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Economic Outlook
Non-Farm Payolls
1,000
(Thousands)
• Non-farm payrolls at -268,000 vs. (3,000)
Changes Cumulative
-175,000 (4,000)
(5,000)
• Participation ratio dropped 0.3% to
(6,000)
65.2% - a 20 year low
(7,000)
12
• Once “Cash for Clunkers” ended so
did the growth in auto sales
Millions of Units
Sales dropped again
10
9%
3%
• Glut of unsold new and existing Deliquencies
homes. 7% Foreclosures
2%
• Vacant homes at a record level of
over 18MM units. 5%
1%
14
M o nths of S up ply For N e w H ome s
10
• Sales of new and existing homes
have dropped precipitously.
6
• Months of sales supply almost at
twice their normal level. 2
• Inventory should be put pressure on Ja n -6 3 Ja n -7 0 Ja n -7 7 Ja n -8 4 Ja n -9 1 Ja n -9 8 Ja n -0 5
Source: National Association of Realtors
prices.
…Means Lower Housing Prices…
130
-600
• Financial institutions lost $35.9 billion
for every 1% drop in housing prices. -800
-1000
ASSETS LIABILITIES
Equity
30%
• This is not a typical post WWII
recession; it is a “balance-sheet 25%
recession” Liabilities / Net Worth
20%
• Balance sheet problems linked to
asset bubble busts tend to last 15%
10%
• The government has stabilized the
banking system but has failed to
restart lending 5%
1951Q4 1958Q1 1964Q2 1970Q3 1976Q4 1983Q1 1989Q2 1995Q3 2001Q4 2008Q1
12%
Savings Rate
• Consumers have increased their
savings and reduced consumption
8%
• The savings rate is at the highest level
over the last 10 years
4%
Billions ($)
9500
6% growth
• What happens to consumer spending
when government supports expire?
8500
• Assume that we are able to maintain a
3% spending rate over the next 12
months in the absence of government
stimulus.
7500
Jan-03 Mar-04 May-05 Jul-06 Sep-07 Nov-08 Jan-10
14 Consumer spending -4
• Changes in the unemployment rate
exhibit a strong correlation with Unemployment rate changes average growth
consumer spending 10 -2
-6 6
Nov-85 Apr-91 Oct-96 Apr-02 Sep-07
U S 1 0 -ye a r ra te
5
• In the aftermath of the Long Depression U.S.
10-y rates remained below 3% for over 20 4
years
3
1873 1877 1881 1885 1889 1893
5
• In the aftermath of the Great Depression U.S. U S 1 0 -ye a r ra te
10-y rates remained below 3% for 22 years 4
0
Ja n -8 8 Ju n -9 3 D e c -9 8 Ju n -0 4 N o v-0 9
2.1
• Velocity = Nominal GDP / Money Velocity of Money
Supply
1.9
• Many consumers are burdened with heavy loans taken out during more prosperous
times. The debt problem will act as a permanent drag on the hopes for recovery.
• Unemployment may remain stubbornly high for many years dampening consumption
prospects and thus subduing the governments’ efforts to boost the economy.
• The Fed may not raise rates until the first quarter of 2011.
• A large body of historical evidence suggests that it takes a long time for an economy
to recover following a recession caused by a financial crisis. This time may be no
different as consumer spending, which represents 70% of economic activity, will
remain anemic given the numerous headwinds the consumer is facing.