Research
January Economic 23, 2009
US Weekly Prospects
Data Watch: Waiting for help Focus: Credit conditions Research Note: The bad bank of the US: lessons from history Global Data Watch: Amidst the wreckage Economic Indicators US Forecast Calendar
2 4 5 9 12 22 23
Single-family housing starts and housing permits
%ch saar, over 3 months 20 0 -20 -40 -60 -80 2006 Starts Permits
Bruce Kasman
(1-212) 834-5515 [e-mail]
Robert Mellman
(1-212) 834-5517 [e-mail]
Michael Feroli
(1-212) 834-5523 [e-mail]
Abiel Reinhart
(1-212) 834-5614 [e-mail]
2007
2008
www.morganmarkets.com
JPMorgan Chase Bank, New York Robert Mellman (1-212) 834-5517 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
Data Watch: Waiting for help
Incoming data remain dismal, consistent with forecasts of large declines in real GDP in 4Q08 and 1Q09 Fiscal package is likely to be passed by mid-February Focus of FOMC statement will be on potential purchases of Treasuries and expansion of TALF The relatively sparse economic news this week has come in below already downbeat expectations. The weekly surge in initial jobless claims confirmed continuing softness in the labor markets, while housing market readings from the January homebuilders survey, December housing starts, and the November FHFA house price index each posted declines and were each weaker than expected. Auto industry guidance suggests that a modest increase in household purchases of autos and light trucks in January was more than offset by sharp cuts in sales to rental fleets, and overall unit sales edged down to a new monthly low for this cycle. All in all, the news is in line with the view that the economy is going through a second quarter of deep contraction. The forecast looks for 4Q08 real GDP to contract 5.5% saar (advance GDP release next Friday) and for current quarter real GDP to be down at a 5.0% annual rate. The forecast still looks for a noticeable moderation in the downturn in the spring and a gradual return to growth in 3Q09. This outlook depends on very aggressive support from fiscal and monetary policies. The latest press reports suggest that Congress will pass a fiscal package amounting to at least $825 billion, more than had previously been incorporated into the forecast, by the mid-February Presidents Day recess. Republican leadership is pressing for some changes to the proposed legislation, including those that would make the stimulus more front-loaded. The CBO evaluated time-phasing of discretionary spending, about $350 billion of the $825 billion, and finds that only $26 billion (0.2% of GDP) would be spent this fiscal year ending September 30 and that $110bn (an increase of $84bn of 0.6% of GDP) would be spent in FY 2010. More than 60% of discretionary funds would not be spent until FY2011 and beyond. The Fed is also doing its part by bringing the fed funds rate close to zero and supporting credit markets directly, through initiatives including the large-scale purchase of agency MBS and the TALF program aimed at restarting the consumer ABS market. The focus of attention of the FOMC statement following the meeting will be on potential further action by the Fed. The statement is expected to
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Single-family housing starts and housing permits
%ch saar, over 3 months 20 0 -20 -40 -60 -80 2006 Starts Permits
2007
2008
Estimated cost of proposed fiscal stimulus, discretionary spending $bn, fiscal year, CBO estimates
2009 Budget authority Estimated outlays 274.0 26.2 2010 66.5 110.2 2011 4.1 103.0 2012 3.6 52.9 2013-19 9.9 63.2
indicate that the Fed is increasingly leaning toward buying Treasuries; in addition, there could be an announcement that the Fed is expanding the TALF, perhaps to include CMBS or private-label RMBS.
Lower mortgage rates not much help yet
Residential mortgage rates have declined more than 100bp since last October, encouraged by lower yields on Treasury bonds and by sizable Fed purchases of Agency MBS. Mortgage rates have historically been a key influence on home sales, even in recessions, and the combination of lower mortgage rates and lower house prices might be expected to give a noticeable lift to home sales. But the latest data do not show much impact yet. The January homebuilders survey dropped another point to 8 in January, a new all-time low for this series. And the survey component measuring new home sales dropped 2 points to a reading of 6, also a new low for this series. Thus, the latest industry response indicates that demand is weak and falling further. The weekly series on mortgage applications for home purchase provides another timely measure of housing demand, although mortgage applications have had only a loose correlation with home sales over the past few years, (probably because tighter lending standards have increased the number of mortgage applications relative to sales). At any rate, mortgage applications for home purchase have trended
JPMorgan Chase Bank, New York Robert Mellman (1-212) 834-5517 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
higher lately, but not dramatically. Mortgage applications for purchase in the first three weeks of January are about 9% above the monthly low back in November, but still well below 3Q08 levels In contrast, mortgage applications for mortgage refinancing for the first three weeks of January are running more than 5 times the monthly average low for this series (October 2008).
Mortgage applications for home purchase and total home sales
Sa, Mar 1990=100 460 410 360 310 260 Mn units, saar Mortgage applications for home purchase 7.5 7.0 6.5 6.0 New and existing home sales 5.5 5.0 4.5 2006 2007 2008 2009 4.0
Housing starts plunging toward zero
There is nothing subdued about the recent moves in housing starts. The latest December data show a monthly 15.5% decline in housing starts, a 10.7% decline in housing permits, and a 12.3% decline in single-family permits (probably the best trend indicator of building activity). Decembers results are not an outlier but reflect a continued intensification of the decline in homebuilding activity that has been under way for several months. For 4Q08, housing starts declined 68.5%saar and housing permits fell 71.8%saar. Both were by far the deepest quarterly declines in this extended housing downturn. While the decline in starts is a clear negative for near-term real GDP, this is the correction that is needed to work down inventories of unsold homes. The collapse in activity over the past few months leaves single-family starts and permits of units built for sale well below the level of sales. Monthly Census data suggest that starts built for sale were running almost 30% below sales in November. The gap likely widened significantly further last month, as December starts declined much more than the forecasted 3.0% drop in December new home sales (out Thursday).
Single-family housing starts.
Mn units, saar 2.0 1.5 1.0 0.5 0.0
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FHFA house price index
%ch saar over 3 months, national, purchase-only index 20 10 0 -10 -20 -30 2004 2005 2006 Pacific region 2007 2008 US Mid-Atlantic region
A negative reading for house prices
The latest November reading from the FHFA (formerly the OFHEO series), based on transaction prices of existing homes financed by conforming mortgages, shows that the downturn in house prices intensified. According to this measure, national prices dropped 1.8% (samr) in November, following declines averaging 1.1% in the three previous months. Declines continued to be especially steep in the Pacific region that includes California (-2.2%) and in the South Atlantic region that includes Florida (-2.3). Monthly declines, at least through November, remained more moderate in New England (-0.7%) and in the Mid-Atlantic region (0.8%). Tuesdays release of the November Case-Shiller home price index is also expected to show a larger house price decline than the recent trend.
FOMC meeting, more downbeat data ahead
In addition to the two-day FOMC meeting, the upcoming economic calendar includes the advance report on 4Q08 real GDP and the employment cost index (both Friday). Upcoming reports on December housing and manufacturing activity are expected to show declines. These include releases on December existing home sales (Monday), new home sales (Thursday), and durable goods orders and shipments (Thursday). Little change is expected in the January consumer confidence surveys from the Conference Board (Tuesday) and the University of Michigan (Friday).
