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Economic Outlook: One Year Later – Sustainable Recovery? UConn Center for Real Estate: 2010 Connecticut Housing Conference May 10, 2010 Todd P. Martin Economic Services 203-218-9825 Toddpmartin@yahoo.com. Economic Outlook . US Economic Backdrop .

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Presentation Transcript
slide1

Economic Outlook:

One Year Later – Sustainable Recovery?

UConn Center for Real Estate:

2010 Connecticut Housing Conference

May 10, 2010

Todd P. Martin Economic Services

203-218-9825

Toddpmartin@yahoo.com

us economic backdrop
US Economic Backdrop
  • After worst post-war recession on record, US GDP growth rebounds during second half of 2009 due to massive fiscal and monetary policy responses – job creation is still weak, however
  • The Fed will begin tightening monetary policy by year end 2010 (Fed Funds increase to 1%?) – Discount rate increased to 0.75% recently, short-term funding programs largely unwound – “Exit Strategy” will be tricky
  • Uncertainty about huge potential federal policy initiatives (Health Care, Cap-and-trade, tax legislation, Fin. Regulation, etc.) have paralyzed private sector investment plans and consumer confidence. InterestingNovember elections!
  • Lots of worries: Sovereign debt, state and local budget squeeze, commercial RE, “real’ unemployment rate, foreclosures, ARM resets, bank lending and failures, etc.
  • Tailwinds: low inflation, pent-up demand, higher stock prices, ISM rebound, inventory rebuilding, exports, awareness finally leads to action on deficits?
us economic backdrop cont
US Economic Backdrop cont.
  • Forecast for moderate expansion (3% GDP 2010) but unemployment rate remains elevated (9.0% - 9.5% +) “U” rather than “W”?
  • Housing sector remains depressed – but performance varies by region. Inventories correcting, prices trying to stabilize – foreclosures loom as unemployment climbs, 25% upside down. $3.4 trillion commercial RE debt under pressure, 45% held by banks - $1.4 trillion coming due 2010-14 (half, upside down)
  • Trade deficit narrows sharply, dollar strengthens – Obama’s $3.8 Trillion Budget raises the Federal budget deficit to 11% of GDP! Unsustainable
  • Risks:
  • Downside: Job growth (wages), further housing sector erosion, commercial RE – small bank exposure, continued uncertainty – lack of confidence
  • Upside: Pessimism rampant and news may be discounted by the markets?. Unprecedented fiscal & monetary policy responses, pent-up demand.
gdp rebounds has unemployment peaked
GDP rebounds; has unemployment peaked?
  • Source: Wall Street Journal, Briefing.com, BEA, BLS
the recession was twice as bad average
The recession was twice as bad “average”

Sources:New England Economic Partnership, NBER, BEA, FRB, BLS, Moody’s Economy.com

and taking longer to recover
…And taking longer to recover
  • Source: Wall Street Journal, BEA, BLS
it could take 6 years to recover jobs lost
It could take 6 years to recover jobs lost
  • Source: Wall Street Journal, BLS
trend in initial jobless claims improving
Trend in Initial Jobless Claims improving….

Source: Federal Reserve Bank of St. Louis, BLS

but long term unemployment at all time high
…but long-term unemployment at all-time high

Source: Federal Reserve Bank of St. Louis, BLS

solid recovery in manufacturing
Solid recovery in manufacturing
  • Source: Wall Street Journal, Briefing.com, Federal Reserve, ISM
core inflation rate continues to trend lower
“Core” inflation rate continues to trend lower
  • Source: Wall Street Journal, Briefing.com, BLS
leading indicators up lots of excess capacity
Leading indicators up - lots of excess capacity
  • Source: WSJ, Briefing.com, Conference Board, Stone & McCarthy Research Federal Reserve
ted spread shows easing of financial stress
TED Spread shows easing of financial stress

Spread between 3 month Libor and T-bill yields

Subprime

financial

shock

[Good news? Patient out of Intensive Care?]

S&L crisis

LTCM

Orange

County

Y2K

Tech

bust

Thai

baht

Peso

crisis

Source: Federal Reserve H-15, Moody’s Economy.com

stock prices up 70 from lows
Stock prices up 70% from lows

Source: Wall Street Journal,TPM Economic Services

fed at the cusp of tightening policy
Fed at the cusp of tightening policy?

"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.“

“In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis..”

“Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.”

FOMC Press Release - 4/28/10

slide18

How will the Fed’s exit strategy work?

