His prediction of GDP growth (or rather GDP decline) means that we are in the second phase of this crisis (left bottom of the U). But, at the same time, he says that "In our view, personal consumption will continue to contract throughout 2009 quite sharply as a result of negative wealth effects from housing and equity market losses, the disappearance of home equity withdrawal from the second half of 2008, mounting job losses, tighter credit conditions and high debt servicing ratios".
Main conclusion is that he sees that right now we are crossing the line into the second phase of the crisis (left bottom of the U), my question, based on what?. Therefore, he predicts the bottom in the last quarter of 2009 or early 2010. With all respects, to predict anything is risky until we have some data that show that we are in phase 2, I mean until we see that indicators relax. Peace and best wishes. Xi On Jan 7, 5:25 pm, Justice <[email protected]> wrote: > It is clear that 2008 was not a very good year and it is official that > the current U.S. recession started already in December 2007. So how > far are we into this recession that has already lasted longer than the > previous two (1990 and 2001 recessions lasted 8 months each)? We > believe the U.S. economy is only half way through a recession that > will be the longest and most severe in the post war period. U.S. GDP > will continue to contract throughout 2009 for a cumulative output loss > of 5% and a recession that will last close to two years. > > One last look at 2008 will reveal a very weak fourth quarter with GDP > growth contracting -6%, in the wake of a sharp fall in personal > consumption and private domestic investments. We see the real GDP > growth contraction playing out through the year as follows: Q1 2009 > -5%; Q2 2009 -4%; Q3 2009. -2.5%; Q4 2009 -1%, adding up to a yearly > real GDP growth of -3.4% for the U.S. in 2009. > > Personal Consumption > > The resilient U.S. consumer started to give up in the third quarter of > 2008, when for the first time in almost two decades, personal > consumption contracted. With personal consumption making up over two- > thirds of aggregate demand, the outlook for the U.S. consumer is at > the center of the dynamics that will play out in the real economy in > 2009. > > In our view, personal consumption will continue to contract throughout > 2009 quite sharply as a result of negative wealth effects from housing > and equity market losses, the disappearance of home equity withdrawal > from the second half of 2008, mounting job losses, tighter credit > conditions and high debt servicing ratios (the debt to income ratio > went from 70% in the 90s, to 100% in 2000 to 140% now). This > retrenchment of the U.S. consumer will result in a painful rebalancing > in the economy that will eventually restore the saving rate of a > decade ago. > > The wealth losses for households related to the fall in home prices > are roughly $4 trillion so far, and are clearly bound to increase > further as home prices continue to fall –eventually reaching the $6-8 > trillion range (compatible with a 30-40% fall in home prices peak to > trough). With a negative wealth effect of 6 cents on the dollar, the > reduction in personal consumption could amount to a whopping $500bn. > And negative wealth effect from fall in equity prices – on the wake of > a bleak 2009 for corporate profits – will also contribute to the > contraction in personal consumption by an estimated $100bn (compatible > with a 25% contraction in the stock markets). > > This adjustment is consistent with a rebalancing of the economy that > will over time bring the saving rate to a positive level of roughly > 5-6% where it was a decade ago, for this to happen consumption has to > contract by an amount close to $800bn. > > Housing Sector > > The 4th year of housing recession is well on course. > Total housing starts have plunged from the 2.3 million seasonally > adjusted annual rate (SAAR) peak of January 2006 all the way to the > 625 thousand SAAR of November 2008 (the last data point available), an > all time low for the time series that started in January 1959. Single- > family starts built for sale are down 75% from their Q4 2005 peak > (seasonally adjusted data are not available, we performed our own > seasonal adjustment). > > On the demand side, new single-family home sales are down 65% from > their July 2005 peak. Both demand and supply of homes are therefore > still falling very sharply which does not bode well for inventories. > Inventories are the mortal enemy of prices for any goods-producing > sector, including housing. > > Starts need to fall substantially below sales so that the excess > supply in the housing market is reabsorbed. Inventories persist at > record highs and the gap between one-family starts (for sale) and one- > family sales (-92K annual rate in Q3 2008 according to our estimates) > is at levels that cannot promote a fast work–off of inventories. To > put these numbers in perspective, compare this with a measure of > vacant homes for-sale-only. Vacant homes for-sale-only were at 2.2 > million in Q3 2008, an all time high. In the decade between 1985 and > 1995 it oscillated around 1 million units on average and 1.3 million > units between 2001 and 2005. This implies that we have to deal with > an excess supply that ranges between 0.9 and 1.2 million units, of > which roughly 85% are single-family structures. > > The