Econnomic outlook

8/7/2019 Econnomic outlook

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The Economic Outlook

William F. Achtmeyer, Cha irma n and Managing PartnerRoger E. Brinner, Ph.D., Partner and Chief Ec onomist

May 25, 2010


2/32

Key Topics

The Great Recession in Historical Perspective

The Range of Opinion on the Outlook

Facts and Myths: Consumer Behavior

Challenges to the Recovery After 2010

1


3/32

Our US Current Forecast Compared

Real GDP Growth Versus 4 Quarters Ago: Past 3 and Current Business Cycles

to Recent Major Recessions

10%10%

go

History Forecast

5%5%

thvs.

Year

A

0%0%

lGDPGro

w

1974-1975

-5%-5% 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3

Re

Current

1990-1991

1981-1982

-

2005

2006

2006

2007

2007

2008

2008

2009

2009

2010

2010

2011

2011

2012

2012

2

Parthenon expects the recovery will be better than the consensus expects in 2010, but run into trouble in

2011 as fiscal and monetary policies are tightened

Note: Cycles are aligned on the first quarters of near zero real GDP growth versus a year earlier: The 1990-91 cycle alignment implies 2008 Q3=1990Q4; the 1980-81 cycle implies 2008 Q3=1981 Q4; and the 1974-75 cycle implies 2008 Q3=1974 Q1.Source: Parthenon Anal sis Bureau of Economic Anal sis


4/32

A Gradual Employment Recovery Will Begin inEarly 2010, a Half-Year Behind GDP Because ofBusiness Conservatism

Real GDP, Employment, and Productivity Relative to Peak

106%

107%

108%108%

106%

107%

108%108%

cession

Real GDP

Payroll Employment

Productivity106%

107%

108%

106%

107%

108%

ces

sion

Real GDP

Payroll Employment

Productivity

History Forecast

102%

103%

104%

105%

102%

103%

104%

105%

eginningofR

102%

103%

104%

105%

102%

103%

104%

105%

eginningofRe

GDPRecession GDP

Recession

99%

100%

101%

99%

100%

101%

eRelativeto

B

99%

100%

101%

99%

100%

101%

Relativeto

B

95%

96%

97%

98%

95%

96%

97%

98%

Performanc

95%96%

97%

98%

95%96%

97%

98%

Perf

ormanc

94%94%

2007Q1

2007Q3

2008Q1

2008Q3

2009Q1

2009Q3

2010Q1

2010Q3

2011Q194%94%

1980Q2

1980Q4

1981Q2

1981Q4

1982Q2

1982Q4

1983Q2

1983Q4

3

- yc e

Source: Parthenon Analysis, Bureau of Economic Analysis

urren yc e


5/32

Where Is the Stock Market Headed?

US Stock Market in Prior Crashes(Indexed by Peak Day to Current Levels)

18000

20000

e ) 1987 Crash

1974 Crash

1929 CrashJune 09

Forecast RangeOct 2007

Aug 1987

DJIA Peak

12000

14000

strialAverag

to

2007Pea 2008 Crash an

Sep 1929

6000

8000

10000

wJonesIn

d

ea

ks

Indexe

d

Today

0

2000

4000

5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1

D (

1/2/19

1/1/19

1/6/19

1/5/19

1/4/19

1/3/20

1/1/20

1/7/20

1/6/20

1/5/20

1/3/20

1/2/20

1/1/20

1/7/20

1/5/20

1/4/20

1/3/20

4

conom c recovery was s pro ec e o r ng a ou ngof the market from mid 2009 to late 2011


6/32

Key Topics





5


7/32

The Range of Outlook Opinion at Selected Key

Real GDP Growth Forecasts for 2009-2011,

Dates: Parthenon and the Blue Chip Survey

t

Official 2008 1.4%

Nov 2009Nov 2008 May 2010

By Date of Forecast

ei

ng

Foreca

c a - .