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JPMorgan Chase Bank, New York Abiel Reinhart (1-212) 834-5614 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
Focus: Credit conditions
Changes in credit pricing have been mixed recently. Mortgage rates and corporate bond yields have each risen slightly, but the rise has been small when compared to an earlier decline in rates. Spreads have meanwhile narrowed in the interbank market. The spread on lowerquality nonfinancial paper has also fallen, but issuance is still light. Between last Friday, January 16, and this Thursday, 10year Treasury yields rose 26bp. Higher Treasury yields combined with other market-specific factors have contributed to a 29bp increase in high-grade corporate bond yields over the same period. The required net yield on mortgages deliverable to Freddie Mac has also risen 53bp from its low a couple weeks ago. Although corporate bond and mortgage rates have risen recently, they are still well below their levels three months ago. Over that period, high-grade corporate bond yields fell 130bp and mortgage rates declined 106bp. The spread between 3-month LIBOR and the 3-month overnight index swap rate was basically unchanged this week, but fell steadily in earlier weeks. It is now about 10bp from where it was just before the Lehman Brothers bankruptcy in mid-September. Following the Lehman Brothers bankruptcy, the spread between yields on A2/P2 and AA nonfinancial corporate paper widened dramatically. The spread peaked at the end of 2008, but then fell sharply because of calendar effects. The spread on 30-day paper is still more than 90bp above where it was prior to the Lehman Brothers bankruptcy, but it is down more than 400bp from its December peak. On a more negative note, daily issuance is still less than half of the pre-September amount.
Spread between 3-month LIBOR and 3-month OIS
Basis points 400 300 200 100 0 2007 2008 2009
Treasury yields
Percent 6 5 4 3 2 1 0 2007 2-year note 3-month bill 2008 2009 10-year bond
Freddie Mac required net yield for 30-year loan, 0-60 day delivery
Percent, FHLMC series ex cludes transaction costs 7.0 6.5 6.0 5.5 5.0 4.5 4.0 2007 2008 2009
JULI investment grade corporate bond index
Percent Spread over Treasuries 9 8 7 6 5 2007 2008 2009 Yield 600 500 400 300 200 100 0 Basis points
Spread between 30-day A2/P2 and AA nonfinancial CP yields
Basis points 700 600 500 400 300 200 100 0
2007
2008
2009
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JPMorgan Chase Bank, New York Michael Feroli (1-212) 834-5523 [e-mail] Robert Mellman (1-212) 834 5517 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
Economic Research note
Loan loss allowances to nonperforming loans, US banks
% 200
The bad bank of the US: lessons from the past
The idea of creating a bad bank is gaining traction among policymakers Swedens experience is often held up as a model for how the US should proceed The Mexican and US experience in the Great Depression may also be relevant for the current situation Despite several rounds of policy responses to the credit crisis, the ongoing increase in borrower delinquencies is continuing to threaten the viability of large segments of the US financial system. As officials debate the next round of support, the experience from other countries is being suggested as a template for guiding the US response. The resolution of the Nordic banking crisis, particularly the Swedish use of asset-management companies, or bad banks, is often held up as an example for the US. Less discussed is the structure of Mexican response to their 1990s banking crisis, though in certain ways it may be more applicable. Finally, the US experience in the 1930s with the Home Owner Loan Corporation (HOLC) could also be held up as example, though there the focus was more on the borrower than the bank. The underlying economic rationale for providing support to banks is that they have organizational capital that is socially useful and is lost if a bank is destroyed. That organizational capital is generally thought to be the informational capital that is relationship-specific between a borrower and a lender. If all banks dissolved once the financial value of their assets fell below liabilities, society would have to bear the cost of establishing new credit relationships. One way to preserve this essential value of banks is for the government to nationalize and operate troubled banks. Another outcome is for the government to leave banks in private hands, but to remove nonperforming loans from bank balance sheets, leaving the private bank in a better condition to focus on tending to healthy credit relationships. Historically, bad banks have been used in both outcomes: to manage troubled assets of nationalized banks or of assets obtained from private banks. Beyond that general framework, policymakers need to make many choices, including at what price to buy assets, how to fund the bad bank, and how to treat potential windfall gains to the good bank. The international and historical experience shows that these questions have been answered in a variety of ways.
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Nonperforming loans to total assets, US banks
% 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 90 92 94 96 98 00 02 04 06 08
The Scandinavian crisis
The Nordic crises of the early 1990s were the first systemic banking crises in the developed world after the Great Depression of the 1930s. A turn in asset prices, procyclical macro policies, and the onset of deep recessions led to a spike in credit losses that threatened the solvency of the largest banks in Sweden, Norway, and Finland. The Nordic governments adopted a series of extraordinary measures to protect bank creditors and prevent a massive credit crunch. These measures included blanket creditor guarantees, public takeovers, and the creation of bank restructuring agencies and asset management companies for nonperforming assets. Blanket guarantees were used by the Swedish and Finnish governments which offered full government protection not just for depositors but for all bank creditors (with the exception of equity holders). The Norwegian government did not provide such explicit guarantees, but its commentary suggested that it was in place. All three governments injected significant amounts of capital into their banking systems and ended up nationalizing most of the major banks. Capital injections came with stringent conditions, including balance sheet restructuring, cost cutting, management replacement, and an increase in internal controls. With the exception of a
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JPMorgan Chase Bank, New York Alfredo Thorne (5255) 5540-9558 [e-mail] Nicola Mai (44-20) 7777-3467 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
small bank in Norway early in the crisis, no banks were allowed to fail. The nationalizations, however, did penalize equity holders heavily. Existing equity holders were wiped out in Norway and lost most of their capital in Sweden and Finland. The exception was Nordbanken in Sweden (where equity maintained its value following a significant public capital injection), although this bank was already 70% government owned prior to the injection. The injections came alongside the creation of bank restructuring agencies, tasked with managing public capital and deciding the structure of the troubled banks. In Sweden and Finland, separate companies (bad banks) were also created with the aim of managing nonperforming assets of some of the banks taken over by the government. This was done so that the healthy parts of the banks could continue normal operations while specialized asset managers dealt with the bad loan portfolios. The policy measures adopted in Scandinavia helped contain the financial and economic crises. After experiencing deep recessions early in the decade, economic activity in Sweden, Norway and Finland resumed growing vigorously from 1993 on. Over the space of a few years after the crises, the Nordic governments sold or liquidated most of the stakes in the acquired banks, although the Swedish and Norwegian governments to date still have stakes in a couple of banks. According to a Norwegian study conducted in 2004,1 the gross fiscal costs of the resolution measures were around 10.6% in Finland, 4.5% in Sweden and 3.5% in Norway when measured as a share of 1990 GDP. Net costs, however, were much lower as governments recouped costs through reprivatizations. While the Scandinavian workout was generally deemed a success, the most important difference with the current US environment is that bad banks generally emerged after the private banks had already failed and were in the hands of the government. In the US, authorities have naturally expressed a desire for banks to continue to function, but to assist them with some sort of bad bank. In this respect, the Mexican experience offers some parallels.
