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Copyright © 2008 Global Insight, Inc.
The U.S. Economic OutlookThe U.S. Economic Outlook
Nigel Gault
Chief U.S. Economist
Raleigh, North Carolina
October 15, 2008
Copyright © 2008 Global Insight, Inc. 2 09/2008
The Worst Is Yet to Come For The EconomyThe Worst Is Yet to Come For The Economy
Financial crisis has deepened, $ trillions in wealth obliterated
Credit markets frozen
Households, businesses, state and local governments all face tighter – or shut-off – credit
Rest-of-the-world is being dragged down too, undermining exports
Lower oil prices offer little comfort
Risks are rising of recession comparable to worst since WWII
Copyright © 2008 Global Insight, Inc.
Financial CrisisFinancial CrisisReaches A New LevelReaches A New Level
Copyright © 2008 Global Insight, Inc. 4 09/2008
A Key Sign of Extreme Risk AversionA Key Sign of Extreme Risk Aversion
(3-month LIBOR less 3-month Treasury bill rate, % points)
0.00.51.01.52.02.53.03.54.04.55.0
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08
Copyright © 2008 Global Insight, Inc. 5 09/2008
T-Bill Yield Near Zero as Investors Flee to SafetyT-Bill Yield Near Zero as Investors Flee to Safety
0
1
2
3
4
5
6
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08
Federal Funds Target 3-Month LIBOR 3-Month T-Bill
Copyright © 2008 Global Insight, Inc. 6 09/2008
Latest Steps: Good NewsLatest Steps: Good News
Direct capital injections into banks ($250 billion)
Guarantees on all non-interest-bearing bank deposits
Bank debt guarantees
Commercial paper lending facility soon in place
More fiscal stimulus coming?
Copyright © 2008 Global Insight, Inc. 7 09/2008
0.0 2.5 5.0 7.5 10.0 12.5 15.0 17.5 20.0 22.5 25.0
(Percent of nominal GDP)
Sources: IMF, Global Insight
Fiscal Costs of Major Post-War Banking CrisesFiscal Costs of Major Post-War Banking Crises
U.S. Crisis2007-Present
U.S. S&L Crisis1984-91
Sweden1991
Norway1987-93
Finland1991-94
Spain1977-85
Japan1991-Present
The “Big Five”
Financial Crises
?
Copyright © 2008 Global Insight, Inc. 8 09/2008
Stock Market Decline Comparable With The Stock Market Decline Comparable With The Worst Seen Since The DepressionWorst Seen Since The Depression
-100-90
-80-70
-60-50-40
-30-20
-100
1929-32 1973-74 1987 2000-2002 2007-2008
Peak-to-Trough Percent Change in Dow Jones Industrial Average
To Oct 10, 2008
Copyright © 2008 Global Insight, Inc. 9 09/2008
GDP Declines in Post-War RecessionsGDP Declines in Post-War Recessions
-4
-3.5
-3
-2.5
-2
-1.5
-1
-0.5
0
1948 1953 1957 1960 1969 1973 1980 1981 1990 2001 2008
Peak-to-Trough Percent Change in Real GDP
Dated by Year of the Peak
Pessimistic
Baseline
Copyright © 2008 Global Insight, Inc. 10 09/2008
Historical Comparisons of Outcomes of Historical Comparisons of Outcomes of Post-War Banking Crises in Industrial NationsPost-War Banking Crises in Industrial Nations
AVERAGE DROP IN REAL PER CAPITA GDP GROWTH
(peak growth year to trough growth year)
Past Crises: Actual Outcome
Eighteen Post-War Financial Crises over 2%
“Big Five” Financial Crises over 5%
Current Crisis: GI Projections
U.S. Baseline Scenario 3.5% (2004: 2.7%; 2009: -
0.8%)
U.S. Pessimistic Scenario5.6% (2004: 2.7%; 2009: -
2.9%)
Source for data on past crises: Reinhart and Rogoff (2008)
Copyright © 2008 Global Insight, Inc.
