U.S. Macroeconomic Outlook 2009-10 & Beyond

Dr. Edward J. DeakProfessor of EconomicsFairfield University, and

ABA Graduate Banking SchoolEdwardjdeak.com

ABA’ Seminar For PresidentsMarch 2, 2009

U.S. Macro Overview

• Where we are today?• The forces that brought us to the brink• The issue of financial structural change• A look at the current-historical data• Federal fiscal actions – TARP + Obama• Monetary policy actions• The prospects for 2009-10• There is no Plan B• What about 2011-15?

Where Are We Today?

• Worst Economic Decline Since 1930’s

• Not a Traditional Downturn

• Structural Change in Financial Sector

• Massive in Size + Asset Value Loss

• Less Responsive to Traditional Monetary + Fiscal Policy Actions

• Global in Scope

The Forces that Brought US to the Brink of Economic Abyss

• The events of 9/11 -> Fed (i) – Too much, Too Long• Excessive stimulus to U.S. housing• BOP deficits - Excess global supply of $• Excessive Securitization - Housing assets + others• Rating agencies + Credit default swaps• Excessive Capital Leverage – Not 12:1 but 34:1• Unsound Lending Practices – Lax underwriting• Exotic Mtgages – NINJA, Exploding + Option ARMs• Lax Supervision - Allowed Wall St greed• Alphabet soup credit instruments – ABS, CDOs, etc• Phased collapse of housing 2006-09

Speculators, resets, under water, recession

Financial Structural Change

• The Pre-2008 Financial System is Gone– The death of traditional investment banking– The squeeze on insurance companies– The weakening of nationwide + regional commercial banks

• A list of likely survivors– Community banks– Boutique investment banks: ex: Raymond James– Private equity + hedge funds

• Intensified federal regulation– Likely to be excessively restrictive

• Rebirth of financial structure– Financing is a service – Channel $ to opportunity– Requires a new wave of real technological change

• Entrepreneurship financial intermediation

Current-Historical Data:Housing + Financial

• Existing Home Sales• Median Sale Price Existing Homes• Median Sale Price Case-Shiller Index• Housing Affordability Index• Loan Delinquency Rates• Loan Charge-off Rates• Consumer Credit Outstanding• Dow Industrial Average

Existing Home Sales:Single Family + Condo

7.1

4.91

0

1

2

3

4

5

6

7

8

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Mill. Units: NAR

Median Sale Price $:Existing Home

221198.6

0

50

100

150

200

250

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Nom$th: NAR

Median Existing Sale Price $:Constant Home – Case/Shiller

207

155

0

50

100

150

200

250

Ja00 Ja01 Ja02 Ja03 Ja04 Ja05 Ja06 Ja07 Ja08 No08

Nom$Th

Housing Affordability Index

0

20

40

60

80

100

120

140

160

2005 2006 2007 Ja-08 Ma-08 Ju-08 Se-08 No-08

Index Val: NAR

U.S. Housing Permits Th: Single family & Condos

2155.3

852.5

0

500

1000

1500

2000

2500

2000 2002 2004 2006 2008YTD

Delinquency Rates %:All Comm Bks (FR: sa)

0

1

2

3

4

5

6

3:04 1:05 3:05 1:06 3:06 1:07 3:07 1:08 3:08

Tot Loans/Leases

Residential RE

Commer RE

All Consumer

Charge-off Rates %:All Comm Bks (FR: sa)

0

0.5

1

1.5

2

2.5

3

3.5

4

3:04 1:05 3:05 1:06 3:06 1:07 3:07 1:08 3:08

Tot Loans/Leases

Residential RE

Commer RE

All Consumer

Consumer Credit:(% Chg - FR: sa)

-4

-2

0

2

4

6

8

2003 2004 2005 2006 2007 1:08 2:08 3:08 8-Oct 8-Nov

Revolving

Non-Revol

Dow Industrial Average:Monthly Range/Close 1/07-1/09

Current-Historical Data:Main St Economy

• Initial Claims Unemployment Insurance

• Net Change in Non-farm Payrolls

• Unemployment Rate

• Real Gross Domestic Product

• Consumer Price Index

Initial New Claims UE Insurance:U.S. DOL 1st Week of Month 08-09

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

Jan Mar May Jul Sept Nov Jan-09

Seas Adj

Not SA

U.S. Net Chg Total Nonfarm Employ:12:07-12:08 U.S. DOL

-600,000

-500,000

-400,000

-300,000

-200,000

-100,000

0

100,000

7:12 8:02 8:04 8:06 8:08 8:10 8:12

Net Job Chg

U.S. Unemployment Rate %:12/07-12/08 U.S. DOL

0

1

2

3

4

5

6

7

8

7:12 8:01 8:02 8:03 8:04 8:05 8:06 8:07 8:08 8:09 8:10 8:11 8:12

UE Rate

U.S. Real GDP:Quarterly % Chg (saar)

-4

-3

-2

-1

0

1

2

3

4

5

07-Q1 07-Q2 07-Q3 07-Q4 08-Q1 08-Q2 08-Q3 08-Q4

RGDP % Chg

Consumer Price Index:Quarterly % Chg (saar)

-4

-3

-2

-1

0

1

2

3

07-Q1 07-Q2 07-Q3 07-Q4 08-Q1 08-Q2 08-Q3 08-Q4

CPI % Chg

Federal Fiscal Action -1

• TARP - $700 Bil.– Original plan – Bank stabilization: Bad assets– Bank capital infusion - $350 Bil.– Housing stabilization - $350 Bil.?

