Recovery: Uneven, But Gaining Steam! · The Great Recession 1-2 Punch of Credit Crisis and Consumer...

Jon Haveman Owner, Compass Economics TMA– February 17, 2011

Recovery: Uneven, But Gaining Steam!

The Great Recession 1-2 Punch of Credit Crisis and Consumer Retrenchment

-‐8

-‐6

-‐4

-‐2

0

2

4

6

8

Q1-‐06

Q2-‐06

Q3-‐06

Q4-‐06

Q1-‐07

Q2-‐07

Q3-‐07

Q4-‐07

Q1-‐08

Q2-‐08

Q3-‐08

Q4-‐08

Q1-‐09

Q2-‐09

Q3-‐09

Q4-‐09

Q1-‐10

Q2-‐10

Q3-‐10

(%)

Source: Bureau of Economic Analysis

GDP Growth (SAAR) to Q3-‐10

US Unemployment

Source: Bureau of Labor StaEsEcs Source: Bureau of Labor StaEsEcs

4

5

6

7

8

9

10

11

Jan-‐07

Jun-‐07

Nov-‐07

Apr-‐0

8

Sep-‐08

Feb-‐09

Jul-‐0

9

Dec-‐09

May-‐10

Oct-‐10

(%)

Unemployment Rate to January

152.0

152.5

153.0

153.5

154.0

154.5

155.0

155.5

Jan-‐07

Jun-‐07

Nov-‐07

Apr-‐0

8

Sep-‐08

Feb-‐09

Jul-‐0

9

Dec-‐09

May-‐10

Oct-‐10

Millions of P

eople

Labor Force to January

<- Recession -> <- Recession ->

Jobs, Jobs, Jobs Jan-‐03 to Dec-‐07

Dec-‐07 to Dec-‐09

2010 Change

Total Nonfarm 7,685 -‐8,363 951 Prof/Business 2,127 -‐1,563 373 EducaTon/Health 2,121 791 369 Admin Support 709 -‐1,114 355 Health Care 1,814 661 299 Leisure/Hospitality 1,362 -‐544 183 Manufacturing -‐1,141 -‐2,192 114 Other Services 115 -‐200 88 Retail Trade 612 -‐1,206 70 Transport/Warehouse 340 -‐377 45 Wholesale Trade 406 -‐474 45 Federal Government -‐34 69 13 State Government 106 38 5 UTliTes -‐30 0 -‐6 InformaTon -‐241 -‐275 -‐31 ConstrucTon 787 -‐1,795 -‐81 Financial AcTviTes 314 -‐570 -‐84 Local Government 679 -‐3 -‐238

Source: Bureau of Labor StaEsEcs

Change in Payrolls by Sector

-‐1000

-‐800

-‐600

-‐400

-‐200

0

200

400

600

Jan-‐07

Jun-‐07

Nov-‐07

Apr-‐0

8

Sep-‐08

Feb-‐09

Jul-‐0

9

Dec-‐09

May-‐10

Oct-‐10

Chan

ge in Payrolls (T

housan

ds)

NaEonal Change in Payrolls to January

California: A widespread hit Nov-‐10 Peak to

Current (%) Inland Empire 1,096.6 -‐14.1 Santa Rosa 168.8 -‐11.9 Oakland (MD) 929.0 -‐11.7 Stockton 187.8 -‐11.4 Orange County (MD) 1,362.6 -‐10.7 Modesto 144.5 -‐10.4 Ventura 270.4 -‐9.4 San Francisco (MD) 910.4 -‐9.2 Los Angeles (MD) 3,756.7 -‐9.1 San Jose 845.2 -‐8.3 Salinas 119.2 -‐8.0 San Diego 1,209.5 -‐8.0 Bakersfield 222.1 -‐7.4 Santa Barbara 162.1 -‐7.1

Source: California Employment Development Department Source: California Employment

Development Department

4 5 6 7 8 9 10 11 12 13 14

13,000

13,500

14,000

14,500

15,000

15,500

Jan-‐98

Sep-‐99

May-‐01

Jan-‐03

Sep-‐04

May-‐06

Jan-‐08

Sep-‐09

(%)

Thou

sand

s

State Labor Markets to December

Total NonFarm Unemployment Rate

Why did it happen?

