The Economic Outlook Presented by: Augustine Faucher Director of Macroeconomics October 24, 2007
Growth, but Slow Growth. . . Average monthly change in payroll employment, ths Source: BLS Trend 2
. . . Through This Time Next Year Real GDP growth, % change year ago December 2006 outlook October 2007 outlook Potential growth Sources: BEA, Moody's Economy. com 3
The Subprime Financial Shock Is a Major Event. . . TED spread, difference between 3 mo. Euro $ and T-bill LTCM Gulf war Orange County Peso crisis Tech bust Subprime financial shock Thai baht 4
. . . And It Continues to Reverberate. . . TED spread, difference between 3 mo. Euro $ and T-bill Subprime financial shock 5
. . . And May Not Be Over. . . $ mil, Source: Moody’s Economy. com 6
. . . Given the Risk in the Banking System Residential RE assets of large commercial banks Source: FRB Share of assets % (R) $ bil (L) 7
The Cost of Capital Has Risen. . . CMBS inv grade to 10 -yr Treasury spread, percentage points Sources: Lehman, FRB Average 8
. . . And Credit Is Less Ample High-yield bond issuance, $ bil MA Source: Lehman Brothers 9
The Subprime Financial Shock Spooks Investors. . . Bond Issuance, $bil, annualized 10
. . . Inducing a Mortgage Lending Crunch. . . Net % of banks tightening mortgage loan standards Sources: Senior Loan Officer Survey, Moody's Economy. com 11
. . . In These Housing Markets. . . Non-conforming share of 2006 originations, U. S. = 50% >=60% - 40% =<40% Sources: 2006 HMDA, Moody's Economy. com 12
Housing Demand Slumps. . . Home sales, ths, SAAR Sources: Realtors, Census 13
. . . And Mortgage Loan Defaults Soar. . . Default rate, % of residential mortgage debt, $ Sources: Equifax, Moody's Economy. com 14
. . . In Much of the Country. . . Change in mortgage default rate, 2005 Q 4 -2007 Q 3, ppt. >=0. 7% U. S. = 0. 54% 0. 3% - 0. 7% =<0. 3% Sources: Equifax, Moody's Economy. com 15
. . . And More Are Coming Mortgage debt outstanding facing first payment reset, $ bil Source: First American LP 16
Already Swollen Inventories Will Swell More. . . # of excess housing units, ths Sources: Census, Moody's Economy. com 17
. . . Forcing Lower Construction and House Prices. . . What it would take to reach a bottom by year-end 2008 0 Peak-trough % price decline Baseline outlook -10 -20 -30 Job growth 1 0. 5 0 -40 -50 0. 8 0. 9 1. 0 1. 1 1. 2 1. 3 1. 4 1. 5 1. 6 1. 7 Housing starts, mil units 18
. . . In Much of the Country Projected peak-to-trough % decline < -15% -15 < -5% -5 < 0% No correction Source: Moody’s Economy. com 19
Negative Housing Wealth Effects Kick In. . . Sources: Realtors, Census, Moody's Economy. com House-price growth 6 mo. lead (L) Core retail sales growth 3 mo. MA (R) 20
. . . As Equity Withdrawal Fades. . . Gross equity extraction, $ bil, Source: Moody's Economy. com 21
. . . Weighing on Lower-Mid Income Homeowners… Personal saving rate Homeowner no HELOC Renter Homeowner HELOC Source: Moody's Economy. com 22
…Who Will Pack It in If the Job Market Weakens Change in employment, 3 mo. MA Non-housing related Housing related Source: BLS 23
Businesses Remain Highly Profitable. . . Corporate profit margin Source: BEA 24
. . . And Highly Liquid Ratio of liquid assets to short-term liabilities, nonfinancial corporations Source: Federal Reserve Board 25
Trade Swings from Negative to Positive Trade balance contribution to real GDP growth 26
…As Global Growth Remains Broad-Based Recovery Expansion Real GDP growth, 2007 Q 2 China Chile Europe North America Colombia Asia South America India Argentina Canada Annualized % change Hong Korea Philippines Malaysia Czech Republic Sweden U. S. Mexico Australia New Zealand Portugal France Spain Euro Zone Norway Hungary Italy Denmark Recession Brazil U. K. Belgium Germany Japan Netherlands Russia Struggling % change year ago NOTE: Size reflects relative GDP
Confidence Doing Better in Asia, South America Business confidence, 4 wk. MA, diffusion index South America Asia Pacific U. S. Europe 28
China and India Still Going Strong Industrial production, 4 mo. MA, % change year ago China India 29
Growth Strong But Variable Across Europe Real GDP, % change year ago, 2007 H 1 30
Policymakers Respond Federal funds future contract for December 2007 Source: CBOT 31
Watch the CP Market. . . Commercial paper outstanding, $ bil Source: Federal Reserve Board 32
. . . The ARM Share. . . ARM share of originations, % Source: MBA 33
. . . Business Confidence. . . Global confidence, present conditions diffusion index Source: Moody's Economy. com Iraq invasion Subprime financial shock 34
. . . Consumer Confidence. . . ABC/Washington Post consumer survey, index 35
. . . And UI Claims Initial UI claims, ths, 4 wk. MA Source: BLS 36
www. economy. com gfaucher@economy. com 37
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