1 “WHAT’S NEXT FOR THE FLEDGLING ECONOMIC RECOVERY?” Presented by Barton Smith Economics Professor Emeritus University of Houston November 16, 2010
Nov 12, 2014
1
“WHAT’S NEXT FOR THE FLEDGLING
ECONOMIC RECOVERY?”
Presented by
Barton Smith
Economics Professor Emeritus
University of Houston
November 16, 2010
2
THE RECOVERY SEEMS
PAINFULLY SLOW
3
GROSS NATIONAL PRODUCTAre We Headed For Even Slower Growth?
-8%
-4%
0%
4%
8%
Apr-07 Apr-08 Apr-09 Apr-10
Date
An
nu
ali
zed
Perc
en
t G
row
th
Source: BEA
Forecast for 4th quarter 2010
Mostly an inventory adjustment
4
U.S. MONTHLY EMPLOYMENT GROWTHGains/Losses in Employment
-800
-600
-400
-200
0
200
400
600
Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
Monthly Change
12 Month Average
Ab
so
lute
Level
of
Em
plo
ym
en
t G
row
thIn
Th
ou
sa
nd
s
Date
Source: BLS
Lost 2.1 million jobs
Lost 8.0 million jobs
5
NATIONAL EMPLOYMENT GROWTH3 Month Average Annualized Job Growth
-7.0%
-3.5%
0.0%
3.5%
7.0%
Jan-
79
Jan-
82
Jan-
85
Jan-
88
Jan-
91
Jan-
94
Jan-
97
Jan-
00
Jan-
03
Jan-
06
Jan-
09
Perc
en
t A
nn
uali
zed
Gro
wth
Rate
Date
Usually, when job growth starts, it comes back strong
Source: BLS
6
INITIAL CLAIMS FOR UNEMPLOYMENT3 Month Average of Weekly U.S. Claims
200
300
400
500
600
700
Jan-
79
Jan-
82
Jan-
85
Jan-
88
Jan-
91
Jan-
94
Jan-
97
Jan-
00
Jan-
03
Jan-
06
Jan-
09
Initial Claims
30 Year Average
Weekly
Un
em
plo
ym
en
t C
laim
s
(Th
ou
sa
nd
s)
Date
New claims have been above 450,000 for 28 straight months
Source: Dept. of Labor
7
INDEX OF CONSUMER SENTIMENT30 YEAR AVERAGE = 87
50
60
70
80
90
100
110
120
Jan-
79
Jan-
82
Jan-
85
Jan-
88
Jan-
91
Jan-
94
Jan-
97
Jan-
00
Jan-
03
Jan-
06
Jan-
09
Ind
ex V
alu
e:
30 y
ear
avera
ge =
87
Date
9/11;
ScandalsS&L
Crisis
Double Dip
Recession
Subprime
Meltdown
Source: University of Michigan
Consumer confidence still hovers at recessionary lows.
8
REAL DOLLAR RETAIL SALESPercent Year-Over-Year Growth
-12.0%
-8.0%
-4.0%
0.0%
4.0%
8.0%
Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
Date
An
nu
al
Year-
Over-
Year
Gro
wth
Rate
This is the largest contraction in retail sales since the Depression
and the consumer is in no position to come roaring back.