Blue Chip Top 10 0.3%

Blue Chip Average (52) -0.4%09

Year

Parthenoncorrect:below

Blue Chip Bottom 10 -1.1%Parthenon -2.1%

Blue Chip Top 10 3.4% 3.6%

2Consensus

catching up toParthenon

ottom

Blue Chip Average 2.7% 3.2%

Blue Chip Bottom 10 2.0% 3.0%Parthenon 3.3% 3.7%

2010

Parthenon

near top

Blue Chip Top 10 4.0%

Blue Chip Average 3.1%

Blue Chi Bottom 10 2.1%2011 Parthenon

near

6

Parthenon 2.6%

Source: Blue Chip Economic Indicators


8/32

Key Indicators Spectrum for 2010:Progress Is Being Made Toward Full Year Predictions

Most Current Reading NOV. 2009 FORECAST for CY 2010 Average

Downside Case Base Case Upside Case

65-75 80-90 90-100

Key Indicators Normal2009

Average

December Reading

5.5% 5.25% 5.0%

Mortgage Rate (%)

450 550 650 Single Family Housing Starts

4.5%+Inflation

5.1%

(thousands, at annual rate)

2-3% 2-2% 2-2%Credit Risk Premiums:baa corp. bond-Treasury bond

1000-1100 1250-1350 1350-1500

2% 2.0%

S&P 500

0% 10% 15% Business EquipmentSpending Growth

0-5% 10-12% 12-15% -

6%

1100

965

-16.6%

Export Growth (yr. ago)

6%

CY2009 Outlook and Implicationsof Current Indicator Readings Downside Case Base Case Upside CaseNormal

-11%

2009Average

United States

US Major Trading Partners

-

3-4%

-

1-2%

-

2-3%

2.5%

3.0%

-3.4%

-2.5%

Other Important Global Markets

US Unemployment Rate

6-7%

9-9.5%

3-4%

10.5-11.5%

5-6%

9.5-10.5%

6.5%

5.0%

9.3%

-1.5%


9/32

Key Topics





8


10/32

Even Though the Crisis Was Assumedto Start in the US Housing Market,

Annualized Growth in Real GDP Versus Prior Quarter for the UK, the US and the Euro Zone

the European Recessions Are More Severe

6%

8%

ior

United Kingdom

United States

OECD Europe

0%

2%

4%

ersustheP

lGDP(%)

-4%

-2%

edChange

arterinRea

-10%

-8%

-6%

A

nnualizQu

2007Q1

2007Q

2007Q

2007Q

2008Q1

2008Q

2008Q

2008Q

2009Q1

2009Q

2009Q

2009Q

2010Q1

9Source: Global Insight; OECD

exceptionally high oil and commodity prices US monetary and fiscal stimulants have been greater and continue in 2010


11/32

Responding to Late and Tepid Stimulus, Retail

Quarter over Quarter Growth in Real Retail Sales for Major Markets

Sales Volumes Are Notably Weakest in Europe

15%

20%

arter

30%

40%China

5%

10%

vs.PriorQ

10%

20%

-5%

0%

lizedGrow

t

-10%

0%

-20%

-15%

-

Annua

United StatesEuropean Union

Germany

-40%

-30%

-China

2007Q1

2007Q

2007Q

2007Q

2008Q1

2008Q

2008Q

2008Q

2009Q1

2009Q

2009Q

2009Q

2010Q1

10Source: Global Insight


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Key Topics





11


13/32

Panic Seems to Be Eroding, but Confusion andUncertainty About the Future Still Remain

Is a trueparadigm shift

occurr ng nconsumers

spending?

12

Myth: The Depression Created a Generation


14/32

Myth: The Depression Created a Generationof High SaversReality: The Personal Saving Rate Fell Early in the

Personal Saving Rate and Periods of Recession, 1929-2009

Depression Then Recovered to a Normal ~5% Rate

30%30%

ea

lGDP

Savings Rate

NegativeGDP Growth

10%10%

alGrow

thin

0%0%

atean

dAn

nu

-20%

-10%

-20%

-10%

30

32

34

36

38

40

42

44

46

48

50

52

54

56

58

60

62

64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

Sav

ings

R

09

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2

13Source: Bureau of Economic Analysis

a on ng prope e sav ng n ,followed by a gradual savings rise until 1982


15/32


16/32

Consumers Are Evolving Towards Value Retailing Tough Times Simply Accelerate This Evolution on

