s Analytics (May 2012 baseline forecast) 11 Few housing markets are showing much price appreciation yet Existing single-family (constant quality) home price indexes Index April 2006 peak = 100 100% Tampa Los Angeles 90% Boston 90% 80% NYC 80% 70% DC 60% 50% Miami Phoenix 06 07 08 09 Source: S&P Case-Shiller monthly data through April 2012 10 Las Vegas 11 12 100% Dallas 70% Chicago 60% 50% Detroit 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 06 07 08 09 10 11 12 12 Mortgages with negative equity will keep RES RE loss rates high in some states Share of 1st liens (count) with negative equity 70% 60% Underwater less than 20% (LTV 100% to 120%) Underwater more than 20% (LTV >120%) 50% 40% 30% 45% 20% 27% 31% 26% 21% 22% 10% US 10% 18% 2% NV MI Sources: OCC Mortgage Metrics; LPS Home Price Index; data as of January 2011 FL AZ GA IL CA 0% UT Data are for 9 large servicers. Data reflect both loans held in portfolio and serviced for others. Data include FHA/VA mortgages but exclude 1st liens without a refreshed LTV. 13 Euro area slowdown weighing on U.S. export growth Real GDP Yr-yr % chg Real quarterly U.S. GDP and exports % chg. annualized, seasonally adjusted 3.5 15 exports 3.0 10 2.5 2010 5 2.0 2011 0 GDP 1.5 2012 est. -5 1.0 -10 0.5 0.0 -15 Recessions -0.5 Euro Area U.K. U.S. Advanced Economies -20 98 00 02 04 06 08 10 12 Sources: IMF July 2012 World Economic Outlook update; BEA 14 Obstacles to growth still outweigh positives Negatives Weak housing market Fiscal drag Continued deleveraging Generally tight credit Low consumer and business confidence Risk from Europe Positives Signs of life in construction Stronger household balance sheets Lower energy prices Some credit easing; low interest rates and inflation Better US competitiveness 15 Loss rates still high for residential real estate National banks and federal thrifts Annual net charge-off rates, % Large Community Midsize 3.0 3.0 3.0 2.5 2.5 2.5 2.0 2.0 2.0 1.5 1.5 1.5 1.0 1.0 1.0 0.5 0.5 0.5 0.0 0.0 0.0 1Q:12 91-12 avg 1-4 famly HELOC Source: Integrated Banking Information System (OCC) 1-4 famly HELOC 1-4 famly HELOC Data are merger adjusted as of 1Q:2012 and use the current supervision designation. 16 Loss rates well above average on CRE loans at community banks National banks and federal thrifts Annual net charge-off rates, % Large 1Q:12 Construction 91-12 avg Cmmrcl mortgage Source: Integrated Banking Information System (OCC) Community Midsize 4.0 4.0 4.0 3.5 3.5 3.5 3.0 3.0 3.0 2.5 2.5 2.5 2.0 2.0 2.0 1.5 1.5 1.5 1.0 1.0 1.0 0.5 0.5 0.5 0.0 0.0 0.0 Construction Cmmrcl mortgage Construction Cmmrcl mortgage Data are merger adjusted as of 1Q:2012 and use the current supervision designation. 17 Risks to economy: What did we say last year? [From March 13, 2011 presentation to Utah Bankers’ Roundtable] Downside risks Soft job market keeps unemployment rate high Housing falls again as foreclosure crisis drags on Weak housing and job market further stresses banks Overseas: Mid East turmoil, Japan disaster, European debt crisis State and local fiscal woes intensify Upside risks Emerging market growth accelerates Strong business sector drives hiring Self-sustaining growth cycle kicks in 18 Risks to economy: This year’s story US (high-impact, low probability) Economy falls off fiscal cliff US (lower-impact, higher-probability) • Housing falls again as foreclosure crisis drags on Global (high-impact, low probability) • War in Persian Gulf, European financial meltdown Global (lower-impact, higher-probability) • Long slump in Europe, Sharp slowdown in China Upside possibilities Emerging markets pick up Strong US business sector drives hiring 19 Summary—US economy • Slow growth to persist, but US likely to avoid recession • Slow growth means slow improvement in unemployment • Housing has yet to turn around • Europe now a big risk to US economy • Positives: lower energy prices, continued low interest rates 20 Outlook for Utah and Salt Lake City • Moderate growth in jobs, household income • Positive signs in housing market, though house prices have yet to turn around 21 SLC leads Utah and the U.S. in job growth Sources: BLS, Moody’s Analytics 22 Office jobs increasing in Utah Office-using employment 2011Q1 to 2012Q1 Salt Lake City