Real bank loans
1982=100 300 250 200 150 100 50 82 84 86 88 90 Sweden Norway Finland
92
94
Number of banks in Scandinavia
Count 700 600 500 400 300 200 100 Sweden 80 82 84 86 88 90 92 94 Norway Finland
credit growth. The massive devaluation in December 2004 and then the massive increase in short-term rates to defend the currency proved to be the worst of both worlds for the banking system and for many borrowers. Before too long, an estimated 50% of all outstanding loans were in default. Initially, as part of an economic stabilization process, the government subsidized households and mortgage owners that had witnessed a sharp decline in the value of their collateral and/or increase in their financing costs. The government launched several schemes that subsidized interest payments and others that reduced the value of the mortgage loans. In addition, the government took over insolvent banks in an attempt to prevent a deposit run. At that time, Mexicos legislation not only protected bank deposits, but all other bank creditors (except equity holders) as well. In late 1995, policymakers realized that the banking crisis was feeding into the overall economy and preventing stabilization. Initially they took over some banks, recapitalized them, and sold them to new owners, mainly foreigners. However, policymakers soon realized that bad debts in solvent banks were clogging the credit system and were pulling the economy into a deeper recession.
Fobaproa: Mexicos asset manager
Mexico went through an economic and banking crisis in late 1994 and 1995. In the months before the crisis, both the economy and banking system had seemed sound. But because of the crawling peg used to bring down inflation, the banking system was overly dependent on foreign borrowing at short maturities to finance rapid domestic
1. G. Moe et al., The Norwegian Banking Crisis, Norges Bank 2004.
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JPMorgan Chase Bank, New York Michael Feroli (1-212) 834-5523 [e-mail] Robert Mellman (1-212) 834 5517 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
By the end of 1995 the government decided on a program, based on the US RTC, to buy bad debts from banks and launched an off-budget trust fund called Fobaproa to hold these debts. The government through the Fobaproa offered to swap government bonds in exchange for troubled loans, on the condition that investors inject new capital into the banks 50% of the loans taken by Fobaproa. Initially and on average loans were marked down 25% before the swap was performed, although in retrospect even these prices paid for the loans were generally viewed as above market prices. Banks incurred the initial 25% loss and the additional loss was shared with the governmentbanks on average incurred an additional 25% and the government the other 50%. Loans were never legally removed from bank balance sheets and banks (rather than the government) were responsible for collecting on them. The mechanics of the Fobaproa program did have major drawbacks. The program is widely viewed as overpaying for the bank debts and, even so, bank lending growth remained sluggish for an extended period. Moreover, because at that time Mexico had deficient bankruptcy and foreclosure procedures, there was little success in collecting on these debts, and there were large-scale defaults. Partly as a result, public-sector debt increased to 40% of GDP in 1999 from its prebanking crisis level of 24%. And Fobaproa had very little success in disposing of the bad loans. Another problem with the program was the absence of government warrants on the debt buybacks; and, some bank owners sold their banks with no benefit to taxpayers. On the positive side, the program did help to both stabilize bank finances and reduce foreclosures. And although widespread debt repudiation damaged government finances, reduced private-sector debt stimulated domestic demand and the overall economy. These somewhat extreme features of the Mexican experience highlight the extent to which the details of any bad bank plan will determine the relative benefits and costs for banks, borrowers, and the government.
US residential nonfarm mortgage debt outstanding
Billions of dollars 32 30 28 26 24 22 20 18 25 27 29 31 33 35 37 39
US real private new residential construction spending
Billions of 1957-1959 dollars 15
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and lenders. These conditions were also present during the Depression of the 1930s. In this context, it is useful to review the experience of the Home Owners Loan Corporation (HOLC), a government agency that acquired and refinanced one million delinquent mortgages between 1933 and 1936.2 The combination of falling nominal incomes and rapidly rising unemployment rates during the early years of the Depression led to soaring mortgage delinquency and foreclosure rates. These trends were exacerbated by the fact that many mortgages issued in the 1920s had terms of five years or less with no amortization, and borrowers depended on refinancing of mortgages at the end of the 5-year term. Refinancing proved very hard to accomplish in an environment of increasing bank failures and tightening credit conditions. One Department of Commerce study of cities found that in early 1934, close to half of urban homes with an outstanding mortgage were in default. In 1933, Congress set up the Home Owners Loan Corporation, an agency of the Federal Home Loan Board, to purchase and refinance delinquent residential mortgages in2. This discussion borrows heavily from, David Wheelock, The Federal Response to Home Mortgage Distress: Lessons from the Great Depression, Federal Reserve Bank of St. Louis Review, May/June 2008.
US mortgage purchases in the 1930s
The US economy is now suffering the effects of falling house prices, increasing mortgage foreclosure rates, and resulting negative outcomes for both mortgage borrowers
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JPMorgan Chase Bank, New York Alfredo Thorne (5255) 5540-9558 [e-mail] Nicola Mai (44-20) 7777-3467 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
cluding mortgages on properties in foreclosure. The HOLC received capital from Congress, but the bulk of the financing was from government-guaranteed, tax-exempt bonds. Mortgages purchased by the HOLC were limited to 80% of the appraised value of the property (although appraisals were often generous) or a dollar maximum amount, and HOLC loans were made only to homeowners with sufficient income to likely make the required mortgage payments. HOLC loans were generally made at an interest rate below the rate charged by most private lenders. Private lenders who sold mortgages to the HOLC often took a haircut on the mortgage, reflecting a reappraisal of the property. But private lenders found that they would lose less by selling to the HOLC than by going though a costly foreclosure process. The HOLC accounted for a maximum of 71% of new 1-4 family mortgages in the peak year for its activity, 1934, and refinanced about 20% of all such mortgages. The HOLC purchased delinquent loans during tough economic times, when foreclosure rates were high as a result, even with the reasonably stringent conditions for providing refinancing to borrowers. Even though HOLC loans were allowed to be delinquent for an average of two years before going into foreclosure, roughly 20% of refinancings provided by the HOLC ended in foreclosure or voluntary
transfer of the property to the HOLC. Researchers have had difficulty quantifying the effect of the HOLC in supporting the housing market, the financial system, or the overall economy. But by taking a million troubled mortgage loans from private-sector lenders, the HOLC doubtless sped the resumption of private mortgage lending. In many ways the HOLC functioned like a bad bank, though that was not necessarily its intended purpose. Some politicians in the US have looked back to the HOLC as a useful guide as to how to proceed in the current crisis. Part of the fondness for the HOLC is that it is designed to help homeowners, not banks, which is a more politically appealing rationale. Nonetheless, the HOLC probably did benefit the banking system.
Bad bank part of comprehensive strategy
As US authorities look to address the current banking crisis, a bad bank will likely form only one part of a broader, more comprehensive policy response. Removing bad assets from bank balance sheets may resolve some uncertainty surrounding the health of banks, but it is still the case that many banks will need more equity capital. For this reason, a bad bank will probably be only one part of a larger effort to get credit flowing in the economy again.