Unemployment Rate Versus Value Shopping as a Percent of Core Retail

a Temporary Basis

10

11

19%

20%

Value Share of Core

Unemployment Rate

Trend at 4% Unemployment

WholesalS

(excl.gas

8

9

17%

18%

mentRat

eCluband

toreShare

line,moto

5

6

15%

16%

Unemp

loDiscount

ofCoreR

r

vehicles,

3

4

13%

14%

1 1 1 1 1 1 1 1 1 1 1 1

epartment

tail

estau

rant

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

)

15

e curren s o va ue s opp ng s propor ona o e re a ve r se n unemp oymen :both are 3x as great as during the 2001-2002 recession

Source: Parthenon analysis; Bureau of Economic Analysis


17/32


18/32

Consumers Indicate That Their Long-Term SpendingPhilosophy Will Be Different Post-Recession

situation and the general economy fully recover?

40%

50%

39%

43%

en

ts

39% saying they willpermanently shift how

30% I will permanentlyshift how I viewspending, living

I'll revert to mostof my old spendingways, but in someways will be moreg

eo

fResp

on

10%

20%,

hopefully savinga lot more, andincurring a lot

less debt thanI used to

mindful of generallyspending less,

incurring less debt,

and saving more

I'll be able andwilling to spend

more than or as muchas I did before the

18%

Percen

ta

0%

means incurringsome debt)

17Source: Consumer Survey (n=1,500)

How much panic and uncertainty still exist???


19/32

HOWEVER, the Neutral Question of Expectationsfor Future Spending (vs. the Loaded PhilosophicalQuestion), Produces a Different Story

Anticipation of Future Spending By Philosophy

50%

39% Will spend more

43%Will spend significantly more

Will spend significantly more

Q: When your personal

30% No impact - willspend the same

Will spend more

Will spend Slightly more Will spend Slightly moreeconomic situationand the generaleconomy fullyrecover, how doyou envision your

20% Will spend slightly less

No impact - willspend the same

Will spend more

Will s end Sli htl more

18%Will spend significantly more

overall spending

on goods andservices changing?

0%

10%

I will permanently shift how I view

Will spend less

Will spend significantly lessI'll revert to most of my old spending

Will spend slightly less

Will spend lessI'll be able and willing to spend more

Will spend slightly less

No impact - willspend the same

Will spendsignificantlyless

Will spend lessWill spendsignificantly less

Q: What do you thinkyour spendingphilosophy willmost likel be when

spen ng, v ng w n my means,hopefully saving a lot more, and

incurring a lot less debt than I used to

ways, u n some ways w e moremindful of generally spending less,incurring less debt, and saving more

an or as e ore e recess on(even if it means incurring some debt)your personal

economic situationand the generaleconomy fullyrecover?

18

e ars: n y o consumers expec ochange their spending habits

Source: Consumer Survey (n=1,500)


20/32

Consumer Segments Show Meaningful Variation inTheir Expectation of Future Behavior

% S endin Lesspen ng ess

Than One Year AgoAfter Recovery ThanPrior to Recession

Wtd Avg = 45% Wtd Avg = 17%

66%

48%

22%

24%Empty Nesters

UnemployedrdestHit

58%

49%

18%

21%Families

Low Incomentyle

Ha

35%

38%

14%

15%Retired

Higher Incomey

Le

Lifes

32%

33%

10%

11%Top Earners

Young w/o KidsFinancial

Flexible

19Note: % Spending Less includes respondents who (intend to) spend less or spend significantly less, but excludes spend slightly lessSource: Consumer Survey (n=1,500)

0% 20% 40% 60% 80% 0% 10% 20% 30%


21/32

The Prevalence of Most Thrift ShoppingBehaviors Has Decreased Since Last Juneand Will Fall Further

70% Doing More - June '09

Doing More - January '10

save money?

