Recession EconomicsRecession Economics

Christopher ThornbergChristopher ThornbergFounding Principal, Beacon EconomicsFounding Principal, Beacon Economics

NBER says U.S. recession began December 2007Mon Dec 1, 12:20 pm ET WASHINGTON (Reuters) – The U.S. economy slipped into recession in December 2007, the National Bureau of Economic Research's business cycle dating committee announced on Monday.

Denial Hysteria

Reality

Recession Is Over According to

Financial ExpertsImproving Housing

Market, Leading Economic Indicators

Makes Experts OptimisticMay 12, 2009

Equity HypeEquity Hype

What is a Recession?What is a Recession?AN ECONOMIC FLUAN ECONOMIC FLU

– The economy does not perform to its normal level of output

– Issue typically driven by a rapid change in structure of demand

– Such a shock can be temporary (cyclical) or permanent

Two Parts to any downturnTwo Parts to any downturn– Pain of initial shock

– A negative feedback loop

– Recovery is a given, but the process can be painful

• A fall to rememberA fall to remember– Heard on the street “There are only two positions out there:

cash, and fetal”• Its not ‘what Wall Street troubles mean to California’, its ‘what

California troubles mean for Wall Street’– Recession was already fully underway even if many

economists and politicians remained in deep denial

• What went wrongWhat went wrong– The big three imbalances: housing, finance, and the consumer– The good news: The big imbalances are settling out– The bad news: we still have healing to do– The better news: California is going to come out of this

downturn in good shape

VA ?UWLBad

1980-II -7.8 1982-I -6.4 2008-IV -6.3 2009-I -6.1 1981-IV -4.9 1975-I -4.7

2008-IV 2009-I

Gross domestic product -6.3 -6.1

Personal consumption -2.99 1.5

Durable goods -1.67 0.61

Nondurable goods -1.97 0.26

Services 0.66 0.63

Gross investment -3.47 -8.83

Structures -0.38 -2.13

Equipment software -2.18 -2.55

Residential -0.8 -1.36

Change in inventories -0.11 -2.79

Net exports -0.15 1.99

Exports -3.44 -4.06

Imports 3.29 6.05

Government 0.26 -0.81

Federal 0.52 -0.32

State and local -0.25 -0.49

Labor MarketsLabor Markets

Consumer SpendingConsumer Spending

The 3 ImbalancesThe 3 Imbalances1.1. The Housing ImbalanceThe Housing Imbalance

The collapse of the pyramid

2.2. The Financial ImbalanceThe Financial ImbalanceThe Asset Price Bubble

3.3. The Consumer ImbalanceThe Consumer ImbalanceToo much spending

14

Residential

1999

$199 $62,118 $21,879 35.2%

2006

$577 $78,949 $55,847 70.7%

Los Angeles Home Prices

Median Price

Median Owner Income

Annual Home Cost

Share of Income

16

Foreclosed homes: mountingForeclosed homes: mountingREO Total % HH REO Total % HH

Nevada 27804 65905 6.0% Tennessee 15722 20864 0.8%

Arizona 44058 96525 3.6% New Hampshire 2558 4531 0.8%

Florida 60855 273695 3.1% Rhode Island 2109 3252 0.7%

California 193311 395809 3.0% Washington 8404 19229 0.7%

Michigan 61173 87565 1.9% Texas 45354 65569 0.7%

Illinois 27333 101307 1.9% Wisconsin 7732 17413 0.7%

Ohio 43561 88010 1.7% New York 7021 53823 0.7%

Colorado 17035 35444 1.7% Minnesota 11984 15583 0.7%

Georgia 34971 61281 1.5% Massachusetts 8799 17667 0.6%

New Jersey 7287 52887 1.5% South Carolina 7334 13000 0.6%

Utah 4295 11116 1.2% Arkansas 2986 7924 0.6%

Indiana 13961 31504 1.1% Missouri 11793 16030 0.6%

Idaho 612 6613 1.0% Connecticut 2137 8481 0.6%

Oregon 4519 16271 1.0% DC 912 1673 0.6%

Virginia 15430 27032 0.8% Maryland 5201 13374 0.6%

18

60 to 90 Days Behind

New Foreclosures

• New BillNew Bill– Loosen Fannie Freddie Rules

– Incentivize workouts

– Try to reduce mortgage rates

• Will it work?Will it work?– Doesn’t deal with seriously under-water folks

– Won’t turn around banks or markets

– Why does it matter anyways?

The Financial ImbalanceThe Financial ImbalanceThe CDO “Revolution”The CDO “Revolution”

Risky Revenue Stream

AAA

AA

A

BBB

Investment Bankers

Investment Managers

Asset Market Brokers

Asset Markets Investors

Rating Agencies

25

Real Estate ConsumerRes Non-Res CC Other Lease C&I Total

Q4 2008 1.75 2.39 6.15 2.87 0.6 1.4 2.04Q4 2007 0.45 0.33 4.06 1.84 0.23 0.65 0.81Q4 2006 0.12 0.11 4.02 1.29 0.17 0.24 0.48

Max 0.6 4.42 8.05 2.37 1.57 2.35 2.34

OutstandingsWeekly (Wednesday), seasonally adjusted

The consumer imbalance…The consumer imbalance…

30

31

Income -23.3

Taxes Paid -178.1Spending -285.0Int + Trans -15.5Savings 455.4

Changes in IncomeAug to Feb$Bill, SAAR

34

Income $ 12,250 Taxes (No SI) $ 1,550 Tax Cut $ 250 New Savings 2.80%

Personal Tax Cut Q: How much will 4.5% conforming mortgage rates

and foreclosures help?

35

M1

M2

SummarySummary RECESSION IS HERE…RECESSION IS HERE…

Consumer weakness will continue , but not foreverConsumer weakness will continue , but not forever

Business weakness to get worse on profit issuesBusiness weakness to get worse on profit issues

Exports are a big negative, but will be solid in the longer runExports are a big negative, but will be solid in the longer run

Housing close to bottom, but no bounceHousing close to bottom, but no bounce

State budget issues to get worseState budget issues to get worse

WHAT KIND OF RECESSION?WHAT KIND OF RECESSION? Bad, but Bad, but notnot a depression, decline followed by period of a depression, decline followed by period of

doldrums doldrums

Recover in economy early to mid 2010Recover in economy early to mid 2010

Recovery in housing 2012Recovery in housing 2012

State

US

1.1. Recovery is inevitable if delayedRecovery is inevitable if delayed

2.2. Fire Sales will create Fire Sales will create opportunities—but wait for itopportunities—but wait for it

3.3. Low Home Prices are good in the Low Home Prices are good in the long runlong run

4.4. Look for an export boomLook for an export boom

5.5. Keep to your fundamentalsKeep to your fundamentals

6.6. In desperate times comes real In desperate times comes real changechange

To view or download this presentation To view or download this presentation please visit: please visit: www.BeaconEcon.comwww.BeaconEcon.com

Beacon Economics is an independent research Beacon Economics is an independent research and consulting firm with offices in both Northern and consulting firm with offices in both Northern

and Southern California.and Southern California.

Contact us at 415-457-6030Contact us at 415-457-6030