The Economy is Already in The Economy is Already in RecessionRecession
Copyright © 2008 Global Insight, Inc. 12 09/2008
950
960
970
980
990
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
8,350
8,400
8,450
8,500
8,550
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
137.0137.2137.4137.6137.8138.0138.2
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
109
110
111
112
113
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
NBER’s Key Monthly Recession Indicators NBER’s Key Monthly Recession Indicators
*Billions of 2000 dollars, SAAR; **Billions of 2000 dollars, SAAR; ***Millions, SA; ****Index, 2002=100, SA
Real Manuf. & Trade Sales*Real Manuf. & Trade Sales* Real Pers. Income (ex transfers)**Real Pers. Income (ex transfers)**
Employment***Employment*** Industrial Production****Industrial Production****
Peak: Oct 07Peak: Oct 07 Peak: Oct 07Peak: Oct 07
Peak: Dec 07Peak: Dec 07 Peak: Jan 08Peak: Jan 08
Copyright © 2008 Global Insight, Inc. 13 09/2008
40
45
50
55
60
65
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
ISM Manufacturing PMI now in the Recession ISM Manufacturing PMI now in the Recession ZoneZone
(PMI, Manufacturing, Diffusion index)
Copyright © 2008 Global Insight, Inc. 14 09/2008
(Annualized rate of growth)
The Downside Risk to GDP GrowthThe Downside Risk to GDP Growth
-4
-2
0
2
4
6
2007 2008 2009 2010
Baseline Pessimistic
Copyright © 2008 Global Insight, Inc. 15 09/2008
(Percent)
Unemployment OutlookUnemployment Outlook
4
5
6
7
8
9
10
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Baseline Pessimistic
Copyright © 2008 Global Insight, Inc. 16 09/2008
(Loss of jobs from peak, millions)
Employment OutlookEmployment Outlook
-5.0-4.5-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.50.0
07Q4 08Q2 08Q4 09Q2 09Q4 10Q2 10Q4
Baseline Pessimistic 2001 Recession
Copyright © 2008 Global Insight, Inc. 17 09/2008
(Percent change unless otherwise noted)
U.S. Economic Growth by Sector:U.S. Economic Growth by Sector:Baseline ScenarioBaseline Scenario
2007 2008 2009 2010
Real GDP 2.0 1.5 0.2 2.4
Domestic Demand 1.4 -0.1 -1.0 2.4
Consumption 2.8 0.6 0.4 2.1
Light Vehicle Sales (Millions) 16.1 13.6 13.4 14.5
Residential Investment -17.9 -21.2 -14.4 13.2
Housing Starts (Millions) 1.34 0.94 0.80 1.10
Business Fixed Investment 4.9 3.1 -6.1 1.4
Government 2.1 2.3 -0.3 -1.1
Exports 8.4 9.3 5.2 5.8
Imports 2.2 -2.1 -3.2 5.3
Copyright © 2008 Global Insight, Inc. 18 09/2008
(Percent unless otherwise noted)
Other Key Indicators: Baseline ScenarioOther Key Indicators: Baseline Scenario
2007 2008 2009 2010
Industrial Production (% growth) 1.7 -0.7 -1.2 2.0
Employment (% growth) 1.1 -0.1 -1.0 0.8
Unemployment Rate 4.6 5.6 7.2 7.4
CPI Inflation 2.9 4.3 1.3 2.1
Oil Prices (WTI, US$/bbl) 72 108 90 92
Core PCE Price Inflation 2.2 2.3 1.9 1.7
Federal Funds Rate 5.02 2.21 1.25 2.95
10-year Government Bond Yield 4.63 3.78 3.68 4.61
Dollar (Major Currencies, 2000=1) 0.77 0.72 0.73 0.72
Copyright © 2008 Global Insight, Inc. 19 09/2008
(Percent change unless otherwise noted)
U.S. Economic Growth by Sector: U.S. Economic Growth by Sector: Pessimistic ScenarioPessimistic Scenario
2007 2008 2009 2010
Real GDP 2.0 1.3 -2.0 0.8
Domestic Demand 1.4 -0.3 -3.3 0.8
Consumption 2.8 0.4 -1.1 0.9
Light Vehicle Sales (Millions) 16.1 13.4 11.4 13.1
Residential Investment -17.9 -21.8 -20.5 7.5
Housing Starts (Millions) 1.34 0.94 0.68 0.93
Business Fixed Investment 4.9 2.4 -12.4 -3.6
Government 2.1 2.3 -0.9 -2.0
Exports 8.4 9.2 1.9 3.0
Imports 2.2 -2.4 -7.3 2.7
Copyright © 2008 Global Insight, Inc. 20 09/2008
(Percent unless otherwise noted)
Other Key Indicators: Pessimistic ScenarioOther Key Indicators: Pessimistic Scenario
2007 2008 2009 2010
Industrial Production (% growth) 1.7 -0.9 -3.8 -0.8
Employment (% growth) 1.1 -0.2 -2.1 -0.5
Unemployment Rate 4.6 5.7 8.0 8.9
CPI Inflation 2.9 4.2 0.3 2.1
Oil Prices (WTI, US$/bbl) 72 105 73 83
Core PCE Price Inflation 2.2 2.3 1.7 1.8
Federal Funds Rate 5.02 2.15 0.52 1.50
10-year Government Bond Yield 4.63 3.68 2.93 3.77
Dollar (Major Currencies, 2000=1) 0.77 0.72 0.73 0.69
Copyright © 2008 Global Insight, Inc.