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Economic Research
January 23, 2009
Global Data Watch
Another severe decline in global GDP is on tap for this quarter Financial market setback highlights risk that cyclical lift might get shortcircuited Tentative signs that China is firming to help EM Asia but not Japan Fed to tiptoe in direction of Treasury purchases
Amid the wreckage
As dismal as the recent indicator flow has beenwe continue to lower GDP growth forecasts from levels already signaling the deepest global economic downturn in over 50 yearsthe dynamics of the downturn increasingly appear cyclical. In response to powerful drags from high inflation followed by severe credit tightening, final demand collapsed during the second half of last year. Global fiscal and monetary policies are now aggressively responding to this slide as they push global real policy rates into significant negative territory and as budget deficits are set to rise as much as 5% of GDP this year. At the same time, the year-end collapse in global manufacturing production and the near disappearance of new US single family housing activity represent a cathartic event, as firms move aggressively to lower costs and clear inventories. The correct signal to take from this cyclical dynamic is that the global economy will remain in the grip of a deep downturn for some months to come as the business adjustment remains intense and policy stimulus takes time to work. This view is incorporated in the J.P.Morgan forecast of a greater than 4% annualized decline in global GDP this quarter. However, dynamics combining intense cost-cutting and substantial policy support usually are constructive in that they set the stage for lift. The standard rules of the road do not accurately gauge timing but they do point to a significant rebound in growth taking hold over the next six to twelve months. Two key data markers that will confirm that this outcome is tracking are a stabilization in global auto and US home sales alongside a stabilization in our global PMI index as this quarter endseven as production cutbacks continue and unemployment rises significantly (see Declines in global employment to broaden and deepen, page 9). In the US, initial jobless claims are expected to reach 700,000 by midyear.
Developed market fiscal deficit and unemployment rate
% 8.5 7.5 6.5 5.5 4.5 Unemployment rate Fiscal deficit % of GDP 7 6 5 4 3 2 1 80 85 90 95 00 05 10 0
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JPMorgan Chase Bank, New York Bruce Kasman (1-212) 834-5515 [e-mail] David Hensley (1-212) 834-5516 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
Lowering the US unemployment rate to 6%, required real GDP growth
Average real GDP growth, %ch saar If peak unemployment rate is 7.5% Time to 6%: 4 quarters 8 quarters 12 quarters 6.3 4.4 3.8 8.8 5.6 4.6 11.3 6.9 5.4 8.5% 9.5%
nearly stalled last quarter despite its track record as a lowbeta economy. Upcoming reports are expected to deliver double-digit GDP losses in Taiwan and possibly Japan. As brutal as this backdrop is, there are some tentative signs of improvement below the surface. Koreas GDP report revealed a significant inventory reduction, a constructive development for the medium-term outlook. It also appears that Chinese businesses liquidated inventories last quarter. In addition, regional governments have moved to provide trade financing, which was sharply curtailed last fall. (As USD liquidity dried up last fall, Korea also had to contend with an interruption of domestic credit stemming from concerns over banks external debt exposure; this has since eased.) These official measures are being supplemented by a broad easing of monetary and fiscal policies across the region. In the near term, the most tangible signs of improvement are expected in China, where the forecast calls for a steady, investment-led acceleration in the economy. Consistent with this view is acceleration in public infrastructure spending and tentative signs of restocking in some industries. Indeed, this weeks December reports delivered the first monthly gain in industrial production since midyear, notwithstanding a retail sales report that hinted at unexpected weakness in consumer spending. A sustained pickup in IP is a crucial marker, as this would suggest that the balance of goods demandfrom exports, inventory accumulation, consumption, and fixed investmentis gaining speed. A rebound in Chinese growth would be an important development for the rest of Asia, which has suffered disproportionately from the recent slump in Chinas imports. Whereas China is expected to rise, Japan appears to be sinking like a stone. This week we revised down our 4Q08 and 1Q09 GDP forecasts to near -10% annualized, reflecting a combination of plunging net tradeexacerbated by Japans dependence on automotive exports and the 30% leap in the yen TWI since Septemberand a deepening slide in domestic demand. A considerable inventory overhang also is expected to weigh on the economy. In addition, Japan has developed a home-grown credit crunch, prompting the BoJ to announce plans to support the CP market and possibly to buy corporate bonds.
Relying on current economic indicators alone is not sufficient, considering the potential for a further deterioration in credit markets. This week provided a timely reminder that market conditions remain fragile and that downside risks are significant. With fears of a severe recession punching large holes in financials balance sheets, bank stocks fell sharply this week. In addition, government bond yields spiked, indicating that there are costs to using countercyclical fiscal policy. As a result, corporate and household borrowing rates moved higher and concerns about credit availability remain heightened. Our forecast thus sees tension ahead between forces supporting lift and continued financial drags. While a secondhalf recovery is expected, global growth is projected to remain below trend until 2Q10. The upshot of this forecast is that a return to economic growth will not lead to an early restoration of economic health. Indeed, by the end of this year, industrial country unemployment rates are likely to approach, while budget deficits could rise above, their early 1980s peak levels. The degree to which this will present a long-lasting problem depends critically on what pace of growth will be necessary to reverse the rise in the unemployment rate. For the US, a return to a 6% unemployment rate by the end of 2011the top of the range recorded since the mid-1980swill likely require an average pace of GDP growth of 5.5% for more than two full years. As we have been emphasizing, the likelihood of sustained high unemployment and high budget deficits increases the risk that the US potential growth rate could slide to 2% as we turn toward the next decade.
Faint hope emerges in Asian downturn
In Asia, the steady drumbeat of bad economic news, dominated by extreme declines in trade flows and industrial production, is now culminating in severe declines in 4Q GDP. The first reports have come from Korea and Singapore, where GDP nosedived at annual rates of 20.8% and 16.9%, respectively. In less dramatic fashion, Chinas GDP growth
UK plans fail to calm markets
The handful of large institutions that constitute the UKs ailing banking sector grabbed the spotlight this week. The
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JPMorgan Chase Bank, New York Bruce Kasman (1-212) 834-5515 [e-mail] David Hensley (1-212) 834-5516 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
China: imports by region
%3m/3m saar 75 50 25 0 -25 -50 -75 2005 2006 2007 US Japan EM Asia 2008 EU
cisely because the market thinks the Fed will eventually buy government bonds. Policymakers are unlikely to agree to such a step at this time, but a baby-step in that direction seems feasible; e.g., the Fed will consider purchases of longer-term Treasuries if needed to support broader financial conditions.
