Wells Fargo Economics Scott Anderson, Ph.D. Vice President Senior Economist Plunging Into The New...

Wells Fargo EconomicsWells Fargo Economics

Scott Anderson, Ph.D.Scott Anderson, Ph.D.Vice PresidentVice PresidentSenior EconomistSenior Economist

Plunging Into The New YearPlunging Into The New Year

Durango, CODurango, CO

January 9, 2008January 9, 2008

U.S. Economy U.S. Economy

SevereSevere

Recession Recession

Worst in Post-War Worst in Post-War PeriodPeriod

Change in Total Nonfarm Payroll

(600)

(500)

(400)

(300)

(200)

(100)

-

100

200

300

11-06 5-07 11-07 5-08 11-08

000s

Source: Bureau of Labor Statistics

Estimated Level of Monthly Job Gains Needed to AbsorbLabor Force Growth

Overall Unemployment Rate

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

11-98 11-99 11-00 11-01 11-02 11-03 11-04 11-05 11-06 11-07 11-08

Percentage


-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08

Retail Sales and Hourly Earnings GrowthY/Y%

Real ex. gasolineretail sales

Real hourlyearnings

Source: Census Bureau; Bureau of Labor Statistics; Wells Fargo Economics

15

20

25

30

35

40

45

Nov-88 Nov-93 Nov-98 Nov-03 Nov-08

Source: National Federation of Independent Business; Wells Fargo Economics

Capital Expenditure Plans PlummetPercent of Small Businesses Planning Capital Expenditures in 3-6 months

New Factory Orders

(14)(12)(10)

(8)(6)(4)(2)

-2468

101214

11-06 5-07 11-07 5-08 11-08

YOY Pct Chg

Source: Census Bureau

ISM Non-Manufacturing

30

40

50

60

70

12-05 6-06 12-06 6-07 12-07 6-08 12-08

Index

Source: Institute for Supply Management

Leading Economic Indicators

(4.0)

(2.0)

-

2.0

4.0

11-05 5-06 11-06 5-07 11-07 5-08 11-08

YOY Pct Chg

-3.7

Source: The Conference Board

U.S. Recession Comparisons

PCE (%)

NRFI (%)

UE (PP)

Jobs (%)

Jobs (#, mil)

’73-’75 -1.8% NA +4.1 -2.0% -1.6

’81-’82 -0.8% NA +3.3 -3.0% -2.7

’90-’91 -1.1% -8.2% +2.3 -1.4% -1.5

’08-’09 -3.1% -12.3% +4.4 -4.0% -5.5

Source: BEA; BLS; Wells Fargo Economics

Peak to trough changes

65

43

16

16

12 7

0 10 20 30 40 50 60 70

October 1873 -March 1879

August 1929 -March 1933

November 1973 -March 1975

July 1981 -November 1982

December 2008 - ?

U.S. Recessions

Months (Peak to Trough)

Source: NBER; Wells Fargo Economics

Forecast

A Credit Crisis A Credit Crisis

In The Making In The Making

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1958Q2 1968Q2 1978Q2 1988Q2 1998Q2 2008Q2

Home MortgagesBil

Source: Federal Reserve Flow of Funds; Wells Fargo Economics

0%

20%

40%

60%

80%

100%

120%

140%

160%

1958Q2 1968Q2 1978Q2 1988Q2 1998Q2 2008Q2

Debt Ratios

Percent of personal disposable income

Source: Federal Reserve Flow of Funds; Wells Fargo Economics

Total householddebt

Mortgage debt

-18.0-20

-15

-10

-5

0

5

10

15

20

10/31/2003 10/31/2004 10/31/2005 10/31/2006 10/31/2007 10/31/2008

Case-Shiller Home Price IndexY/Y%

Source: Case-Shiller

Top 20 U.S. cities

-25%

-20%

-15%

-10%

-5%

0%

Boston

Chicag

o

Denve

r

Las V

egas

Los Angel

es

Mia

mi

New Y

ork

San D

iego

San F

ranci

sco

Was

hingto

n

Composi

te

November 2008 February 2009 May 2009August 2009 November 2009 February 2010

CME Real Estate Futures Expected price growth from October 2008Percent

Source: CME; Wells Fargo Economics

$(2,515)$(2,744)

$(5,259)$(6,000)

$(5,000)

$(4,000)

$(3,000)

