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The Economic Outlook Community Development Forum Salt Lake City - - PowerPoint PPT Presentation

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Comptroller of the Currency Administrator of National Banks The Economic Outlook Community Development Forum Salt Lake City July 19, 2012 Ray Squitieri Economic and Policy Analysis, OCC Summary US economy Slow growth to persist, but

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Ray Squitieri Economic and Policy Analysis, OCC

Comptroller of the Currency Administrator of National Banks

The Economic Outlook

Community Development Forum Salt Lake City July 19, 2012

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1

Summary—US economy

  • Slow growth to persist, but US likely to avoid

recession

  • Slow growth means slow improvement in

unemployment

  • Housing has yet to turn around
  • Europe now a big risk to US economy
  • Positives: lower energy prices, continued low

interest rates

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2

  • 4.0
  • 3.0
  • 2.0
  • 1.0

0.0 1.0 2.0 3.0 4.0 07 08 09 10 11 12F 13F

Quarterly average unemployment rate, % Real GDP, % change annual rate

Sources: BEA, BLS, Blue Chip Indicators (June 2012) Consensus Forecast

4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 07 08 09 10 11 12F 13F

Recovery plods along

Recession Recession Consensus Forecast

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80 84 88 92 96 00 04 08 12 60 70 80 90 100 110 120 130 140 150

Weekly leading index has waffled since end of recession, unlike steady gains in past expansions

3 Recessions

Source: Economic Cycle Research Institute (ECRI)

Weekly leading index 1992 = 100

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4

After rising above 200K per month, job growth faltered over the last 4 months

Change in nonfarm employment, thousands

8.8 million jobs lost in total through 2/10 Recession

Sources: BLS, E&PA calculations (data through May 2012)

3.8 million jobs added since 2/10; 548 thousand in 2012

  • 900
  • 700
  • 500
  • 300
  • 100

100 300 07 08 09 10 11 12

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Civilian Unemployment Rate: 16 yr +

SA, %

Civilian Participation Rate: 16 yr +

SA, % 11 10 09 08 07 Sources: Bureau of Labor Statistics /Haver Analytics 10 9 8 7 6 5 4 67 66 65 64 63 62 61

5

Much of the improvement in unemployment rate due to drop in labor force participation rate

Source: Bureau of Labor Statistics / Haver Analytics

Labor Force Participation rate % SA LHS Unemployment rate % SA RHS Note: if participation rate had remained at 2010 average, latest UE rate would be 9.5% not 8.2%

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0% 2% 4% 6% 8% 10% 12% 14% 05 06 07 08 09 10 11 12 6

Source: BLS

As published Unemployment rate assuming all labor force exits remained unemployed

54 56 58 60 62 64 66 68 52 62 72 82 92 02 12

Recessions

Labor force participation rate % of civilian population Unemployment rate share of labor force

Unprecedented drop in LF participation in recent years

If labor force exits had remained unemployed, the statistics would look a lot worse today

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7

For most states, employment likely to remain below pre-recession levels through 2013

Source: Moody’s Analytics; Federal Reserve Board Supervisory Stress-Test Baseline

U.S. =-2.3%

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82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 20 40 60 80 100 120 140 160

Consumer confidence remains historically low

8

Source: Conference Board

Consumer Confidence 1985 = 100

Recessions

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  • 10%
  • 5%

0% 5% 10%

06 07 08 09 10 11 12 13

… though shoppers are gradually returning to the stores

Source: Census Bureau, Moody’s Analytics forecast

Retail sales (ex. auto) Yr-yr % change

9

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10

Inventory of distressed properties still weighing

  • n housing market

Sources: CoreLogic; NAR; S&P; Fiserv; E&PA calculations *2012 sales data are first quarter at annualized rate. 2012 inventory data are through January. Distressed existing home sales estimates include short-sales and sales from REO inventory; latter is two-thirds of volume. Shadow inventory includes all properties in serious delinquency or worse that are ultimately expected to be listed as for sale from REO

1 2 3 4 5 6 07 08 09 10 11 12* 1 2 3 4 5 6 06 07 08 09 10 11 12*

New

Single-family home sales millions

Non-distressed existing Distressed existing (estimated) Shadow inventory

  • f distressed

existing homes “For-sale” inventory

  • f all existing homes

“For-sale” and shadow inventory millions

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11

50 60 70 80 90 100

00 01 02 03 04 05 06 07 08 09 10 1112F 13F

Inventory of distressed properties still weighing

  • n house prices

Sources: Equifax/Moody’s Analytics , Fiserv/Moody’s Analytics (May 2012 baseline forecast)

First mortgage loans (number)