Latin central banks shed inflation fears
This weeks decision by Brazil to cut the policy rate 100bp follows aggressive rate cuts by Chile (100bp) and Mexico (50bp) earlier this month. The abrupt shift in policy directionLatin central banks were tightening through late last yearis in response to the free-fall in activity and, diminished concerns that weaker currencies and lingering wage pressure would keep inflation above target. The forecast currently envisions further rate cuts of 225bp in Brazil and 150bp in Mexico, Chile, and Colombia before midyear. In Brazil this path would lead to a historically low rate, but there and elsewhere the forecasted policy rates would at best be modestly stimulative. Indeed, recent developments suggest that the risks to our economic and policy rate forecasts lie to the downside. The recent resilience of Latin fx rates suggests that markets will reward pro-growth policies.
light-touch implementation of the regulatory framework left the banks relatively thinly capitalized as the credit crunch began in 2007. Losses realized on investments outside of the UK on leveraged loans, subprime debt, and the purchase of financial institutions have eroded capital ratios, despite last Octobers state-sponsored recapitalization plan. At this stage, losses on UK mortgage and business loans are low, but they are rising dramatically as the recession takes hold. With many questioning the viability of these institutions, this weeks package of government measures to restart credit flows failed to provide sufficient clarity to markets. The government will offer the banks protection against losses on their assets, and guarantees on asset-backed securities they issue. But the cost and scope of such measures remains to be detailed. In the meantime, the governments share holdings in UK banks are rising, and the weakness of bank equity prices is making nationalization more likely. Concern over the stability of the banks, the potential liabilities the government may need to incur, and a steady diet of recessionary data have undermined sterling asset markets and the currency this week. Estimates provided by our banking team suggest that the state may ultimately need to socialize losses amounting to near 7% of GDP. This comes in addition to a budget deficit likely to exceed 8% of GDP in 2009, and a net debt to GDP ratio that is rising rapidly, albeit from a relatively low (47.5% of GDP) starting point.
Russia tries for ruble stability
The Central Bank of Russia this week announced an end to its policy of gradual ruble devaluation. The upper (weak) bound of the corridor was set at 41 and the lower at 26. The CBRs hope is that the relatively large final devaluation step will introduce two-way risk into the ruble trade and give the market a chance to stabilize, breaking the vicious cycle of gradual devaluation and high capital outflows. Two key risks to the sustainability of the corridor are the potential for an additional decline in oil prices and a further slide in economic activity. The ruble has depreciated only some 10% in real effective terms since end-July 2008, despite the major deterioration in the terms of trade. So unless Russias industrial sector shows some sign of vigor, it is possible that the ruble will weaken beyond its recently widened corridor.
Fed to discuss buying Treasuries
Next weeks FOMC statement almost certainly will announce that the 0-25bp target range is being maintained and that exceptionally low rates will prevail for some time owing to weak economic conditions. The more interesting issue is how the Fed will refer to potential purchases of longer-term Treasury securities. On the one hand, not much needs to be said as rates all along the Treasury curve are accommodative. At the same time, this may be true pre-
11
JPMorgan Chase Bank, New York Michael Feroli (1-212) 834-5523 [e-mail] Abiel Reinhart (1-212) 834-5614 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
US Indicator Forecasts
JPMorgan Research versus the consensus Release date/ Indicator
Mon, Jan 26 Existing home sales (Dec) Tue, Jan 27 S&P/Case-Shiller HPI (Nov) 20-city composite (%oya) Consumer confidence (Jan) Thu, Jan 29 Initial jobless claims (w/e Jan 24) Durable goods orders (Dec) Ex transportation New home sales (Dec) Fri, Jan 30 Real GDP (4Q advance) GDP deflator Employment cost index (4Q) Chicago PMI (Jan) Consumer sentiment (Jan final)
JPMorgan forecast
4.36 mn
Consensus median
4.40 mn
Consensus range
4.15 mn to 4.75 mn
-18.7% 38.0
-18.4% 39.0
-20.0% to -17.4% 35.0 to 42.0
585k - 2.8% -3.0% 395k
575k -2.0% -2.7% 400k
540k to 650k -4.0% to 1.3% -4.0% to -0.8% 350k to 431k
-5.5% 2.0% 0.6% 35.0 60.0
-5.4% 0.5% 0.7% 34.9 61.9
-7.0% to -3.0% -5.3% to 3.6% 0.4% to 0.8% 29.1 to 38.8 60.0 to 63.0
Source: consensus forecasts reported by Bloomberg.
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JPMorgan Chase Bank, New York Feroli Michael (1-212) 834-5523 [e-mail] Abiel Reinhart (1-212) 834-5614 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
Existing home sales (Dec)
Released on Mon, Jan 26 at 10:00am
We expect that existing home sales declined about 3% in December to an annualized pace of 4.36 million. This would be a new cycle low. Existing home sales had remained roughly stable from the fall of 2007 through October 2008, running at a pace near 5.0 million, but they then declined 8.6% in November to a pace of 4.49 million, Our forecast is based on the pending home sales index. The index, which leads existing home sales by one to two months, was down 4.2% in October and another 4.0% in November. Because existing home sales measure contract closings, they are a somewhat lagging measure of housing activity. As a result, the effect on lower mortgage rates on existing home sales probably will not become evident until the reports covering early 2009 are released. Be prepared to see a sizable inventory decline in this report, regardless of what happens to sales. The inventory figures are not seasonally adjusted, and inventories almost always decline in December. Over the last ten years they have declined an average of 8.2% during the month.
Pending home sales and existing home sales
Index , sa 130 120 110 100 90 80 70 2003 2004 2005 2006 2007 2008 Pending home sales (advanced one m onth) Existing sales Mn, sa 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0
Existing single-family: months' supply, homes for sale
Months, nsa 14 12 10 8 6 4 2 83 88 93 98 03 08 Months' supply Homes for sale Mn, nsa 4.0 3.5 3.0 2.5 2.0 1.5 1.0
Median price of existing single-family homes sold
%oy a 20 15 10 5 0 -5 -10 -15
90
92
94
96
98
00
02
04
06
08
Existing home sales
Millions of units, annual rate Existing home sales Single-family Inventory (000s, nsa) Months supply (months, nsa) month over month % change Existing home sales Single-family %oya, nsa Existing home sales Single-family Inventory Median price Average price May 08 4.99 4.41 4.48 10.8 2.0 1.6 -16.3 -15.2 2.4 -6.6 -6.7 Jun 08 4.85 4.26 4.50 11.1 -2.8 -3.4 -16.7 -16.2 2.9 -6.1 -6.6 Jul 08 5.02 4.41 4.58 10.9 3.5 3.5 -11.3 -10.5 0.3 -8.0 -8.2 Aug 08 4.91 4.35 4.34 10.6 -2.2 -1.4 -15.0 -14.0 -1.1 -9.5 -8.9 Sep 08 5.14 4.58 4.27 10.0 4.7 5.3 6.8 9.0 -2.2 -9.1 -8.7 Oct 08 4.91 4.37 4.20 10.3 -4.5 -4.6 -1.9 -0.5 -5.3 -9.8 -10.0 Nov 08 4.49 4.02 4.20 11.2 -8.6 -8.0 -17.0 -15.5 -0.3 -13.2 -12.3 Dec 08 4.36
-3.0
-11.3
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JPMorgan Chase Bank, New York Michael Feroli (1-212) 834-5523 [e-mail] Abiel Reinhart (1-212) 834-5614 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
S&P/Case-Shiller HPI (Nov)
Released on Tue, Jan 27 at 9:00am
We expect that the Case-Shiller index will show that home price declines were intensifying in November. We look for the Case-Shiller 20-city composite to have declined 2.6%m/m, the largest one-month decline to date. The already released FHFA home price index posted a 1.8% drop in November, a record. Although the Case-Shiller index has shown no sustained signs of leveling off, we point out that a considerable part of the earlier runup in housing prices has already been reversed. For instance, the ratio of prices to rents has fallen back to where it was in mid-2003. To return to where it was in 2000, the Case-Shiller 20-city index would need to decline another 11%. Of course, the fact that prices diverged from rents so much during the housing boom raises the question of whether prices will overshoot on the way down. We suspect so, given that inventories of homes are still very high and there are a large number of distressed properties hitting the market. While both the Case-Shiller and FHFA indices are pointing to intensifying home price declines, a separate index from LoanPerformance has very recently shown a moderation in declines. In the past, the LoanPerformance index has tracked both the Case-Shiller and FHFA indices fairly well, so this discrepancy will probably disappear soon.
