The Winding Road of Economic Recovery

Bank Capital Markets and Tax Institute West

October 17, 2013

Rob StrandSenior Economist, ABA

aba.com 1-800-BANKERS

Inflation-Adjusted GDP

Source: U.S. Bureau of Economic Analysis and NBER

$13

$14

$15

$16

2003 2005 2007 2009 2011 2013

$Trillion

Recession

State Indexes of Leading Indicators

Over 2

1—2

0—1

Decline

Source: Federal Reserve Bank of Philadelphia, August 2013

Business Confidence

Source: NFIB, University of Michigan

Index Values (2

005=10

0)

50

60

70

80

90

100

2005 2007 2009 2011 2013

Small Business Optimism

Consumer Confidence

$0

$4

$8

$12

2000 2004 2008 2012

Bank Deposits and Loans

Deposits

Loans

$Trillions

Source: Federal Deposit Insurance Corporation

Quarterly Inflation-Adjusted GDP Growth

‐6%

‐3%

0%

3%

6%

2009 2010 2011 2012 2013Source: U.S. Dept. of Commerce, Bureau of Economic Analysis

Consumer-Driven U.S. Economy

‐6%

‐3%

0%

3%

6%

2009 2010 2011 2012 2013

Total GDP Consumer Spending

Source: U.S. Dept. of Commerce, Bureau of Economic Analysis

Business Firms are Wary

‐6%

‐3%

0%

3%

6%

2009 2010 2011 2012 2013

Total GDP Net Exports Business Investment & Inventories

Source: U.S. Dept. of Commerce, Bureau of Economic Analysis

Government Pullback

Source: U.S. Dept. of Commerce, Bureau of Economic Analysis

‐6%

‐4%

‐2%

0%

2%

4%

6%

2009 2010 2011 2012 2013

Total GDP Municipal Government Federal Government

Consumer Driven Recovery

Don't sit there mumblin', talkin' trash.

If you wannahave a ball,

you gotta go out and spend some cash …

Let the good times roll.

— B.B. King

Housing Starts

Source: U.S. Department of the Census

0

1

2

1963 1970 1977 1984 1991 1998 2005 2012

Recession 1959 ‐ 2010 Average

August2013:891K

Millions of Units

Conventional 30-Year Mortgage Rate

Source: Federal Reserve

0%

3%

6%

9%

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

4.2%

26 Million Millenial’s Live with Relatives

43%

39%

35%

36%

2012

2007

1981

1968

Source: Pew Research Center on 18-31-year-olds

Highest in Four Decades

Retail Sales

Inflation & Seasonally‐Adjusted Quarterly Growth Rate on Quarter Avg.

‐24%

‐18%

‐12%

‐6%

0%

6%

12%

1994 1998 2002 2006 2010Source: U.S. Dept. of Commerce: Bureau of Economic Analysis

Automobile Sales

Source: Autodata Corp.

0

5

10

15

2010 2011 2012 2013

SAAR in Millions

Average Age of Vehicles

Source: HIS/Polk

0

4

8

12

2002 2004 2006 2008 2010 2012

Passenger Cars Light TrucksYears

Consumer Credit

Revolving Non‐Revolving

Seasonally Adjusted Change Over the Last 6 Months

$75 Billion

($1 Billion)

Source: Federal Reserve

Student Loan Debt

Source: Federal Reserve Bank of New York

$0

$300

$600

$900

2005 2006 2007 2008 2009 2010 2011 2012

$292

$307

$154

$106

$ Billions

Under 30

60+

Average Tuition, Fees, Room and Board

Source: The College Board Annual Survey of Colleges

$0

$10,000

$20,000

$30,000

$40,000

1972‐1973 1980‐1981 1988‐1989 1996‐1997 2004‐2005 2012‐2013

Public 4‐Year School(3.8% 2003‐2013 annual growth rate)

Private 4‐Year School(2.3% 2003‐2013 annual growth rate)

2012 Dollars

Proportion with Home-Secured Debt at 30

0%

10%

20%

30%

40%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Have Student LoansNo Student Loan