$(2,000)

$(1,000)

$-

Real Estate Stocks Total

Wealth Destruction

Decline from peak to Q308

Billions

Source: Federal Reserve; Wells Fargo Economics

Banks Banks Tightening Tightening

Credit Across Credit Across The Board The Board

Senior Loan Officer Survey Credit CrunchWillingness to Lend - Consumer Loans

-60

-50

-40

-30

-20

-10

0

10

20

30

40

1990Q4 1993Q4 1996Q4 1999Q4 2002Q4 2005Q4 2008Q4

Net Percentof Banks

Source: Federal Reserve Board

More Willing

Less Willing

Standards for Approval

-20

-10

0

10

20

30

40

50

60

70

80

1996Q4 1998Q4 2000Q4 2002Q4 2004Q4 2006Q4 2008Q4

Credit Card Loans Other than Credit Card Loans

Net Percentof Banks


Easing Standards

Tightening Standards

Demand for Consumer Loans

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

1992Q4 1996Q4 2000Q4 2004Q4 2008Q4

Net Percentof Banks


Stronger Demand

Weaker Demand

Mortgage Standards

-20-10

0102030405060708090

100

1996Q4 1998Q4 2000Q4 2002Q4 2004Q4 2006Q4 2008Q4

Net Percentof Banks



Easing Standards

Sub-primeNon-traditionalPrime

Senior Loan Officer Survey Credit CrunchStandards for C&I Loans

-40

-20

0

20

40

60

80

100

1990Q4 1993Q4 1996Q4 1999Q4 2002Q4 2005Q4 2008Q4

to Large and Medium Firms

to Small Firms

Net Percentof Banks



Easing Standards

Demand for C&I Loans

-80

-60

-40

-20

0

20

40

60

1990Q4 1993Q4 1996Q4 1999Q4 2002Q4 2005Q4 2008Q4


to Small Firms

Net Percentof Banks


Stronger Demand

Weaker Demand

Spreads

-80

-60

-40

-20

0

20

40

60

80

100

120

1990Q4 1993Q4 1996Q4 1999Q4 2002Q4 2005Q4 2008Q4


to Small Firms

Net Percentof Banks


Increasing Spreads

Narrowing Spreads

Little Appetite Little Appetite for Risk for Risk

Credit Spreads Near Record Peaks

100

150

200

250

300

350

400

450

500

550

600

650

1/2/

2002

1/2/

2003

1/2/

2004

1/2/

2005

1/2/

2006

1/2/

2007

1/2/

2008

1/2/

2009

Moody's Baa Corporate BondsSpread over 10-year Treasury yield

Basis points

Source: Bloomberg; Federal Reserve

100

200

300

400

500

600

700

800

900

1000

1/2/2004 1/2/2005 1/2/2006 1/2/2007 1/2/2008 1/2/2009

Emerging Markets IndexSpread over theoretical U.S. zero coupon curveBasis points

Source: JPMorgan Bond Incides

0

200

400

600

800

1000

1200

1400

1600

1800

Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08

High Yield IndexSpread over 10-year Treasury yield

Source: Citigroup

BasisPoints

120

140

160

180

200

220

240

260

280

300

1/2/

2002

1/2/

2003

1/2/

2004

1/2/

2005

1/2/

2006

1/2/

2007

1/2/

2008

1/2/

2009

30-Year Mortgage vs. 10-Year TreasuryBasis points

Source: Federal Reserve; Freddie Mac

Spread over 10-year Treasury yield

Where Does This Where Does This Leave the Leave the

Housing Market? Housing Market?

0

10

20

30

40

50

60

70

80

90

Dec-88 Dec-93 Dec-98 Dec-03 Dec-08

NAHB/Wells Fargo Homebuilder Confidence Index

Source: National Association of Homebuilders

Index

New Home Sales

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

11-05 5-06 11-06 5-07 11-07 5-08 11-08

000sSAAR


Single-family

New Home Inventories

0

2

4

6

8

10

12

Nov-05 Nov-06 Nov-07 Nov-08

Months Supply


Single-family

0

500

1000

1500

2000

2500

3000

Nov-63 Nov-68 Nov-73 Nov-78 Nov-83 Nov-88 Nov-93 Nov-98 Nov-03 Nov-08

Source: Commerce Dept.