Source: Federal Reserve, Wall Street Journal

slide19

Huge expansion of the Fed’s B/S

The Fed's balance sheet has more than doubled in size since the Lehman bankruptcy. The focus of policy-makers has been on the asset side of the balance sheet, so-called "Credit Easing".

Source: Federal Reserve, Stone & McCarthy Research

slide20

If banks ever start lending -- Wow

The explosion on the asset side of the balance sheet was matched by an offsetting explosion on the liability side of the balance sheet, especially an explosion in bank reserve balances held at the Fed. These reserve balances represent immediately available funds.

Source: Federal Reserve, Stone & McCarthy Research

consumers are still worried
Consumers are still worried….

Source: Wall Street Journal, Briefing.com, Conference Board

but spending increases marginally
…. But spending increases marginally

Source: Stone & McCarthy Research

slide23

Global Governments in the Red

Source: IMF, OECD, Wall Street Journal

slide24

Greece is not alone with fiscal problems

Source: White House OMB, Wall Street Journal

slide25

Obama’s proposed budget is stunning

Please see USdebtclock.org for real-time analysis of federal debt & deficit

Source: White House OMB, Wall Street Journal

slide26

“It’s the spending stupid”

Source: Heritage Foundation, Census Bureau & OMB, Wall Street Journal

slide27

Taxes headed higher – No Trust in Gov.

Source: Wall Street Journal, Tax Policy Center, Pew Research Center

state budgets in very poor shape
State Budgets in very poor shape

Source: Wall Street Journal, Census Bureau, Rockefeller Institute

housing starts forming a bottom
Housing starts forming a bottom?

Source: NAR, Stone & McCarthy Research

inventories down and trend in prices turning
Inventories down and trend in prices turning

Source: Stone & McCarthy Research, Census Bureau, S&P Case Shiller, FHFA

high level of foreclosures delinquencies
High level of foreclosures & delinquencies

Source: BLS, Stone & McCarthy Research

fl nv az mi and ca hit the hardest
FL, NV, AZ, MI, and CA Hit the hardest

Source: Wall Street Journal, LPS Applied Analytics

they also have the largest price declines
They also have the largest price declines

Projected home price correction from peak to trough, %

U.S. = -37.0%

> -4%

-4% to -11%

-11% to -37%

< -37%

Source: Fiserv, FHFA, Moody’s Economy.com

location location location
Location, Location, Location…

Source: Wall Street Journal, Zelman & Assoc.

shadow inventory will keep lid on prices
Shadow Inventory will keep lid on prices

Source: Wall Street Journal, Barclays Capital, RealtyTrac, LPS Applied Analytics

detroit as bad as it gets
Detroit: As bad as it gets

Source: Wall Street Journal

continued credit risks
Continued Credit Risks

Commercial Real Estate: $3.4 trillion

[3,000Community Banks have exposure]

The Moody's/REAL Commercial Property Price Index - 43% from 2007 peak. $1.4 Trillion MBS coming due 2010-14

Consumer Credit: $900 billion in credit-card debt outstanding – 1/3rd owned by Sub-prime borrowers?

Municipal Debt: The $3 trillion

More housing trouble: Nearly 10.7 million homeowners, 23% upside-down [NV=64%] – Foreclosure pipeline = 3-7 million?

Sovereign Debt: Greece, Portugal, Italy, Spain

Source: Wall Street Journal

1 10 billion banks at increased risk
$1-10 billion banks at increased risk

Source: FDIC Quarterly Banking Profile

more deleveraging to come
More Deleveraging to come?

Source: Wall Street Journal

ct economic outlook
CT Economic Outlook
  • Connecticut Economy is slowly beginning to add back some of the 103,000 jobs lost during the recession. 6,400 net new jobs have been created over the last 3 months.
  • Unemployment rate continues to move higher, however – at 9.2% in March (below the US rate of 9.7%)
  • State & Local fiscal continues to deteriorate as tax revenues slow and spending outpaces inflation or population growth. General Assembly avoids making tough choices – huge unfunded liabilities among the worst in the U.S.
  • CT was not immune to Housing recession, but was not as exposed as other areas of the country. Sales & prices down, marketing times up.
ct lost 103 000 jobs during the recession
CT lost 103,000 jobs during the recession

Down 30,600 (1.9%) YOY

Source: BLS, TPM Economic Services

ct unemployment rate continues to climb
CT Unemployment rate continues to climb

9.2% as of March 2010

Source: BLS, TPM Economic Services

construction has lost 17 000 jobs or 24 from peak
Construction has lost 17,000 jobs, or 24% from peak

