From Recession to Recovery

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Roberta Marcia Lambert
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1 From Recession to Recovery Monday, April 26, :00 AM - 9:15 AM Moderator Michael Klowden, President and CEO, Milken Institute Speakers Mohamed El-Erian, CEO and Co-Chief Investment Officer, Pacific Investment Management Co. (PIMCO) Steve Forbes, Chairman and CEO, Forbes Media; Editor-in-Chief, Forbes Kenneth Griffin, Founder, President and CEO, Citadel Investment Group LLC Marc Lasry, Chairman and CEO, Avenue Capital Group 1

2 A lost decade The U.S. economy had its worst decade since the 1930s % Real GDP growth (%) % 4.4% 3.3% 3.1% 3.2% 2 1.3% 1.9% s 1940s 1950s 1960s 1970s 1980s 1990s 2000s Source: The U.S. Bureau of Economic Analysis. 2

3 8.2 million total job losses Thousands of nonfarm workers 400 Average monthly change in employment 8.2 million workers lost their jobs December 2007-March Q1: Q1: 2010 Source: U.S. Bureau of Labor Statistics. 3

4 Americans net worth is down by 12 trillion from its 2007 peak US$ trillions Household's net worth Pre-recession peak: 70 $65.9 trillion Fourth quarter, 2009 $54.2 trillion Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Source: Federal Reserve

5 Deep recession, strong recovery? Average real GDP growth rates (%) in the four quarters following each recession Periods of Recession % % XX? 1.9% 2.6% 7.8% Real GDP grew 10.9% in 1934, the year after the Great Depression ended Sources: U.S. Bureau of Economic Analysis; the Milken Institute. 5

6 Large reductions in the world real GDP growth Real GDP (% change, year-to-year) Projected 10 Emerging and 8 developing economies World Advanced economies

7 World stock market capitalization still 23% below its peak level (as of April 20, 2010) US$ trillions Highest point: $62.6 trillion on October 31, 2007 Lowest point: $25.6 trillion on March 9, 2009 $48 trillion as of April 20, Source: Bloomberg. 7

8 Forecasts of positive real GDP growth rates Real GDP growth (%) (Quarterly ypercentage change, seasonally adjusted at an annual rate) Note: Composite forecasts are average forecasts of 27 private organizations. Sources: U.S. Bureau of Economic Analysis; Bloomberg Composite forecasts Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q

9 Decline in initial claims for unemployment insurance Thousands million people receiving jobless benefits as of June, million (as of March 31, 2010) Source: U.S. Bureau of Labor Statistics. 9

10 Retail sales climbed in March A sign showing American consumers were beginning to spend more US$ billions 400 Monthly total retail sales, seasonally adjusted +1.6% in March Shade area indicates recession Source: U.S. Department of Commerce. 10

11 Turnaround stock markets 15,000 12,500 Nasdaq (right scale) ,800 1,600 Russell 2000 (right scale) 1, ,000 7,500 Dow Jones (left scale) ,200 1, S&P 500 (left scale) , Source: DataStream. 11

12 Narrowing risk spread Indicative of the reduced stress in the debt markets Percentage points 5 Oct10, TED spread 3 2 BAA-AAA spread 1 0 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. 12

13 Unemployment rate near the highest level since Great Depression % Unemployment rate: 10.8% 12 Unemploymentrate:9.7% during the recession in March, Source: U.S. Bureau of Labor Statistics. 13

14 Involuntary part-time or underemployed hits the highest level in 50 years Thousands ,000 6,000 5,000 4,000 Part-time employment for economic reasons Part-time due to slack work or business conditions 3, ,000 1, Source: U.S. Bureau of Labor Statistics. Could only find part-time work

15 One in four black, Hispanic workers is underemployed (%) Underemployment rates by race 26 Hispanic or Latino 23.2% African American 23.1% White 13.7% Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Nov-09 Note: the shown underemployment data are from November, Underemployed includes the unemployed, involuntary part-time, and discouraged workers. Source: The Economic Policy Institute. 15

16 Job creation still a problem Rate of job creation and destruction Percent Job destruction Job creation Sources: Bureau of Labor Statistics, Moody s Economy.com 16

17 Small businesses account for nearly half the decline in job creation Change between 2007 and Q >1000 employees 27.1% Total change in job creation = -1,648 ths employees 48.5% employees 24.5% Sources: Bureau of Labor Statistics, Moody s Economy.com 17

18 60 percent of current decline in job creation stems from small businesses versus 26 percent in previous recession Percent Job creation with <100 employees Job destruction with <100 employees Q Q Sources: Bureau of Labor Statistics, Moody s Economy.com Q Q

19 Nearly 1 in 4 homeowners underwater % negative equity Q3, Q4, States with negative equity share > 20% as of Q4: % 24% Note: The data only include properties with a mortgage. Source: First American CoreLogic. 19

