“by the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”
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“By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”
Here Comes The U.S. Here Comes The U.S. SlowdownSlowdown
…How Bad, And How Long?…How Bad, And How Long?
Ian C. ShepherdsonChief U.S. Economist, High Frequency
Economics
The Root Of The Problem
The Housing Boom Is At The Root Of The Problem
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68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
Long-run trend in home sales, million
Total home sales, million
15-year uptrend
Soaring Sales Have Driven Prices UpSoaring Sales Have Driven Prices Up
Home Price Gains Still Look Substantial…
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79 81 83 85 87 89 91 93 95 97 99 01 03 05
OFHEO index of U.S. house prices, y/y%
15-year acceleration
Soaring Prices Encourage Equity Soaring Prices Encourage Equity Extraction…Extraction…
As Home Price Gains Slow, Equity Extraction Will Plunge
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76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
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7Real OFHEO home prices y/y%,lagged four quarters (Left)
Net equity withdrawal as % nethousing wealth (Right)
……And Equity Extraction Boosts SpendingAnd Equity Extraction Boosts Spending
xxxx
-800
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73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
-3
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24Real equity withdrawal, y/y $B, 4-quarteraverage (Left)
Personal saving rate, % (Right)
Meanwhile, Construction Has Boomed TooMeanwhile, Construction Has Boomed Too
Meanwhile, Construction Has Boomed Too
3.0
3.5
4.0
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5.0
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68 72 76 80 84 88 92 96 00 04
Residential construction as % GDP
Average 1961-95
But Homebuilders Became GreedyBut Homebuilders Became Greedy
…But Homebuilders Got Greedy; Supply Has Soared
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4.0
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5.0
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6.0
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97 98 99 00 01 02 03 04 05 06
Months supply of new homes (Left)
Now, Soaring Inventory Is Depressing PricesNow, Soaring Inventory Is Depressing Prices
Now, Soaring Inventory Is Depressing New Home Prices
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Jan 02 Jan 03 Jan 04 Jan 05 Jan 06
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26Months supply of new homes, 3-mth ave. (Left)
Median new home price, y/y%, 3-mth average(Right)
……As Prices Slow, Real Mortgage Rates RiseAs Prices Slow, Real Mortgage Rates Rise
As Price Gains Slow, Real Mortgage Rates Rise…
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76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
Real mortgage rate, %. Average 30-year fixed mortgage rate less OFHEOy/y home prices
For.
……And As Real Rates Rise, Home Sales FallAnd As Real Rates Rise, Home Sales Fall
…And As Real Rates Rise, Sales Volumes Will Plunge
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76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
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Real mortgage rates, % (Left)Home sales per 1000 of population (Right)
Put It Another Way: Homes Are ExpensivePut It Another Way: Homes Are Expensive
Put It Another Way: Homes Are Just Too Expensive
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93 94 95 96 97 98 99 00 01 02 03 04 05 06
-40
-30
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-10
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Composite affordability index (Left)
Mortgage applications y/y% (Right)
Plunging Home Sales Will Hurt RetailersPlunging Home Sales Will Hurt Retailers
Plunging Home Sales Will Hammer Retailers
-15
-10
-5
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93 94 95 96 97 98 99 00 01 02 03 04 05 06
-2
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20Home sales y/y%, lagged threequarters (Left)
Retail sales of building materials &furniture, y/y% (Right)
Post-Katrina boost
For.
