From Recession to RecoveryMonday, April 26, 2010
8:00 AM 9:15 AM8:00 AM - 9:15 AM
ModeratorMichael Klowden, President and CEO, Milken Institute
SpeakersMohamed El-Erian, CEO and Co-Chief Investment Officer, Pacific Investment
M t C (PIMCO)
1
Management Co. (PIMCO) Steve Forbes, Chairman and CEO, Forbes Media; Editor-in-Chief, Forbes
Kenneth Griffin, Founder, President and CEO, Citadel Investment Group LLCMarc Lasry, Chairman and CEO, Avenue Capital Group
A lost decadeThe U.S. economy had its worst decade since the 1930s
7Real GDP growth (%)
6.0%
4.2% 4.4%
3.3% 3.1% 3.2%
1.9%2
3
4
5
6
2
1.3%
0
1
2
1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000sSource: The U.S. Bureau of Economic Analysis.
8.2 million total job losses
Average monthly change in employmentThousands of nonfarm workers
-31-191
-334-477
-261
-90
54
600
-400
-200
0
200
4008.2 million workers lost their jobs
December 2007- March 2010
3Source: U.S. Bureau of Labor Statistics.
-652-753
477
-1000
-800
-600
Q1: 2006 2007 2008 2009 Q1: 2010
Americans’ net worth is down by 12 trillion from its 2007 peak
70US$ trillions Household's net worth Pre-recession peak:
$65.9 trillion
30
40
50
60
Fourth quarter, 2009$54.2 trillion
4
Source: Federal Reserve.
20
30
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2007 2008 2009
Deep recession, strong recovery?
Average real GDP growth rates (%) in the four quartersfollowing each recession
2.6%
7.8%
6.2%
10.9%
1990-1991
1981-1982
1973-1975
1929-1933
following each recessionPeriods of Recession
Real GDP grew10.9% in 1934, the year after the Great
5
Sources: U.S. Bureau of Economic Analysis; the Milken Institute.
1.9%
0 2 4 6 8 10 12
2007-20XX
2001year after the Great Depression ended.
?
Large reductions in the world real GDP growth
10Real GDP (% change, year-to-year)
Emerging andProjected
-2
0
2
4
6
8 World
Advanced economies
Emerging and developing economies
6
-6
-4
1980 1985 1990 1995 2000 2005 2010
economies
2014
World stock market capitalization still 23% below its peak level (as of April 20, 2010)
70US$ trillions
30
40
50
60 Highest point: $62.6 trillion on October 31, 2007
$48 trillion as of April 20, 2010
Lowest point: $25.6 trillion
7Source: Bloomberg.
10
20
2004 2005 2006 2007 2008 2009 2010
on March 9, 2009
Forecasts of positive real GDP growth rates
Real GDP growth (%) (Quarterly percentage change, seasonally adjusted at an annual rate)
2.1
-0.7
1.5
-2.7-0.7
2.2
5.9
3.0 3.0 2.8 2.9 2.9 3.0 3.2 3.9
6-4-202468
( yp g g y j )
Composite forecasts
8
Note: Composite forecasts are average forecasts of 27 private organizations. Sources: U.S. Bureau of Economic Analysis; Bloomberg.
-5.4-6.4
-10-8-6
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42007 2008 2009 2010 2011
Decline in initial claims for unemployment insurance
700Thousands
6.6 million people receiving jobless b fit f J 2009
400
500
600 4.56 million(as of March 31, 2010)
benefits as of June, 2009
9Source: U.S. Bureau of Labor Statistics.
200
300
1980 1985 1990 1995 2000 2005 2010
Retail sales climbed in MarchA sign showing American consumers were beginning to spend more
400US$ billions Monthly total retail sales, seasonally adjusted
300
350
+1.6% in March
10Source: U.S. Department of Commerce.
2502000 2002 2004 2006 2008 2010
Shade area indicates recession
Turnaround stock markets
300015,000
Nasdaq9001,800
1500
2000
2500
7,500
10,000
12,500
Nasdaq (right scale)
D J400
500
600
700
800
800
1,000
1,200
1,400
1,600 Russell 2000 (right scale)
S&P 500(left scale)
11Source: DataStream.