1,000 2,000 3,000 4,000 5,000 06 07 08 09 10 11 12

90+days delinquent In foreclosure

Case-Shiller 20-Metro Home Price Index, SA, 2006Q2=100

  • 33%
  • 36%
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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 06 07 08 09 10 11 12 12

Few housing markets are showing much price appreciation yet

Source: S&P Case-Shiller monthly data through April 2012

Existing single-family (constant quality) home price indexes

Index April 2006 peak = 100

Los Angeles Tampa Miami Phoenix Las Vegas

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 06 07 08 09 10 11 12

Dallas Boston NYC Detroit DC Chicago

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13

10% 45% 27% 31% 26% 21% 22% 18% 2%

0% 10% 20% 30% 40% 50% 60% 70%

US NV MI FL AZ GA IL CA UT

Mortgages with negative equity will keep RES RE loss rates high in some states

Sources: OCC Mortgage Metrics; LPS Home Price Index; data as of January 2011 Data are for 9 large servicers. Data reflect both loans held in portfolio and serviced for others. Data include FHA/VA mortgages but exclude 1st liens without a refreshed LTV.

Share of 1st liens (count) with negative equity

Underwater less than 20% (LTV 100% to 120%) Underwater more than 20% (LTV >120%)

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98 00 02 04 06 08 10 12

  • 20
  • 15
  • 10
  • 5

5 10 15

Euro area slowdown weighing on U.S. export growth

14

Real quarterly U.S. GDP and exports % chg. annualized, seasonally adjusted

Recessions

Sources: IMF July 2012 World Economic Outlook update; BEA

exports GDP

Real GDP Yr-yr % chg

  • 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Euro Area U.K. U.S. Advanced Economies

2010 2011 2012 est.

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Obstacles to growth still outweigh positives

Negatives

 Weak housing market  Fiscal drag  Continued deleveraging  Generally tight credit  Low consumer and

business confidence

 Risk from Europe

Positives

 Signs of life in construction  Stronger household

balance sheets

 Lower energy prices  Some credit easing; low

interest rates and inflation

 Better US competitiveness

15

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Data are merger adjusted as of 1Q:2012 and use the current supervision designation. 0.0 0.5 1.0 1.5 2.0 2.5 3.0 1-4 famly HELOC

Loss rates still high for residential real estate

National banks and federal thrifts

Midsize

Source: Integrated Banking Information System (OCC)

Annual net charge-off rates, %

Community Large

16

0.0 0.5 1.0 1.5 2.0 2.5 3.0 1-4 famly HELOC 91-12 avg 1Q:12 0.0 0.5 1.0 1.5 2.0 2.5 3.0 1-4 famly HELOC

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0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Construction Cmmrcl mortgage

Loss rates well above average on CRE loans at community banks

National banks and federal thrifts

Midsize

Source: Integrated Banking Information System (OCC)

Annual net charge-off rates, %

Community Large

Data are merger adjusted as of 1Q:2012 and use the current supervision designation. 91-12 avg 1Q:12 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Construction Cmmrcl mortgage 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Construction Cmmrcl mortgage

17

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18

Downside risks

  • Soft job market keeps unemployment rate high
  • Housing falls again as foreclosure crisis drags on
  • Weak housing and job market further stresses banks
  • Overseas: Mid East turmoil, Japan disaster, European debt crisis
  • State and local fiscal woes intensify

Upside risks

  • Emerging market growth accelerates
  • Strong business sector drives hiring
  • Self-sustaining growth cycle kicks in

Risks to economy: What did we say last year?

[From March 13, 2011 presentation to Utah Bankers’ Roundtable]

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US (high-impact, low probability)

  • Economy falls off fiscal cliff

US (lower-impact, higher-probability)

  • Housing falls again as foreclosure crisis drags on

Global (high-impact, low probability)

  • War in Persian Gulf, European financial meltdown

Global (lower-impact, higher-probability)

  • Long slump in Europe, Sharp slowdown in China

Upside possibilities

  • Emerging markets pick up
  • Strong US business sector drives hiring

Risks to economy: This year’s story

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20

Summary—US economy

  • Slow growth to persist, but US likely to avoid

recession

  • Slow growth means slow improvement in

unemployment

  • Housing has yet to turn around
  • Europe now a big risk to US economy
  • Positives: lower energy prices, continued low

interest rates

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21

Outlook for Utah and Salt Lake City

  • Moderate growth in jobs, household

income

  • Positive signs in housing market, though

house prices have yet to turn around

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SLC leads Utah and the U.S. in job growth

22

Sources: BLS, Moody’s Analytics

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Office jobs increasing in Utah