50%

60%

spon

den

tsExpecting to Do This Permanently

30%

cen

tageo

fR

10%

Pe

Delaying

purchasesof higher

priceditems

Staying

at homemore to

avoidspendingoutside

Looking for/

waiting forsales

Usingcoupons

Doing

thingsmyself

instead ofpaying

someone

Closely

monitoringand

stickingto a budget

Shifting

spendingto private

labelproducts

Shifting

spendingto cheaper

brand nameproducts

Doing

researchon which

productto buy

Shifting

spendingto cheaper

stores

Using lower

quantities/frequency

of products

20Note: Does not include respondents who do not engage in the respective thrift shopping behaviorSource: Consumer Survey (n=1,500)

ome r s opp ng w preva , u mos consumersalready expect to revert to their norms


22/32

Consumers Unwillingness to Pay for CertainProduct Benefits Has Decreased as Well

The sharpest reversion to date in

spending on natural / organic products

provide the following benefits and/or have the following characteristics?

60%

70%

en

ts

Less Willing to Pay More For June '09Less Willing to Pay More For January '10Expect To Continue January '10

indicates consumers resonance withrenewed values and priorities

40%

50%

eo

fResp

on

20%

30%

Percen

ta

0%

10%

PersonalIndulgence

PremiumBrands

Natural /Organic

Save meTime (from

Green/Good for the

Health& Wellness

Safetyand Control

21

or ewar av ng o oit myself) nv ronmen

Note: Percentage spending less for each category does not include respondents who have been and remain unwilling to pay moreSource: Consumer Survey (n=1,500)


23/32

Consumers Cut Back Most on DiscretionaryCategories, and Some Should See Quick Recovery

Question 1: In which categories are you spending less?

4 783 5 6 21

Question 2: In which categories do you expect to increase spending most quickly? [# = rank order]

80% 77%

60%

70%72

71%

70%

70%

70%

66%

66%

64%

64%

64%

64%

61%

60%

59%

59%

58%

4%

%ts

40%

50%

52

50

45%

44%

43%

43%

40%

37%

ofRespon

de

20%

30% 29

P

ercentag 29

19%

0%

10%

outatsit-

staurants

watches

vacations

utatfast-

staurants

g/apparel

spectator

usements

lectronics

oys,

dolls,

ndgames

osmetics

perfumes

Shoes

Furniture

tyshops

ns,spas)

gambling

andother

ppliances

Candy

ortingand

quipment

zinesand

wspapers

ine,

And

edSpirits

itableand

usgiving

Groceries

althclubs

apparel

ene,care,

products

cleaning

products

escription

drugs

(Devices)

tproducts

services

ldutilities

tiondrugs

22Note: Percentage spending less for each category does not include respondents who did not or are not currently buying these productsSource: Consumer Survey (n=1,500)

Eatin

g

down

r

Jewelryan

Out-of-town

Eating

food

r

Cloth

in

Admissionto

am

Consumer

T a

an

d

Bea

(sa

l

Lotteriesan

d

Kitchen

household S

p

fitness M

ag

a

N

e

Beer,

Distill

Char

relig

i

H

Babyfood

Personalhygi

andbeau

t

Househo

l

Non-p

CellPhone

s

P

e

Househ

Prescrip

W B li C A R ll ti S di


24/32

We Believe Consumers Are Reallocating Spending,but Not How MuchThey Will Spend Once theEconomy Has Healed

Is a trueparadigm shift

occurring?NO!

23


25/32

Key Topics





24

Federal Taxes Are Headed Sharply Higher While


26/32

Federal Taxes Are Headed Sharply Higher, Whilethe Spending Stimulus Is Fading: Such Fiscal

Federal Receipts and Spending Relative to GDP, 1960-2015

Restraint Trims Growth After 2010

20%

22%24%26%

20%

22%24%26%

History Forecast

10%12%14%16%

10%12%14%16%

ofGDP

to

fGDP

Surplus/Deficit(-)/GDP

-2%0%2%4%

6%

-2%0%2%4%

6%

Percen

t

Percen

Spending/GDP

axes

-12%-10%-8%-6%-4%

-12%-10%-8%-6%-4%

67

71

75

79

83

87

91

95

99

03

07

11

15

19

19

19

19

19

19

19

19

19

20

20

20

20

=> -

25

Even with a return to full employment in 2015, new programs will have raised the spending share of GDP to

23% versus a typical value of 20%

Source: Parthenon Analysis; Bureau of Economic Analysis


27/32

As Unemployment Recedes, the Fed Will PushShort-Term and Long-Term Rates Higher

Interest Rates Versus Inflation and Unemployment, 1999-2012F

12 12Unemployment Rate History Forecast

8 8

t

.

