From Recession to Recovery Monday, April 26, 2010 8:00 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
A lost decade The U.S. economy had its worst decade since the 1930s 7 6 6.0% Real GDP growth (%) 5 4 3 4.2% 4.4% 3.3% 3.1% 3.2% 2 1.3% 1.9% 1 0 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s Source: The U.S. Bureau of Economic Analysis. 2
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 2010 200 54 0-31 -200-90 -191-261 -400-334 -600-477 -800-652 -753-1000 Q1: 2006 2007 2008 2009 Q1: 2010 Source: U.S. Bureau of Labor Statistics. 3
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 60 50 40 Fourth quarter, 2009 $54.2 trillion 30 20 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Source: Federal Reserve. 2007 2008 2009 4
Deep recession, strong recovery? Average real GDP growth rates (%) in the four quarters following each recession Periods of Recession 1929-1933 10.9% 1973-1975 6.2% 1981-1982 1990-1991 2001 2007-20XX? 1.9% 2.6% 7.8% Real GDP grew 10.9% in 1934, the year after the Great Depression ended. 0 2 4 6 8 10 12 Sources: U.S. Bureau of Economic Analysis; the Milken Institute. 5
Large reductions in the world real GDP growth Real GDP (% change, year-to-year) Projected 10 Emerging and 8 developing economies World 6 4 2 0-2 -4 Advanced economies -6 1980 1985 1990 1995 2000 2005 2010 2014 6
World stock market capitalization still 23% below its peak level (as of April 20, 2010) US$ trillions 70 60 50 40 30 20 Highest point: $62.6 trillion on October 31, 2007 Lowest point: $25.6 trillion on March 9, 2009 $48 trillion as of April 20, 2010 10 2004 2005 2006 2007 2008 2009 2010 Source: Bloomberg. 7
Forecasts of positive real GDP growth rates 8 6 4 2 0-2 -4-6 -8-10 2.1-0.7 Real GDP growth (%) (Quarterly ypercentage change, seasonally adjusted at an annual rate) 1.5-2.7-5.4-6.4-0.7 2.2 Note: Composite forecasts are average forecasts of 27 private organizations. Sources: U.S. Bureau of Economic Analysis; Bloomberg. 5.9 3.0 3.0 2.8 2.9 2.9 3.0 3.2 Composite forecasts Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2007 2008 2009 2010 2011 3.9 8
Decline in initial claims for unemployment insurance Thousands 700 600 500 6.6 million people receiving jobless benefits as of June, 2009 4.56 million (as of March 31, 2010) 400 300 200 1980 1985 1990 1995 2000 2005 2010 Source: U.S. Bureau of Labor Statistics. 9
Retail sales climbed in March A sign showing American consumers were beginning to spend more US$ billions 400 Monthly total retail sales, seasonally adjusted +1.6% in March 350 300 Shade area indicates recession 250 2000 2002 2004 2006 2008 2010 Source: U.S. Department of Commerce. 10
Turnaround stock markets 15,000 12,500 Nasdaq (right scale) 3000 2500 1,800 1,600 Russell 2000 (right scale) 1,400 900 800 700 10,000 7,500 Dow Jones (left scale) 2000 1500 1000 1,200 1,000 800 600 S&P 500 (left scale) 600 500 400 300 5,000 500 2002 2004 2006 2008 2010 400 200 2002 2004 2006 2008 2010 Source: DataStream. 11
Narrowing risk spread Indicative of the reduced stress in the debt markets Percentage points 5 Oct10, 2008 4 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
Unemployment rate near the highest level since Great Depression % Unemployment rate: 10.8% 12 Unemploymentrate:9.7% during the 1981-1982 recession in March,2010 10 8 6 4 2 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: U.S. Bureau of Labor Statistics. 13
Involuntary part-time or underemployed hits the highest level in 50 years Thousands 7000 7,000 6,000 5,000 4,000 Part-time employment for economic reasons Part-time due to slack work or business conditions 3,000 2000 2,000 1,000 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: U.S. Bureau of Labor Statistics. Could only find part-time work 2010 14
One in four black, Hispanic workers is underemployed (%) Underemployment rates by race 26 Hispanic or Latino 23.2% 24 22 20 18 African American 23.1% 16 14 12 White 13.7% 10 8 6 4 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. 15
Job creation still a problem Rate of job creation and destruction Percent 8.5 8.0 7.5 Job destruction 7.0 6.5 60 6.0 5.5 5.0 1999 2000 2001 2002 2003 2004 2005 2006 Job creation 2007 2008 2009 Sources: Bureau of Labor Statistics, Moody s Economy.com 16