Source: Federal Reserve Bank of New York

Unemployment Rate

0%

5%

10%

15%

1994 1998 2002 2006 2010

7.3%

Source: U.S. Department of Labor, Bureau of Labor Statistics

13.7%

Unemployment

Underemployment

Labor Force Participation at 1979 Level

Source: U.S. Department of Labor, Bureau of Labor Statistics

45%

55%

65%

75%

1976 1982 1988 1994 2000 2006 2012

Men

Women

Under 5%

6%—7½%

8%—9%

Over 9%

Unemployment Rate

Source: U.S. Dept. of Labor, Bureau of Labor Statistics, July 2013

4.6%9.5% 4.2%

4.6%4.8%

3.9%3.0%

U.S. Payroll Growth

Source: U.S. Department of Labor, Bureau of Labor Statistics

(900,000)

(700,000)

(500,000)

(300,000)

(100,000)

100,000

300,000

500,000

2005 2006 2007 2008 2009 2010 2011 2012 2013

8.7 Million Jobs Lost

7.1 MillionJobs Recovered

GDPBroke Even

Loss in Payrolls from Pre-Recession Peak

‐8%

‐4%

0%

0 10 20 30 40 50 60

1948 1953 1957 1960 1969 19731980 1981 1990 2001 2007

Source: U.S. Department of Labor, Bureau of Labor Statistics

Unemployment Duration

Source: U.S. Department of Labor, Bureau of Labor Statistics

0

5

10

15

20

1971 1978 1985 1992 1999 2006 2013

Less than 5 Weeks

5–14 Weeks

Millions

15–26 Weeks

27+ Wks

Personal Income

Source: U.S. Dept. of Commerce, Bureau of Economic Analysis

‐12%

‐6%

0%

6%

12%

2001 2003 2005 2007 2009 2011 2013

Seasonally‐Adjusted Quarterly Growth Rate on Quarterly Average

Median Family Income

$40,000

$45,000

$50,000

$55,000

1985 1989 1993 1997 2001 2005 2009 2013

Sources: Census Department and Sentier Research, LLC

Rebuilding Wealth

Source: Bureau of Economic Analysis and Federal Reserve

Household Wealth0%

2%

4%

6%

8%

$0

$20

$40

$60

$80

2004 2006 2008 2010

Savings Rate

Household Net Worth in $Trillions

2013

Source: Scott Adams, Dilbert, September 6, 2013

Business is Growing

Business Indexes

80

90

100

30

40

50

60

2006 2007 2008 2009 2010 2011 2012 2013

Industrial Production

ISM Non‐Manufacturing

Contraction          Expa

nsion

ISM Manufacturing

Sources: Federal Reserve, Institute for Supply Management

2013

U.S. Exports to China Slowing

($2)

($1)

$0

$1

$2

$3

$4

2005 2007 2009 2011 2013

Source: Federal Reserve Bank of St. Louis (FRED)

Change from a year ago, $Billions

Corporate Profits

Source: U.S. Dept. of Commerce: Bureau of Economic Analysis

$0.0

$0.5

$1.0

$1.5

2001 2003 2005 2007 2009 2011 2013

SAAR in $Billions

0

400

800

1200

1600

2005 2006 2007 2008 2009 2010 2011 2012 2013

S&P 500 Index

Source: Standard & Poor’s

Up 123%

VIX Index of S&P Volatility Futures

0

20

40

60

80

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Chicago Board of Exchange

Source: Clay Bennett, The Christian Science Monitor

Impact of No Federal Budget

• Furloughed workers will get back pay

• Contractors will not

• Sales lost due to furloughs

• Falling consumer and business confidence

Cash Crunch

$30 billion of U.S. Treasury cash left after today. Payments due:

$12B Social Security

$6B Interest on debt

$2B Medicaid

$3B Salaries

$3B Supplementary SecurityIncome benefits

$12B Military pay

$18B Medicare

$25B Social Security

$29B Interest on debt

$12B Social Security

Sources: Bipartisan Policy Center, U.S. Treasury, CBO, WSJ

Maturing Debt

October 24 $58 billionOctober 31 $115 billionNovember 7 $54 billionNovember 14 $79 billionNovember 15 $63 billion