Provo Ogden Utah Las Vegas Denver Seattle US -4.0% -3.0% -2.0% -1.0% Sources: BLS, Moody’s Analytics 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 23 Utah will show solid job growth over next 12 months Forecast employment growth 2012Q1 to 2013Q1 Sources: BLS, Moody’s Analytics (July 2012 forecast) 24 Foreign migration dominates in SLC Sources: Census Bureau/Moody’s Analytics 25 Job gains support income gains in SLC Sources: BLS, Moody’s Analytics 26 Moderate growth expected for household incomes in Utah Forecast household income growth 2012Q1 to 2013Q1 Sources: Census, Moody’s Analytics (July 2012 forecast) 27 Home sales picking up in SLC … Sources: Utah Association of Realtors, Moody’s Analytics 28 … though house prices have yet to turn back up Sources: Fiserv, Census Bureau, Moody’s Analytics 29 Comptroller of the Currency Administrator of National Banks The Economic Outlook Community Development Forum Salt Lake City July 19, 2012 Ray Squitieri Economic and Policy Analysis, OCC Monthly job gains over the past 18 months have barely exceeded new labor force growth Monthly nonfarm payroll growth, 000s 500 Job growth required simply to accommodate 0.9% per year growth in labor force 400 Extra needed to achieve 6% unemployment rate in time shown 300 200 Jan 2011- June 2012 average (150,000) 280 137 90 67 53 100 116 117 118 120 121 0 1 year Sources: BLS; E&PA calculations 2 years 3 years 4 years 5 years Assumes no change in current labor force participation rate of 63.8% and overall population growth of 0.9% per year. There’s no doubt that since the recession, growth has been well less than average Recession start Quarterly U.S. real GDP Cumulative change from start of recession 30% Average of prior 10 cycles 20% 10% 0% Current cycle -10% -20% -30% -16 -12 -8 -4 0 +4 +8 +12 +16 Quarters Source: BEA Dashed lines are minimum and maximum values for each month across the 10 pre-2007 cycles. 32 U.S. economic policy uncertainty is rising again, ahead of “fiscal cliff” concerns for 2013 Economic Policy Uncertainty Index Mean = 100 monthly data through June 2012 300 August 2011 U.S. debt downgrade 250 200 150 100 50 Recessions 85 90 95 Source: Haver Analytics (index developed by Scott Baker and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago) 00 05 0 10 Index measures the frequency of references to economic uncertainty and policy in Google news media catalog, the number of federal tax code provisions set to expire in future years, and the extent of disagreement among economic forecasters over future government purchases and the CPI. 33 After six years, new home construction is no longer weighing on overall economic growth Contribution to percent change in real GDP percent 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 Source: BEA 34 Despite some improvement, small business optimism remains low, and sales concerns high NFIB small business survey Optimism Index Reporting poor sales as most important problem 120 40 115 35 110 30 105 25 100 20 95 15 90 10 85 5 80 0 Recessions 80 84 88 92 96 00 04 08 12 Sources: Federal Reserve, BEA 80 84 88 92 96 00 04 08 12 NFIB members responding to survey typically employ 10 people with annual sales of $0.5 million. 35 Growth could be significantly reduced if U.S. falls off the “fiscal cliff” Real GDP annualized growth, % 4.0 Blue Chip Consensus forecast, June 2012 CBO estimates of “fiscal cliff” effects, applied/scaled to Blue Chip Consensus forecast 3.0 Anticipatory reduction in activity 2.0 1.0 0.0 -1.0 -2.0 1st half 2012 Sources: Blue Chip Consensus Forecasts June 2012; CBO analysis May 2012; E&PA calculations 2nd half 2012 1st half 2013 2nd half 2013 “Fiscal Cliff” refers to expiration of various tax rate reductions, extended unemployment benefits, and other fiscal programs, as well as sequestration (mandatory reductions) in federal government spending set to begin in calendar year 2013. For details see: http://www.cbo.gov/sites/default/files/cbofiles/attachments/FiscalRestraint_0.pdf Forecasts for Europe have steadily weakened, adding risk for U.S. economy and banks GDP growth forecasts for 2012 Percent 1.5 UK Eurozone 1 0.5 0 -0.5 Oct-11 Nov-11 Dec-11 Source: Consensus Forecasts Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 17