Note: the LoanPerformance index presented here is different from the one that was presented last week in our preview of the FHFA index. We are now using the official singlefamily detached home index from LoanPerformance. Previously we were using a version of the national index derived by J.P.Morgan from state-level LoanPerformance price indices.
Home price indices
%oy a 30 20 10 0 -10 -20 92 94 96 98 FHFA purchase-only index 00 02 04 06 08 Case-Shiller 10-city index LoanPerformance index
Monthly changes in existing home prices
%m/m, sa 2 1 0 -1 -2 -3 Case-Shiller 20-city index 2005 2006 2007 2008 LoanPerformance index FHFA purchase-only index
Home price to rent ratio
Jan 1991=100, home price index /CPI ow ners' equiv alent rent 200 180 160 140 120 100 80 91 93 95 97 99 FHFA purchase-only index 01 03 05 07 Case-Shiller 10-city index
S&P/Case-Shiller home price indexes
%oya 20-city composite %m/m, sa 10-city composite
14
Apr 08 -15.2 -1.6 -16.3
May 08 -15.8 -1.3 -16.8
Jun 08 -15.9 -1.0 -17.0
Jul 08 -16.3 -1.1 -17.4
Aug 08 -16.6 -1.1 -17.7
Sep 08 -17.4 -1.8 -18.5
Oct 08 -18.0 -2.1 -19.1
Nov 08 -18.7 -2.6
JPMorgan Chase Bank, New York Michael Feroli (1-212) 834-5523 [e-mail] Abiel Reinhart (1-212) 834-5614 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
Consumer confidence (Jan)
Released on Tue, Jan 27 at 10:00am
In January, the consumer confidence index probably remained close to the record low of 38 that was set last month. Other confidence indices have also shown little change between December and January. The Michigan consumer sentiment index rose to 61.9 from 60.1, while the weekly ABC/WP consumer comfort index fell to -53 in the week ending January 17 from -48 a month earlier. The main point of interest in this report is that labor market differential, which measures the difference between the share of people saying jobs are plentiful and the share saying jobs are hard to get. This measure is useful because it is a decent predictor of changes in the unemployment rate. If the labor market differential keeps declining in January which it probably willthe unemployment rate will likely rise.
Conference Board consumer confidence
Index , sa 150 100 50 0
78
83
88
93
98
03
08
Consumer confidence report: expectations and present situation
Index , sa 200 150 100 50 0 78 83 88 93 Present situation
Expectations 98 03 08
Unemployment rate, Conference Board's labor market differential
Percent, sa 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 Net percent, sa, inv erted scale Labor market differential (Jobs plentiful less hard-to-get share) -40 -30 -20 -10 0 Unemployment rate 2003 2004 2005 2006 2007 2008 10 20
The Conference Board (1985=100)
Index, seasonally adjusted Consumer confidence Present situation (40%)1 Jobs-plentiful Jobs-hard-to-get Plentiful less hard-to-get Expectations (60%)
Source: The Conference Board
May 08 58.1 74.2 16.1 28.3 -12.2 47.3
Jun 08 51.0 65.4 14.1 29.7 -15.6 41.4
Jul 08 51.9 65.8 13.6 30.2 -16.6 42.7
Aug 08 58.5 65.0 13.5 31.7 -18.2 54.1
Sep 08 61.4 61.1 12.6 32.2 -19.6 61.5
Oct 08 38.8 43.5 9.0 36.6 -27.6 35.7
Nov 08 44.7 42.3 8.7 37.1 -28.4 46.2
Dec 08 38.0 29.4 6.2 42.0 -35.8 43.8
Jan 09 38.0
1. Weights in parentheses.
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JPMorgan Chase Bank, New York Michael Feroli (1-212) 834-5523 [e-mail] Abiel Reinhart (1-212) 834-5614 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
Initial claims (w/e Jan 24)
Released on Thu, Jan 29 at 8:30am
Last week initial jobless claims retouched their cycle high of 589,000, and we expect they remained elevated this week as well. We do not see them going anywhere near their recent low of 470,000 in the week ending January 3. That low reading probably only occurred because of seasonal adjustment problems, not changes in labor market fundamentals. The fundamentals are probably in line with January payroll declines that are near the average monthly drop of 510,000 in the prior three months. The next report will contain continuing jobless claims for the week ending January 17, which is the payroll and household survey week. Since the December survey week, continuing claims have increased 235,000 and the insured unemployment rate has risen a tenth of a percent.
Initial jobless claims
000s, sa 600 550 500 450 400 350 300 250
01
03
05
07
09
Continuing jobless claims
000s, sa 5000 4500 4000 3500 3000 2500 2000 01 03 05 07 09
Jobless claims
Dec 6 Initial claims (000s) Weekly change 4-week moving average Weekly change Continuing claims (000s) Weekly change 4-week moving average Weekly change Insured unemployment rate (%) 575 60 541 15 4387 -44 4227 93 3.3 Dec 13 556 -19 544 3 4372 -15 4320 94 3.3 Dec 20 589 33 559 15 4510 138 4425 105 3.4 Dec 27 491 -98 553 -6 4612 102 4470 45 3.4 Jan 3 470 -21 527 -26 4510 -102 4501 31 3.4 Jan 10 527 57 519 -7 4607 97 4560 59 3.4 Jan 17 589 62 519 0 Jan 24 585 -4 543 24
Source: US Department of Labor, Employment & Training Administration. 1. Employment survey week.
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JPMorgan Chase Bank, New York Michael Feroli (1-212) 834-5523 [e-mail] Abiel Reinhart (1-212) 834-5614 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
Durable goods (Dec)
Released on Thu, Jan 29 at 8:30am
Durable goods orders and shipments likely continued to decline in December. There are a whole range of factors weighing on the durable goods manufacturing industry. Car production is being cut drastically because of weak sales, exports are softening, and many domestic companies have slashed their capital expenditure plans. Since the data in this report are nominal, the falling price of metal will also lead to lower reported sales in the primary metal industry. Nondefense ex aircraft capital goodscore capital goods have been quite weak, but we think there is considerable room for them to fall. Shipments fell 2.2%oya in November and orders were down 2.5%. These were bad numbers to be sure, but not nearly as bad as in the previous recession, when shipments at one point declined 19% in a year and orders fell 25%. The one positive factor for December durable goods is aircraft. A Boeing strike was resolved in early November, and data from the company shows that shipments and orders of new planes jumped between November and December. Orders increased from 7 planes to 23 (not seasonally adjusted), and deliveries increased from 4 to 41. In addition to the data on orders and shipments, it will be useful to watch the inventory data in this report for any evidence of large inventory reductions. The inventory/shipments ratio has recently increased to its highest level since 1993, which suggests that manufacturers are going to need to make significant inventory cuts.
