the economic outlook - in · 4/17/2009 · the economic outlook nigel gault chief u.s. economist,...

The Economic OutlookThe Economic Outlook

Nigel Gault

Chief U.S. Economist, IHS Global Insight

Indianapolis

April 17, 2009

The U.S. Recession

• Deepest, longest in post-war history

• Rest of the world in deep recession, too

• All policy options blazing

Copyright © 2009 IHS Global Insight. All Rights Reserved.

2

• All policy options blazing

• Monetary stimulus

• Fiscal stimulus

• Banking (and other) bail-outs

• Hints of improvement are appearing in the data

• “Free fall” appears to be over – what next?

The U.S. Is Not The Worst-Hit Economy

-5

0

2008 Q4 Change in Real GDP, annualized rate


3

-20

-15

-10

U.S. U.K. Germany Japan Singapore Korea

02468

10(Percent change)

The U.S. Recession


4

-12-10-8-6-4-20

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

U.S. Real GDP Industrial Production

GDP Declines in Post-War Recessions

-2

-1

0

Peak-to-Trough Percent Change in Real GDP


5

-5

-4

-3

-2

1948 1953 1957 1960 1970 1973 1980 1981 1990 2001 2008

Dated by Year of the GDP Peak

Forecast

Are Financial Conditions Easing?Are Financial Conditions Easing?

TED Spread Off Its Peak

(3-month LIBOR less 3-month Treasury bill rate, % points)

3

4

5


7

0

1

2

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

Corporate Bond Spreads Still Wide

(Corporate Yield Less 10-Year Treasury, percentage points)

4

5

6

7


8

0

1

2

3

4

1962 1967 1972 1977 1982 1987 1992 1997 2002 2007

BAA Spread AAA Spread

Mortgage Rates Have Fallen

(Percent)

6

7


9

4

5

Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09

30-Year Fixed Mortgage Rate

0

1

2

3

4

5

6

Household Credit Conditions Still Very Tight

-202468

1012

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

Consumer Credit Growth*Consumer Credit Growth* Home Mortgage Credit Growth*Home Mortgage Credit Growth*


10

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

*% change y/y; **Diffusion Index; ***Mills, SA; ****Index, 2002=100, SA

Banks Tightening Cons. Credit (%)Banks Tightening Cons. Credit (%) Banks Tightening Mortgage Credit (%)Banks Tightening Mortgage Credit (%)

0

20

40

60

80


-20

0

20

40

60

80


Credit Cards

Other LoansPrime Loans

U.S. Recession:U.S. Recession:The Latest EvidenceThe Latest Evidence

-2

-1

0

1

2

Glimmers of Hope…

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Retail Sales exRetail Sales ex--Autos and Gasoline*Autos and Gasoline* Housing Starts**Housing Starts**


12

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

*M/M % change; **Millions, SA; ***Diffusion Index

ISM Manufacturing Index***ISM Manufacturing Index*** ISM Manufacturing Orders Index***ISM Manufacturing Orders Index***

20

30

40

50

60


30

35

40

45

50

55


0

200

400

600

…But Employment Is Still Falling Sharply

(Establishment employment, thousands of jobs)


13

-800

-600

-400

-200

0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

…And An Inventory Overhang Has Built Up

(Inventory/shipments ratio, manufacturing and trade)

1.5

1.6


14

1.2

1.3

1.4

Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

0

2

4

6

(Real GDP, annualized rate of growth)

Q1 Probably the Worst Quarter


15

-8

-6

-4

-2

0

2007 2008 2009 2010 2011

(Percent change unless otherwise noted)

U.S. Economic Growth by Sector

2008 2009 2010 2011

Real GDP 1.1 -3.5 1.4 3.5

Domestic Demand -0.3 -3.7 2.1 3.5

Consumption 0.2 -0.9 1.7 2.4


16

Light Vehicle Sales (Millions) 13.1 9.5 11.3 13.8

Residential Investment -20.8 -24.3 9.4 28.2

Housing Starts (Millions) 0.903 0.551 0.848 1.256

Business Fixed Investment 1.6 -18.8 -0.1 13.2

Government 2.9 0.7 0.2 -1.9

Exports 6.2 -15.3 -0.1 9.2

Imports -3.5 -13.8 5.8 7.7

(Percent unless otherwise noted)

