Dr. David Wyss, chief economist with Standard & Poor's spoke at the Utah Economic Forum.

1. The Economic Outlook:
Who’ll Stop The Rain
David Wyss
Chief Economist
Standard & Poor’s
January 7, 2010
Data as of December 29
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2. The U.S. Hits Bottom
• The recession appears to be over
• Housing had been in recession for three years, subtracting over a
percentage point from GDP growth in both 2007 and 2008.
• But seems to be stabilizing.
• Overseas partners are recovering, helping exports
• The fiscal stimulus has helped boost the economy, especially consumer
and government spending.
• The financial system appears to be stabilizing.
• But private nonresidential construction is plunging.
• The recession has been the longest and deepest since the 1930s.
• And an even deeper and longer recession is possible if the financial
markets lock up again, oil prices jump, or consumers remain scared.
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3. The Housing Bubble
• Housing was too affordable, thanks to low mortgage rates
• Ratio of home price to income hit a record high in 2006.
• We built too many houses at too high prices
• Starts and sales dropped sharply
• Defaults have soared, cutting back on willingness to lend
• Prices are down 29% from their peak, with the price/income ratio
below its historical average
• Starts and sales are recovering
• But prices may drop back into early 2010.
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4. Home Prices Were Too High
(Ratio of average home price to average household disposable income)
4.5
4
3.5
3
2.5
2
1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Existing New Quality-adjusted
Source: Bureau of Economic Analysis and Census Bureau
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5. Bubbles Were Almost Everywhere
(Percent increase in home prices, 1997-2005)
US
Canada
Germany
Switzerland
Netherland
Britain
Ireland
Italy
Sweden
France
Spain
Japan
Australia
China
NewZealan
Hong Kong
-100 -50 0 50 100 150 200 250
Source: Mortgage Bankers’ Association and Standard & Poor’s
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6. Those Who Bubbled Highest Burst Loudest
(Percent increase in S&P/Case-Shiller home price index, October 2009)
Miami
Los Angeles
Washington
San Diego
Tampa
Las Vegas
Phoenix
New York
San Fran.
Seattle
Portland
Boston
Minneapoli
Chicago
Denver
Charlotte
Atlanta
Detroit
Dallas
Cleveland
-100 -50 0 50 100 150 200
2000-peak peak-present
Source: Standard & Poor’s
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7. Home Price Declines
(4-quarter change in home prices, third quarter 2009)
0% or better
0% to -3%
-3% to -5%
-5% or worse
Source: Federal Housing Finance Agency
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8. Foreclosures Are Concentrated
(Percentage of homes in foreclosure, first half 2009)
•
Under 0.5%
0.5% to 1%
1% to 2%
Over 2%
Source: RealtyTrac
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9. The Fed Didn’t Stop At Nothing
(Percent)
10
8
6
4
2
0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Federal Funds Rate 10-Yr Bond Yield Mortgage rate
Source: Federal Reserve
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10. Quality Spreads Are Narrowing From Record Highs
(Spread over Treasury yields, percentage points)
18
16
14
12
10
8
6
4
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Default rate (12-month) Credit spread
Old spread series
Source: Standard & Poor’s Global Fixed Income Research
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11. Fiscal Costs of Post-War Banking Crises
(Percent of nominal GDP)
South Korea
1997-2002
Japan
1991-Present
Spain
1977-85
Finland
1991-94
Norway
The Big Financial
1987-93
Crises Since 1970
Sweden
1991
U.S. S&L Crisis
1984-91
U.S. Subprime Crisis
2007-Present
0 5 10 15 20 25 30 35
Source: Organization for Economic Cooperation and Development, International
Monetary Fund, Global Insight
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12. Synchronized Sinking
• Industrial countries went into recession in 2008
• Real GDP fell in the U.S., Japan, and Europe and softened in Asia
• Developing countries looked like they might escape
• Until commodity prices plunged in Q4
• We expect a drop in world GDP, by negative 1.3% in 2009 from
3.8% in 2007
• But recovery now seems underway
• The most synchronized world recession in history
• Followed by a synchronized recovery
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13. All Fall Down
(Percent change in real GDP, quarterly rate)
1.5
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
-3
-3.5
-4
-4.5
2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3
US Japan Eurozone UK
Source: Global Insight
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14. Synchronized Sinking
(Real GDP, % change)
10
8
6
4
2
0
-2
-4
-6
-8
. pe ca
tes da ne .K an ro ac i ca f ri ric
a
ta na zo U ap -P er Af
S Ca ro J Eu si a Am
A
t ed Eu rn rA
N an
ni st e he t in t& ar
U
Ea Ot La E as Sa
h
id b-
M Su
2006 2007 2008 2009 2010 2011
Source: Global Insight and Standard & Poor’s
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15. Trade Gap And Reserve Diversification Will Send Dollar Lower
(Index) (Percent of GDP)
1.4 0%
1.3 -1%
1.2 -2%
1.1 -3%
1.0 -4%
0.9 -5%
0.8 -6%
0.7 -7%
2000 2002 2004 2006 2008 2010 2012
Net exports (right) Dollar index (Major trading partners)
Source: Bureau of Economic Analysis and Federal Reserve
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16. Fiscal Stimulus Packages Varied Widely
(Packages passed in Q4 2008- Q1 2009, percent of GDP)
0 2 4 6 8 10 12 14
Australia
Canada
China
France
Germany
India
Italy
Japan
Korea
Spain
UK
US
Source: Standard & Poor’s CRISIL
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17. Deficits Are Mostly Cyclical
(Government deficit as % of GDP, fiscal years)
4
2
0
-2
-4
-6
-8
-10
-12
2000 2003 2006 2009 2012
ex stimulus stimulus
Source: Standard & Poor’s.