•  Housing •  Consumers •  Financial Markets

Roots of the Great Recession

Source: Federal Reserve Board, Bureau of Economic Analysis


0

1

2

3

4

5

6

7

8

Q1-‐90

Q4-‐91

Q3-‐93

Q2-‐95

Q1-‐97

Q4-‐98

Q3-‐00

Q2-‐02

Q1-‐04

Q4-‐05

Q3-‐07

Q2-‐09

% of D

ispo

sable Income

BEA U.S. Personal Savings Rate to Q3-‐10

2.5

3.0

3.5

4.0

4.5

5.0

Q1-‐52

Q2-‐56

Q3-‐60

Q4-‐64

Q1-‐69

Q2-‐73

Q3-‐77

Q4-‐81

Q1-‐86

Q2-‐90

Q3-‐94

Q4-‐98

Q1-‐03

Q2-‐07

% of G

DP

Net Wealth of the U.S. to Q3-‐10

60

80

100

120

140

160

180

200

Q1-‐87

Q1-‐88

Q1-‐89

Q1-‐90

Q1-‐91

Q1-‐92

Q1-‐93

Q1-‐94

Q1-‐95

Q1-‐96

Q1-‐97

Q1-‐98

Q1-‐99

Q1-‐00

Q1-‐01

Q1-‐02

Q1-‐03

Q1-‐04

Q1-‐05

Q1-‐06

Q1-‐07

Q1-‐08

Q1-‐09

Q1-‐10

Inde

x = 100 in Q1-‐00

Source: Standard and Poor’s

National Housing Markets Case-Shiller US National Values to Q3-10

National Credit Bubble

10 12 14 16 18 20 22 24 26 28 30

Q1-‐65

Q1-‐69

Q1-‐73

Q1-‐77

Q1-‐81

Q1-‐85

Q1-‐89

Q1-‐93

Q1-‐97

Q1-‐01

Q1-‐05

Q1-‐09

(%)

Source: Federal Reserve Board

Household Debt as % of Net Worth to Q3-‐10

0

10

20

30

40

50

60

70

80

Q1-‐52

Q4-‐56

Q3-‐61

Q2-‐66

Q1-‐71

Q4-‐75

Q3-‐80

Q2-‐85

Q1-‐90

Q4-‐94

Q3-‐99

Q2-‐04

Q1-‐09

(%)

Consumer Debt as % of GDP to Q3-‐10

Mortgage Other Consumer Credit Source: Federal Reserve Board

Financial Sector Imbalance


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Q1-‐52 Q2-‐57 Q3-‐62 Q4-‐67 Q1-‐73 Q2-‐78 Q3-‐83 Q4-‐88 Q1-‐94 Q2-‐99 Q3-‐04 Q4-‐09

RaEo

Total Debt/GDP to Q3-‐10

Public Private Financial

Where do we stand now?

•  Many signs of improvement –  Industrial producTon growing – Consumers are going gangbusters – Businesses are doing quite well

•  Signs that the improvement is tenuous

– Private sector employment growth slowing – Slow growth in retail spending in January