Source: St. Louis Fed
9
MOST RECOVERIES SEEM
PAINFULLY SLOW,
ESPECIALLY THE RETURN
TO JOB GROWTH
10
THE WORST RECESSIONS
OF THE PAST 50 YEARSDeviations from GDP Peak: 1st Qtr = Peak Level of GDP
92%
96%
100%
104%
108%
1 2 3 4 5 6 7 8 9 10 11 12 13 14
1973-75 1980-82
2008-2010 Old Peak
Quarter From Peak Level of GDP
Perc
en
t o
f P
eak
Source: BEA
80s trough
70s troughRecent trough
Return to Old High
11
Length and Severityof
Past Recessions
Recession GDP Jobs GDP
Trough
Jobs
Trough
Jobs
Recovery
Lag
1974 24 mos 20 mos -3.2% -2.8% 5 mos
1980 36 mos 42 mos -2.2% -2.5% 8 mos
1990 18 mos 32 mos -2.4% -2.5% 16 mos
2000 3 mos 45 mos -0.3% -2.0% 46 mos
2008* 40 mos 35 mos -3.5% -6.1% N/A
Duration in Months / Severity in Percent Decline
Source: BLS/BEA
* Neither GDP or Employment Have Yet Returned to Old Peak
12
EXAMPLES OF THE LAG
BETWEEN GDP GROWTH
AND
EMPLOYMENT GROWTH
13
THE 1980-82 RECESSIONPercent Level In Comparison With
1st Qtr 1980 Peak
95.0%
97.5%
100.0%
102.5%
105.0%
1979 1980 1981 1982 1983 1984
Employment
GDP
Date
Year-
to-Y
ear
%
Ch
an
ge
Source: BLS/BEA
Lag
14
THE 1990-91 RECESSIONPercent Level In Comparison With
2nd Qtr 1990 Peak
95.0%
97.5%
100.0%
102.5%
105.0%
1990 1991 1992 1993
Employment
GDP
Date
Year-
to-Y
ear
%
Ch
an
ge
Source: BLS/BEA
Lag
15
THE 2008+ RECESSIONPercent Level In Comparison With
4th Qtr 2007 Peak
92.0%
94.0%
96.0%
98.0%
100.0%
102.0%
104.0%
2007 2008 2009 2010
Employment
GDP
Date
Year-
to-Y
ear
Perc
en
t C
han
ge
Source: BLS/BEA
GDP hasn’t returned
to old peak
16
THE ALTERNATIVE SCENARIO:
JAPAN’S LOST DECADE
17
“THE LOST DECADE”From Boom to Gloom – Japan’s Real Growth
-2%
0%
2%
4%
6%
8%
1975 1980 1985 1990 1995 2000 2005
Real GDP Growth
Avg Growth Rate in the 80sAvg Growth Rate in the 90s
Year
Perc
en
t G
ain
in
Real G
DP
Source: U.S. Census Bureau
18
“Every Recession Has Purposes
Which Must Be Fulfilled
Before Any Recovery is Sustainable”
19
WHAT’S BEEN ACCOMPLISHED&
WHAT HASN’T
0% 20% 40% 60% 80% 100%
Rebalancing of Macro Economy
Labor Productivity Growth
Public Sector Budget Control
Private Sector Savings
Banking Reform & Stabilization
Commerical RE Mkt Correction
Housing Mkt Stabilization
Home Price Correction
TA
SK
S T
O B
E C
OM
PL
ET
ED
Source: B. Smith
20
THE HOUSING MARKET
21
Housing Must Remain AffordableNational Median Home Price vs. Median Income
2.50
2.75
3.00
3.25
3.50
3.75
4.00
4.25
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Price to Income Ratio
Year
Source: NAR / BEA
Rati
o:
Pri
ce t
o I
nco
me
Median home prices should not exceed 3X median incomes
22
MORTGAGE DELINQUENCY RATES
Percent 60 Days Delinquent
0%
10%
20%
30%
40%
50%
Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
Alt A
Subprime
FHA/VA
Conv. Prime
Perc
en
t D
elin
qu
en
t
Date
Source: First American CoreLogic
The foreclosure problem will not be over until delinquencies fall
23
NEW HOME SALESSales As A Percent of American Households
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
Jan-63 Jan-68 Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08
Sales to Households
46-Year Average
Rati
o o
f S
ale
s t
o H
ou
seh
old
s
Date
Source: Bureau of Census
.8% is approximately equal to
the growth in households qualified to own a home.
Unfortunately, new home production must remain subdued for at least 2 more years.
24
COMMERCIAL REAL ESTATE
25
COMMERCIAL PROPERTY
National Price Index
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Commercial Property Price Index
Year
Ind
ex:
100 =
Jan
2001
Source: NCREIF, RCA, CBRE /B. Smith
Commercial property values
are 46% off their peak.
This is for properties sold. Most unsold properties haven’t been written down.
26
OVERALL REIT PERFORMANCEApril 2004 to April 2009
0.0
0.5
1.0
1.5
2.0
2.5
2004 2005 2006 2007 2008 2009 2010
Year
Ind
ex:
Ap
ril
2004 =
1.0
0
Source: Dow Jones
On average commercial REITs lost 64% of their value,
but since March, 2009 they are now up 140%.
That compares with a 70% rise in stock values.