23

  • 4.0%
  • 3.0%
  • 2.0%
  • 1.0%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% US Seattle Denver Las Vegas Utah Ogden Provo Salt Lake City

Office-using employment 2011Q1 to 2012Q1

Sources: BLS, Moody’s Analytics

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Utah will show solid job growth over next 12 months

24

Sources: BLS, Moody’s Analytics (July 2012 forecast) Forecast employment growth 2012Q1 to 2013Q1

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Foreign migration dominates in SLC

25

Sources: Census Bureau/Moody’s Analytics

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Job gains support income gains in SLC

26

Sources: BLS, Moody’s Analytics

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Forecast household income growth 2012Q1 to 2013Q1

Moderate growth expected for household incomes in Utah

Sources: Census, Moody’s Analytics (July 2012 forecast)

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Home sales picking up in SLC …

28

Sources: Utah Association of Realtors, Moody’s Analytics

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… though house prices have yet to turn back up

29

Sources: Fiserv, Census Bureau, Moody’s Analytics

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Ray Squitieri Economic and Policy Analysis, OCC

Comptroller of the Currency Administrator of National Banks

The Economic Outlook

Community Development Forum Salt Lake City July 19, 2012

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Monthly job gains over the past 18 months have barely exceeded new labor force growth

116 117 118 120 121 280 137 90 67 53

100 200 300 400 500 1 year 2 years 3 years 4 years 5 years

Monthly nonfarm payroll growth, 000s

Job growth required simply to accommodate 0.9% per year growth in labor force

Jan 2011- June 2012 average (150,000)

Assumes no change in current labor force participation rate of 63.8% and

  • verall population growth of 0.9% per year.

Extra needed to achieve 6% unemployment rate in time shown

Sources: BLS; E&PA calculations

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There’s no doubt that since the recession, growth has been well less than average

Quarterly U.S. real GDP Cumulative change from start of recession

  • 30%
  • 20%
  • 10%

0% 10% 20% 30%

  • 16
  • 12
  • 8
  • 4

+4 +8 +12 +16

Recession start Current cycle Average

  • f prior 10 cycles

Quarters

32

Dashed lines are minimum and maximum values for each month across the 10 pre-2007 cycles. Source: BEA

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50 100 150 200 250 300 85 90 95 00 05 10

Source: Haver Analytics (index developed by Scott Baker and Nicholas Bloom of Stanford University and Steven Davis

  • f the University of Chicago)

Economic Policy Uncertainty Index Mean = 100

Recessions

U.S. economic policy uncertainty is rising again, ahead of “fiscal cliff” concerns for 2013

33

Index measures the frequency of references to economic uncertainty and policy in Google news media catalog, the number of federal tax code provisions set to expire in future years, and the extent of disagreement among economic forecasters over future government purchases and the CPI.

monthly data through June 2012

August 2011 U.S. debt downgrade

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  • 2.0
  • 1.5
  • 1.0
  • 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12

Source: BEA

34

After six years, new home construction is no longer weighing on overall economic growth

Contribution to percent change in real GDP percent

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80 84 88 92 96 00 04 08 12 5 10 15 20 25 30 35 40 80 84 88 92 96 00 04 08 12 80 85 90 95 100 105 110 115 120

Despite some improvement, small business

  • ptimism remains low, and sales concerns high

35

NFIB small business survey

Recessions

Sources: Federal Reserve, BEA NFIB members responding to survey typically employ 10 people with annual sales of $0.5 million.

Optimism Index Reporting poor sales as most important problem

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Sources: Blue Chip Consensus Forecasts June 2012; CBO analysis May 2012; E&PA calculations

Growth could be significantly reduced if U.S. falls

  • ff the “fiscal cliff”

Real GDP annualized growth, %

  • 2.0
  • 1.0

0.0 1.0 2.0 3.0 4.0 1st half 2012 2nd half 2012 1st half 2013 2nd half 2013 Blue Chip Consensus forecast, June 2012 CBO estimates of “fiscal cliff” effects, applied/scaled to Blue Chip Consensus forecast

“Fiscal Cliff” refers to expiration of various tax rate reductions, extended unemployment benefits, and other fiscal programs, as well as sequestration (mandatory reductions) in federal government spending set to begin in calendar year 2013. For details see: http://www.cbo.gov/sites/default/files/cbofiles/attachments/FiscalRestraint_0.pdf Anticipatory reduction in activity

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Forecasts for Europe have steadily weakened, adding risk for U.S. economy and banks

GDP growth forecasts for 2012

Source: Consensus Forecasts 17

Percent

  • 0.5

0.5 1 1.5 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12

UK Eurozone