• Obama Recovery Plan - $825 Bil.+?– Twin goals

• Macro stabilization• Self-sustaining recovery

– Social goals?– Plan structure

Federal Fiscal Action-2

• Critique: Recovery Plan Focus (Deak)– Quick aid to distressed households + bus– Short-run & intermediate stimulus - Infrastructure– Long-run support for self-sustaining growth

• Recovery Plan Problems (Deak)– Too small - $1.2Tril+ needed– Too little for housing market stabilization– Too short – Needed 4 year focus– Too much for tax cuts – Limited bang for buck– Too little for growth stimulus

Federal Fiscal Action -3Financial Market Action

• “Bad Bank” – Distressed asset aggregator– FDIC RTC model from 1980’s– Problem: Pricing of assets from banks

• Implicit taxpayer subsidy vs. Mark-to-market• Asset acquisition method

• Nationalization – Takeover failing banks– Problems: The $ size of the banks

• Interim management• Ultimate asset disposition

• Ring fencing bad assets – Federal insurance

Federal Reserve Policy Actions

• Traditional Monetary Policy– Federal funds rate – Cut to ZERO– OMO – Infuse reserves = money supply

• Non-traditional Monetary Actions– Direct loans to investment banks (IB)– Convert IB + insurance co to comm banks– Extend credit directly to bus + households– Purchase agency + mgt backed securities

• Result – Boost FR bal sheet +$1.25 Tril.

Economic Outlook 08:Q4-10:Q1• Real Gross Domestic Product• Change in Non-farm Payrolls• Unemployment Rate• Consumer Price Index• Average Oil Price (nymex)• Housing Starts, Existing home sales, Prices• Consumer Spending• Business Investment• Fed Funds Rate Target• 10-year T-Note

Real GDP % Change:Quarterly (saar)

-4

-3

-2

-1

0

1

2

3

08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:01

RGDP % Chg

Non-farm Payroll Jobs:Ave Monthly Chg (000’s) (sa)

-600,000

-500,000

-400,000

-300,000

-200,000

-100,000

0

100,000

8:04 9:01 9:02 9:03 9:04 10:01

Job Chg

U.S. Unemployment Rate %:Quarterly 08:4-10:1

7.2

8.8

0

1

2

3

4

5

6

7

8

9

8:04 9:01 9:02 9:03 9:04 10:01

UE Rate

Consumer Price Index:% Chg Quarterly 08:4-10:1

-1.5

-1

-0.5

0

0.5

1

1.5

2

08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1

CPI %Chg

Average Oil Price Per BL:08:Q1-10:Q1(nymex)

0

10

20

30

40

50

60

08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1

Bl price $

Housing Starts (saar)

876,000

650,000

791,000

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

08-Q3 08-Q4 09-Q1 09-Q2 09-Q3 09-Q4 10-Q1

Starts

Existing Home Sales (mil)

4.96

4.38

5.26

0

1

2

3

4

5

6

2007 2008 2009 2010 2011 2012

Existing Sales

Existing Home Sale Price: Nominal $

199,000

169,000

191,000

150,000

155,000

160,000

165,000

170,000

175,000

180,000

185,000

190,000

195,000

200,000

2008 2009 2010 2011 2012

Median Price

Real Consumer Spending:% Chg (saar)

-3

-2

-1

0

1

2

3

08:Q4 09:Q! 09:Q2 09:Q3 09:Q4 10:Q1

Real Cons Spending

Real Business Investment:% Chg (saar)

-12

-10

-8

-6

-4

-2

0

2

4

08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1

% Chg

Fed Funds Rate Target %

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

08:Q$ 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1

FF Rate %

10-Year T-Note Yield %

0

0.5

1

1.5

2

2.5

3

3.5

08:Q4 09:Q1 09:Q2 09:Q3 09:Q$ 10:Q1

10-year yield

There is No Plan B

• The risk of fiscal + monetary failure– Short-run stimulus v. self-sustaining

recovery

• Plan needs domestic cooperation• Recovery needs global coordination

– Multi-national government action– Global business buy-in– Global financial buy-in

• There is no going back for round-2

What About 2011-2015?

• Real risk of massive global inflation

• Crush of medicare + social security

• Financing U.S. budget deficits

• Correcting U.S. Balance of Payments

• Constructing a U.S. energy policy

• Constructing a global environmental policy