27
Commercial Property Cap RatesNational Average of NOI to Transactions Price
Composite Index for Apts., Retail, Office
5.5%
6.5%
7.5%
8.5%
9.5%
1996 1999 2002 2005 2008 2011
Date
Perc
en
t C
ap
Rate
Source: NCREIF, RCA, CBRE, M&M
Today there is a dramatic difference between appraised and transaction cap rates
28
BANK STABILIZATION
29
U.S. BANK CREDITCommercial, Real Estate, and Consumer Credit
-8%
-4%
0%
4%
8%
12%
16%
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
Date
An
nu
al
Perc
en
t G
row
th
Source: St. Louis Fed
30
HOUSEHOLD SAVINGS RATE
31
U. S. PERSONAL SAVINGS RATE3 Month Moving Average
0%
2%
4%
6%
8%
10%
12%
14%
Jan-
59
Jan-
64
Jan-
69
Jan-
74
Jan-
79
Jan-
84
Jan-
89
Jan-
94
Jan-
99
Jan-
04
Jan-
09
Perc
en
t o
f
Dis
po
sab
le I
nco
me
Date
Source: St. Louis Fed
The savings rate needs to rise further, which is not good news for U.S. retailing.
32
FEDERAL GOVERNMENT
DEBT CONTROL
33
The Future Deficits
Are Very Troublesome
$0
$400
$800
$1,200
$1,600
$2,000
$2,400
$2,800
2007 2009 2011 2013 2015 2017 2019
Federal Deficit Additions to Debt
Source: OMB / CBO
Year
An
nu
al
Fed
era
l D
efi
cit
In B
illi
on
s
(Note that all projected deficits are greater than any deficit during the Bush Administration.)
Deficits during periods of economic health are intolerable.
34
STATE BUDGET
BALANCING
35
CHANGE IN STATE REVENUESPercent Real Dollar Growth
-20%
-15%
-10%
-5%
0%
5%
10%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Real Dollar Growth
Year
An
nu
al
Perc
en
t G
row
th
Source: Bureau of Census
Estimate
36
LABOR PRODUCTIVITY
37
LABOR PRODUCTIVITYMid 70s Recession and Recovery
61.0
62.0
63.0
64.0
65.0
66.0
1972 1973 1974 1975 1976
GDP/Employment
Year
Source: NAR / BEA
Gro
ss L
ab
or
Pro
du
cti
vty
Job Growth Never Begins Until Labor Productivity Reaches A New HIgh
38
LABOR PRODUCTIVITYEarly 80s Recession and Recovery
The Infamous Double Dip Recession
63.0
64.0
65.0
66.0
67.0
68.0
69.0
1978 1979 1980 1981 1982 1983
GDP/Employment
Year
Source: NAR / BEA
Gro
ss L
ab
or
Pro
du
cti
vty
Job Growth Never Begins Until Labor Productivity Reaches A New HIgh
39
LABOR PRODUCTIVITYRecent Recession and Recovery
94.00
96.00
98.00
100.00
102.00
2008 2009 2010
GDP/Employment
Year
Source: NAR / BEA
Gro
ss L
ab
or
Pro
du
cti
vty
Productivity Levels are Consistent With The Start of Job Growth
40
THE TRANSFORMATION
OF THE
AMERICAN ECONOMY
41
MOVING TOWARDS
A SUSTAINABLE, BALANCED ECONOMY
Historical Range of Component Shares of GDP
Consumption Investment Government Net Exports
Min 60.95% 10.35% 17.44% -5.86%
Max 71.97% 18.16% 28.14% 1.10%
Average 67.88% 14.63% 19.80% -2.31%
2009 70.63% 12.50% 19.67% - 2.53%
Goal 65.00% 17.50% 17.50% 0.00%
Source: BEA / B. Smith
Note: Averages in first table are based upon period from 1954 to present
This will require reduced government; increased savings;
expanded investment and less reliance on consumption.
42
HOUSTON’S FUTURE IS
CONTINGENT
ON THE NATIONAL RECOVERY
43
Houston ForecastLast Five Years/Next Five Years
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Employment
Population
Year
An
nu
al
Perc
en
t G
ain
Note: Yearly numbers are based on employment averages for the whole year.
Source: TWC / BLS/B. Smith
This implies continued weak growth through 2010
This growth requires the absence
of a double-dip recession