Economic Outlook

Dr. Don SchunkResearch EconomistBB&T Center for Economic & Community DevelopmentCoastal Carolina University

Presented to the Government Finance Officers Association of South Carolina

October 13, 2008

Overview of Economic Conditions

• The current financial crisis:– How did we get here, and where are we?

• Thoughts on the ‘Bailout’

• Recent and Projected U.S. Conditions

• Recent and Projected S.C. Conditions

U.S. New Home Sales – The Double Correction1970Q1 – 2008Q3

200

400

600

800

1000

1200

1400

1970 1975 1980 1985 1990 1995 2000 2005

10

00

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Key Housing Indicators

2.5

3.0

3.5

4.0

4.5

5.0

80 82 84 86 88 90 92 94 96 98 00 02 04 06

Ratio of Median Home Price to Median Income

20

30

40

50

60

70

80

2001 2002 2003 2004 2005 2006 2007

Prime MortgagesNon-Prime Mortgages

Percent of Mortgage Loans by Product Type

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The Storm Surge: 2000 - 2006

• The push for ever-increasing homeownership rates

• Ongoing financial innovation

• Record low interest rates

• NINJA loans

• The spread of mortgage-backed assets and mortgage derivatives

The Surge Recedes: 2006 - ?

• Homeowners default

• Mortgage-backed assets lose value

• Balance sheets weaken

• Abrupt shift in the appetite for risk

• Mark-to-market accounting without a market

• Credit market stops functioning

• Stock markets slide

Savers Borrowers

The Financial Infrastructure

Financial Markets

The TED Spread

Sept 17

Where are we now?

• Banks are unwilling to lend

• Households and businesses are shifting out of deposits

• These decisions are causing the money multiplier to move in the wrong direction – we are witnessing deposit contraction rather than deposit creation

The impacts

• The credit freeze is preventing individuals and businesses from borrowing to finance productive economic activities

• The economy was already precarious – frozen credit markets have made a recession unavoidable

The intentions of the “bailout”

• Remove uncertain assets from the banking system – increase the willingness to lend to households and businesses by increasing the willingness of banks to lend to each other

• Keep more funds in the form of bank deposits

-30

-20

-10

0

10

20

30

00 01 02 03 04 05 06 07 08 09

ConsumptionBusiness InvestmentResidential Investment

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% c

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Recent U.S. Trends2000Q1 – 2009Q4

U.S. Net Exports1970Q1 – 2009Q4

-700

-600

-500

-400

-300

-200

-100

0

100

1970 1975 1980 1985 1990 1995 2000 2005

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U.S. Real GDP Growth2000Q1 – 2009Q4

2000 3.7%2001 0.8%2002 1.6%2003 2.5%2004 3.6%2005 2.9%2006 2.8%2007 2.0%2008 1.4%2009 0.4%2010 2.0%-2

0

2

4

6

8

00 01 02 03 04 05 06 07 08 09

an

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% c

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e

Job Growth: SC and US1991Q1 – 2008Q3

-3

-2

-1

0

1

2

3

4

2000 2001 2002 2003 2004 2005 2006 2007 2008

South Carolina United States

an

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al %

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Employment: Total and Selected Sectors2000Q1 – 2008Q3

-4

-2

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008

Total EmploymentRestaurantsHealth Care

an

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al %

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S.C. Employment Growth2000Q1 – 2009Q4

2000 1.6%2001 -1.9%2002 -1.0%2003 0.2%2004 1.4%2005 1.8%2006 2.2%2007 2.3%2008 0.3%2009 -0.3%2010 0.8%

-3

-2

-1

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1

2

3

4

00 01 02 03 04 05 06 07 08 09

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Unemployment: S.C. and U.S.1976Q1 – 2009Q4

3

4

5

6

7

8

9

10

11

12

1980 1985 1990 1995 2000 2005

S.C. U.S.

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