Other Key Indicators

2008 2009 2010 2011

Industrial Production (% growth) -2.2 -10.2 -0.3 4.6

Employment (% growth) -0.4 -3.6 -0.8 1.5

Unemployment Rate 5.8 9.1 10.2 9.6


17

Unemployment Rate 5.8 9.1 10.2 9.6

CPI Inflation 3.8 -1.4 1.6 2.1

Oil Prices (WTI, US$/bbl) 100 45 54 61

Core PCE Price Inflation 2.2 1.3 1.1 1.4

Federal Funds Rate 1.93 0.14 0.21 1.70

10-year Government Bond Yield 3.67 2.78 2.89 3.84

Dollar (Major Currencies, 2000=1) 0.73 0.82 0.78 0.74

Fiscal Stimulus HelpsFiscal Stimulus Helps

Fiscal Stimulus: $787 Billion over Ten Years

Our assumptions

• Total – $561 billion over two calendar years

• Personal “Tax Cuts” – $143 billion

• Personal Transfers (e.g., extended UI) – $97 billion

• Corporate Tax Cuts - $88 billion


19

• Corporate Tax Cuts - $88 billion

• State and Local Transfers (incl. Medicaid)– $149 billion

• Infrastructure & Other– $82 billion

• Time Path:

• 2009: $252 billion (1.8% of GDP)

• 2010: $309 billion (2.2% of GDP)

Fiscal Stimulus Impacts

(Percent real GDP growth)

0

1

2

3


20

-5

-4

-3

-2

-1

2008 2009 2010

Baseline No Stimulus

(Loss of jobs from peak, millions)

Employment Outlook

-4

-3

-2

-1

0


21

-10

-9

-8

-7

-6

-5

2008 2009 2010 2011

Baseline No Fiscal Stimulus

The Housing BustThe Housing Bust

Housing Affordability At A Record High

1.4

1.6

1.8A higher index means homes are more affordable.A higher index means homes are more affordable.


23

0.6

0.8

1.0

1.2

1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

Affordability Index for Existing Single-Family Homes

Source: National Association of Realtors

0.8

1.0

1.2

1.4(Percent of all home mortgage loans entering foreclosure)

Foreclosure Rates High, Though May Be Peaking


24

0.0

0.2

0.4

0.6

0.8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

National Indiana

Source: Mortgage Bankers Association

1.1

1.2

1.3(FHFA house price index divided by average labor compensation, 2000 = 1.0)

House Prices Will Probably Overshoot on theDownside


25

0.8

0.9

1.0

1.1

1975 1980 1985 1990 1995 2000 2005 2010

1.5

2.0

2.5(Million units)

Housing Starts Near A Bottom


26

0.0

0.5

1.0

1.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Consumers RetrenchingConsumers Retrenching

90

100

110

120

Consumer Sentiment Deep in the Recession Zone

(Reuters/Univ. of Michigan Sentiment Index)


28

50

60

70

80

90

1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Household Net Worth Has Plunged

• End-Q2 2007 to end-Q4 2008:down $12.9 trillion

• End-Q4 2008 to April 9, 2009:down $0.7 trillion*

WealthEffect

ConsumptionHit ($bln)

ConsumptionHit (%)

3 $407 billion 4.0%


29

down $0.7 trillion*

• Total loss: $13.6 trillion* (down21%)

• Consumption hit depends onwealth effect (change inconsumption per dollar of lostwealth)

* Apr 9 wealth figures are IHS Global Insight estimates

3cents/$

$407 billion 4.0%

5cents/$

$679 billion 6.7%

Consumption Will Fall In 2009

(Percent growth, real)

2

3

4


30

-1

0

1

2005 2006 2007 2008 2009 2010 2011

Real Consumption Real Disposable Income

Business Investment ContractingBusiness Investment Contracting

Business Equipment Demand Falling

(Non-defense capital goods ex-aircraft, 3-mo moving average, $ billions)

60

65

70


32

45

50

55

60

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Orders Shipments

(Percent change from a year earlier, real spending)

The Business Capital Spending Cycle:Construction Is Lagging

0

10

20


33

-30

-20

-10

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Software & Equipment Buildings

Foreign Trade:Foreign Trade:World Trade Is Contracting SharplyWorld Trade Is Contracting Sharply

(Percent change from a year earlier, volumes)

Exports Falling Sharply

0

5

10

15


35

-20

-15

-10

-5

0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Real U.S. Exports Real U.S. Imports

(2000=1.0, inflation-adjusted)

The U.S. Dollar: How Big a Bounce?