CPI Inflation

10-Year Treasury Note Rate

4 4Per

ce

Perce

nt

0 0

- -

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

2011Q1

2012Q1

2013Q1

26


28/32

OPECs Production Restrictions Have Brought OilBack to $80-plus and Cut Real Incomes 1%

The Energy Price Burden: Percentage Reduction in Real Income Due to Oil Price >$25 (Real 2000 Prices)

3.0% $125

ice

Additional Energy Burden

Actual Oil Price per Barrel

Oil Price if Held at $25 plus inflation

History Forecast

2.0%

$75

etoHigher

P

ome

)

cenario

0.0%

.

$50

gy

Burden

Du

(%o

fIn

OilPric

eS

-1.0% $0

$25

1 1 1 1 1 1 1 1 1 1 1 1 1

Ener

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

27

The Greek Economic Bailout Is the Largest


29/32

The Greek Economic Bailout Is the LargestSovereign Bailout in History, Both in Size andRelative to the Economy

Size of Bailout Package, Size of Bailout Package

$150B $145B

al)

50%

44%

P

$100B

Pac

kage

($B,Nomin

30%

age

ofGDP

lNom

ina

lG

$50B

To

talBailou

t

$55B$50B

$42B $41B

BailoutTotal

20%

Ba

iloutP

ac

aPercen

tag

11%

17%

ntageofT

ot

$0BGreece South Korea Mexico Indonesia Brazil

0%

10%

Greece

as

South Korea Mexico Indonesia Brazil

5%Perce

2009 1997 1995 1997 1998Year

28Source: IMF

Relative to World GDP the EuroZone Bailout Is


30/32

Relative to World GDP, the EuroZone Bailout IsSignificantly Larger Than TARP or the BailoutsDuring the 1997 Asian Crisis

Size of Bailout Packages Relative to World GDP

2.00%

Greece

1.90%

1.50%

1.14%WorldGDP

0.50%

1.00%

US - TARP

EuroZone

ercentageo

0.00%1995

Mexico

0.17%

1997

Indonesia

South Korea

0.32%

1998Brazil

0.14%

2008 2009

P

29Source: IMF


31/32

Government Deficits, Adjusted for Recessions

Government Cyclically-adjusted Balances as Percentage of GDP

2%

4%

justed

History Forecast

-2%

0%

United States(Federal)

Cyclically-A

%o

fGDP)

-8%

-6%

-4% Euro area

Greece

overnme

nt

alances(as

-12%

-10%

2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2G

eneral

Current government deficitproblems are not novel

19

19

19

19

19

19

19

19

20

20

20

20

20

20

20

20

20

20

20

20

20

30Source: OECD


32/32

About The Parthenon Groupand Contact Information

About The Parthenon Group

The Parthenon Group is a leading advisory firm focused on strategy consulting with offices in Boston, London, Mumbai, andSan Francisco. Since its inception in 1991, the firm has embraced a unique approach to strategic advisory services built onlong-term client relationships, a willingness to share risk, an entrepreneurial spirit, and customized insights. This unique

approach has established the firm as the strategic advisor of choice for CEOs and business leaders of Global 1000corporations, high-potential growth companies, private equity firms, educational institutions, and healthcare organizations.

Roger BrinnerPartner and Chief Economist

The Parthenon Grou

Bill AchtmeyerChairman and Managing PartnerThe Parthenon Grou

For further information, please contact:

617-478-4690

Assistant: Joan Consilvio617-478-4626

617-478-4600

Assistant: Mary Ann Watts617-478-4644

..

31

Econnomic outlook

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