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Economic Outlook: Navigating the Recovery

Economic Outlook: Navigating the Recovery. Chris Low Chief Economist March 2010. The Big Themes. Waves of crisis subsiding, but still an issue (Greece). Washington’s challenges to investors. Timing the most important economic signals. Staying a step ahead of the Fed.

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Economic Outlook: Navigating the Recovery

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  1. Economic Outlook: Navigating the Recovery Chris LowChief Economist March 2010

  2. The Big Themes • Waves of crisis subsiding, but still an issue (Greece). • Washington’s challenges to investors. • Timing the most important economic signals. • Staying a step ahead of the Fed.

  3. 2010 Political Calendar (The Plan)

  4. 2010 Political Calendar (The Reality)

  5. 2010 Fed Calendar (highlights) Earliestlikely date.

  6. GDP is growing again Recession

  7. Thanks to stimulus

  8. But stimulus is not forever, and sustainablerecoverydepends on theprivate sector

  9. Deep recessions have V-shaped jobs recoveries(as long as GDP recovers, of course…) GDP = 100 at cycle peak Jobs = 100 at cycle peak

  10. Still Waiting for Employment Turn…

  11. …but the emp. diffusion index is stronger than 2-years after the 2001 recession…

  12. …manufacturing payrolls are growing…

  13. …and the Workweek is rising

  14. Key Sectors Consumers

  15. Step 1: Savings rate Rose to 4.3%

  16. Step 2: borrowing transitions to saving

  17. Step 3: spending falls below trend, but is growing again Housing-boom era above-trend growthhas given way to below-trend growth now.

  18. Key Sectors Business

  19. Step 1: Inventories were overbuilt,then worked off

  20. Step 2: Orders tanked, then recovered

  21. Step 3: Inventory cycle shifts into up phase Recession

  22. Key Sectors Housing

  23. Step 1: Sales bottom in Feb 2009

  24. Step 2: Inventories peak in July 2009

  25. Step 3: Prices should bottom this spring

  26. Housing Pitfalls • End of Fed mortgage purchases. • End of 1st time homebuyer tax credit version 2.0. • Looming foreclosures. Reasons for Housing Optimism • 1st time homebuyer tax credit version 3.0 will follow if sales falter in an election year. • GSEs renting homes to foreclosed families, which will keep foreclosed homes off the market. Reason not to worry Housing doesn’t matter like it did in the boom, because no one subsidizes spending with home equity debt anymore.

  27. Keys to inflation

  28. Market expectations for CPI inflation Big jump next year.

  29. Cyclical components are deeply deflationary

  30. The dollar will drive inflation when unemployment is low again

  31. The $ view is not all bad • The bear case for the dollar: • The 2nd lowest short-term interest rates in the industrialized world. • The deficit is huge and Congress is threatening the autonomy of the Fed. • The Treasury’s strong dollar policy is all talk. • The bull case for the dollar: • Europe and the UK face a tougher banking cleanup than we do. • The dollar appears to be correctly valued from a balance-of-trade perspective, even with China. • Debt-to-GDP % US = 84.9% (IMF), right in the middle of the G-7 pack. • The Balance: • Dollar is already strengthening as it becomes clear US will raise rates before Europe, the UK or the BoJ.

  32. Risks: It could take years for household delevering to end Assumes there are mortgages on 70% of the housing stock.

  33. Risks:State Budgets are Busted Pew center for the states: http://downloads.pewcenteronthestates.org/BeyondCalifornia.pdf

  34. Change in State & Local Payrolls (2-mo avg)

  35. Risks: Washington • New taxes will be part of FY 2011 budget • Cap and trade (or EPA carbon restrictions) • Healthcare reform will cost more than benefit in first years • Finance reform (increased regulation = less credit)

  36. Fed can wait for clear falling unemployment rate before tightening

  37. 10-yr TIPS yields in 100bp range for 2 years10-yr USTshould stay below 4.5% as long as inflation is low

  38. Inflation outlook In the short and medium term, inflation will trend downward due to lack of pricing power and pursuit/protection of market share. Longer-term (beyond the next three years) the dollar will move into the driver’s seat. By then, we expect the Fed will be tightening and therefore the dollar will have stabilized. Growth outlook • After a quarter or two of robust, stimulus-fueled growth, GDP will settle onto a slowly rising path. The result is likely to be reminiscent of the early 1990s: • below trend GDP growth • lingering fear of a double dip • slower than usual drop in unemployment rate • little private-sector debt growth

  39. This material was produced by an FTN Financial Strategist and is not considered research and is not a product of any research department. Strategists may provide advice to investors as well as to FTN Financial’s trading desk. The trading desk may trade as principal in the products discussed in this material. Strategists may have consulted with the trading desk while preparing this material and the trading desk may have accumulated positions in the securities or related derivatives products that are the subject of this material. Strategists receive compensation which may be based in part on the quality of their analysis, FTN Financial revenues, trading revenues, and competitive factors. Although this information has been obtained from sources which we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. Opinions, historical price(s) or value(s) are as of the date and, if applicable, time, indicated. FTN Financial does not accept any responsibility to update any opinions or other information contained in this communication. FTN Financial is not providing investment advice through this material. This is for information purposes only and is not intended as an offer or solicitation of any product. Securities, financial instruments, products or strategies mentioned in this material may not be suitable for all investors. Before acting on any advice or recommendation in this material, you should consider whether it is suitable for your particular circumstances. Further information on any of the securities or financial instruments mentioned in this material may be obtained upon request. FTN Financial Group and FTN Financial Capital Markets are divisions of First Tennessee Bank National Association (FTB). FTN Financial Securities Corp (FFSC), FTN Financial Capital Assets Corporation, and FTN Equity Capital Markets Corp. (FTN Equity Capital) are wholly owned subsidiaries of FTB. FFSC and FTN Equity Capital are members of FINRA and SIPC—http://www.sipc.org/. Equity research is provided by FTN Equity Capital. FTN Financial Group, through First Tennessee Bank or its affiliates, offers investment products and services.

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