The Housing DownturnThe Housing Downturn
Copyright © 2008 Global Insight, Inc. 22 09/2008
House Prices: Overvaluations Becoming Less House Prices: Overvaluations Becoming Less ExtremeExtreme
Source: National City
UNDERVALUEDFAIRLY VALUEDOVERVALUEDEXTREMELY OVERVALUED
Q2 2008 Valuations
Copyright © 2008 Global Insight, Inc. 23 09/2008
(OFHEO house price index divided by average labor compensation, 2000 = 1.0)
House Prices Will Probably Overshoot on The House Prices Will Probably Overshoot on The DownsideDownside
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1975 1980 1985 1990 1995 2000 2005 2010
Baseline Pessimistic
Copyright © 2008 Global Insight, Inc. 24 09/2008
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Baseline Pessimistic
(Million units)
Housing Starts Dip FurtherHousing Starts Dip Further
Copyright © 2008 Global Insight, Inc.
A Severe Consumer A Severe Consumer RetrenchmentRetrenchment
Copyright © 2008 Global Insight, Inc. 26 09/2008
Bad News Everywhere For Consumer FinancesBad News Everywhere For Consumer Finances
Positive Forces
Gasoline is below its peak
Negative Forces
Falling Employment
Falling Real Wages
Declining Housing Wealth
Declining Stock Market
Tightening Credit Conditions
Mounting Debt Burdens
Low Saving Rate
Copyright © 2008 Global Insight, Inc. 27 09/2008
(Net percent tightening standards)
Consumer Loan Standards TighteningConsumer Loan Standards Tightening
Source: Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices
-20
0
20
40
60
80
100
1996 1998 2000 2002 2004 2006 2008
Credit Cards Other Consumer Loans
Copyright © 2008 Global Insight, Inc. 28 09/2008
Household Net Worth Has Plunged Household Net Worth Has Plunged
End-Q3 2007 to end-Q3 2008: down $4.3 trillion*
End-Q3 2008 to October 10, 2008: down $2.8 trillion*
Total loss: $7.1 trillion* (down 12%)
If wealth effect on consumption is 5 cents on the dollar, that means a $350 billion hit to consumer spending
That’s 3.5% off consumer spending
* Wealth figures are Global Insight estimates
Copyright © 2008 Global Insight, Inc. 29 09/2008
-4
-2
0
2
4
6
2003 2004 2005 2006 2007 2008 2009 2010
Baseline Pessimistic
(Annualized rate of growth)
Consumer Spending: Turning NegativeConsumer Spending: Turning Negative
Copyright © 2008 Global Insight, Inc.
Business InvestmentBusiness InvestmentSofteningSoftening
Copyright © 2008 Global Insight, Inc. 31 09/2008
Architecture Billings Lead Nonresidential Architecture Billings Lead Nonresidential ConstructionConstruction
40
44
48
52
56
60
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-30
-20
-10
0
10
20
Architecture Billings Index* (Left scale)
Real Nonresidential Construction, ex. utilities (Right scale, % change y/y)
* Source: American Institute of Architects
Copyright © 2008 Global Insight, Inc. 32 09/2008
(Percent change from a year earlier, real spending)
The Business Construction Spending CycleThe Business Construction Spending Cycle
-25
-20
-15
-10
-5
0
5
10
15
20
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Baseline Pessimistic
Copyright © 2008 Global Insight, Inc. 33 09/2008
(Percent change from a year earlier, real spending)
The Business Equipment Spending CycleThe Business Equipment Spending Cycle
-25
-20
-15
-10
-5
0
5
10
15
20
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Baseline Pessimistic
Copyright © 2008 Global Insight, Inc.