Residential Building PermitsSAAR000's

Existing Home Sales

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

11-05 5-06 11-06 5-07 11-07 5-08 11-08

Millions SAAR

Source: National Association of Realtors

Total

Existing Home Inventory

11.2

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Nov-05 Nov-06 Nov-07 Nov-08

MonthsSupply

Source: National Association of Realtors

Total

-40

-30

-20

-10

0

10

20

30

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

500

700

900

1,100

1,300

1,500

1,700

1,900

2,100

2,300

Source: Census Bureau; Bureau of Economic Analysis; Wells Fargo Economics

Housing Market OutlookAnnualizedQrtly % change Ths., SAAR

2006 2007 2008

H F

Residential FixedInvestment (L)

Private HousingStarts (R)

2009

Washington to the Washington to the Rescue! Rescue!

Stimulus, Stimulus, Stimulus, and Stimulus, and More StimulusMore Stimulus

Fed ActivityFed Activity

0

1

2

3

4

5

6

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08

FCST

Federal Funds Target Rate

Source: Federal Reserve

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

12/2

7/20

00

12/2

7/20

01

12/2

7/20

02

12/2

7/20

03

12/2

7/20

04

12/2

7/20

05

12/2

7/20

06

12/2

7/20

07

12/2

7/20

08

Fed Balance Sheet


Mil, NSA

$1.3 trillion increase since August 2008

Liquidity Improved

But Still Abnormal!

Despite Fed’s Extensive Credit Facilities and Lending

0

50

100

150

200

250

300

350

400

450

1/2/

2002

1/2/

2003

1/2/

2004

1/2/

2005

1/2/

2006

1/2/

2007

1/2/

2008

1/2/

2009

Commercial Paper SpreadBasis points

Source: Bloomberg

90-day asset-backed commercial paper yield less 3-month Treasury yield

0

50

100

150

200

250

300

350

400

450

1/2/

2002

1/2/

2003

1/2/

2004

1/2/

2005

1/2/

2006

1/2/

2007

1/2/

2008

1/2/

2009

LIBOR SpreadBasis points

Source: Bloomberg

3-month LIBOR less 3-month Treasury yield

$-

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08

Excess Bank Reserves


Mil, NSA

$765.4 billion increase since August 2008

0%

3%

6%

9%

12%

Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08

Money Supply (M2)


Y/Y%

$(2,000)

$(1,500)

$(1,000)

$(500)

$-

$50019

99

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Source: CBO

Federal Budget Surplus/DeficitBillions

H F

-35.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

.0

5.0

10.0

1939 1949 1959 1969 1979 1989 1999 2009 2019

Federal Budget Surplus/Deficit (% of GDP)

H F

Source: CBO; Economic Report of the President

.0

20.0

40.0

60.0

80.0

100.0

120.0

1939 1949 1959 1969 1979 1989 1999 2009 2019

Federal Debt (% of GDP)

H F

Source: CBO; Economic Report of the President

Outlook Darkens

4.8

2.7

0.81.5

0.1

4.8 4.8

-0.2

0.9

2.8

-0.5

-6.2

-4.2

-1.3

1.2 1.6

-8

-6

-4

-2

0

2

4

6

2006.1 2007.1 2008.1 2009.1

HISTORY FORECAST

Q/Q%ChangeReal GDP Annualized

Inflation Turns Inflation Turns into Deflation?? into Deflation??

Consumer Price Index

(2.0)(1.8)(1.6)(1.4)(1.2)(1.0)(0.8)(0.6)(0.4)(0.2)-0.20.40.60.81.01.21.4

11-05 5-06 11-06 5-07 11-07 5-08 11-08

MOM Pct Chg


-1.7

Inflation Expectations

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1/2/2005 1/2/2006 1/2/2007 1/2/2008 1/2/2009

Yield

10-Year Treasury less TIPS Yields

Source: Federal Reserve; Wells Fargo Economics

BOND YIELDS

2

3

4

5

6

7

8

9

10

1/2/2008 3/2/2008 5/2/2008 7/2/2008 9/2/2008 11/2/2008 1/2/2009

AAA Corporates

BAA Corporates

30 Yr Mortgage Rate

Percent

Source: Moody's Investors Service; Federal Reserve; Freddie Mac; Wells Fargo Economics

10-Year Treasury

Wells Fargo Economics Scott Anderson, Ph.D. Vice President Senior Economist Plunging Into The New...

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