Why We Are in a RecessionAugust 2010

Daryl MontgomeryAugust 31, 2010

Copyright 2010, All Rights Reserved

The contents of this presentation are not intended as a recommendation to buy or sell any security.

Current Views on a Double-Dip Recession

• Mainstream Economists:- None or almost none think it will happen.- Uber Bear Nouriel Roubini says 40% chance- Consensus GPD growth forecasts have been lowered to +2.5% for Q3 and Q4.

• Federal Reserve:- Lowered 2010 GDP forecast to +3.0% to +3.5%- Has restarted some minor quantitative easing.- Article that public should ignore bloggers.

• Bloggers are the only ones predicting it.

Leading Indicators Predict Recession

• ECRI weekly leading indicator:- Turned negative in early June. - Was as low as -10.2 in early August- A drop to minus 10 has always indicated recession

• Consumer Metrics Institute measure of consumer demand- Turned negative in January (leads economy 6 months)

• Consumer Confidence highest level during ‘recovery’ about same as worse level in previous 4 recessions.

• Global collapse in interest rates- U.S. 2-year series of record lows- Germany, UK, and Japan - Advanced economies all falling into a liquidity trap.

ECRI Weekly Leading Indicators

Chart Updated to August 13, 2010

Long-Term History of ECRI

Chart Doesn't Include July and August Data

Consumer Metrics

Consumer Metrics: 2010 Versus 2008

Consumer Confidence 2000 to 2010

Red Line Bottom of Previous Recession

Consumer Confidence – Present Situation

Red Line Bottom of Last Recession

Employment Picture• Job losses in July 131,000, in June 221,000. First job

losses took place in August 2007.• Unemployment rate (U-3) for July was 9.5%,

Alternative figure (U-6) was 16.5%• Youth unemployment is 19.1%, a record high (labor

force participation at record low). • 6.6 million students graduated in May, June but labor

force decreased by 1 million. Huh?• Weekly claims hit 500,000. Have not been below

400,000 (recession level) since July 2008.

Weekly Unemployment Claims

Unemployment Post World War II

Long-Term Unemployment 1965-2010

Housing Market Collapsing

• New Home Sales plunged 33% in May to record low of 300,000; July then fell to 276,000; Peak was around 1,400,000.

• Existing Home Sales plunged 27% in July to3.8 million annual rate. Inventory > 12 months.

• Mortgage rates have hit record lows.

• Fed tax credit expiration hurt market; HAMP has been a major failure.

• Housing in worse shape than at bottom of Credit Crisis.

New Home Sales 1963 to 2010

Not Adjusted for Population

Existing Home Sales

Green Line is Credit Crisis Low

Housing Starts

Mortgage Delinquency Rate

Banking System Still Not Functioning

• Fed has pumped huge amounts of money into banking system, but banks are not lending.

• Commercial loans down.• Credit card available credit lower by 9.5% in Q2,

consumer savings up, consumer wage and salary income down, yet consumer spending is up.

• $1.3 trillion in consumer debt delinquent.• The FDIC has taken over 118 banks in 2010.

There are 775 troubled banks. Failures accelerating. FDIC will be bailed out by end of this year.

Change in Bank Loans

Business Loans Post World War II

Small Businesses are Main Source of New Jobs

Consumer Credit: Number of Accounts

GDP During ‘Recovery’

• GDP for 4 quarters of recovery (% Inventory):- Q3 2009 +1.6% (69%)- Q4 2009 +5.0% (57%)- Q1 2010 +3.7% (71%)- Q2 2010 +1.6%

• Q2 2010 GDP without government spending, was up 0.7%, stimulus spending peaked in Q2.

• Computers and software up 24.9%.

• Intel just lowered earnings projections for next quarter because of rapidly slowing business.