20 Banks are still pulling back on lending No bank lending, no recovery US$ trillions 8 Lending by the U.S. commercial banks fell by 7.5% in Q1, 2008 Q2, 2008 Q3, 2008 Q4, 2008 Q1, 2009 Q2, 2009 Q3, 2009 Q4, 2009 Note: The data are loan balances (net loans and leases ) of all U.S. commercial banks. Source: Quarterly Banking Profile, Federal Deposit Insurance Corporation. 20

21 Households are deleveraging U.S. households need to reduce their debt to more manageable level U.S. household debt (% of disposable personal income) Economists see 100% as a sustainable level 50 Total household debt stood at 123% as of the end of Source: Federal Reserve. 21

22 Upward trend of U.S. saving rate % U.S. personal saving rate (% of disposable personal income) The saving rate has started to increase following a decadeslong decline Q Q Q Q Q Q Source: U.S. Bureau of Economic Analysis. 22

23 Consumer borrowing still declined % change of total consumer credit % from a previous year, seasonally adjusted % in 6 January % in February Jan-08 Jul-08 Jan-09 Jul-09 Feb-10 Source: Federal Reserve. 23

24 Growing personal bankruptcy filings The total number of bankruptcy filings = 1.47 million in 2009 Thousands 800 The number of quarterly bankruptcy filings in the federal courts Business bankruptcy filings Personal bankruptcy filings Total Q Q Q Q Q Q Q Q Source: Administrative Office of the U.S. Courts. 24

25 Global economic forecasts Emerging market economies will lead the world growth % Real GDP growth forecasts by key countries/regions 9 (average ) 2014) Western Japan United Latin MENA Brazil Asia India China Europe States America Source: Economist Intelligence Unit. 25

26 The U.S. dollar Trade weight exchange index (January 1997 = 100) Euro/US$ (right axis) Euro/US$ Trade weighted (left axis) Source: Federal Reserve

27 U.S. current account deficit US$ billions 50 U.S. current account, seasonally adjusted Source: The U.S. Bureau of Economic Analysis. 27

28 Parallel relationship between stock market performance and the unemployment rate Dow Jones hits 11,000; Unemployment rate (%) unemployment rate nears 10% (right- axis) Dow Jones (left- axis) Sources: U.S. Bureau of Labor Statistics; DataStream. 28

29 U.S. fiscal position is in a free fall US$ billions Federal surplus [+] or deficit [-], fiscal year ,000-1,200 Shade area indicates recession -1,400-1, Source: The Office of Management and Budget, White House. 29

30 President Obama's budget will generate nearly $10 trillion in budget deficits over the next 10 years Federal Budget (US$ billions) ,000-1,200-1,400-1,600 US$9.761 trillion total deficit from 2011 to 2020 Actual CBO's estimate of federal budget for fiscal year Source: Congressional Budget Office (CBO). 30

31 National debt will reach 90% of GDP in the next decade % of GDP Federal debt held by public % of GDP, or $9.2 trillion % of GDP, or $20.3 trillion 10 CBO's estimate Source: Congressional Budget Office (CBO). 31

32 Change in the world economic power China and India are larger in the world economy Real GDP (PPP dollars), share of world total 1991 United States 22% 2009 United States 20% Rest of the world 48% U.K. 4% France 4% China 4% Japan 9% India 3% Germany 6% Rest of the world 47% China 12% Japan U.K. 6% 3% India France 5% Germany 3% 4% Sources: International Monetary Fund, The Milken Institute. 32

33 Kenneth Griffin s Slides 33

34 Residential real estate loan delinquency rate 34

35 Personal transfer payments 35

36 Household s net worth (as a % of disposable personal income) 36

37 Unemployment and underemployment 37

38 Continuing claims and insured unemployment 38

39 Federal outlays: interest 39

40 Entitlements and interest 40

41 Federal on-budget surplus/deficit [-] 41

42 Share of individual income tax liabilities: top 10 percent 42

43 Share of income: highest 5 percent of families 43

44 Share of individual income tax liabilities: middle income quintile 44

45 Median income of households 45

46 Establishment survey of employment 46

47 Wage and salary disbursements 47

48 Nonfarm business productivity: Output per person 48

49 Nonfarm business: output per person 49

50 Consumer loans: credit cards and other revolving plans 50

51 ICSC-Goldman Sachs weekly retail chain store sales 51

52 Home equity withdrawal: mortgages less residential construction 52

53 When will Americans total net worth return to the peak it saw in the middle of 2007? Your choices are: A. By the end of 2010 B. First 2011 C. Second Half 2011 D E or Later 53

54 In the 79 years from 1930 to 2008, how many years did the U.S. Government have a budget surplus? A. 2 B. 9 C. 13 D. 22 E

Reading the Tea Leaves: Investing for 2010 and Beyond

Reading the Tea Leaves: Investing for 2010 and Beyond Wednesday, April 28, 2010; 8:00 AM - 9:15 AM Moderator: Maria Bartiromo, Anchor, CNBC's Closing Bell With Maria Bartiromo Speakers: Nick Calamos, President