What To Expect in the Next Economic Expansion

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What To Expect in the Next Economic Expansion

• Florida Bankers Association
• Annual Convention
• Rosen Shingle Creek Resort
• Orlando, Florida
• Harry M. Davis, Ph.D
• NCBA Professor of Banking Economist
• Appalachian State University
• June 13, 2009
• davishm_at_appstate.edu

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The Nature of Recessions

• Recession started in December, 2007
• Recessions are a natural part of an economic
  cycle
• Post WWII average is 10.5 months
• 1981 recession lasted 16 months
• Have just been through the mother of all credit
  expansions - now we must deleverage

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U.S. Economy

• Consumer confidence was at record low in Feb
  has now increased for the last three months
• Second half of 2008 saw a decline in real
  consumer spending the first since the 1991
  recession and the largest ever
• Real consumer spending up 1.5 in 1st quarter
• Consumer credit fell 15.7 billion in April, 2nd
  largest drop ever
• Household net worth down 13 trillion since
  middle of 2007

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Employment

• Economy has now shed 6 million jobs, including
  2.9 million this year biggest drop since the
  40s
• Unemployment rate 9.4 (highest since 1982
  recession) in May, up from 4.9 in January, 2008
• Construction and manufacturing led the job losses
  in May
• The government sector has been increasing due to
  hiring for the census

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Florida has 12th highest Unemployment Rate for
April at 9.6
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Housing

• Home prices have dropped over 32 since summer of
  2007
• Rate of decrease is accelerating
• Inventory of existing homes is 9.8 months, down
  from 11.3 months
• Housing starts down to 550,000 annually
• 45 of sales nationally are distressed
• 13 of mortgages either delinquent or in
  foreclosure foreclosures still increasing

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TARP/Banks

• Banks are told to lend more as profits plunge
  (4th quarter of 2008 loss worst since 1990),
  problem loans and loss provisions increasing,
  capital requirements are increasing, as
  businesses and consumers are deleveraging
• More TARP funds will be needed

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Bank Performance

• For the 4th quarter of 2008 and 1st quarter of
  2009, 32 and 22 of banks reported loss
• For institutions under 1billion in assets the
  net interest margin is the lowest since 1988
• Loss provisions represent nearly 50 of net
  operating earnings
• Number of troubled banks rose from 252 in 4th
  quarter to 305 presently
• 37 bank failures so far this year
• Stress Test?

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Regulatory Changes

• All investment banking firms must form bank
  holding company
• SEC moratorium on new types of securities
• Too big to fail regulators dont have power to
  deal with the largest banks
• Capital requirements should increase with size
• Put the genie back in the bottle with regard to
  investment banking and commercial banking

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Federal Reserve Position

• Balance Sheet expanded to about 2.1 trillion in
  December, is now contracting, but
• Asset Backed Security Loan Facility (TALF) is
  just getting started FED will spend 1 trillion
• Money supply increasing rapidly but velocity is
  down, therefore, little inflation so far
• Monetize the debt

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Stimulus Package

• For stimulus to work (787b) - government must be
  able to employ underutilized resources in
  efficient and productive manner and there must be
  a multiplier effect
• Through April have spent 19billion
• Where does the money come from? China and Japan

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U.S. Budget

• Budget was 2.7t in 2006, 3.7t for 2010
• Deficits of 1 trillion plus for as far as the
  eye can see
• Deficit of 1.8 trillion this year and next
• Deficit over 12 of GDP for 2010 and 2011
• Only 3 of couples make over 250,000
• Other countries doing worse than U.S.

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Economic Outlook

• Slow growth after mid-year as stimulus money
  arrives (U-shaped recovery)
• 2nd half growth of 1.5-2.0
• Growth of about 3 in 2010
• Little inflation this year
• 10-yr bond to rise steadily to 4.5-5.0 in 2010
• Mortgage rates already at the highest level in 6
  months and climbing
• Unemployment to 10 for U.S. next year
• Federal Reserve has a difficult task ahead

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Bank Outlook

• Very little help with NIM this year
• Loan losses will continue and move from
  residential to commercial real estate
• Housing will have very slow recovery which will
  be hard on community banks
• Savings rate at 5.7 a 14-year high
• Bank performance will improve slightly for 2010