500
1000
5,000
,
2002 2004 2006 2008 2010
Dow Jones(left scale)
200
300
400
600
2002 2004 2006 2008 2010
Narrowing risk spread Indicative of the reduced stress in the debt markets
5Percentage points
Oct 10, 2008
2
3
4 TED spread
BAA-AAA spread
12
Note: The TED spread is the difference between 3-month LIBOR rates and the yield on 3-month U.S. Treasury bills.The BAA-AAA spread is the difference between the interest rates on high-grade and medium-grade corporate bonds.
Sources: Bloomberg, Federal Reserve.
0
1
Unemployment rate near the highest level since Great Depression
12 Unemployment rate: 9.7%%
Unemployment rate: 10.8%
4
6
8
10
Unemployment rate: 9.7% in March, 2010
during the 1981-1982 recession
13Source: U.S. Bureau of Labor Statistics.
0
2
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Involuntary part-time or underemployed hits the highest level in 50 years
7 000
Thousands Part-time employment for economic reasons
2 000
3,000
4,000
5,000
6,000
7,000
Part-time due to slack work or business conditions
14Source: U.S. Bureau of Labor Statistics.
0
1,000
2,000
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Could only find part-time work
2010
One in four black, Hispanic workers is underemployed
26Underemployment rates by race(%)
Hispanic or Latino 23.2%
1012141618202224
White 13.7%
African American 23.1%
15
468
10
Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Nov-09
Note: the shown underemployment data are from November, 2009. Underemployed includes the unemployed, involuntary part-time, and discouraged workers.Source: The Economic Policy Institute.
8.5Percent
Job creation still a problemRate of job creation and destruction
8.0
7.5
7.0
6.5
6 0
Job destruction
20092008200720062005200420032002200120001999
6.0
5.5
5.0
Sources: Bureau of Labor Statistics, Moody’s Economy.com
Job creation
16
Small businesses account for nearly half the decline in job creation
Change between 2007 and Q1 2009
Total change in job
0-100 employees48.5%
>1000 employees27.1%
Total change in job creation = -1,648 ths.
100-1000 employees24.5%
Sources: Bureau of Labor Statistics, Moody’s Economy.com
17
60 percent of current decline in job creation stems from small businesses versus 26 percent in previous recession
60Percent
Job creation with <100 employees
50
40
30
20
Job creation with <100 employeesJob destruction with <100 employees
Sources: Bureau of Labor Statistics, Moody’s Economy.com
Q1 2008- Q2 2009Q1 2001- Q2 2002
10
0
18
Nearly 1 in 4 homeowners underwater
70States with negative equity share > 20%
as of Q4: 2009
% negative equity
23% 24%
0102030405060
Q
Q3, 2009
Q4, 2009
19
0
Note: The data only include properties with a mortgage.Source: First American CoreLogic .
Banks are still pulling back on lendingNo bank lending, no recovery
US$ trillionsLending by the U.S. commercial banks
fell by 7 5% in 2009
7
8$ fell by 7.5% in 2009
20Note: The data are loan balances (net loans and leases ) of all U.S. commercial banks.Source: Quarterly Banking Profile, Federal Deposit Insurance Corporation.
6Q1, 2008 Q2, 2008 Q3, 2008 Q4, 2008 Q1, 2009 Q2, 2009 Q3, 2009 Q4, 2009
Households are deleveraging U.S. households need to reduce their debt to more manageable level
U.S. household debt (% of disposable personal income)
50
100
150
Economists see 100% as a sustainable level
Total household debt stood at 123% as of the end of 2009
21Source: Federal Reserve.
01950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2009
123% as of the end of 2009
Upward trend of U.S. saving rate
14U.S. personal saving rate (% of disposable personal income)%
4
6
8
10
12
14
The saving rate has started to increase following a decades-
long decline.
22
0
2
Q1 1960 Q1 1970 Q1 1980 Q1 1990 Q1 2000 Q4 2009Source: U.S. Bureau of Economic Analysis.
Consumer borrowing still declined
8
% change of total consumer credit from a previous year, seasonally adjusted%
8-6-4-202468 +5.2% in
January
-5.6% in
23Source: Federal Reserve.
-14-12-10-8
Jan-08 Jul-08 Jan-09 Jul-09 Feb-10
5.6% in February
Growing personal bankruptcy filingsThe total number of bankruptcy filings = 1.47 million in 2009
800
Thousands The number of quarterly bankruptcy filings in the federal courts
200
400
600
800
Business bankruptcy filingsPersonal bankruptcy filingsTotal
24
Source: Administrative Office of the U.S. Courts.