Foreign Trade: Foreign Trade: Export-Led Growth At RiskExport-Led Growth At Risk
Copyright © 2008 Global Insight, Inc. 35 09/2008
(Percent change from a year earlier, volumes)
Export Growth Is PeakingExport Growth Is Peaking
-15
-10
-5
0
5
10
15
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Baseline Pessimistic
Copyright © 2008 Global Insight, Inc. 36 09/2008
(2000=1.0, inflation-adjusted)
The U.S. Dollar: Has Hit Bottom Against Some The U.S. Dollar: Has Hit Bottom Against Some CurrenciesCurrencies
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Major Currency Index Other Important Trading Partners Index
Copyright © 2008 Global Insight, Inc.
Inflation and Interest RatesInflation and Interest Rates
Copyright © 2008 Global Insight, Inc. 38 09/2008
(Percent change from a year earlier)
Headline Inflation Will Fall SharplyHeadline Inflation Will Fall Sharply
-2
-1
0
1
2
3
4
5
6
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Baseline Pessimistic
Copyright © 2008 Global Insight, Inc. 39 09/2008
(Percent)
Fed to Cut to 1% Or BelowFed to Cut to 1% Or Below
0
1
2
3
4
5
6
7
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Baseline Pessimistic
Copyright © 2008 Global Insight, Inc.
State and Local Finances State and Local Finances In TroubleIn Trouble
Copyright © 2008 Global Insight, Inc. 41 09/2008
-150
-125
-100
-75
-50
-25
0
25
50
75
2006 2007 2008 2009 2010
Baseline Pessimistic
(NIPA Operating Deficit, Billions of dollars, annual rate)
State and Local Finances in Trouble State and Local Finances in Trouble
Copyright © 2008 Global Insight, Inc. 42 09/2008
-2
0
2
4
6
8
10
2006 2007 2008 2009 2010
Baseline Pessimistic
(Percent growth, current spending, nominal, year-on-year)
State and Local Spending Growth Must Slow State and Local Spending Growth Must Slow
Copyright © 2008 Global Insight, Inc.
The Economy and the The Economy and the Presidential Election OutcomePresidential Election Outcome
Copyright © 2008 Global Insight, Inc. 44 09/2008
-2
0
2
4
6
8
48 52 56 60 64 68 72 76 80 84 88 92 96 00 04 08
Y/Y Growth in Real Disposable Income Per Capita in Q3 of Election Years
The Economy Is a Huge Negative for the The Economy Is a Huge Negative for the Republicans Republicans
(Percent growth year-on-year)
Q3 2008 calculation excludes economic stimulus payments. Including stimulus payments, real PDI growth per capita would be -0.3% in Q3 2008 instead of -0.9%.
Copyright © 2008 Global Insight, Inc. 45 09/2008
40
45
50
55
60
65
48 52 56 60 64 68 72 76 80 84 88 92 96 00 04 08
Actual Predicted
GII Election Model Points to the Democrats GII Election Model Points to the Democrats
(Percentage of 2-party presidential vote for incumbent party)
Copyright © 2008 Global Insight, Inc. 46 09/2008
Whoever Wins The Election Will Be Constrained Whoever Wins The Election Will Be Constrained by the Federal Deficit by the Federal Deficit
(Percent of GDP)
-8
-6
-4
-2
0
2
4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Baseline Pessimistic
Copyright © 2008 Global Insight, Inc. 47 09/2008
Bottom LineBottom Line
Economy tumbling into recession – severity uncertain but risks are rising that it will be deep
More fiscal action on the way – public capital injections into financial institutions, bank guarantees, and a stimulus package (states, localities need help)
Fed will cut rates further – may not help much, though
Upside Risk: Government intervention stabilizes credit markets
Downside Risk: Vicious spiral between economy and credit markets worsens
Election: Economy favors Obama; whoever wins will have trouble translating fiscal objectives into action
Copyright © 2008 Global Insight, Inc. 48 09/2008
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