Small businesses account for nearly half the decline in job creation Change between 2007 and Q1 2009 >1000 employees 27.1% Total change in job creation = -1,648 ths. 0-100 employees 48.5% 100-1000 employees 24.5% 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 Percent 60 50 Job creation with <100 employees Job destruction with <100 employees 40 30 20 10 0 Q1 2001- Q2 2002 Sources: Bureau of Labor Statistics, Moody s Economy.com Q1 2008- Q2 2009 18
Nearly 1 in 4 homeowners underwater % negative equity 70 60 50 Q3, 2009 40 Q4, 2009 30 20 10 0 States with negative equity share > 20% as of Q4: 2009 23% 24% Note: The data only include properties with a mortgage. Source: First American CoreLogic. 19
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 2009 7 6 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
Households are deleveraging U.S. households need to reduce their debt to more manageable level 150 100 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 2009 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2009 Source: Federal Reserve. 21
Upward trend of U.S. saving rate % 14 12 10 8 U.S. personal saving rate (% of disposable personal income) The saving rate has started to increase following a decadeslong decline. 6 4 2 0 Q1 1960 Q1 1970 Q1 1980 Q1 1990 Q1 2000 Q4 2009 Source: U.S. Bureau of Economic Analysis. 22
Consumer borrowing still declined % change of total consumer credit % from a previous year, seasonally adjusted 8 +5.2% in 6 January 4 2 0-2 -4-6 -8-5.6% in February -10-12 -14 Jan-08 Jul-08 Jan-09 Jul-09 Feb-10 Source: Federal Reserve. 23
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 600 400 Business bankruptcy filings Personal bankruptcy filings Total 200 0 Q1 1995 Q1 1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009 Source: Administrative Office of the U.S. Courts. 24
Global economic forecasts Emerging market economies will lead the world growth % Real GDP growth forecasts by key countries/regions 9 (average 2010-2014) 2014) 8.5 80 8.0 8 7 6 4.6 4.8 4.9 5 3.9 4 3 2.1 2 14 1.4 1.1 1 0 Western Japan United Latin MENA Brazil Asia India China Europe States America Source: Economist Intelligence Unit. 25
The U.S. dollar Trade weight exchange index (January 1997 = 100) 120 115 110 105 Euro/US$ (right axis) Euro/US$ 09 0.9 0.8 0.7 100 95 Trade weighted (left axis) 06 0.6 90 2006 2007 2008 2009 2010 Source: Federal Reserve. 0.5 26
U.S. current account deficit US$ billions 50 U.S. current account, seasonally adjusted 0-50 -100-150 -200-250 1970 1975 1980 1985 1990 1995 2000 2005 2009 Source: The U.S. Bureau of Economic Analysis. 27
Parallel relationship between stock market performance and the unemployment rate 16000 Dow Jones hits 11,000; 14000 Unemployment rate (%) unemployment rate nears 10% 12000 (right- axis) 10000 8000 12 10 8 6 6000 4000 2000 Dow Jones (left- axis) 4 2 0 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Sources: U.S. Bureau of Labor Statistics; DataStream. 28
U.S. fiscal position is in a free fall US$ billions Federal surplus [+] or deficit [-], fiscal year 400 200 0-200 -400-600 -800-1,000-1,200 Shade area indicates recession -1,400-1,600 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source: The Office of Management and Budget, White House. 29
President Obama's budget will generate nearly $10 trillion in budget deficits over the next 10 years Federal Budget (US$ billions) 0-200 -400-600 -800-1,000-1,200-1,400-1,600 US$9.761 trillion total deficit from 2011 to 2020 Actual CBO's estimate of federal budget for fiscal year 2011 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Congressional Budget Office (CBO). 30
National debt will reach 90% of GDP in the next decade % of GDP Federal debt held by public 100 90 80 70 60 50 40 30 20 2010 63% of GDP, or $9.2 trillion 2020 90% of GDP, or $20.3 trillion 10 CBO's estimate 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: Congressional Budget Office (CBO). 31
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
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: A. By the end of 2010 B. First 2011 C. Second Half 2011 D. 2012 E. 2013 or Later 53
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. 36 54