US Industrial Production to January

85

87

89

91

93

95

97

99

101

103 Jan-‐07

Apr-‐0

7 Jul-‐0

7 Oct-‐07

Jan-‐08

Apr-‐0

8 Jul-‐0

8 Oct-‐08

Jan-‐09

Apr-‐0

9 Jul-‐0

9 Oct-‐09

Jan-‐10

Apr-‐1

0 Jul-‐1

0 Oct-‐10

Jan-‐11

Inde

x

US Consumer Markets

8 9

10 11 12 13 14 15 16 17 18

Jan-‐07

Jun-‐07

Nov-‐07

Apr-‐0

8

Sep-‐08

Feb-‐09

Jul-‐0

9

Dec-‐09

May-‐10

Oct-‐10

Millions


Auto and Light Truck Sales to November, SAAR

330

340

350

360

370

380

390

Jan-‐07

Jun-‐07

Nov-‐07

Apr-‐0

8

Sep-‐08

Feb-‐09

Jul-‐0

9

Dec-‐09

May-‐10

Oct-‐10

Billion

s ($), SA

Nominal Retail Sales to January

Source: Census Bureau

More: Jobs, Jobs, Jobs

Source: Bureau of Labor StaEsEcs Source: Bureau of Labor StaEsEcs

-‐100

-‐50

0

50

100

150

200

250

Thou

sand

s

Change in PRIVATE NonFarm Payrolls to January

-‐300

-‐200

-‐100

0

100

200

300

400

500

Thou

sand

s

Change in Government Employment to January

Federal State & Local

Who is recovering well?

700

900

1,100

1,300

1,500

1,700

1,900 2001-‐I

2001-‐III

2002-‐I

2002-‐III

2003-‐I

2003-‐III

2004-‐I

2004-‐III

2005-‐I

2005-‐III

2006-‐I

2006-‐III

2007-‐I

2007-‐III

2008-‐I

2008-‐III

2009-‐I

2009-‐III

2010-‐I

2010-‐III

Billion

s ($), SA

Corporate Profits to Q3-‐10

Who is not?

•  Workers •  Banks •  Homeowners

Labor Markets are Slow to Clear

14

19

24

29

34

39

7

8

9

10

11

12

13

14

15

16

Weeks

Millions of P

eople

Unemployment SituaEon

Number Unemployed Average (mean) duraTon, in weeks..........

National Credit Markets Cleared?


0

200

400

600

800

1,000

1,200

Jan-‐08

May-‐08

Sep-‐08

Jan-‐09

May-‐09

Sep-‐09

Jan-‐10

May-‐10

Sep-‐10

Billion

s ($)


US Bank Excess Reserves to November

0 1 2 3 4 5 6 7 8 9

10

Q1-‐87

Q1-‐89

Q1-‐91

Q1-‐93

Q1-‐95

Q1-‐97

Q1-‐99

Q1-‐01

Q1-‐03

Q1-‐05

Q1-‐07

Q1-‐09

Rate

Bank Por^olio Problems to Q3-‐10

Losses Delinquencies

US Housing Market

Source: NaEonal AssociaEon of Realtors Source: Census Bureau

5

6

7

8

9

10

11

12

13

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Jan-‐07

Jul-‐0

7

Jan-‐08

Jul-‐0

8

Jan-‐09

Jul-‐0

9

Jan-‐10

Jul-‐1

0

Inventory to Sales RaE

o

Sales (Millions)

NAR Sales Stats to October

Sales Months Supply

0 200 400 600 800

1,000 1,200 1,400 1,600 1,800

Jan-‐06

Aug-‐06

Mar-‐07

Oct-‐07

May-‐08

Dec-‐08

Jul-‐0

9

Feb-‐10

Sep-‐10

Thou

sand

s

New Single-‐Family Homes to October, SAAR

Permits Sales

How Many Underwater? as of Q2-10

Source: First American CoreLogic

CBSA Name # Mortgages NegaTve Equity Share

Las Vegas-‐Paradise NV 449,205 72.83 Stockton CA 129,100 62.36 Vallejo-‐Fairfield CA 92,418 57.93 Phoenix-‐Mesa-‐Glendale AZ 966,635 56.03 Bakersfield-‐Delano CA 153,522 52.04 Riverside-‐San Bernardino-‐Ontario CA 861,023 51.33 Fresno CA 153,362 46.85 Visalia-‐Porterville CA 69,237 44.81 Sacramento-‐-‐Arden-‐Arcade-‐-‐Roseville CA 494,024 43.41 Salinas CA 61,704 41.57 Oakland-‐Fremont-‐Hayward CA 547,903 32.44 San Jose-‐Sunnyvale-‐Santa Clara CA 347,365 19.79 San Francisco-‐San Mateo-‐Redwood City CA 324,164 9.48