Total $370 billion

Source: Bipartisan Policy Center, TreasuryDirect

To Buy Time

• Prioritization of Federal payments

3 million payments on 3 systems daily

• 14th Amendment to the Constitution

• “The validity of the public debt of the U.S. … shall not be questioned”

• $1 Trillion platinum coin

• Debt forgiveness by the Federal Reserve

Treasury Bill Interest Rates

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Source: Federal Reserve

Twelve-Month Three-MonthSix-Month One-Month

Impact of a Federal Default

• 20% cut in outlays in an average month Varies by month Economic slowing Deeper cuts

• Higher interest rates? Reduce investments, homebuying, etc. Capital losses for financial institutions Weaker dollar would stimulate exports

• Falling consumer and business confidence

Congressional Negotiations

• Republicans moved away from defunding or delaying Obama Care (ACA)

• No Collins deal over the weekend

• Democrats proffered a desire to replace sequestrations

• Latest proposal: Continuing Resolution to January 15 Raise the Debt Limit to carry to February 7 Bicameral “Super” committee – before December 13

• House contemplating adding measures

Federal Receipts, Outlays & Deficit to GDP

0%

20%

40%

60%

80%

1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023

Source: U.S. Congressional Budget Office

Receipts

Outlays

––– Forecast –––

Entitlements Overwhelm Revenue

Source: U.S. Congressional Budget Office (September 2013)

0%

5%

10%

15%

20%

25%

30%

35%

2000 2010 2020 2030 2040 2050 2060 2070

Hun

dred

s

Social Security

Medicare

Medicaid

OtherForecast

Interest

% of GDP

European Debt-to-GDP is Rising Rapidly

0%

20%

40%

60%

80%

100%

U.S. Germany U.K. Spain France

2011 2012 2013* projected

Source: International Monetary Fund

Developing Country Stock Markets

‐17.4%

‐17.1%

‐16.3%

‐9.4%

‐9.0%

‐7.4%

‐7.4%

‐7.1%

‐7.0%

‐5.6%

BrazilChileTurkeyMexicoCzech RepIndiaChinaRusiaColumbia S. Korea

Market ReturnsOver the Past Year

Source: Bloomberg

Lots of Liquidity from the Fed

Fed’s Balance Sheet Growth

Source: Federal Reserve

$0

$1

$2

$3

2008 2009 2010 2011 2012 2013

$Trillion

MBS & Agency Debt

Treasuries

October 9: $3.7 Trillion$1.4T

$2.1T

Federal Funds Rate Hikes in the Past

Source: Federal Reserve

0%

1%

2%

3%

4%

5%

6%

7%

‐1 1 3 5 7 9 11 13 15 17 19 21 23 25

Fed

Fund

s Ta

rget

Rat

e

Months Since Tightening Began

19942004

2000

Long Term Forecast

Economic Uncertainties

• Federal budget, debt and taxes

• Interest rates

• Global demand

• Fannie, Freddie and QM standards

• Student debt

U.S. Traditional Advantages Continue

• Strong global competitor

• Robust entrepreneurial culture

• Flexible capital and labor markets

• Technological leader

• Highly diverse mix of industries

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0%

5%

10%

15%

20%

1980 1990 2000 2010

Strengthening Household Balance Sheets

Source: Federal Reserve Flow of Funds

2013

Debt/Assets at 2002 Level

Financial Obligations Ratio at 1984 Level

Congressional Banking Issues to End 2013

Housing Issues

Fannie Mae and Freddie Mac (Corker-Warner GSE Reform Bill)

CFPB Ability-to-Repay Standard in the Qualified Mortgage rule

Extension of the Mortgage Forgiveness Debt Relief Act

Five-Year Farm Bill

CFTC Reauthorization

Regulatory Relief for Banks

Dodd-Frank Act Oversight

Designation of SIFIs, resolution authority, derivatives

Brown-Vitter bill and the forthcoming GAO report

Janet Yellen + Replacing Betsy Duke and Sarah Bloom Raskin

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