sharp and unprecedented fall of starts might not have reached a > bottom yet. In this economy-wide recession, weakness on the demand > side is bound to persist and we believe that supply will have to fall > further, given also the great wave of foreclosures that is adding to > the excess of supply in the market. We see starts falling another 20% > from current levels. > > We believe that home prices will not bottom out until the middle of > 2010. Our target is a 38% peak to trough (so far prices have fallen > 25% from the peak) but given the worsening conditions on the real side > of the economy, we see a meaningful chance for over-correction that > would bring prices down 44% from the peak reached in the first half of > 2006 (Case-Shiller is the reference index for these predictions.) > > Labor Markets > > With continued credit crunch and significant cut down in consumer and > business spending, the monthly job losses will continue in the > 400-500k and 300-400k range during the first two quarters of 2009 > respectively, bringing the unemployment rate to 8% by mid-2009. The > severe contraction in private demand until early 2010 will keep lay- > offs high and the unemployment rate elevated over 8%. > > Economy wide job cuts are expected, with big corporations and small > enterprises, residential and commercial construction, financial > services and manufacturing continuing to shed jobs at a strong pace. > Moreover with structural shifts in the economy since the last > recession, job losses this time will be more severe in the service > sector, including retail, business and professional services and > leisure and hospitality. Unless the fiscal stimulus addresses the > deficit problem for state and local government, job losses at the > government level will also gain pace. In turn, income and job losses > will further push up default and delinquency rates on mortgages, > consumer loans and credit cards. Moreover, the loss of high paying > corporate and financial sector jobs will be a big negative for tax > revenues over the next two years. > > Lay-offs are bound to continue thereafter as cost-cutting gains pace > with the beginning of the (sluggish) recovery period in early 2010. > Even as consumer demand might show some signs of recovery, firms, like > in the past, will begin by hiring only part-time and temporary workers > initially. The unemployment rate might peak at close to 9% in Q1 > 2010, almost two years after the recession began. However, the hiring > freeze across industries that began in late 2007 will continue at > least until 2010 causing discouraged workers to leave the work force > and containing the extent of the spike in the unemployment rate. > Further, the decline in labor utilization will add to the deflationary > pressure in the economy. An aging labor force, lower capital spending > and potential growth over the next few years might also result in > lower productivity growth and an increase in the natural rate of > unemployment (NAIRU). > > Capital Expenditure > > Firms have been drawing down inventories beginning in Q4 2008. As the > slump in domestic and foreign demand and difficulty in accessing short- > term credit persist over the next four quarters, business investment > is bound to contract in double-digits throughout 2009. Industrial > production, spending on equipment and durable goods will also remain > in red through 2009. Moreover with a sluggish recovery in private > demand even during 2010, firms will start building inventories and > contemplate capex plans only at a slower pace. > > Trade > > Exports contraction that began in late 2008 will gain pace in 2009 as > more and more emerging economies slip into slowdown following the G-7 > countries. On the other hand, easing oil prices and secular downward > trend in consumer spending and business investment will help imports > to shrink. In fact, this might cause the trade deficit to contract in > 1H 2009 since the contraction in imports might well exceed the decline > in exports, thus containing any negative contribution of trade to GDP > growth. > > Dollar Outlook > > The fate of the U.S. dollar in 2009 rests on the global growth > outlook. After profit-taking on long USD positions ends and trading > volumes pick up as investors return from their holidays, the dollar > may temporarily recover its relative safe haven status in H1 2009. > Since markets have yet to fully appreciate the impact of the commodity > slump and financial crisis on the rest of the world, risk appetite may > collapse again on signs of a deeper- or longer-than-expected recession > outside the U.S.. Further de-leveraging of USD-denominated > liabilities could provide an additional boost to the dollar as a > funding currency. The bond yield outlook could be a further source of > strength: while the Fed is already at ZIRP, other central banks will > cut rates further to stimulate growth, putting downward pressure on > currencies like the Euro. Alternating with these upside risks to the > dollar may be downside risks from 1) a supply crunch in commodities > that lifts commodity prices and producers' economies, 2) inability of > the market to absorb increased Treasury supply at low yields. > > Downside risks to the dollar seem more likely to outweigh upside risks > in the latter half of 2009 and in 2010. Yet at the same time, similar > downside risks exist for other currencies – growing fiscal deficits > will