CA Housing Sales to Q3-10

Source: DataQuick

150

200

250

300

350

400

450

500

550

200

250

300

350

400

450

500

550

Q1-‐05

Q2-‐05

Q3-‐05

Q4-‐05

Q1-‐06

Q2-‐06

Q3-‐06

Q4-‐06

Q1-‐07

Q2-‐07

Q3-‐07

Q4-‐07

Q1-‐08

Q2-‐08

Q3-‐08

Q4-‐08

Q1-‐09

Q2-‐09

Q3-‐09

Q4-‐09

Q1-‐10

Q2-‐10

Q3-‐10

Sales (Th

ousand

s)

Prices (T

housan

ds)

Median Prices Sales (SAAR)

38.1% of January 2011 sales had been foreclosed on in previous year

What comes next?

•  ConTnued Slow Growth?

•  Double-‐Dip?

•  AcceleraTng Recovery?

US GDP and Unemployment Forecasts

Source: Bureau of Economic Analysis Forecast by Beacon Economics

Source: Bureau of Labor StaEsEcs Forecast by Beacon Economics

0

2

4

6

8

10

12

Q1-‐98

Q3-‐99

Q1-‐01

Q3-‐02

Q1-‐04

Q3-‐05

Q1-‐07

Q3-‐08

Q1-‐10

Q3-‐11

Q1-‐13

Q3-‐14

Percen

t

Unemployment Rate to Q4-‐15

-‐8

-‐6

-‐4

-‐2

0

2

4

6

Q1-‐08

Q4-‐08

Q3-‐09

Q2-‐10

Q1-‐11

Q4-‐11

Q3-‐12

Q2-‐13

Q1-‐14

Q4-‐14

Q3-‐15

Percen

t

Real GDP Growth to Q4-‐15

What about a Double-Dip? •  Need some sustained shock to the system •  There is potenTal (worry scale: 1-‐10):

–  Housing (3) –  Consumers (3) –  Deficit/Bond Markets (5) –  Oil Prices (2) –  Europe (2)

•  Only through gross negligence on the part of policymakers is a double-‐dip likely –  Cut too fast, too soon –  Policy signals deficits over the long term

National Housing unBounce

1-yr Change to Nov-10 (Case-Shiller)

1-yr Change to Nov-10 (Case-Shiller)

CA-San Francisco 0.4 TX-Dallas -4.2 DC-Washington 3.5 IL-Chicago -7.6 CA-San Diego 2.6 MI-Detroit -7.1 CA-Los Angeles 2.1 FL-Miami -3.5 MN-Minneapolis -4.4 FL-Tampa -4.0 MA-Boston -0.8 GA-Atlanta -7.9 OH-Cleveland -4.4 NC-Charlotte -4.3 CO-Denver -2.5 NV-Las Vegas -3.5 NY-New York -1.7 OR-Portland -7.0 AZ-Phoenix -6.4 WA-Seattle -4.7

Source: Standard and Poor’s

New Lows

National Spending Fumes?

Source: Federal Reserve Board Source: Bureau of Economic Analysis

750

800

850

900

950

1,000

1,450

1,470

1,490

1,510

1,530

1,550

1,570

1,590

1,610

1,630

Jan-‐06

Aug-‐06

Mar-‐07

Oct-‐07

May-‐08

Dec-‐08

Jul-‐0

9 Feb-‐10

Sep-‐10

Billion

s ($), SA

Billion

s ($), SA

Consumer Credit to January

Non-‐Revolving Revolving

10,500

11,000

11,500

12,000

12,500

13,000

Jan-‐06

Aug-‐06

Mar-‐07

Oct-‐07

May-‐08

Dec-‐08

Jul-‐0

9 Feb-‐10

Sep-‐10

Billion

s ($), SA

Personal Income to December

Sources of Growth in Non-Revolving Credit

-‐40 -‐30 -‐20 -‐10 0 10 20 30 40 50 60 70

Commercial banks

Finance companies

Credit unions Federal government

Billion

s ($), SA

Q1 Q2 Q3 Q4 p

Attack the Deficit Now?

