When Will It End? Presented by: Augustine Faucher, Director of Macroeconomics Presented by: Augustine Faucher, Director of Macroeconomics January 12, 2009.

When Will It End?

Presented by:

Augustine Faucher,Director of Macroeconomics

Presented by:

Augustine Faucher,Director of Macroeconomics

January 12, 2009

2

How Bad Is It?How Bad Is It?

3

The Recession Is Intensifying…

Cumulative job loss, ths

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

J '08 F M A M J J A S O N D

4

Expansion

Recovery

At Risk

In Recession

…Across Most States…

Based on employment and industrial production, November 2008

5

Expansion

Recovery

At Risk

In Recession

Based on employment and industrial production, November 2008

…And Metro Areas

6

Household debt in delinquency or default, $ bil, annualized

0

100

200

300

400

500

600

700

800

900

'00 '01 '02 '03 '04 '05 '06 '07 '08

Default90-120 Days60-90 Days30-60 Days30 Days

Sources: Equifax, Moody’s Economy.com

…As Households Buckle Under The Stress

Improving Expanding

SlippingContracting

An

nu

alized

3-m

o.

% c

han

ge

NOTE: Size reflects relative total employment

Chart 7:One-year vs. 3-month performance (3-mo. MA)

% change year ago

- 3.0

- 2.5

- 2.0

- 1.5

- 1.0

- 0.5

0.0

0.5

1.0

- 1.0 - 0.5 0.0 0.5 1.0 1.5

November 2008

[-3.07,-4.52]

Middle Atlantic

New England

South Atlantic

May 2008

Northeast States

Northeast States—Payroll Employment

New York

Pennsylvania

New Jersey

Massachusetts

Connecticut

New Hampshire

Maine

Rhode Island

Vermont

Maryland

District Of Columbia

Delaware

U.S.U.S.U.S.

[1.67,1.06]

[-2.01,-4.05]

Improving Expanding

SlippingContracting

An

nu

alized

3-m

o.

% c

han

ge

NOTE: Size reflects relative total employment

Chart 8:One-year vs. 3-month performance (3-mo. MA)

% change year ago

- 3.0

- 2.5

- 2.0

- 1.5

- 1.0

- 0.5

0.0

0.5

1.0

- 1.0 - 0.5 0.0 0.5 1.0 1.5

Middle Atlantic

New England

South Atlantic

Northeast States

November 2008

Northeast States—Payroll Employment

New York

Pennsylvania

New JerseyMassachusetts

Connecticut

New Hampshire

Maine

Rhode Island

Vermont

Maryland

District Of Columbia

Delaware

U.S.

[-3.07,-4.52]

Improving Expanding

SlippingContracting

An

nu

alized

3-m

o.

% c

han

ge

NOTE: Size reflects relative total employment

Chart 9:One-year vs. 3-month performance (3-mo. MA)

% change year ago

November 2008

- 3.5

- 3.0

- 2.5

- 2.0

- 1.5

- 1.0

- 0.5

0.0

0.5

1.0

1.5

- 1.0 - 0.5 0.0 0.5 1.0 1.5

Middle Atlantic

New England

South Atlantic

May 2008

Northeast Metro Areas

Northeast Metro Areas—Payroll Employment

New York

Philadelphia

Nassau

Pittsburgh

Edison

Newark

BuffaloCamden

Rochester

Albany

Harrisburg

Syracuse

Trenton

Boston

Providence

Hartford

Bridgeport

New Haven

Springfield

Portland

ManchesterWashington

Baltimore

Bethesda

Wilmington

U.S.U.S.U.S.

[1.08,2.13]

[-1.82,-4.19]

[-2.6,-3.88]

Improving Expanding

SlippingContracting

An

nu

alized

3-m

o.