weaken a range of currencies. With emerging markets continuing > to have trouble attracting capital and Asian economies, hammered by > export contractions, will be reluctant to allow their currencies to > appreciate against or with the dollar – China allowed some > depreciation of the RMB at the recent euro-dollar peak. > > Once crucial support from deleveraging wanes, however, the dollar may > be left with only foreign central bank reserve accumulation, which has > already waned on the reversal of capital flows, to finance the large > U.S. current account deficit. Continued repatriation of assets and > higher enforced domestic savings rates will at least reduce pressure > on the dollar in the short-term. > > Inflation/Deflation > > Annual U.S. inflation, as measured by official producer and consumer > price indices, is likely to slow in 2009 and even fall into technical > deflation despite increases in the monetary base and fiscal measures > to boost spending power. Slumping commodity prices may drag down the > average annual headline CPI inflation rate to around -2% - a technical > deflation which may morph into genuine deflation if falling prices > generate expectations that they will continue to fall. Meanwhile, the > growing slack in product and labor markets will keep core consumer > inflation subdued at an average year-over-year rate of 1-2%. Steep > discounts to get rid of unsold retail inventory, rising job losses and > lower wage growth will reinforce the trend of stagnant or falling > prices. Loose labor markets and weak demand for commodities and goods/ > services will keep producer prices at bay. Risks to the outlook > include 1) a commodity supply crunch or geopolitical shock that leads > to a sustained rise in commodity prices and 2) an earlier than > expected global economic recovery. > > Credit Losses Still Ahead > > Back in February 2008, Nouriel Roubini warned that that the credit > losses of this financial crisis would amount to at least $1 trillion > and most likely closer to $2 trillion. As of mid-November 2008, the > threshold of $1 trillion in global financial writedowns was finally > reached. Given that national house prices expected to drop another > 20%, we expect credit losses of $1.6 trillion. > > An in-depth analysis of current and expected loan losses per asset > class and separately of mark-to-market writedowns per securities class > based on current prices indeed confirms RGE’s initial loss range > estimates (outstanding loan and securities amounts as in IMF GFSR, > Table 1.1) For our calculations we assume a further 20% fall in house > prices, and an unemployment rate of 9%. With respect to credit losses > on unsecuritized loans, recent research by the Fed Board using > comparable assumptions (but assuming high oil prices) concludes that > over half of 2006-2007 subprime mortgage originations are going to > default (i.e. $150bn out of $300bn). The loss trajectories for Alt-A > loans are similar resulting in a 25% default rate ($144bn out of > $600bn). Even prime mortgage delinquencies display a very high > correlation with subprime loan delinquencies, implying an approximate > 7% default rate when the potential for ‘jingle mail’ is taken into > account ($105bn out of $3,800bn). > > The cycle has also turned in the commercial real estate (CRE) arena > with the traditional lag of around 2 years. Current serious > delinquency plus default rates of 5.9% of CRE loans (net recovery, via > Fed data) are projected to increase to up to 17% by Fitch assuming a > 25% fall in prices ($142bn out of $2.4 trillion.) In the consumer > loan area, we estimate credit card charge-off rate could increase to > 13% in the worst case scenario. Adding a typical 5% delinquency rate > during recessions, the total loan losses on unsecuritized consumer > loans are projected to increase to $252bn out of $1.4 trillion (see > The U.S. Credit Card Industry in 2009, by RGE’s Mathias Kruettli.) > > The IMF warned that commercial and industrial loans (C&I) charge-off > and delinquency rates are likely to climb to historical peaks and > potentially beyond in this cycle. Compared to past C&I loan loss > rates, we project charge-off and serious delinquencies to reach 10% or > $370bn out of $3.7 trillion of unsecuritized C&I loans. With regard > to leveraged loans, the latest research by Boston Consulting/IESE > Business School based on the 100 largest PE firms engaged in LBOs > calculates an expected book loss from default of about 30%. This > translates into $51bn out of $170bn unsecuritized leverage loans. > > Based on these calculations, RGE expects total loan losses to reach > about $1.6 trillion out of $12.4 trillion of unsecuritized loans > alone, implying an aggregate default rate of over 13%. The IMF > assumes that the U.S. banking system carries about 60-70% of > unsecuritized loan losses (and about 30% of mark-to-market losses on > securitizations). Even assuming that future loan losses are fully > discounted at current market prices, deploying the remaining TARP > funds towards recapitalizing the banking system would still be > warranted. > > The Disconnect Between Bond and Equity Markets > > U.S. government bonds were on a tear in 2008, while equities plummeted > in a nasty bear market. Bond yields at the long end hit all-time > record lows, while the short end even dipped into negative territory. > Only TIPS suffered as deflation risks rose. Stocks, on the