How to attack the deficit? •  Spending cuts v. tax hikes

–  Spending Cuts •  Affect budget 1 for 1 •  Reduce aggregate demand 1 for 1

–  Tax Hikes •  Reduce aggregate demand by less than 1 (savings) •  Smaller decline demand gives small boost to gov’t revenues

•  Tax Hikes WIN! –  Long term v. short term issues

•  Long term consequences of reduced savings •  Long term benefits of some spending

–  EducaTon, Infrastructure…..investments

Regardless, Let’s Not: Eat The Future

•  Unwise proposed cuts: –  Supplemental nutriTon to pregnant women – Nuclear nonproliferaTon –  IRS Budgets –  Pell Grants

•  The long term spending problem is health care – Medicare and Medicaid

•  > 50% of all health insurance dollars spent •  And growing

What About Big Ticket Items? Category Amount

Defense $700 B Tax Subsidies $1,000 B SS, Medicare, Medicaid $1,000 B DiscreTonary -‐  Educ, Training, Trans -‐  Low-‐income Programs -‐  Public Safety -‐  Veterans -‐  Gen’l Gov’t Overhead

$660 B (44%) (11%) (7%) (8%) (20%)

Focus on discretionary spending is misguided. - A lot of really important stuff is “discretionary”.

Summary •  The Recession is Over… Prognosis Improving

•  Consumer – bounced back too fast? •  Housing bounce has ended – slow recovery coming •  Forecast: Robust 2011-‐12, weakness 2013-‐14

•  Budget Policy, both short and long run, is crucial •  Short run sTmulus, long run danger •  Must convince bond markets of long run fiscal sanity

•  Employment growth accelerates in 2011 •  January not-‐withstanding

•  Real estate markets to remain weak

State Budget

•  $20 Billion problem – Approximately $606 for each state resident

•  No soluTon is good with taxes off the table •  The state is EaTng its Future •  I blame prop 13

CA Summary •  California has been part of the recession’s epicenter •  Housing, exports, business investment

•  Early employment gains have ceased •  Should resume in 2011, but unemployment will lag

•  Decisions now will affect economy long term •  Budget •  EducaTon, infrastructure, regulatory environment

•  Years before recovery is complete •  Catching up to potenTal could be 5+ years

Bay Area Forecast

•  Employment •  Taxable Sales •  Forecast

Employment

0 2 4 6 8

10 12 14

Jan-‐00

Feb-‐01

Mar-‐02

Apr-‐0

3 May-‐04

Jun-‐05

Jul-‐0

6 Au

g-‐07

Sep-‐08

Oct-‐09

(%)

Unemployment Rates to August

Bay Area SACOG

SCAG SANDAG

85

90

95

100

105

110

Jan-‐00

Jan-‐01

Jan-‐02

Jan-‐03

Jan-‐04

Jan-‐05

Jan-‐06

Jan-‐07

Jan-‐08

Jan-‐09

Jan-‐10

Inde

x = 100 in Dec-‐07

Total Nonfarm Employment to August

Bay Area SACOG

SCAG SANDAG

Source: California Employment Development Department


Nonfarm Employment Dec-‐10

Employment

Drop from Peak to

Trough (%)

Increase Since

Trough (%) Inland Empire 1,094.4 -‐15.0 -‐ Santa Rosa 170.1 -‐13.3 2.3 Sacramento 795.5 -‐12.2 -‐ Vallejo 115.1 -‐11.7 -‐ East Bay (MD) 930.3 -‐11.6 0.1 Fresno 279.9 -‐10.1 0.9 Los Angeles (MD) 3,759.9 -‐9.5 0.5 San Francisco (MD) 910.0 -‐9.2 -‐ San Jose (MSA) 848.7 -‐8.9 1.1 San Diego 1,213.5 -‐8.1 0.5


Unemployment Rate Dec-‐10

Unemployment Rate (%)