% c

han

ge

NOTE: Size reflects relative total employment

Chart 10:One-year vs. 3-month performance (3-mo. MA)

% change year ago

- 3.5

- 3.0

- 2.5

- 2.0

- 1.5

- 1.0

- 0.5

0.0

0.5

1.0

1.5

- 1.0 - 0.5 0.0 0.5 1.0 1.5

Middle Atlantic

New England

South Atlantic

Northeast Metro Areas

November 2008

Northeast Metro Areas—Payroll Employment

New York

Philadelphia

Nassau

Pittsburgh

Edison

Newark

Buffalo

Camden

Rochester

Albany

Harrisburg

Syracuse

Trenton

Boston

Providence

Hartford

Bridgeport

New Haven

Springfield

Portland

Manchester

Washington

Baltimore

Bethesda

Wilmington

U.S.

[-2.6,-3.88]

11

-1.0

-0.5

0.0

0.5

1.0

1.5

07 08104

106

108

110

112

114

116

118

Estimated industrial production, 2002=100 (R)Source: Moody's Economy.com

Connecticut Falls Into Recession

Employment, % change year ago

12

4.0

4.5

5.0

5.5

6.0

6.5

07 0817

18

19

20

21

22

23

24

25

26

Unemployment rate, % (L)

Rapid Weakening in Connecticut Labor Market

Initial unemployment insurance claims, ths (R)

3 mo. MA

13

How Did We Get Into This Mess?How Did We Get Into This Mess?

14

100

120

140

160

180

200

00 01 02 03 04 05 06 07 08

The Bursting Housing Bubble…

Fiserv Case Shiller National House Price Index, 2000Q1=100

-23%

-6%

U.S.

CT

15

500

1,000

1,500

2,000

2,500

3,000

00 01 02 03 04 05 06 07 08

Sources: Equifax, Moody's Economy.com

First mortgage loan defaults, ths, SAAR

…Ignites a Mortgage Crisis…

16

Projected losses on assets originated 2004Q1-2007Q4, $ bil

0

100

200

300

400

500

600

700

800

Banks Other financial Government

At risk mortgages20,000,000Foreclosure rate 40%

Foreclosed mortgages 8,000,000Loss rate 50%

Mortgage loss $800 bil

Residential mortgages

Consumer loans

Commercial mortgages

Corporate

…Undermining the Financial System…

17

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Difference between 3 month Libor and Treasury bill yields

…And Pushing It to the Precipice of Collapse

S&L crisis

Subprimefinancialshock

Peso crisis

LTCMTechbustOrange

County

Thai baht

Y2K

18

What Is the Economic Fallout?What Is the Economic Fallout?

19

The Worst Downturn Since the Great Depression

Recessions since World War II

Recession Expansion Real NonfarmPeak Trough Peak to Trough Trough to Peak GDP Employment Low High Change

December 2007 September 2009 21 -- -2.8% -3.7% 4.4% 9.0% 4.6%March 2001 November 2001 8 120 -0.4% -1.2% 3.9% 6.3% 2.4%July 1990 March 1991 8 92 -1.5% -1.3% 5.2% 7.8% 2.6%July 1981 November 1982 16 12 -2.8% -3.2% 7.2% 10.8% 3.6%January 1980 July 1980 6 58 -2.2% -1.2% 5.6% 7.8% 2.2%November 1973 March 1975 16 36 -3.4% -1.8% 4.6% 9.0% 4.4%December 1969 November 1970 11 106 -0.2% -1.2% 3.4% 6.1% 2.7%April 1960 February 1961 10 24 -0.5% -2.3% 4.8% 7.1% 2.3%August 1957 April 1958 8 39 -3.2% -4.0% 3.7% 7.4% 3.7%July 1953 May 1954 10 45 -1.9% -3.0% 2.5% 6.1% 3.6%November 1948 October 1949 11 37 -1.6% -5.0% 3.4% 7.9% 4.5%

