September 2012

Institute for Supply ManagementCarolinas Virginia

Triad Chapter

The 2012 - 2013 Economy –What Lies Ahead? - Revisted

City of Winston-Salem,North Carolina

The Last time we were together was in September 2009

Let’s review how things looked then and what we were saying that the future was going to be like:

The theme of the last presentation was that we’d climbed a steep cliff and fallen off that cliff into a huge swamp and that we were facing along hard, dangerous slog to get out.

The National Outlook

Then:•The recession appears to be ending, and the recovery will likely begin later this year.

– More than 90% of economists recently surveyed by the National Association of Business Economists predict the recession will end this year (2009).

This turned out to be correct.

“Sub-Par” Recovery

Forecast was for sub-par performance in:•Output•Employment•Consumer incomeNew forecast is for sub-par performance in:•Output•Employment•Consumer income

Inflation

The forecast in 2009 was:•Sluggish economic growth should keep inflation contained.•The Fed will likely not need to take any anti-inflationary actions until late 2010 at the earliest.

The forecast now is:•Sluggish economic growth should keep inflation contained. GDP growth in the 1.0% to 2.5% range.•The Fed will likely not need to take any anti-inflationary actions until early 2015.•Chances of a recession in 2012-2013 are about 1 in 4. According to most economists we survey.

The stock markets are a major leading economic indicator

• How the markets are doing is perhaps a matter of one’s perspective.

• Here is what the markets looked in Sept. 2009.

Stock Markets Over the Last 3 years as of 9-10-09

Up about 30% from the March 2009 low, but still 37% below the October 2007 High.

Source: MSN Money.com

The stock markets

• The financial media portray an underperforming market in the doldrums.

• Most pension plans assume about 7.5% annual returns on their whole portfolio, so stocks need to perform a little better, because fixed incomes are supposed to return less over the long run.

• The short term perspective – last three months:

The S&P500 last three months

The S&P500 this calendar Year-To-Date

Sell in March and go home?

Note the big bump in Sept 2012 has been largely due to anticipated QE3 stimulus from the Federal Reserve. Over-bought market?

S&P500 Last five years(since the recession started)

S&P500 Since 1950(the very long term)

The Stock Markets . . .

• In the doldrums?• Doing nicely - up 18.03% calendar Y-T-D?• Nearing all time highs and perhaps over-

valued with a looming recession?• Lots of cash on the sidelines and in Treasuries

leaves stocks prepared to move up?• Take your pick.

Crude Oil – Where we were in 2009Down 58.4% in 2008 and down 72.0% from monthly peak.

Back to $72.41 for light sweet crude 9-10-09

Source: Thomson Baseline / Month End Data

Crude Oil Price: West Texas Intermediate

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Crude OilDown 72.0% from monthly peak in 2009, then back up over $110/barrel and

then easing off in 2012. Record 2012 Labor Day Gas Prices - temporary

Source: Bing.com

Oil Inventories at Lows Usually a sign of increasing prices

Credit and Interest Rates

• The forecast in 2009 was:– Steeper yield curve– Little change in credit spreads– Medium-to-long-term credit will remain difficult

to obtain.

• The forecast for the next couple of years:– Hard to say given the fiscal cliff, elections, slowing

Chinese economy, and Europe’s problems, but probably much the same for the same reasons.

US Treasury Security Yield Curves

Treasury Yield Curve ComparisonsAug 31, 2009 vs Aug 30 2012

Source: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx

Treasury Yield Curve ComparisonsAug 31 2007 vs Aug 30 2012

Note: 2 year Treasury is at .25% and the 10 year is at 1.84% today.30 year fixed rate mortgages are at 3.52%.

Foreign Economies

• The Outlook in 2009 was:– Premature to claim that the global economy is

stabilizing– More likely an “inflection point” has been

reached, in which economic growth continues, but at a slower pace.

• The Outlook in 2012 is:– Pretty much the same only worse for Europe and

for China.

The US Compared to Other Countries

• US policymakers have done relatively more to stimulate economic activity.– The US should continue to grow, albeit at a very

slow pace. – The US dollar will likely appreciate; we are less

sick than everyone else, except the emerging markets.

• The dollar’s rise will be slow due to sluggish US growth.• Foreign purchases of US Treasury securities will slow as

risk aversion becomes less extreme.

Employment Outlook

• NCSU Economist Mike Walden predicted in 2009:– that the NC unemployment rate would peak at around

13% during 1Q10. (we did not get quite that high)• The rate will fall to 10.3% by year-end 2010.• The highest rates will be in the Charlotte and Greensboro-High

Point-Winston-Salem areas.• The lowest rate is expected in the Raleigh-Durham area.

– The national unemployment rate will likely rise through mid 2010 and peak at around 10.5%.

• As usual, he was painfully right.

May 2012 NC Employment

•Employment rose 11,600 to 4.2 million. •Unemployment rates (not seasonally adjusted) –State rate of 9.4% –Down in 21 counties –Up in 76 counties –Unchanged in 3 counties –Extremes •Currituck County had the lowest rate at 5.2%. •Scotland County had the highest rate at 16.9%.

Source: Division of Employment Security, N.C. Department of Commerce.

Conclusions

• The NC economy is following the path of a slow and steady recovery. • The slow growth path is expected to persist into 2013. • Potential economic trouble in Europe is perhaps the biggest threat to the momentum that has been building on the past 5-6 months. •The Fiscal Cliff will be kicked down the road.

The Fallacy of “Getting Back to Where We Were”

• “Where we were in 2006” was out-of-step with long-term sustainable economic growth.

• Policy proposals aimed at “returning us to where we were” are at odds with the economic reality of the excesses of the previous expansion that were fueled by lax qualifications for housing finance and a highly-leveraged consumer.– Economic growth is likely to be lower over the 5 -7

years after a fiscal crisis than during the five years prior. Financial crises take longer to recover from than ordinary recessions.

Special Thanks to:

William W. Hall, Jr., Ph.D.Professor of EconomicsDepartment of Economics and FinanceSenior EconomistCenter for Business and Economic ServicesCameron School of BusinessUNC WilmingtonDr. Hall provided many of these slides.

City of Winston-Salem,North Carolina

Contact Information:

Clark G. Case

Assistant Financial Officer/Treasurer

PO Box 2511

Winston-Salem, NC 27102

clarkc@cityofws.org

336.747.6901