Nominal core capital goods orders and shipments
%oy a 20 10 0 -10 -20 -30 00 02 04 06 08 Shipments New orders
Motor vehicles
%m/m 10 5 0 -5 -10 -15 -20 2005
Assemblies (Industrial production report)
New orders
2006
2007
2008
Durable goods nominal inventory/shipments ratio
Sa 2.1 1.8 1.5 1.2 Excluding civilian aircraft 92 94 96 98 00 02 04 06 08
Total
Durable goods report
Month over month % change New orders for durable goods Core (excluding air and defense) Durable goods ex transportation Nondefense capital goods Core (excluding air and defense) Shipments of durable goods Core (excluding air and defense) Core capital goods (ex air and defense) Inventories of durable goods Unfilled orders for durable goods Core capital goods (ex air and defense) May 08 0.1 -0.9 -0.5 0.0 -0.3 -1.2 -1.0 0.2 0.5 0.9 0.9 Jun 08 1.4 2.2 2.6 -2.3 1.6 0.9 0.8 0.6 0.8 1.0 1.2 Jul 08 0.7 0.8 0.0 3.5 0.3 2.2 2.0 0.3 0.9 0.8 1.2 Aug 08 -5.5 -4.2 -4.2 -7.8 -2.3 -4.2 -4.1 -2.1 0.8 0.3 1.1 Sep 08 0.0 -2.4 -1.9 -1.1 -3.4 0.0 0.1 1.7 0.2 0.2 -0.5 Oct 08 -8.5 -6.7 -6.9 -6.5 -6.7 -3.4 -3.3 -3.7 0.4 -0.9 -1.4 Nov 08 -1.5 0.0 0.6 -1.5 3.9 -3.1 -2.8 -0.2 0.4 -0.6 -0.2 Dec 08 -2.8 -3.0 -2.0 -2.0 -1.5
Source: US Department of Commerce, Bureau of the Census (M3)
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JPMorgan Chase Bank, New York Michael Feroli (1-212) 834-5523 [e-mail] Abiel Reinhart (1-212) 834-5614 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
New home sales (Dec)
Released on Thu, Jan 29 at 10:00am
We expect that new home sales slid to an annualized pace of around 400,000 in December, down from 407,000 in November. If realized, new home sales would have essentially equaled their low in the early 1990s. A number of factors actually point to a rise in sales, including a large decline in mortgage rates in November and early December, and a 5.5% increase in mortgage purchase applications. Nonetheless, we remain hesitant to forecast an increase in sales. That is because the homebuilder index held at a record low between November and December, and then actually fell even lower in January. Builders also chose to slash single-family housing starts 13.5% during the month, on top of a 14.2% drop in November. Currently the months supply of new homes remains very near its cycle high. The months supply was 11.5 in November, and the high was 11.8 in the previous month. Housing starts are running well below sales, so any stabilization or improvement in sales will mean that the months supply begins to rapidly decline. Even so, it will probably not be until late this year that the months supply can fall to a more reasonable range, such as five months. The elevated level of inventories and large stock of existing homes that are also available are contributing to a rapid decline in new home prices. The median price of new homes sold in the three months to November was down 8.7% from the same period a year earlier, the largest decline in the current housing downturn.
New single-family home sales and starts for sale
Mn, saar 1.5 1.0 0.5 0.0 New single-family home sales
Single-family housing starts built for sale (the share built for sale is estimated in 4Q) 2004 2005 2006 2007 2008 000s, sa Months' supply New homes for sale 600 530 460 390 320 90 92 94 96 98 00 02 04 06 08 250
Inventory of new single-family homes
Months, sa 12 10 8 6 4 2
Median price of new single-family homes sold
%oy a, 3mma 30 20 10 0 -10 -20 64 69 74 79 84 89 94 99 04
New home sales
Millions of units, annual rate New home sales Inventory Months' supply (months) Median price ($000s) Average price ($000s) Month over month % change New home sales %oya, nsa New home sales Inventory Median price Average price Jun 08 0.499 0.445 10.9 234.3 299.4 -3.1 -38.4 -18.0 -0.5 -2.3 Jul 08 0.505 0.433 10.6 237.3 301.9 1.2 -36.8 -19.3 -3.6 -1.7 Aug 08 0.448 0.428 11.7 221.0 265.5 -11.3 -36.7 -20.6 -6.6 -11.9 Sep 08 0.442 0.415 11.2 225.4 286.4 -1.3 -34.0 -20.9 -6.2 -2.0 Oct 08 0.419 0.402 11.8 214.6 279.5 -5.2 -42.1 -21.6 -8.4 -9.9 Nov 08 0.407 0.374 11.5 220.4 287.5 -2.9 -37.8 -26.8 -11.5 -9.2 Dec 08 0.395
-3.0
-34.2
Source: US Department of Commerce, Census Bureau.
18
JPMorgan Chase Bank, New York Michael Feroli (1-212) 834-5523 [e-mail] Abiel Reinhart (1-212) 834-5614 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
Real GDP (4Q advance)
Released on Fri, Jan 30 at 8:30am
We expect that real GDP declined 5.5%q/q, saar in 4Q08, the largest drop since a 6.4% decline in 1Q82. The weakness was very widespread, with every type of final expenditure falling. Unfortunately, we are expecting that 1Q will turn out to be almost as bad as 4Q was, which is why we are forecasting a 5.0% drop for the current quarter. We expect that consumption dropped at a 3.6% pace last quarter. While a terrible number, it is actually not as big a fall as the 3.8% drop in 3Q. Given that GDP only fell at a 0.5% pace in 3Q, it must be other types of final expenditures that account for the much worse outcome in 4Q growth. The sectors that turned much worse between 3Q and 4Q include business investment and exports, and the decline in residential investment intensified again.