0
200
Q1 1995 Q1 1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009
Global economic forecastsEmerging market economies will lead the world growth
8 08.59
% Real GDP growth forecasts by key countries/regions (average 2010-2014)
1 42.1
3.94.6 4.8 4.9
8.0
2345678
(average 2010 2014)
25Source: Economist Intelligence Unit.
1.4 1.1
012
Western Europe
Japan United States
Latin America
MENA Brazil Asia India China
The U.S. dollar
0 9120
Trade weight exchange index (January 1997 = 100) Euro/US$
0 6
0.7
0.8
0.9
100
105
110
115
120Euro/US$ (right axis)
26Source: Federal Reserve.
0.5
0.6
90
95
2006 2007 2008 2009 2010
Trade weighted (left axis)
U.S. current account deficit
50US$ billions U.S. current account, seasonally adjusted
-150
-100
-50
0
27
-250
-200
1970 1975 1980 1985 1990 1995 2000 2005 2009Source: The U.S. Bureau of Economic Analysis.
Parallel relationship between stock marketperformance and the unemployment rate
12
14000
16000 Dow Jones hits 11,000; unemployment rate nears 10%U l t t (%)
4
6
8
10
4000
6000
8000
10000
12000
14000 p yUnemployment rate (%)(right- axis)
Dow Jones (left- axis)
28Sources: U.S. Bureau of Labor Statistics; DataStream.
0
2
0
2000
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
(left- axis)
U.S. fiscal position is in a free fall
400Federal surplus [+] or deficit [-], fiscal yearUS$ billions
-1,000-800-600-400-200
0200
29Source: The Office of Management and Budget, White House.
-1,600-1,400-1,200
,
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Shade area indicates recession
President Obama's budget will generate nearly $10 trillion in budget deficits over the next 10 yearsFederal Budget (US$ billions)
US$9.761 trillion total deficit from 2011 to 2020
-1,000
-800-600-400-200
0( $ )
30Source: Congressional Budget Office (CBO).
-1,600-1,400-1,200
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Actual CBO's estimate of federal budget for fiscal year 2011
National debt will reach 90% of GDP in the next decade
100% of GDP Federal debt held by public
30405060708090
201063% of GDP, or$9.2 trillion
202090% of GDP, or$20.3 trillion
31Source: Congressional Budget Office (CBO).
01020
1980 1985 1990 1995 2000 2005 2010 2015 2020
CBO's estimate
Change in the world economic power China and India are larger in the world economy
Real GDP (PPP dollars), share of world total20091991
United States20%
China12%
Rest of the world
47%
2009United States22%
China4%
Japan
Rest of the world
48%
1991
32Sources: International Monetary Fund, The Milken Institute.
Japan6%
India5%Germany
4%
U.K.3%
France3%
Japan9%
India3%
Germany6%
U.K.4%
France4%
Kenneth Griffin’s Slides
33
Residential real estate loan delinquency rate
34
Personal transfer payments
35
Household’s net worth (as a % of disposable personal income)
36
Unemployment and underemployment
37
Continuing claims and insured unemployment
38
Federal outlays: interest
39
Entitlements and interest
40
Federal on-budget surplus/deficit [-]
41
Share of individual income tax liabilities:top 10 percent
42
Share of income: highest 5 percent of families
43
Share of individual income tax liabilities:middle income quintile
44
Median income of households
45
Establishment survey of employment
46
Wage and salary disbursements
47
Nonfarm business productivity: Output per person
48
Nonfarm business: output per person
49
Consumer loans:credit cards and other revolving plans
50
ICSC-Goldman Sachs weekly retail chain store sales
51
Home equity withdrawal: mortgages less residential construction
52
When will Americans’ total net worth return to the peak it saw in the middle of 2007? Your choices are:peak it saw in the middle of 2007? Your choices are:
A. By the end of 2010B. First 2011C Second Half 2011C. Second Half 2011D. 2012E. 2013 or Later
53
In the 79 years from 1930 to 2008, how many years did the U S Government have a budget surplus?did the U.S. Government have a budget surplus?
A. 2B. 9C. 13C. 13D. 22E. 36
54