1.0

1.1

1.2

1.3


36

0.6

0.7

0.8

0.9

1.0

1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

Major Currency Index Other Important Trading Partners Index

Inflation and Interest RatesInflation and Interest Rates

(Percent change from a year earlier)

Headline CPI Will Decline; Core Inflation Will Ease

2

4

6


38

-4

-2

0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

All-Urban CPI Core Consumption Price Index

(Percent)

Fed to Stay Close to Zero

4

5

6

7


39

0

1

2

3

4

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Federal Funds 10-Year Treasury Yield

Federal Budget OutlookFederal Budget Outlook

-500

0

500

-5

0

5(Billions of dollars, fiscal years) (Percent of GDP)

A Record U.S. Federal Budget Deficit in Fiscal 2009


41

-2,000

-1,500

-1,000

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

-20

-15

-10

Unified Budget Deficit (Left scale) Deficit as % of GDP (Right scale)

Taxes Will Have To Rise Eventually

(Effective federal personal income tax rate, percent)

22

24

26


42

14

16

18

20

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

Key IndustriesKey Industries –– Autos and SteelAutos and Steel

16

18

20(Millions, annual rate)

Light Vehicle Sales


44

8

10

12

14

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

8

10

12

14

60

70

80

90(Millions of units) (Percent)

U.S. Vehicle Production


45

0

2

4

6

8

2001 2005 2009

20

30

40

50

60

Total Production (left scale) Big Three share of production (right scale)

80

100

120

140(Index, 2002=100)

Iron & Steel Production Has Plunged


46

0

20

40

60

80

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Industrial Production, Iron And Steel Products

IndianaIndiana

Employment Dives

3

2

1

0

-1

3

2

1

0

-1ange

year

ago

pe

rcen

tch

an

g


48

09080706

-1

-2

-3

-4

-5

-1

-2

-3

-4

-5

perc

en

tch

ag

eye

ar

ag

o

Indiana M idwest US

Indiana Employment:Deepening Recession

1

0

-1

-2

1

0

-1

-2ange

year

ago

pe

rcen

tch

an

g


49

10090807

-2

-3

-4

-5

-2

-3

-4

-5

perc

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December Outlook April Outlook

Unemployment Surges

11

10

9

8

7

11

10

9

8

7cen

t perc


50

090807060504030201

7

6

5

4

3

7

6

5

4

3

perccen

t

Indiana US

Wage Gains Evaporate(nominal total wages and salaries)

6

4

2

6

4

2

ange

year

ago

pe

rcen

tch

an

g


51

10090807

0

-2

-4

0

-2

-4

perc

en

tch

ag

eye

ar

ag

o

Indiana US

Diminishing Personal Income

8

6

4

8

6

4

ange

year

ag

op

erce

nt

cha

ng


52

10090807

2

0

-2

2

0

-2

pe

rcen

tch

ag

eye

ar

ag

o

Indiana US

Cars and Houses

400

350

300

250

200

40

35

30

25

20ousa

nds th

ou

san


53

1009080706

200

150

100

50

20

15

10

5

thon

ds

Indiana New Car Registrations - LIndiana Housing Starts - R

Bottom Line

• Free-fall ending

• Severe inventory correction extends through mid-2009

• Federal stimulus supports growth

• Consumption and housing bottoming out


54

• Consumption and housing bottoming out

• Business equipment spending revives before businessconstruction

• Imports revive before exports

• Rapid recovery unlikely – but the U.S. will outperform Europeand Japan

Thank you!Thank you!

Nigel Gault

Chief U.S. Economist

[email protected]

the economic outlook - in · 4/17/2009 · the economic outlook nigel gault chief u.s. economist,...

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