Average 10 57 -1.8% -2.4% 4.4% 7.6% 3.2%

Sources: NBER, BEA, FRB, BLS, Moody's Economy.com

Jobless Rate

Peak-to-Trough% ChangeDuration in Months

20

Bond issuance, $ bil, annualized, Source: Thomson

0

500

1,000

1,500

2,000

2,500

3,000

'00 '01 '02 '03 '04 '05 '06 '07 '08h1 '08q3 '08q4

HG CorpHY CorpCDOABSCMBSRMBS

The Credit Spigot Closes…

21

Net % tightening standards, Source: Federal Reserve

-30

0

30

60

90

90 92 94 96 98 00 02 04 06 08

Commerical & I ndustrial

Commercial MortgageCredit Card

…And Banks Are In Survival Mode

22

30

40

50

60

70

80

90

100

110

120

130

140

150

69 72 75 78 81 84 87 90 93 96 99 02 05 08

The Collective Psyche Has Been Shattered…

Consumer confidence, 1985 = 100

Source: Conference Board

23

Net % of businesses responding positively to Dismal survey

-40

-30

-20

-10

0

10

20

30

40

50

03 04 05 06 07 08 09

Source: Moody’s Economy.com

…Completely Shattered

24

Nest Eggs Crack…

Household net worth, $ tri

50

52

54

56

58

60

62

64

'06 '07 '08

Stocks -9Housing -4Other +1

25

-15

-10

-5

0

5

10

15

20

05 06 07 08 090

1

2

3

4

5

6

7

8

9

Median sale price, existingsingle-family home, 6 mo. lead (L)Source: NAR

Core retail sales, 3 mo. MA (R)

…Forcing Consumers to Batten Down the Hatches…

% change year ago

26

-15

-10

-5

0

5

10

15

90 92 94 96 98 00 02 '04 '06 '08

Homeowners who borrowedagainst their homesHomeowners who did notborrow against their homesRenters

Personal saving rate, %

Source: Moody's Economy.com

...Particularly Profligate Homeowners

Recovery Expansion

StrugglingRecession

An

nu

alized

% c

han

ge

NOTE: Size reflects relative GDP

% change year ago

- 2.5

- 1.5

- 0.5

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

- 3.0 - 2.0 - 1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

Europe

North America

South AmericaAsia

France

Greece

Germany

Italy

SpainUnited Kingdom

U.S.

Chile

China[9.12,7.45]

Hong Kong

Indonesia

Japan

Korea

Singapore[-0.64,4.94]

Taiwan[-0.99,-8.7]

Thailand

Vietnam[6.52,9.04]

A Global Recession Is Underway

Real GDP growth, 2008Q3

28

When Will It End?When Will It End?

29

House Prices Hit Bottom In Fall ‘09…

% change from peak Sources: Fiserv Case Shiller, Census

-70

-60

-50

-40

-30

-20

-10

0

Early 1990s

House price Home sales Housing starts

Current downturn to date

Early 1980s

Real House price

Forecast

30

...With Big Differences Across the Country

Projected peak-to-trough house price decline

Sources: Fiserv Lending Solutions, Moody's Economy.com, OFHEO

0 to -15%No decline

-15 to -30% < -30%

31

12

14

16

18

20

22

24

26

86 88 90 92 94 96 98 00 02 04 06 081.8

2.0

2.2

2.4

Housing Is Becoming More Affordable…

Sources: BEA, Census, PPR, Realtors

Price-income ratio (R)

Price-rentratio (L)

32

…In An Increasing Number of Markets

Based on house price to income and rent ratios

Over-valued

Correctly valued

Under valued

Source: PPR, NAR, Moody's Economy.com

Significantly over-valued

33

Number of vacant homes for sale, ths

1,000

1,250

1,500

1,750

2,000

2,250

00 01 02 03 04 05 06 07 08

Inventories Are Peaking…

Housing supply 900,000Single 525,000Multi 300,000Manufactured 75,000

Housing demand 1,400,000Households 875,000Obsolescence 400,000Second homes 125,000

34

0

5

10

15

20

25

30

35

'00 '01 '02 '03 '04 '05 '06 '07 '08h1 '08q3 '08q4

FHA share of purchase mortgage loans, %

…And More Credit Is On the Way

35

200

300

400

500

600

700

800

00 01 02 03 04 05 06 07 080

20

40

60

80

100

120

140

A Ray of Economic Sunshine

Oil, $ per barrel (R)