Down 4,600 (8.1%) YOY

Source: BLS, TPM Economic Services

ct financial jobs stronger than expected
CT Financial jobs stronger than expected

Down 10,300 (7.1%) from peak

Source: BLS, TPM Economic Services

ct manufacturing jobs down 45 since 1990s
CT Manufacturing Jobs down 45% since 1990s

Down 7,300 (2.9%) from peak

Source: BLS, TPM Economic Services

where ct has lost jobs over the last 12 months
Where CT has lost jobs over the last 12 months

Change in CT Non-Farm Employment Mar. 2010 vs. Mar. 2009 ( Not SA)

Source: CT Labor Department, TPM Economic Services

where jobs were created last year
Where jobs were created last year

Change in CT Non-Farm Employment Mar. 2010 vs. Mar. 2009 ( Not SA)

Source: CT Labor Department, TPM Economic Services

largest job losses year over year
Largest % job losses year-over-year

Change in CT Non-Farm Employment Mar. 2010 vs. Mar. 2009 ( Not SA)

Source: CT Labor Department, TPM Economic Services

largest gain in jobs last year
Largest % gain in jobs last year

Change in CT Non-Farm Employment Mar. 2010 vs. Mar. 2009 ( Not SA)

Source: CT Labor Department, TPM Economic Services

rare decline in personal income last year
Rare decline in personal income last year

2010-2014 is forecast

Source: U.S. Commerce Dept., CT DOL, DataCore Partners, Economy.com

housing was not overbuild like the mid 1980s
Housing was not overbuild like the mid-1980s

CT Home Permits Authorized

Down 73% from cycle peak, over 88% from 1986 peak

2010-2014 is forecast

Source:CT DECD, New England Economic Partnership, Economy.com, TPM Economic Services

only 558 permits issued ytd in 2010
Only 558 permits issued YTD in 2010

Source:CT DECD, TPM Economic Services

ct homes took longer to sell in 2009
CT Homes took longer to sell in 2009….

Source: Prudential CT Realty CT RE Market Report, TPM Economic Services

and prices were softer
….and prices were softer

Source: Prudential CT Realty CT RE Market Report, TPM Economic Services

tri state prices still very high
Tri-State prices still very high

Source: Wall Street Journal, Fiserv Case-Shiller

home sales begin to turn around yoy
Home sales begin to turn around YOY%….

Source: Prudential CT Realty CT RE Market Report, TPM Economic Services

while prices still fell in all counties
…. while prices still fell in all counties

Source: Prudential CT Realty CT RE Market Report, TPM Economic Services

ct tax revenues down 205 mm ytd
CT Tax revenues down $205 mm YTD

CT Real Per Capita Spending ($2005)

1970 = $863

1980 = $1,823

1990 = $3,089

2000 = $3,797

2005 = $4,322

2009 = $6,133

Source: CT DRS, TPM Economic Services

summary
Summary
  • US Economic recovery technically underway
    • GDP may average 3% in 2010 but unemployment remains 9%+, Future growth likely to be sub-par
    • Consumer & Business confidence remains depressed – uncertainty huge
    • Stocks, ISM, inflation, productivity, leading indicators trending higher
    • Massive (and unsustainable) fiscal & monetary policy stimulus increases aggregate demand
    • Housing markets still under pressure, commercial RE loans add to bank (and FDIC) woes
    • Status of Financial Regulation? “Too Big to Fail” banks outperform small banks?
  • Fed on hold at 0% - 0.25% fed funds until mid-year – 1% by year end. Exit strategy will include raising rates paid on reserves
  • Watch: Jobless Claims – Purchasing Managers Index – Housing Inventories – Stock Prices – Auto Sales – Consumer Confidence – TED Spread – November elections
housing questions
Housing Questions
  • Current stabilization in market due to:
    • very low interest rates
    • homebuyer tax credit
    • decline in resets (will pick-up - $2.4 trillion in Alt-A – peak in 2013)
    • massive FHA support of market (23% of market – defaults 17%)
    • temporary reduction of foreclosure inventory
  • 25%homeowners underwater – how will they behave?
  • Sub-prime and speculative losses largely over?
  • Next wave: Prime, Jumbo, HELOCs, Alt-A, & Commercial RE?
  • U.S. Home prices drop 35% - 40% from peak (late 2010?) – no quick rebound (shadow inventory – slow economic growth)
slide61

Economic Outlook:

One Year Later – Sustainable Recovery?

UConn Center for Real Estate:

2010 Connecticut Housing Conference

May 10, 2010

Todd P. Martin Economic Services

203-218-9825

Toddpmartin@yahoo.com