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18. The Future Looks Bleak
(Government debt as % of GDP)
600 530
500
400 350
300
223 220
173 182
200
113 101 86 59 71
100 49 38 62 57
0
US Japan UK France Germany
2005 2025 2050
Source: Standard & Poor’s, 2007
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19. Aging Populations Will Boost Government Spending
(Ratio of over 65 population to labor force)
60
50
40
30
20
10
0
US Canada France Germany Italy UK Japan AustraliaMexico OECD
2000 2020
Source: Organization for Economic Cooperation and Development
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20. State Budgets Sour
(Percent of GDP)
15%
14%
13%
12%
11%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Receipts Expenditures
Source: Bureau of Economic Analysis
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21. Weaker Employment Is Hurting Construction
(4-quarter percent change)
4% 40%
3% 30%
2% 20%
1% 10%
0% 0%
-1% -10%
-2% -20%
-3% -30%
-4% -40%
-5% -50%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Employment Nonresidential construction (right)
Source: Bureau of Labor Statistics, Bureau of Economic Analysis
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22. Can the Consumer Keep Spending?
• Consumer spending led recent expansions
• But wealth is down because home prices have dropped and
• Stocks are still down sharply from their peak
• Borrowing is more difficult, and home equity loans much
less available
• Confidence has dropped and unemployment risen
• Consumers are likely to continue to save more and
borrow less
• Falling oil prices gave back some purchasing power, but that is
now reversing
• Stimulus package provides some income boost
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23. No Savings, But Lots of Debt
(Percent of after-tax income)
10 140%
8 130%
6 120%
4 110%
2 100%
0 90%
-2 80%
1990 1993 1996 1999 2002 2005 2008 2011
Saving rate Debt/income (right)
Source: Bureau of Economic Analysis and Federal Reserve
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24. High Unemployment Scares Consumers
(Percent)
130 11
120 10
110 9
100 8
90 7
80 6
70 5
60 4
50 3
2000 2003 2006 2009 2012
Consumer sentiment Unemployment Rate (right)
Source: Bureau of Labor Statistics and University of Michigan Survey Research Center
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25. Wealth Slides With Home and Stock Prices
(Percent of after-tax income)
700%
600%
500%
400%
300%
200%
100%
0%
1990 1993 1996 1999 2002 2005 2008 2011
Net worth Financial assets
Source; Federal Reserve
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26. Bigger Than The Average Bear
• A great run from 1982 to 2000
• But the secular bear began in 2000
• Two largest bear markets since the depression
• Earnings were negative in Q4 for first time in history
• Stocks were overdue for a correction
• We think the rally will continue
• But a near-term correction is likely.
• The long-term cycle probably has another bear in it.
• World stock markets have become synchronized
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27. Stock Market Looks High Relative To Bonds
(Earnings yield on stocks vs 10-year Treasury)
10
8
6
4
2
0
-2
1990 1993 1996 1999 2002 2005 2008 2011
Earnings/price Bond yield Dividend yield
Source: Standard & Poor’s and U.S. Bureau of the Census
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28. Everybody’s Down
(Percent change in stock prices, November)
120
100
80
60
40
20
0
-20
-40
-60
-80
World US Canada Lat Europe Japan Asia PacAustralia
Amer
Since March Oct 2007 to March 2009
Source: Standard & Poor’s
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29. Bottom Line: The Economy Will Recover Slowly
• The recession is the longest and deepest since the 1930s
• Fiscal stimulus will support the recovery
• But recovery is likely to be slow because of financial markets
and switch to higher savings
• If financial markets lock up again
• Home prices continue to fall
• And oil prices continue to rise
• The recession could be longer and deeper
• With the risk of a “lost decade” similar to Japan in the 1990s
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30. Oil Prices Have Dropped
($/barrel, WTI and deflated by CPI; household energy purchases as percent of disposable income)
120 9%
100 8%
80 7%
60 6%
40 5%
20 4%
0 3%
1980 1985 1990 1995 2000 2005 2010
Oil price (WTI) 2005 dollars % of disp. income (right)
Source: Bureau of Economic Analysis
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31. Risks to the U.S. Economy
The Unemployment Rate
%
13
12
11
10
9
8
7
6
5
4
3
2000 2002 2004 2006 2008 2010 2012
Baseline Pessimism Optimism
Source: U.S. Bureau of Labor Statistics (BLS), Standard & Poor’s projections.
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32. State Ratings Remain Strong
(S&P rating)
A, A+
AA-
AA, AA+
AAA
Unrated
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33. Unemployment Rates Are High
(November 2009)
Under 8%
8% to 9.5
9.5% to 11%
11% and over
Source: BLS
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34. And Far Above 2000 Lows
(Change in unemployment rate, October 2000 to November 2009)
Under 3%
3 to 5%
5% to 6%
6% or more
Source: BLS
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35. State Pension Underfunding
(Percent of gross state product, 2008)
Over 35%
25% to 35%
15% to 25%
Under 15%
Source; Robert Novy-Marx and Joshua Rauh, Journal of Economic Literature, Fall 2009
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