Consumer spending, energy goods and services, $ bil (L)

36

Policymakers Work To Quell the Panic…

Equity Investments in Financial Institutions

Zero Effective Federal Funds Rate

Quantitative Easing – CP, GSE Debt and MBS

Lending Facilities and Credit Protection

Insurance for Money Funds, Deposits, Bank Debt

Mortgage Loan Modification Plans

37

Policymakers Work To Quell the Panic…

Federal Reserve Pledged Provided

Term auction credit 900 448Other loans Unlimited 207

Primary credit Unlimited 90Secondary credit Unlimited 0Seasonal credit Unlimited 0Primary Dealer Credit Facility Unlimited 47Asset-Backed Commercial Paper Money Market Mutual Fund Unlimited 27AIG 85 42

Rescue of Bear Stearns (Maiden Lane)** 27 27AIG-RMBS purchase program (Maiden Lane II)** 23 20AIG-CDO purchase program (Maiden Lane III)** 30 20Term Securities Lending Facility 200 26Commercial Paper Funding Facility** 1,800 319TALF 200 0Money Market Investor Funding Facility 600 0Currency swap lines with emerging markets* 120 4Purchase of GSE debt and MBS 600 0Guarantee of Citigroup debt 306 0

Treasury

TARP 700 330Fed supplementary financing account 479 479Back stop of Fannie Mae and Freddie Mac 200 0

Federal Deposit Insurance Corporation

Guarantee of U.S. banks' debt 1,400 0Transaction deposit accounts 500 0

Federal Housing Administration

Refinancing of mortgages 300 0Congress

Economic Stimulus Act of 2008 170 170Total 8,640 2,050

Sources: Fed, Treasury, FDIC, FHA, Moody's Economy.com*Note: the Fed has unlimited swap lines with several central banks**Net portfolio holdings

38

6

8

10

12

14

16

18

06 07 08 09 10 11 12 13 14 15

Light vehicle sales, SAAR, mil

…With An Auto Bailout…

Source: Moody’s Economy.com

Baseline

Auto bankruptcy scenario

39

5

6

7

8

9

10

11

12

08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4

Economic stimulus

No economic stimulus

Unemployment rate

…A Massive Economic Recovery Package…

40

Number of underwater homeowners, ths

0

2,000

4,000

6,000

8,000

10,000

12,000

06 07 08

Sources: Equifax, Moody's Economy.com

…And a Bigger Foreclosure Mitigation Plan…

41

Homeowners by % of equity, Sep 08, ths

621 1,157 1,9653,449

6,434

11,892

18,649

29,883

0

5,000

10,000

15,000

20,000

25,000

30,000

-50 -40 -30 -20 -10 0 10 20

…As More Homeowners Will Soon Be Underwater…

Source: Equifax, Case Shiller,Moody’s Economy.com

42

Ths

0

500

1,000

1,500

2,000

2,500

3,000

3,500

01 02 03 04 05 06 07 08 09 10 11

Loan DefaultsLost Homes

…And Millions Will Lose Their Homes

Sources: Equifax, Moody’s Economy.com

43

-4

-3

-2

-1

0

1

2

3

07 08 09 10 11

Employment, % change year ago

Connecticut, U.S. Recessions Look Similar

Source: Moody’s Economy.com forecast U.S.

CT

44

A Timeline to Recovery

’08q1 ’08q2 ’08q3 ’08q4 ’09q1 ’09q2 ’09q3 ’09q4 ’10q1 ’10q2 ’10q3 ’10q4

Stock MarketBottoms

Oil PricesPeak

Home SalesBottom

Housing StartsBottom

EmploymentBottoms

House PricesBottoms

ForeclosuresPeak

Jobless RatePeaks

House PricesResume Rising

Financial FailuresAbate

Extraordinary WritedownsEnd

Fed Tightens

$ Rises

45

www.economy.com www.economy.com