other > hand, had their worst year since the Great Depressions: DJIA lost 34%, > S&P 500 -38.5%. At its 2008 low on November 20, the S&P 500 was down > 49% for the year and 52% from its October 2007 peak. Stocks rallied > in December though, resulting in an apparent disagreement between the > stock and bond markets over the outlook for the U.S. economy. Bond > markets seemed to be discounting a recession in 2009 while stock > markets have been gaining since late November. This disconnect may > vanish in 2009 though if the stock market rally was really just a bear > market rally due to portfolio re-balancing and thin year-end trade > volumes. > > However, there have been intimations that the bond market is in a > bubble about to burst in 2009. Indeed, with ultra low bond yields, > investors may be tempted to switch into higher-yielding equities - > which are now considered by many to be undervalued. Valuation, > however, is not the be-all and end-all of asset performance. The > credit freeze needs to end before equities can see the end of the bear > market. However, considering the likely economic stagnation ahead, > bonds should be a better bet than equities for some time. We see > meaningful downside risks to stock prices as bad macro news – worse > than expected – continues to dominate in 2009. Using the S&P 500 as > benchmark, earnings per share will stay in the $50-60 range – and > earnings will fall further. If, and it is not unusual during > recessions, P/E ratio falls in the 12-14 range, we could see another > 25% slide in stock prices. > > Fiscal and Monetary Policy > > Fiscal Policy > A lot of hope is being placed on the expected fiscal stimulus package > of around $750 bn spread over 2009-10 including 40% of the stimulus in > tax cuts for households and firms. Around half of the stimulus is > expected to kick-in starting Q2 2009 and through 2010. But this will > fall short of the pull-back in private demand of close to $1 trillion > during this period. > Infrastructure spending, in spite of being highly effective, might not > be timely, stimulating the economy only in late-2009 and 2010 when it > has well passed the severe recession phase only to exacerbate the > ballooning fiscal deficit. Nonetheless, around $100bn of > infrastructure investment might be able to kick-in during 2009. > Moreover, job creation in infrastructure might be overestimated given > limitations in moving laid-off workers from other sectors to the > infrastructure projects. As such, any job creation via government > spending and tax incentives for firms will significantly fall short of > the ongoing lay-offs. > > Given the drawback of the ‘spending’ component of the stimulus, the > government may be > enticed to implement more tax cuts. While tax incentives for > households like payroll and child tax credit might be well-targeted at > the group with high propensity to spend, tax cuts in general will be > less effective in stimulating demand given a secular rise in the > saving rate expected over the next few years. Likewise, tax breaks > for firms hiring new workers or investing in new equipment will be > rather ineffective since businesses see little viability in doing so > during a slump in domestic and export demand. At the most, tax > stimulus in spite of being timely and well-targeted will cause only a > temporary rebound in the economy for a month or a quarter merely > shifting the spending decision period just like tax rebates did in 2Q > 2008. > Expansion of unemployment benefits, food stamps and other incentives > will have a high bang-for-buck effect in 2009 and will only assuage > the impact of the recession. The stimulus will also include up to > $100 bn for state and local governments to meet their severe budget > shortfalls including grants, Medicaid and unemployment insurance > funds, preventing cutbacks in public services, investment and jobs in > several recession-hit states. But again, fiscal aid for states often > suffers from time lags. > > Fiscal stimulus, TARP spending, GSEs-related expenditure along with > further slowdown in corporate and individual income tax revenues will > push the fiscal deficit to around $1.3 trillion in FY2009. > > Monetary Policy > The Fed has enacted a wide and unprecedented range of measures to > mitigate the credit crisis and stimulate the economy. It has already > cut its target range for the Fed funds rate down to 0-0.25% > (essentially ZIRP) but, more importantly, it has created currency swap > lines and an alphabet soup of programs to provide liquidity to the > financial system and clean out toxic financial assets. The Fed > experimented with different forms of financing itself in order to > enable a sharp expansion of its balance sheet to accommodate these > liquidity facilities. In addition to rate cuts and quantitative > easing, the Fed has directly aided failing financial institutions. > Now, the Fed is considering issuing its own debt and/or purchasing > long-dated Treasuries and Agency debt. Will the monetary easing > work? So far, the increase in money supply has not been accompanied > by an increase in the velocity of money. In other words, credit > growth remains stagnant as banks are reluctant to lend back out the > money provided by the Fed and, at the same time, borrower demand has > fallen. --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "World-thread" group. 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