Gross domestic product
%ch, q/q, saar, unless noted Real GDP Real GDP (%oya) Final Sales Final Sales (%oya) Domestic final sales Domestic final sales (%oya) Net exports (contr., pct, pts) Inventories (contr., pct, pts) Consumption Equipment and software Nonresidential structures Residential investment Government purchases Net exports (bn, $00) Inventories (ch, bn, $00) Nominal GDP Nominal GDP (%oya) GDP chain price index GDP chain price index (%oya) Core PCE price index Core PCE price index (%oya) Corporate pretax profits (%q/q, sa) Corporate pretax profits (%oya) PCE Chain price index PCE Chain price index (%oya) Employee compensation Employee compensation (%oya) Wages and salaries Wages and salaries (%oya) 1Q08 0.9 2.5 0.9 2.5 0.1 1.1 0.8 0.0 0.9 -0.5 8.7 -25.0 1.9 -462.0 -10.2 3.5 4.7 2.6 2.3 2.3 2.2 -1.1 -1.5 3.6 3.5 3.5 3.9 3.3 4.0 2Q08 2.8 2.1 4.4 2.5 1.3 0.8 2.9 -1.5 1.2 -5.0 18.4 -13.3 3.9 -381.3 -50.6 4.1 4.1 1.1 2.0 2.2 2.3 -3.8 -8.3 4.3 3.7 1.2 3.5 0.8 3.5 3Q08 -0.5 0.7 -1.3 1.2 -2.2 -0.2 1.1 0.8 -3.8 -7.5 9.6 -16.1 5.8 -353.1 -29.6 3.4 3.3 3.9 2.6 2.4 2.3 -1.2 -9.2 5.0 4.3 2.4 3.1 2.4 3.0 Adv 4Q08 -5.5 -0.6 -5.9 -0.6 -5.1 -1.5 -0.8 0.4 -3.6 -20.0 -2.0 -30.0 1.4 -372.1 -17.9 -3.6 1.8 2.0 2.4 0.4 1.8
Real GDP
%oy a 10 5 0 -5 Forecast
80
85
90
95
00
05
Although the current recession has sometimes been characterized as one led by the consumer, business equipment and software investment actually began to fall before consumption did. The pace of cuts has steadily accelerated throughout the year, but appears to have gotten considerably worse last quarter. We predict a 20% annualized decline after a 7.5% drop in 3Q. Not all of this intensification is the result of fundamentals, however: a strike at Boeing led to a big slowdown in aerospace production from September to November. Nonresidential construction also turned worse in 4Q, and we predict a 2% drop, the first fall in about three years. This is just the tip of the iceberg, however, as nonresidential construction should fall through 2009. Financing conditions have become much tighter, vacancies are rising, and demand is falling. Moreover, the energy price decline is causing a reversal of a boom in well drilling, which accounts for a quarter of nonresidential construction spending. One uncertainty is what inventories will do. We expect them to have fallen at about a $18 billion annualized pace. Because that is not as large as the $30 billion fall in 4Q, inventories will contribute 0.4 %-point to growth. It is difficult, however, to precisely estimate real inventory changes when prices are changing very rapidly, as was the case last quarter.
-5.6 1.7
19
JPMorgan Chase Bank, New York Michael Feroli (1-212) 834-5523 [e-mail] Abiel Reinhart (1-212) 834-5614 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
Employment cost index (4Q)
Released on Fri, Jan 30 at 8:30am
The rate of increase in compensation has recently fallen, a trend that we expect to have continued in the fourth quarter of last year. Compensation rose 2.9%oya in 3Q, the slowest growth since the four quarters to 1Q06. Average hourly earnings rose 1.0% between September and December, about the same as the 0.9% increase between June and September. However, any bonus income should have been less than in the previous year. We expect that the 4Q wage and salary compensation index will have risen 0.6% (not annualized), after having risen 0.7% in 3Q. The rate of increase in benefit costs may have also slowed, because of moderating growth in medical care costs. We estimate that the PCE medical care deflator rose between 0.1% and 0.2% in the three months to December, one of the smallest increases in the past fifty years, and well below the 0.7% rise from June to September.
Employment cost index: civilian nonfarm compensation
%oy a 5.5 5.0 4.5 4.0 3.5 3.0 2.5 90 92 94 96 98 00 02 04 06 08
ECI wages and salaries, average hourly earnings
%oy a 4.5 4.0 3.5 3.0 2.5 2.0 1.5 90 92 94 Average hourly earnings 96 98 00 02 04 06 08 ECI wages and salaries, private nonfarm
Benefit costs
%oy a 8 6 4 2 0 PCE medical care deflator, with December forecast 90 92 94 96 98 00 02 04 06 08 Benefit cost index
Employment cost index
%q/q, sa Compensation costs Private Wages and salaries (70) Private Benefits (30) Private
20
Employment cost index
1Q08 0.7 0.8 0.8 0.8 0.6 0.6 2Q08 0.7 0.6 0.7 0.7 0.6 0.5 3Q08 0.7 0.6 0.7 0.6 0.6 0.6 4Q08 0.6 0.5 0.6 0.5 0.5 0.5 %oya, nsa Compensation costs Private Wages and salaries (70) Private Benefits (30) Private 1Q08 3.3 3.2 3.2 3.2 3.5 3.2 2Q08 3.1 3.0 3.2 3.1 2.9 2.6 3Q08 2.9 2.8 3.1 2.9 2.6 2.4 4Q08 2.7 2.5 3.0 2.7 2.3 2.1
JPMorgan Chase Bank, New York Michael Feroli (1-212) 834-5523 [e-mail] Abiel Reinhart (1-212) 834-5614 [e-mail]
Economic Research US Weekly Prospects January 23, 2009
Consumer sentiment (Jan final)
Released on Fri, Jan 30 at 9:55am
We expect a small decline in the consumer sentiment index, to 60.0 to 61.9, between the preliminary and final January reports. The economic news has remained generally grim, gas prices have edged up 16 cents in two weeks, and the stock market has declined. On the other hand, sentiment may get a boost from the inauguration of President Obama. Although consumer sentiment remains at extremely depressed levels, there were a few pieces of good news in the preliminary January report. The first one was that five- to ten-year inflation expectations rebounded to 3.0% from 2.6%. The December reading of 2.6% had been the second lowest print on record, which was worrisome given concerns about deflation. The second piece of good news was an increase in reported buying conditions for homes and cars. The home-buying conditions index is now at its highest level since March 2005, and the vehicle-buying conditions index is at its highest level since September 2007.
Michigan consumer sentiment
Index 120 100 80 60 40 80 85 90 95 00 05
Michigan sentiment survey: home-buying conditions
Index 200 180 160 140 120 100 85 90 95 00 05
Michigan 5-10 year median inflation expectations
Percent change at annual rate 5.0 4.5 4.0 3.5 3.0 2.5 90 92 94 96 98 00 02 04 06 08
Michigan sentiment survey: car-buying conditions
Index 180 160 140 120 100 80 60 78 83 88 93 98 03 08
University of Michigan sentiment index
Nonseasonally adjusted 1Q66=100 Jul 08 61.2 73.1 53.5 5.1 3.2 138.0 Aug 08 Sep 08 63.0 70.3 71.0 75.0 57.9 67.2 4.8 4.3 3.2 3.0 146.0 140.0 Oct 08 57.6 58.4 57.0 3.9 2.9 117.0 Nov 08 55.3 57.5 53.9 2.9 2.9 145.0 Dec 08 60.1 69.5 54.0 1.7 2.6 130.0 Pre Jan 09 61.9 69.2 57.2 2.0 3.0 150.0 Fin Jan 09 60.0
Consumer sentiment Current conditions (40%)1 Expectations (60%) Median 1-year ahead inflation expectations Median 5-year ahead inflation expectations Home buying conditions
Source: University of Michigan. 1. Weights in parentheses.
21
JPMorgan Chase Bank Bruce Kasman (1-212) 834-5515
Economic Research US Weekly Prospects January 23, 2009
JPMorgan US forecast
%q/q, saar 1Q08 2Q08 Gross domestic product Real GDP Final sales Domestic Consumer spending Business investment Equipment Structures Residential investment Government Net exports ($bn, chained $2000) Exports (goods and services) Imports (goods and services) Inventories (ch $bn, chained $2000) Contribution to real GDP growth (% p...