Unemployment Rate Low to Peak Change

Inland Empire 14.0 10.2 Fresno 16.8 10.7 Sacramento 12.8 8.5 San Jose 11.4 8.0 Vallejo 12.5 7.9 Los Angeles (MD) 13.0 8.5 Oakland (MD) 11.6 7.6 San Diego 10.5 7.2 Santa Rosa 10.4 7.1 San Francisco (MD) 9.4 6.1


Taxable Sales LocaTon Q2-‐10

(Millions) Drop from Peak to

Trough (%) Increase since Trough (%)

Bay Area 26,600 -‐20.5 7.3 SACOG Region 7,155 -‐23.2 2.6 SCAG Region 55,300 -‐23.2 4.5 SANDAG Region 10,300 -‐20.1 7.4

San Francisco (MD) 7,261 -‐19.0 7.3 San Jose (MSA) 7,572 -‐22.1 12.1 Oakland (MD) 8,323 -‐21.8 5.4 Vallejo 1,301 -‐26.2 2.4 Napa 562 -‐17.2 3.4 Santa Rosa 1,579 -‐24.4 2.9

Source: California Board of EqualizaEon

Bay Area Forecast (SF, EB, and SJ)

Current Level (2010 Q2)

Peak Level (Various) Return to Peak

NF Employment 2,710 2,962 2015 Q4

Taxable Sales 23,155 26,872 2015 Q1

Home Prices

-‐ San Francisco (MD) 695,093 891,542 90% in 2015 Q4

-‐ East Bay (MD) 350,475 646,658 69% in 2015 Q4

-‐ San Jose MSA 552,695 779,001 98% in 2015 Q4

Obama Budget Makes Long Term Forecast Brighter

•  InnovaTon Items in Budget – Wireless IniTaTve – Patent Reform Agenda – K-‐12 Programs – Clean Energy – Startup America

•  Export promoTon – TransportaTon infrastructure

Bay Area Summary •  Recovery is starTng to take hold •  It will strengthen going into 2011 and 2012

– East bay and Napa/Sonoma slower than other regions

•  Local budgets under strain for some Tme •  Fundamentals remain intact, but in jeopardy

– EducaTonal opportuniTes –  Infrastructure

•  Remains an asracTve region for investment

Venture Capital

Q3-‐10 Value of All Deals

(Millions) % of Total US VC

Bay Area 1,750 36

California 2,220 46

United States 4,820

Source: PriceWaterhouseCoopers MoneyTree

25%

30%

35%

40%

45%

50%

55%

60%

1995-‐1

1996-‐2

1997-‐3

1998-‐4

2000-‐1

2001-‐2

2002-‐3

2003-‐4

2005-‐1

2006-‐2

2007-‐3

2008-‐4

2010-‐1

(%)

California’s Share of U.S. Venture Capital to Q4-‐10

Amount Deals

Q4-‐10 Value of All Deals

(Millions) % of Total US VC

Bay Area 1,994 40

California 2,498 50

United States 5,017

VC: What Industries in Q4?

Industry Amount ($Millions)

Sotware 486

Media and Entertainment 334

Industrial Energy 199

IT Services 160

Biotechnology 153

Medical Devices & Equipment 118

VC: What Companies in Q4?

Company Industry Amount ($Millions)

Twiser Media and Entertainment

200

Pearl TherapeuTcs Biotechnology 37.5

SolFocus Semiconductors 31.3

L59 Industrial Energy 30

Cyan OpTcs Networking and Equipment

30

Intersect ENT Medical Devices & Equipment

30

Soladigm Industrial Energy 28.5

Summary •  Recovery is growing roots

–  But is uneven •  Bay Area future is, as usual, bright

–  InnovaTon economies tend to be super-‐cyclical – Obama innovaTons iniTaTves will be especially beneficial here

•  Budget decisions – Are being made at all levels of government –  Starving the beast will jeopardize the future

•  Sacrificing investments •  Sacrificing the less well off

Ø Regional Analysis Ø Business & Market Analysis Ø Ports & Infrastructure Analysis Ø Economic Impact Analysis Ø Public Policy Analysis

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Recovery: Uneven, But Gaining Steam! · The Great Recession 1-2 Punch of Credit Crisis and Consumer...

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