Soaring Gas Prices Also Hurt ConsumersSoaring Gas Prices Also Hurt Consumers
Soaring Gas Prices Also Hurt Consumers
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-10
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Jul 03 Jul 04 Jul 05 Jul 06
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130CPI gasoline y/y%, lagged onemonth (Left)
Univ. of Michigan surveyexpectations index (Right)
Lower Confidence Implies Slower SpendingLower Confidence Implies Slower Spending
Lower Confidence Implies Slower Spending
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105
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97 98 99 00 01 02 03 04 05 06
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6Michigan surveyexpectations index (Left)
Real consumers’ spending,y/y% (Right)
Retailers Are Already Shedding LaborRetailers Are Already Shedding Labor
Retailers Are Already Shedding Labor
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-25
0
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50
Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06
Change in retail payrolls, thous.(Left)Three-month average, thous.(Right) Katrina
Broad Payroll Growth Is Slowing Too…Broad Payroll Growth Is Slowing Too…
Overall Payroll Growth Is Slowing Too
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100
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Jan 04 Jan 05 Jan 06
Private nonfarm payrollsThree-month average
Katrina
……With More To ComeWith More To Come
…With More To Come
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-40
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-20
-10
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97 98 99 00 01 02 03 04 05 06 07
-250
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Help wanted, y/y%,five month lag (Left)
Nonfarm payroll 12-month ave. (Right)
Meanwhile, Manufacturing Is Doing Well…Meanwhile, Manufacturing Is Doing Well…
Meanwhile, Manufacturing Is Doing Well…
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Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06
Manufacturing production, y/y%
But It Won’t Last, As Higher Rates BiteBut It Won’t Last, As Higher Rates Bite
But It Won’t Last, As Higher Rates Bite Next Year
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94 95 96 97 98 99 00 01 02 03 04 05 06 07
-15
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4510-year BBB, 4-qtr change %, 4-qtr lag (Left)
Four-quarter change in ISM index (Right)
The Manufacturing ISM Will Drop Next YearThe Manufacturing ISM Will Drop Next Year
The Manufacturing ISM Will Drop Next Year
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62
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07
ISM headline index,three-month average
Expect A Sustained, Broad SlowdownExpect A Sustained, Broad Slowdown
Expect A Sustained, Broad Slowdown
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99 00 01 02 03 04 05 06 07
Real GDP, q/q annualized, %Year-over-year, %
HFE forecast
In The Meantime, The Labor Market Is TightIn The Meantime, The Labor Market Is Tight
In The Meantime, The Labor Market Is Tight
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89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
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2.4
2.8
3.2
3.6
4.0
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Unemployment, 6-mthlag, inverted (Left)Hourly earnings, y/y%(Right)
All data are three-month averages
War
Faster Wage Gains Are Pushing Up CostsFaster Wage Gains Are Pushing Up Costs
Faster Wage Gains Are Pushing Up Costs
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98 99 00 01 02 03 04 05 06 07
Nonfarm productivity, y/y%
Nonfarm unit labor costs, year-over-year %
Slower Growth, Rising Costs Hurt EarningsSlower Growth, Rising Costs Hurt Earnings
Slower Growth, Rising Costs Hurt Earnings
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87 89 91 93 95 97 99 01 03 05 07
-40
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Nominal GDP y/y% less unit labor costs, y/y% (Left)
S&P 500 EPS, y/y% (Right)
HFE forecasts
Core Inflation Has Clearly Picked UpCore Inflation Has Clearly Picked Up
Core Inflation Has Clearly Picked Up…
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Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06
Core CPI y/y%
Core CPI, 3-monthannualized, %
Rents Aside, Not Much Is HappeningRents Aside, Not Much Is Happening
Rents Aside, Not Much Is Happening
2.0
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Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06
-3.0
-2.5
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Services ex-energy &rent y/y% (Left)Core goods y/y%(Right)
The Fed Can’t Stop Rents RisingThe Fed Can’t Stop Rents Rising
The Fed Cant Stop Rents Rising
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96 97 98 99 00 01 02 03 04 05 06 07
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Two-year notes, %, lagged 12months (Left)CPI combined primary rents and OER,y/y% (Right)
The Lower Dollar Is No Inflation ThreatThe Lower Dollar Is No Inflation Threat
The Lower Dollar Is No Inflation Threat
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-12
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-4
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97 98 99 00 01 02 03 04 05 06 07
-2.0
-1.5
-1.0
-0.5
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1.5Major currencies dollar index,y/y%, inverted (Left)
Price of consumer goodsimports ex-autos, y/y%(Right)
The Good News: The Trade Deficit Will FallThe Good News: The Trade Deficit Will Fall
The Good News: The Trade Deficit Will Fall
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96 97 98 99 00 01 02 03 04 05 06 07
-12
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20Real domestic demand, y/y% (Left)Real imports of goods and services, y/y% (Right)
HFE For.
The Bad NewsThe Bad News
The Bad News
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93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
-40
-20
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60U.S. real domestic demand, y/y% (Left)
U.S. imports from South Africa, y/y% (Right)
For.
SummarySummary
• Growth will slow further; housing first, then industry
• The Fed is done, easing starts late 06/Q1 07
• Rising labor costs threaten earnings more than inflation
• Treasury yields are set to trend lower; stocks are in trouble